-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, GXJMmeu5i+kV/L6HWDxuYhe8ZzRbwLvD2n7mLD6P4NGDj2FSilI868wR5JGgzRUQ lUorLecMit8ftezRBHWl5g== 0001047469-99-006652.txt : 19990222 0001047469-99-006652.hdr.sgml : 19990222 ACCESSION NUMBER: 0001047469-99-006652 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990219 FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL MEDIA CORP CENTRAL INDEX KEY: 0000070412 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-CATALOG & MAIL-ORDER HOUSES [5961] IRS NUMBER: 132658741 STATE OF INCORPORATION: DE FISCAL YEAR END: 0331 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06715 FILM NUMBER: 99545940 BUSINESS ADDRESS: STREET 1: 15821 VENTURA BOULEVARD STREET 2: SUITE 570 CITY: ENCINO STATE: CA ZIP: 91416 BUSINESS PHONE: 8184616400 MAIL ADDRESS: STREET 1: 15821 VENTURA BOULEVARD STREET 2: SUITE 570 CITY: ENCINO STATE: CA ZIP: 91416 FORMER COMPANY: FORMER CONFORMED NAME: NATIONAL PARAGON CORP DATE OF NAME CHANGE: 19870827 10-Q 1 FORM 10-Q UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (MARK ONE) /x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the 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 1-6715 NATIONAL MEDIA CORPORATION --------------------------- (Exact Name of Registrant as Specified in Its Charter) Delaware 13-2658741 --------- ---------- (State or Jurisdiction of (I.R.S. Employer Identification No.) Incorporation or Organization) 15821 VENTURA BOULEVARD, 5th FLOOR LOS ANGELES, CALIFORNIA 91436 ---------------------------------- (Address of Principal Executive Offices) (Zip Code) Registrant's Telephone Number, Including Area Code: (818) 461-6400 -------------- 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 30,547,053 issued and outstanding shares of the registrant's common stock, par value $.01 per share, at January 31, 1999, net of 874,044 shares of common stock held in treasury as of such date. NATIONAL MEDIA CORPORATION AND SUBSIDIARIES INDEX -----
PAGE ---- Facing Sheet .....................................................................................................1 Index.............................................................................................................2 Part I. Financial Information Item 1. Financial Statements (unaudited) Condensed Consolidated Balance Sheets at December 31, 1998 and March 31, 1998...................3 Condensed Consolidated Statements of Operations for the three months ended December 31, 1998 and 1997.................................................4 Condensed Consolidated Statements of Operations for the nine months ended December 31, 1998 and 1997 ................................................ 5 Condensed Consolidated Statements of Cash Flows for the nine months ended December 31, 1998 and 1997................................................. 6 Notes to Condensed Consolidated Financial Statements............................................7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations................................................14 Part II. Other Information Item 1. Legal Proceedings .............................................................................31 Item 4. Submission of Matters to a Vote of Security Holders ...........................................31 Item 6. Exhibits and Reports on Form 8-K...............................................................32 Signatures.......................................................................................................34
-2- Part I. Financial Information Item 1. Financial Statements (Unaudited) NATIONAL MEDIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands, except number of shares and per share amounts)
DECEMBER 31, MARCH 31, 1998 1998 ------------- ---------------- (Unaudited) (See Note Below) ASSETS ------ Current assets: Cash and cash equivalents ................................................... $ 6,467 $ 17,915 Restricted cash ............................................................. 359 400 Securities available for sale ............................................... 5,700 -- Accounts receivable, net .................................................... 36,863 37,285 Income tax receivable ....................................................... -- 341 Inventories, net ............................................................ 15,087 21,228 Deferred costs .............................................................. 6,191 4,191 Prepaid expenses and other current assets ................................... 3,689 8,731 Deferred income taxes ....................................................... 2,835 2,835 --------- --------- Total current assets ...................................................... 77,191 92,926 Property and equipment, net .................................................... 9,252 12,338 Excess of cost over net assets of acquired businesses and other intangible assets, net ................................................... 33,562 35,877 Other assets ................................................................... 1,247 1,950 --------- --------- Total assets ................................................................ $ 121,252 $ 143,091 --------- --------- --------- --------- LIABILITIES AND STOCKHOLDERS' EQUITY ------------------------------------ Current liabilities: Accounts payable ............................................................ $ 22,110 $ 21,167 Accrued expenses ............................................................ 37,591 29,713 Income taxes payable ........................................................ 209 -- Deferred income taxes ....................................................... 1,792 1,792 Current portion of long-term debt and capital lease obligations ............. 1,712 30,812 --------- --------- Total current liabilities ................................................. 63,414 83,484 Long-term debt and capital lease obligations ................................... 159 469 Deferred income taxes .......................................................... 1,043 1,043 Other liabilities .............................................................. 5,623 3,768 Stockholders' equity: Preferred stock, $.01 par value; authorized 10,000,000 shares; issued 5,000 and 81,250 shares Series B convertible preferred stock; and 19,576 and 20,000 shares Series D convertible preferred stock and 20,000 and 0 shares Series E convertible preferred stock at December 31, 1998 and March 31, 1998, respectively ................................................................ 1 1 Common stock, $.01 par value; authorized 150,000,000 shares; issued 30,653,575 and 26,262,716 shares, respectively ..................... 307 263 Additional paid-in capital .................................................. 182,110 156,975 Retained earnings (deficit).................................................. (119,965) (85,891) --------- --------- 62,453 71,348 Treasury stock, 874,044 and 887,229 shares respectively, at cost ............ (6,701) (6,802) Notes receivable, officers .................................................. (545) (139) Net unrealized gain on securities available for sale ........................ 5,212 -- Foreign currency translation adjustment ..................................... (9,406) (10,080) --------- --------- Total stockholders' equity ................................................ 51,013 54,327 --------- --------- Total liabilities and stockholders' equity ................................ $ 121,252 $ 143,091 --------- --------- --------- ---------
Note: The balance sheet at March 31, 1998 has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required under generally accepted accounting principles for complete financial statements. See notes to condensed consolidated financial statements. -3- NATIONAL MEDIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands, except per share amounts)
THREE MONTHS ENDED DECEMBER 31, ------------------------------- 1998 1997 ---------- ----------- Revenue: Product sales .................................................. $ 81,922 $ 63,182 Sales commissions and other .................................... 1,237 1,735 --------- --------- Net revenue ........................................... 83,159 64,917 Operating costs and expenses: Media purchases ................................................ 28,807 20,532 Direct costs ................................................... 47,926 38,157 Selling, general and administrative ............................ 9,470 10,885 Depreciation and amortization .................................. 1,394 1,840 Unusual charges ................................................ 21,680 750 Interest expense ............................................... 528 910 --------- --------- Total operating costs and expenses .................... 109,805 73,074 --------- --------- Loss before income taxes ......................................... (26,646) (8,157) Income taxes (benefit) ........................................... 105 (11) --------- --------- Loss before extraordinary item ................................... (26,751) (8,146) Extraordinary item - gain on extinguishment of debt, net of income taxes............................................................. 4,876 -- --------- --------- Net loss ......................................................... $ (21,875) $ (8,146) --------- --------- --------- --------- Net loss per common share - basic and diluted: Loss before extraordinary item ............................... $ (1.04) $ (0.34) Extraordinary item - gain on extinguishment of debt .......... 0.18 -- --------- --------- Net loss per common share ........................................ $ (0.86) $ (0.34) --------- --------- --------- --------- Weighted average number of common shares outstanding - basic and diluted ................................................ 26,803 25,324 --------- --------- --------- ---------
See notes to condensed consolidated financial statements. -4- NATIONAL MEDIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (In thousands, except per share amounts)
NINE MONTHS ENDED DECEMBER 31, ------------------------------ 1998 1997 --------- --------- Revenue: Product sales .................................................. $ 248,826 $ 182,959 Sales commissions and other .................................... 4,152 3,676 --------- --------- Net revenue ........................................... 252,978 186,635 Operating costs and expenses: Media purchases ................................................ 87,942 61,332 Direct costs ................................................... 146,184 116,272 Selling, general and administrative ............................ 29,735 35,820 Depreciation and amortization .................................. 4,221 5,355 Unusual charges ................................................ 20,481 750 Interest expense ............................................... 3,030 2,299 --------- --------- Total operating costs and expenses ..................... 291,593 221,828 --------- --------- Loss before income taxes ......................................... (38,615) (35,193) Income taxes ..................................................... 335 300 --------- --------- Loss before extraordinary item ................................... (39,950) (35,493) Extraordinary item - gain on extinguishment of debt, net of income taxes............................................................. 4,876 -- --------- --------- Net loss ......................................................... $ (34,074) $ (35,493) --------- --------- --------- --------- Net loss per common share - basic and diluted: Loss before extraordinary item .............................. $ (1.55) $ (1.45) Extraordinary item - gain on extinguishment of debt ......... 0.19 -- --------- --------- Net loss per common share ........................................ $ (1.36) $ (1.45) --------- --------- --------- --------- Weighted average number of common shares outstanding - basic and diluted ................................................ 25,898 24,736 --------- --------- --------- ---------
See notes to condensed consolidated financial statements. -5- NATIONAL MEDIA CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (In thousands)
NINE MONTHS ENDED DECEMBER 31, ------------------------------ 1998 1997 -------- -------- Cash flows from operating activities: Net loss .................................................................. $(34,074) $(35,493) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization ......................................... 4,221 5,355 Amortization of loan discount ......................................... 581 286 Gain on extinguishment of debt ........................................ (4,876) -- Non-cash executive compensation ....................................... (937) 750 Non-cash portion of unusual charges ................................... 7,452 -- Changes in operating assets and liabilities, net ...................... 13,787 4,298 Other ................................................................. 3,027 5,304 -------- -------- Net cash used in operating activities ..................................... (10,819) (19,500) Cash flows from investing activities: Investment in securities available for sale ............................. (488) -- Additions to property and equipment ..................................... (871) (1,805) Proceeds from sale of common stock investment ........................... -- 1,025 -------- -------- Net cash used in investing activities ..................................... (1,359) (780) Cash flows from financing activities: Net proceeds from issuance of preferred stock ........................... 17,943 19,708 Proceeds from long-term debt ............................................ 2,136 8,759 Payments on long-term debt, notes payable and capital lease obligations . (27,749) (1,857) Exercise of stock options and warrants .................................. 8,252 1,602 Loan to officer ......................................................... (406) -- -------- -------- Net cash provided by financing activities ................................. 176 28,212 Effect of exchange rate changes on cash and cash equivalents .............. 554 (156) -------- -------- Net (decrease) increase in cash and cash equivalents ................ (11,448) 7,776 Cash and cash equivalents at beginning of period .......................... 17,915 4,058 -------- -------- Cash and cash equivalents at end of period ................................ $ 6,467 $ 11,834 -------- -------- -------- --------
See notes to condensed consolidated financial statements. -6- NATIONAL MEDIA CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) December 31, 1998 1. BASIS OF PRESENTATION The accompanying unaudited condensed consolidated financial statements of National Media Corporation and Subsidiaries (the "Company") have been prepared in accordance with generally accepted accounting principles for interim financial information and in accordance with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, the financial statements do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of the Company's management, all adjustments (consisting of normal, recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three and nine month periods ended December 31, 1998 are not necessarily indicative of the results that may be expected for the year ending March 31, 1999. For further information, refer to the consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended March 31, 1998. NEW ACCOUNTING STANDARDS In June 1997, the Financial Accounting Standards Board ("FASB") issued Statement Of Financial Accounting Standards No. 131, "Disclosures About Segments of an Enterprise and Related Information" ("SFAS No. 131"). SFAS No. 131 requires disclosure of certain information pertaining to a company's operating segments, products and services, geographic areas of operations and major customers. The Company is required to adopt this statement as of the end of the fiscal year ending March 31, 1999. The Company is evaluating the effects of SFAS No. 131 on its financial statement disclosures. SFAS No. 131 will have no effect on the Company's results of operations, financial condition, capital resources or liquidity. SECURITIES AVAILABLE-FOR-SALE The Company's marketable securities are categorized as available-for-sale securities as defined by the Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." Unrealized holding gains and losses are reflected as a net amount under a separate component of stockholders' equity until realized. RECLASSIFICATIONS Certain prior year amounts have been reclassified to conform to the current presentation. 2. PER SHARE AMOUNTS In 1997, the FASB issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS No. 128"), which replaced primary and fully diluted earnings per share with basic and diluted earnings per share. Basic earnings per share are computed based upon the weighted average number of shares of common stock outstanding during the period. Diluted earnings per share are computed based upon the weighted average number of shares of common stock outstanding during the period plus the dilutive effect of stock options, warrants to purchase common stock, and convertible preferred stock. Earnings per share amounts for all periods have been presented, and where necessary, restated to conform with SFAS No. 128. In computing per share net loss amounts, deemed dividends on preferred stock and certain warrants have been deducted from net income to arrive at net income applicable to common stockholders. -7- The following table sets forth the computation of basic and diluted net loss per share (in thousands, except per share data):
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------- ------------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Net loss ................................................. $(21,875) $ (8,146) $(34,074) $(35,493) Deemed dividend on convertible preferred stock and warrants ............................................. (1,200) (358) (1,187)(1) (401) -------- -------- -------- -------- Adjusted net loss for basic and diluted earnings per share............................................... $(23,075) $ (8,504) $(35,261) $(35,894) -------- -------- -------- -------- -------- -------- -------- -------- Weighted average shares outstanding - basic and diluted .. 26,803 25,324 25,898 24,736 -------- -------- -------- -------- -------- -------- -------- -------- Loss per share - basic and diluted ....................... $ (0.86) $ (0.34) $ (1.36) $ (1.45) -------- -------- -------- -------- -------- -------- -------- --------
(1) Represents reversal of previously recorded accrued premium on Series C Preferred Stock of $690, net of the current premium earned on Series D and E Preferred Stock and Series B Warrants of $1,877. Convertible preferred stock to purchase 31,649,302 and 4,162,830 shares of common stock, and stock options and warrants to purchase 17,016,024 and 10,986,275 shares of common stock for the three and nine month periods ended December 31, 1998 and 1997, respectively, were not included in the computation of diluted earnings per share due to net losses incurred by the Company during each of the respective periods, the effect of which is antidilutive. The above amounts do not include shares of common stock issuable upon conversion of accrued premium on convertible preferred stock. 3. LONG-TERM DEBT In December 1998 the Company entered into a new, three-year credit agreement with a senior lender (the "Credit Agreement"). The Credit Agreement provides for a revolving credit facility with a maximum commitment of $20.0 million, of which up to $7.5 million may be in the form of outstanding letters of credit. Borrowings under the Credit Agreement are limited to a borrowing base consisting of certain eligible domestic accounts receivable and inventory. Outstanding borrowings under the Credit Agreement bear interest, at the option of the Company, at the Prime rate plus one-quarter percent or the London Interbank Offered Rate (LIBOR) plus three percent, however, in no event shall the interest rate charged be less than seven percent per annum. A commitment fee of one-quarter percent per annum is paid on the unused portion of the Credit Agreement. The Credit Agreement is collateralized by a lien on substantially all of the assets of the Company's domestic subsidiaries, and a pledge of the stock of the Company's foreign subsidiaries. The Credit Agreement contains certain financial covenants, with respect to, among other matters, payment of dividends, maintenance of tangible net worth, and restrictions on borrowings and purchases of fixed assets. At December 31, 1998, the Company had approximately $636,000 outstanding and approximately $13.6 million of remaining availability under the Credit Facility. 4. SECURITIES AVAILABLE-FOR-SALE Securities available for sale consist of common stock of Earthlink Network Inc. ("Earthlink") acquired through the exercise of warrants to purchase the common stock during December 1998. Prior to the three-month period ended December 31, 1998, the common stock underlying the warrants were restricted and, therefore, had been included in the Company's balance sheet in other assets. As a result of the inclusion of these shares in Earthlink's registration statement that was filed with the Securities and Exchange Commission, the Company has classified the common stock as "available for sale" as of December 31, 1998. At December 31, 1998, the common stock had a cost of approximately $488,000 and a market value of $5.7 million, resulting in an unrealized gain on securities available for sale of $5.2 million that has been recorded as a separate component of stockholders' equity. -8- Subsequent to December 31, 1998, the Company sold the common stock for net proceeds of $7.0 million, resulting in a gain of approximately $6.5 million that will be included in the statement of operations for the fiscal year ended March 31, 1999. 5. SERIES E CONVERTIBLE PREFERRED STOCK The Company consummated a transaction pursuant to which, among other things, operational control of the Company was acquired by an investor group led by Stephen C. Lehman and the Company sold to the investor group $20.0 million of newly issued shares of Series E Convertible Preferred Stock ("Series E Preferred Stock") (the "Transaction"). The Series E Preferred Stock provides for a 4.0% coupon for one year and is convertible into shares of the Company's common stock at a fixed conversion price of $1.50 per share (subject to standard anti-dilution adjustments). Based upon the $1.50 per share fixed conversion price, the Series E Preferred Stock was convertible into 13,333,333 shares of the Company's common stock at issuance. As part of the Transaction, holders of the Company's Series D Preferred Stock sold to the investor group $10.0 million of Series D Preferred shares and 992,942 warrants issued in connection with such shares, and agreed to certain limitations regarding the sale of the Series D Preferred Stock and the Company's common stock issuable upon conversion and/or exercise of the Series D Preferred Stock and underlying warrants ("Series D Securities"). In connection with the Transaction, a management company of which Mr. Lehman and two of his associates are managing members was granted a five-year option to purchase up to 212,500 shares of the Company's common stock, subject to certain vesting requirements, at an exercise price of $1.32 per share and warrants to purchase up to 3,762,500 shares of the Company's common stock at exercise prices ranging from $1.32 to $3.00 per share. 1,000,000 of the warrants may not be transferred to Mr. Lehman, his associates or any employee of the management company. Approximately $16.1 million of the proceeds from the sale of the Series E Preferred Stock was used to retire approximately $21.5 million in outstanding senior indebtedness to the Company's principal lender under a revolving credit and term loan facility at an approximate twenty-five percent discount. The resulting extraordinary gain of $4.9 million has been recognized by the Company in its statement of operations for the three and nine month periods ended December 31, 1998. The remaining proceeds have been used for certain expenses related to the Transaction and for working capital purposes. The Company is currently in dispute with its former investment advisor regarding a fee of approximately $1.9 million related to the Transaction. The payment of this fee, if any, will be recorded as a reduction of stockholders' equity as a cost of the Transaction. In connection with the Transaction, three former executive officers of the Company waived the change of control provisions in their employment agreements in exchange for the repricing and one year extension on the exercise of certain stock options they held. In addition, one officer received a consulting agreement and payment of a one-time bonus. The Company recorded a charge of approximately $1.8 million for these items which is included in unusual charges in the statement of operations for the three and nine month periods ended December 31, 1998. 6. SERIES B CONVERTIBLE PREFERRED STOCK AND WARRANTS As a result of the Transaction and other matters, certain anti-dilution provisions of the Company's outstanding Series B Convertible Preferred Stock ("Series B Stock") and the Series B Convertible Preferred Stock Warrants ("Series B Warrants") were triggered resulting in an increase in the total shares of common stock underlying the outstanding Series B Stock from 812,500 shares to approximately 1.2 million shares, and an increase in the Series B Warrants from approximately 4.7 million to approximately 9.5 million and a decrease in the exercise price from approximately $4.80 per share to approximately $2.37 per share. 7. AUTHORIZED COMMON STOCK On October 23, 1998 the Company's stockholders approved an amendment of the Company's Certificate of Incorporation increasing the authorized number of shares of common stock of the Company to 150,000,000 shares. -9- 8. UNUSUAL CHARGES In connection with the Transaction, the Company adopted a revised business plan that reflects a significant change in the Company's business model under the direction of its new management team and board of directors. As a result, the Company has undertaken specific actions to dramatically reduce its overall cost structure and transition its business model from a television direct marketing company to an electronic commerce company. Certain of these actions had resulted in pre-tax unusual charges during the three months and nine months ended December 31, 1998 of $21.7 million and $20.5 million, respectively. The unusual charges for the three months ended December 31, 1998 are attributable to a restructuring charge of $13.8 million; a loss of $4.7 million related to the lease of a 24-hour transponder on a European Satellite; $1.2 million of start-up costs associated with the Company's "Everything4Less" membership shopping club; and $1.8 million in costs associated with the waiver of change of control provisions contained in the employment agreements of three former executive officers. The restructuring charge consists of costs associated with the closure of the Company's former corporate headquarters in Philadelphia, Pennsylvania and relocation to the Company's offices in Los Angeles, California; the consolidation of the Company's New Zealand and Far East business offices and closure of retail stores; the closure of certain unprofitable Asian and Eastern European markets and/or transfer to licensee arrangements; the outsourcing of various aspects of the Company's North American operations; $210,000 of non-cash charges attributable to stock options granted under a consulting agreement in connection with the Transaction; and the write-down of production costs related to the change in the Company's fundamental strategy involving the use of its infomercials. In addition, unusual charges for the nine months ended December 31, 1998 include the write-off of $0.7 million in June 1998 of previously capitalized costs attributable to a proposed merger, and a reduction of compensation expense of $1.9 million in June 1998 attributable to stock options granted to three former executive officers of the Company. Included in unusual charges for the three and nine months ended December 31, 1998 is $8.4 million and $6.5 million, respectively, of non-cash charges. Included in accrued expenses and other liabilities at December 31, 1998 are reserves for restructuring and other unusual charges of approximately $12.5 million. Management believes these reserves are sufficient to cover all material remaining cash payments associated with the aforementioned unusual charges. The Company expects the plans associated with the restructing charges to be substantially completed during the first fiscal quarter of 2000. Included in this charge is severance of $2.9 million related to 96 employees. During the period ended December 31, 1998, the Company paid approximately $540,000 of severence to approximately 55 terminated employees related to the restructuring actions. Assets that are no longer in use have been sold or abandoned at December 31, 1998, and/or were written down to their estimated fair market values. For further information, refer to "Management's Discussion and Analysis of Financial Condition and Results of Operations" contained in Item 2 of this Form 10-Q. -10- 9. INCOME TAXES The Company recorded income tax expense of approximately $105,000 and $335,000 for the three and nine months ended December 31, 1998, respectively, due to tax liabilities associated with its Asian operations. Income tax benefits on domestic and European losses and loss carryovers have been fully reserved until realized. -11- 10. COMPREHENSIVE INCOME In April 1998, the Company adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130"). Comprehensive income is defined as the change in equity from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. For the Company, the difference between net income and comprehensive income results from foreign currency translation adjustments and net unrealized gain on securities available for sale. Comprehensive income for the three and nine months ended December 31, 1998 and 1997 is as follows (in thousands):
THREE MONTHS ENDED NINE MONTHS ENDED DECEMBER 31, DECEMBER 31, ------------------------- ------------------------- 1998 1997 1998 1997 -------- -------- -------- -------- Net loss ......................................................... $(21,875) $ (8,146) $(34,074) $(35,493) Other comprehensive income: Foreign currency translation adjustments ..................... 2,616 (2,417) 674 (3,458) Net unrealized gain on securities available for sale ......... 5,212 -- 5,212 -- -------- -------- -------- -------- Total comprehensive income ....................................... $(14,047) $(10,563) $(28,188) $(38,951) -------- -------- -------- -------- -------- -------- -------- --------
11. COMMITMENTS AND CONTINGENCIES WWOR LITIGATION In March 1997, WWOR Television filed a complaint for breach of contract in the United States District Court for New Jersey against one of the Company's subsidiaries alleging, among other things, that the subsidiary wrongfully terminated a contract for the purchase of television broadcast time, seeking in excess of $1.0 million in compensatory damages. The Company is contesting the action. At this time, the Company cannot predict the outcome of this matter; however, even if plaintiffs were to succeed on all of its claims, the Company does not believe that such results would have a material adverse impact on the Company's results of operations or financial condition. REGULATORY MATTERS In June 1996, the Company received a request from the FTC for additional information regarding one of the Company's infomercials in order to determine whether the Company was operating in compliance with its consent orders. The FTC later advised the Company that it believed the Company had violated one of the consent orders by allegedly failing to substantiate certain claims made in one of its infomercials which it no longer broadcasts in the United States. The Company has entered into a settlement agreement with the FTC staff completely resolving all of the FTC staff's concerns. The settlement is presently pending final approval by the commission. The Company does not believe that the final resolution of this matter will have a material adverse effect on the Company's results of operations or financial condition. In addition, during 1997, in accordance with applicable regulations, the Company notified the Consumer Products Safety Commission ("CPSC") of breakages that were occurring in its Fitness Strider product. The Company also notified the CPSC of its replacement of certain parts of the product with upgraded components. The CPSC reviewed -12- the Company's test results in order to assess the adequacy of the upgraded components. The CPSC also undertook its own testing of the product and, in November 1997, informed the Company that the CPSC compliance staff had made a preliminary determination that the Fitness Strider product and upgraded components present a substantial product hazard, as defined under applicable law. The Company and the CPSC staff have discussed voluntary action to address the CPSC's concerns, including replacement of the affected components. At present, management of the Company does not anticipate that any action agreed upon, or action required by the CPSC, will have any material adverse impact on the Company's results of operations or financial condition. The Company has also been contacted by Australian consumer protection regulatory authorities regarding the safety and fitness of the Fitness Strider product and an exercise product marketed by the Company only in Australia and New Zealand. At the present time, the Company cannot predict whether the outcome of these matters regarding the Fitness Strider will have a material adverse impact upon the Company's results of operations or financial condition. In August 1998, the Company received a notice from the New York Stock Exchange ("NYSE") that the Company did not meet the NYSE's standards for continued listing criteria. The NYSE also requested that the Company provide information regarding any actions taken or proposed by the Company to restore the Company to compliance with the NYSE standards. The Company has responded to the NYSE notification, and in November 1998, the Company received written notice from the NYSE that while the NYSE intends to monitor the Company's compliance with the NYSE listing standards, no action will be taken with respect to this matter at this time. OTHER MATTERS The Company, in the normal course of business, is a party to litigation relating to trademark, patent and copyright infringement, product liability, contract-related disputes, and other actions. It is the Company's policy to vigorously defend all such claims and enforce its rights in these matters. The Company does not believe any of these actions, either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition. -13- CERTAIN FORWARD-LOOKING STATEMENTS THIS REPORT CONTAINS "FORWARD-LOOKING" STATEMENTS REGARDING POTENTIAL FUTURE EVENTS AND DEVELOPMENTS AFFECTING THE BUSINESS OF THE COMPANY. SUCH STATEMENTS RELATE TO, AMONG OTHER THINGS, (I) FUTURE OPERATIONS OF THE COMPANY, INCLUDING THE IMPACT OF ANY YEAR 2000 ISSUES ENCOUNTERED BY THE COMPANY; (II) THE DEVELOPMENT OF NEW PRODUCTS, PRODUCT SALES AND MEDIA, INCLUDING ELECTRONIC COMMERCE; (III) COMPETITION FOR CUSTOMERS FOR THE COMPANY'S PRODUCTS; (IV) THE UNCERTAINTY OF DEVELOPING OR OBTAINING RIGHTS TO NEW PRODUCTS THAT WILL BE ACCEPTED BY THE MARKET,(V.) THE TIMING OF THE INTRODUCTION OF NEW PRODUCTS INTO THE MARKET; (VI.) THE LIMITED MARKET LIFE OF THE COMPANY'S PRODUCTS; AND (VII) OTHER STATEMENTS ABOUT THE COMPANY OR THE DIRECT RESPONSE TELEVISION OR ELECTRONIC COMMERCE INDUSTRIES. FORWARD-LOOKING STATEMENTS MAY BE INDICATED BY THE WORDS "EXPECTS," "ESTIMATES," "ANTICIPATES," "INTENDS," "PREDICTS," "BELIEVES" OR OTHER SIMILAR EXPRESSIONS. FORWARD-LOOKING STATEMENTS APPEAR IN A NUMBER OF PLACES IN THIS REPORT AND INCLUDE STATEMENTS REGARDING THE INTENT, BELIEF OR CURRENT EXPECTATIONS OF THE COMPANY AND ITS BOARD OF DIRECTORS AND OFFICERS WITH RESPECT TO NUMEROUS ASPECTS OF THE COMPANY AND ITS BUSINESS. THE COMPANY'S ABILITY TO PREDICT RESULTS OR THE EFFECT OF ANY PENDING EVENTS ON THE COMPANY'S OPERATING RESULTS IS INHERENTLY SUBJECT TO VARIOUS RISKS AND UNCERTAINTIES, INCLUDING THE RISKS ATTENDANT TO COMPETITION FOR PRODUCTS, CUSTOMERS AND MEDIA ACCESS; THE RISKS OF DOING BUSINESS ABROAD; THE UNCERTAINTY OF DEVELOPING OR OBTAINING RIGHTS TO NEW PRODUCTS THAT WILL BE ACCEPTED BY THE MARKET; THE LIMITED MARKET LIFE OF THE COMPANY'S PRODUCTS; AND THE EFFECTS OF GOVERNMENT REGULATIONS. SEE "MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS." ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL The Company has historically been engaged in the direct marketing of consumer products, primarily through infomercials and more recently through electronic commerce worldwide. Domestically, the Company has been dependent on a limited number of successful products to generate a significant portion of its net revenue. The Company's new strategies for future periods are designed to reduce the risk associated with relying on a limited number of successful products for a disproportionate amount of its revenue, expand the Company's leverage of its media expenditures and tailor the Company's domestic operations to more efficiently deal with the cyclical nature of the Company's business. On July 16, 1998, the Company announced the execution of a July 10, 1998 letter of intent related to a Transaction pursuant to which an investor group led by Mr. Lehman agreed to acquire a substantial equity interest in, and operational control of, the Company through an investment of $30.0 million. In connection with the Transaction, the investor group consummated the acquisition of $10.0 million of Series D convertible preferred stock along with 992,942 warrants to purchase common stock from a third party. On October 23, 1998, the Company announced consummation of the Transaction resulting in the purchase by the investor group of $20.0 million of newly issued Series E Preferred Stock directly from the Company. In connection with the Transaction, the Company has substantially revised its business model. The key strategy for the Company's future is the branding of its "Everything-4-Less" membership shopping club. The Company will do this by leveraging its substantial media expenditures, first in North America and then internationally (i.e., using its media more as an advertising vehicle to build a higher awareness of its "Everything-4-Less" membership shopping club). This strategy encompasses the more effective utilization and leveraging of its global presence and media access, the continued development and marketing of innovative products to enhance its existing infomercial programs, the increased emphasis on developing other means of revenue generation such as the shopping club, as well as retail, expanded upsell programs, continuity programs and list rental. The infomercial is now viewed as a vehicle to generate a customer base which will be utilized in various revenue generating initiatives versus the infomercial sale being the end result or merely a one-time sale. International expansion over the last five years has resulted in approximately one-half of the Company's revenues being generated outside of North America. The Company takes advantage of product awareness created by its infomercials and also extends the sales life of its products through non-infomercial distribution channels. These channels include retail arrangements, as well as continuity sales programs, and internet marketing, among others. -14- The Company's revenue varies throughout the year. The Company's revenue has historically been highest in its third and fourth fiscal quarters and lower in its first and second fiscal quarters due to fluctuations in the number of television viewers. These seasonal trends have been and may continue to be affected by the timing and success of new product offerings and the potential growth in the Company's electronic commerce businesses. In the discussion and analysis set forth below, the Company discusses its "EBITDA" and "EBITDA Margin." EBITDA consists of net income before interest, provision for income taxes, depreciation and amortization and non-recurring items. EBITDA Margin is EBITDA as a percentage of net revenue. EBITDA does not represent cash flows as defined by generally accepted accounting principles and does not necessarily indicate that cash flows are sufficient to fund all of the Company's liquidity requirements. EBITDA should not be considered in isolation or as a substitute for net income, cash from operating activities or other measures of liquidity determined in accordance with generally accepted accounting principles. The Company believes that EBITDA is a measure of financial performance widely used in the media and internet/electronic commerce industries, and is useful to investors as a measure of the Company's financial performance. RESULTS OF OPERATIONS The following table sets forth operating data of the Company as a percentage of net revenues for the periods indicated below.
Three Months Ended Nine Months Ended December 31, December 31, --------------------------- --------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- Statements of Operations Data: Net revenue 100.0% 100.0% 100.0% 100.0% Operating costs and expenses: Media purchases 34.6 31.6 34.8 32.9 Direct costs 57.6 58.8 57.8 62.3 Selling, general and administrative 11.4 16.8 11.8 19.2 Depreciation and amortization 1.7 2.8 1.7 2.9 Unusual charges 26.1 1.2 8.1 0.4 Interest expense 0.6 1.4 1.2 1.2 ------------- ------------- ------------- ------------- Total operating costs and expenses 132.0 112.6 115.3 118.9 ------------- ------------- ------------- ------------- Loss before income taxes (32.0) (12.6) (15.3) (18.9) ------------- ------------- ------------- ------------- Extraordinary item 5.9 - 1.9 - ------------- ------------- ------------- ------------- Net loss (26.3)% (12.5)% (13.5)% (19.0)% ------------- ------------- ------------- ------------- ------------- ------------- ------------- -------------
THREE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED TO DECEMBER 31, 1997 NET REVENUE Net revenue was $83.2 million for the three months ended December 31, 1998, as compared to $64.9 million for the three months ended December 31, 1997, an increase of $18.3 million or 28.1%. Domestic net revenue for the three months ended December 31, 1998 was $50.8 million as compared to $27.8 million for the three months ended December 31, 1997, an increase of $23.0 million or 82.4%. This increase was primarily attributable to a greater number of successful shows and products being distributed during the current period. The current three month period included four shows with net revenues of $5.0 million or greater, including three shows each of which comprised over 15% of the total domestic net revenue. The comparable three month period included only two shows with net revenues of $5.0 million or greater and which comprised over 15% of total domestic net revenue. During the period of 1997, the PVA 10X Mop product generated approximately 41.7% of total domestic net revenue. During the three months ended December 31, 1998, the Larry North II show generated -15- approximately 21.0% of total domestic net revenue. International net revenue for the three months ended December 31, 1998 was $32.4 million as compared to $37.1 million for the three months ended December 31, 1997, a decrease of $4.7 million or 12.8%. The decrease was primarily attributable to a $3.9 million or 33.8% decline in the Company's South Pacific net revenue. Approximately 7.6% of the decrease in South Pacific revenue was due to currency devaluation. Net revenue in the Company's South Pacific markets was negatively impacted by a lack of successful new shows, as well as the continued impact of the economic downturn being experienced throughout the region, which has resulted in a significant decline in consumer spending. In addition, Asian revenue decreased approximately $500,000 or 5.3% for the three months ended December 31, 1998 as compared to the three months ended December 31, 1997, principally due to the Company's decision to close down its operations in and/or convert certain markets (e.g., Indonesia, Thailand, Malaysia, China) to third-party licensee arrangements. The Asian revenue decrease was offset in part by a 4.6% increase in Japanese net revenue for the three months ended December 31, 1998 as compared to the three months ended December 31, 1997, resulting from a favorable currency impact in the current period. OPERATING COSTS AND EXPENSES Total operating costs and expenses were $109.8 million for the three months ended December 31, 1998 as compared to $73.1 million for the three months ended December 31, 1997, an increase of $36.7 million or 50.3%. The three months ended December 31, 1998 included unusual charges of approximately $21.7 million as compared to unusual charges of $750,000 for the three months ended December 31, 1997. Excluding the unusual charges, operating costs and expenses were $88.1 million for the three months ended December 31, 1998 compared to $72.3 million for the three months ended December 31, 1997, an increase of $15.8 million or 21.8%. The increase was principally due to the 28.1% increase in net revenue. This increase was partially offset by reductions in selling, general and administrative expenses. MEDIA PURCHASES Media purchases were $28.8 million for the three months ended December 31, 1998 as compared to $20.5 million for the three months ended December 31, 1997, an increase of $8.3 million or 40.3%. The Company's worldwide ratio of media purchases to net revenue increased to 34.6% for the three months ended December 31, 1998 as compared to 31.6% for the three months ended December 31, 1997. The increase in media purchases as a percentage of net revenue was principally due to the increased proportion of domestic net revenue to foreign revenue, which domestic revenue carries greater media costs. Domestic net revenue represented 61.1% of total net revenues for the three months ended December 31, 1998 as compared to 42.9% for the three months ended December 31, 1997. In addition, the Company experienced a decrease in international media purchases as a percentage of net revenue due to the recognition of a loss on media costs involving excess capacity associated with the Company's lease of a transponder on the Eutelstat Satellite, the costs of which are included in unusual charges. Recent trends indicate an increase in international media costs in total and as a percentage of net revenue due to increased competition and a trend towards minimum guarantees of media purchases. The Company is in the process of renegotiating two significant international contracts which currently expire in the fourth fiscal quarter of 1999. The failure to retain or replace these contracts with new media time or alternative means of revenue (i.e. retail, shopping club) would have a negative impact on future European net revenue and/or operating results. DIRECT COSTS Direct costs are principally variable and consist of product costs, fulfillment, program production, commissions and royalties, in-bound telemarketing, credit card charges, warehousing and profit participation payments. Direct costs were $47.9 million for the three months ended December 31, 1998 as compared to $38.2 million for the three months ended December 31, 1997, an increase of $9.7 million or 25.6%. The increase was primarily attributable to the 28.1% increase in net revenue. As a percentage of net revenue, direct costs were 57.6% for the three months ended December 31, 1998 and 58.8% for the three months ended December 31, 1997. While, in the aggregate, direct costs as a percentage of net revenue improved slightly during the three months ended December 31, 1998 as compared to the three months ended December 31, 1997, domestic direct costs increased as a percentage of net revenue and foreign direct costs decreased as a percentage of net revenue. The increase in -16- domestic direct costs as a percentage of net revenue was primarily attributable to increased overall domestic product return rates. The increased domestic return rates were primarily attributable to the Company's product mix, which included a greater portion of intellectual properties than the comparable period in 1997, and included a 30-day deferred payment and return offer. The decrease in foreign direct costs as a percentage of net revenue was primarily attributable to the Company's European businesses. The decline in European direct costs as a percentage of net revenue was a result of increased net revenue and a product mix yielding higher average per transaction sales and a reduction in average fulfillment and telemarketing costs per order. In addition, the European region benefited from reduced direct costs associated with the Company's closure of certain unprofitable Eastern European markets. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $9.5 million for the three months ended December 31, 1998 as compared to $10.9 million for the three months ended December 31, 1997, a decrease of $1.4 million or 13.0%. The decrease was attributable to the Company's continued cost reduction efforts. Selling, general and administrative expenses as a percentage of net revenue decreased from 16.8% for the three months ended December 31, 1997 to 11.4% for the three months ended December 31, 1998, due to the impact of the cost reductions combined with a 28.1% increase in net revenue. DEPRECIATION AND AMORTIZATION Depreciation and amortization were $1.4 million for the three months ended December 31, 1998 as compared to $1.8 million for the three months ended December 31, 1997, a decrease of $400,000 or 24.2%. The decrease in depreciation and amortization was primarily attributable to the write-off of goodwill and other intellectual properties associated with the Company's PRTV subsidiary that was recognized during the fourth quarter of fiscal 1998. UNUSUAL CHARGES In connection with the Transaction, the Company adopted a revised business plan under the direction of its new management team and board of directors. As a result, the Company has undertaken specific actions to dramatically reduce its overall cost structure and transition its business model from a television direct marketing company to an electronic commerce company. Certain of these actions resulted in pre-tax restructuring and unusual charges during the three months ended December 31, 1998 of $21.7 million. The Company is continuing to evaluate all areas of its business, however, as a result of the plans discussed below, the Company expects to remove in excess of $10.0 million from its cost structure in fiscal year 2000 and beyond. These savings are predominantly due to wage related costs; reduced carrying costs of property, plant and equipment; reduced office rent and satellite leasing charges; and other miscellaneous savings. The restructuring charges are primarily attributable to the following: CLOSURE OF PHILADELPHIA, PENNSYLVANIA HEADQUARTERS. The Company made a decision to close its former corporate headquarters in Philadelphia, Pennsylvania and relocate its headquarters to its offices in Los Angeles, California. Included in restructuring charges are $4.1 million of costs associated with the termination of employees, cancellation of lease and other commitments, and the write-down of assets that are no longer in use. Such assets shall be sold or abandoned during the first quarter of fiscal year 2000. A total of 17 employees were terminated as part of the Company's plans to close its corporate offices. Of the 17 employees affected, 11 have been paid and/or left the Company as of December 31, 1998, and 6 shall receive their severance packages and leave the Company during the fourth fiscal quarter of 1999 or first fiscal quarter of 2000. CONSOLIDATION OF NEW ZEALAND AND FAR EAST BUSINESS OFFICES AND CLOSURE OF AUSTRALIAN RETAIL STORES. The Company made a decision to reduce the size of its New Zealand work force, and consolidate its previously separate New Zealand and Far East business offices within one location and shut-down unprofitable Australian retail stores. The restructuring charges of $826,000 are primarily comprised of costs associated with the termination of employees, cancellation of lease and commitments, and the write-down of assets that are no longer in use. Such assets have been sold or abandoned as of December 31, 1998. A total of 46 employees were terminated as part of the Company's plans to consolidate the two offices and close certain retail stores. Of the 46 employees affected, 32 -17- have been paid and/or left the Company as of December 31, 1998, and 14 shall receive their severance packages and leave the Company during the fourth fiscal quarter of 1999 or first fiscal quarter of 2000. OUTSOURCING OF CERTAIN NORTH AMERICAN OPERATIONS. The Company is in the process of outsourcing various aspects of its North American fulfillment center, customer service operations, and media agency business. As a result, during the quarter ended December 31, 1998 the Company disposed of its media agency subsidiary and is in the process of transitioning its fulfillment and customer service functions to third parties. The costs incurred to date of $4.4 million include costs primarily associated with the termination of employees, cancellation of lease and other commitments, and the write-down of assets to their fair market value. CLOSURE OF THE COMPANY'S OPERATIONS IN CERTAIN ASIAN AND EASTERN EUROPEAN MARKETS. Due to the economic downturn in Asia and Eastern Europe, the forecasted sales and opportunities in these regions has decreased significantly from the Company's original plans. Accordingly, the Company has made a decision to exit certain Asian and Eastern European markets and/or transfer such markets to third party licensee arrangements. The costs included in these restructuring charges of $1.9 million are costs incurred to date in connection with the termination of 12 employees, all of which terminations were completed and paid as of December 31, 1998, and the write-down of inventories and uncollectable trade accounts receivable in the affected markets. WRITE-DOWN OF PREPAID PRODUCTION. The Company has included in restructuring charges $2.6 million of costs related to the write-down of certain prepaid costs attributable to the production of its infomercials. The Company wrote-down these costs due to the fundamental change in its strategy involving the use of its infomercials. In connection with its revised business model, new electronic commerce platform and other initiatives, the Company has begun utilizing its infomercials not only for the sale of underlying products, but has begun leveraging its infomercial programs and television media to drive memberships in its membership shopping club, "Everything-4-Less", to exploit a retail market and continuity programs for its products, and to create list rental opportunities with respect to its customer base. Other unusual charges consist of the following: SHOPPING CLUB START-UP COSTS. The Company has included in unusual charges $1.2 million of start-up costs associated with the development and production of commercials related to the Company's "Everything-4-Less" membership shopping club. EUTELSTAT SATELLITE CONTRACT. The Company entered into a long-term commitment to lease a transponder on the Eutelstat/Q-24 satellite for the life of the satellite. The satellite launched in April 1998, and the Company has an estimated commitment of 10 to 12 years. The Company has classified the satellite contract as unfavorable, as it has estimated that it will be unable to recover certain costs involving excess capacity relating to its lease. Accordingly, the Company has included in unusual charges $4.7 million relating to its inability to recover certain costs attributable to the satellite lease. CHANGE OF CONTROL PAYMENTS. As part of the Transaction, the Company recorded severance charges of $1.8 million associated with the waiver of the change of control provisions contained in the employment agreements of three former executive officers. CONSULTING FEES. In connection with the Transaction, the Company recorded a non-cash charge of $210,000 in connection with a five year option to purchase up to 212,500 shares of the Company's common stock at an exercise price of $1.32 per share. The stock options were granted under a consulting agreement to a management company of which Mr. Lehman and two of his associates are managing members. INTEREST EXPENSE Interest expense was $528,000 for the three months ended December 31, 1998, as compared to $910,000 for the three months ended December 31, 1997, a decrease of $382,000. This decrease was attributable to a decrease in the Company's average outstanding indebtedness from approximately $26.6 million during the quarter ended December 31, 1997 to approximately $14.1 million during the quarter ended December 31, 1998, resulting from retirement of $21.5 million in outstanding indebtedness to its principal lender in October 1998 and repayment of $10.0 million outstanding indebtedness to ValueVision International, Inc. ("ValueVision) in December 1998. -18- INCOME TAXES The Company recorded income tax expense of $105,000 for the three months ended December 31, 1998 attributable to certain Asian operations. Income tax benefits have not been recorded during the respective periods for domestic and European losses and have been fully reserved for. These benefits will be recorded when realized, reducing the effective tax rate on future domestic and European earnings, if any. EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF LONG-TERM DEBT The gain on extinguishment of long-term debt resulted from the Company's retirement of its approximately $21.5 million debt outstanding under a revolving credit and term loan facility with its then principal lender at a twenty-five percent discount. EARNINGS BEFORE INTEREST, INCOME TAXES, DEPRECIATION AND AMORTIZATION (EBITDA) EBITDA deficit exclusive of unusual charges and gain on extinguishment of debt was $3.0 million for the three months ended December 31, 1998 as compared to an EBITDA deficit exclusive of unusual charges of $4.7 million for the three months ended December 31, 1997, a decrease of $1.6 million or 34.6%. EBITDA margin, exclusive of the above items, was (3.7)% and (7.2)% during the three month periods ended December 31, 1998 and 1997, respectively. NET INCOME The Company incurred a net loss of $21.9 million for the three months ended December 31, 1998, as compared to a net loss of $8.1 million for the three months ended December 31, 1997. Net loss for the December 31, 1998 quarter includes unusual charges of $21.7 million and a gain on extinguishment of debt of $4.9 million. Net loss for the December 31, 1997 quarter included unusual charges of $750,000. Excluding these items, net loss was $5.1 million for the three months ended December 31, 1998, as compared to a net loss of $7.4 million for the three months ended December 31, 1997, a decrease of $2.3 million or 31.4%. NINE MONTHS ENDED DECEMBER 31, 1998 AS COMPARED TO DECEMBER 31, 1997 NET REVENUE Net revenue was $253.0 million for the nine months ended December 31, 1998 as compared to $186.6 million for the nine months ended December 31, 1997, an increase of $66.4 million or 35.5%. Domestic net revenue for the nine months ended December 31, 1998 was $155.8 million as compared to $70.0 million for the nine months ended December 31, 1997, an increase of $85.8 million or 122.4%. The increase was primarily attributable to a greater number of successful infomercials and products during the current period. The nine month period ended December 31, 1998 included five shows which generated over $15.0 million in net revenue and only one show which comprised over 15% of total domestic net revenues. The comparable nine month period of fiscal 1998 included only one show which generated in excess of $15.0 million of net revenue and which comprised over 15% of total domestic net revenue. During the fiscal 1998 period, the Great North American Slim Down show generated approximately 28.7% of the domestic net revenues. During the nine months ended December 31, 1998, the Larry North II show generated approximately 21.0% of total domestic net revenue. International net revenue for the nine months ended December 31, 1998 was $97.2 million as compared to $116.6 million for the three months ended December 31, 1997, a decrease of $19.4 million or 16.7%. The decrease was attributable to a 29.7% decline in net revenue in Japan, of which approximately 5.7% was attributable to currency devaluation and the current economic climate in Japan. In addition, the Company's operations in the South Pacific continued to experience the negative impact of the economic downturn throughout that region, which resulted in a significant decline in consumer spending. This region also suffered from a lack of successful new shows. The Company's South Pacific revenue for the nine months ended December 31, 1998 as compared to the nine months ended December 31, 1997 decreased approximately $12.3 million or 35.7%. Approximately 12.6% of the decline was the result of currency devaluation. -19- OPERATING COSTS Total operating costs and expenses were $291.6 million for the nine months ended December 31, 1998 as compared to $221.8 million for the nine months ended December 31, 1997, an increase of $69.8 million or 31.5%. Included in the nine months ended December 31, 1998 and 1997 were unusual charges of $20.5 million and $750,000 respectively. Excluding the unusual charges, operating costs for the nine months ended December 31, 1998 increased by $50.0 million or 22.6% over operating costs for the nine months ended December 31, 1997. The increase was principally attributable to the increase in net revenue of 35.5% which was partially offset by a reduction in direct costs as a percentage of net revenues and a decrease in selling, general and administrative expenses. MEDIA PURCHASES Media purchases were $87.9 million for the nine months ended December 31, 1998 as compared to $61.3 million for the nine months ended December 31, 1997, an increase of $26.6 million or 43.4%. The Company's worldwide ratio of media purchases to net revenue increased to 34.8% for the nine months ended December 31, 1998 as compared to 32.9% for the nine months ended December 31, 1997. The increase in media purchases as a percentage of net revenue was attributable to the increased proportion of domestic revenue in relation to foreign revenue, which domestic revenue carry greater media costs. Domestic net revenue represented 61.6% of total net revenue for the nine months ended December 31, 1998 as compared to only 37.5% for the nine months ended December 31, 1997. DIRECT COSTS Direct costs were $146.2 million for the nine months ended December 31, 1998 as compared to $116.2 million for the nine months ended December 31, 1997, an increase of $30.0 million or 25.7%. The increase was primarily attributable to the 35.5% increase in net revenue. As a percentage of net revenue, direct costs were 57.8% for the nine months ended December 31, 1998 as compared to 62.3% for the nine months ended December 31, 1997. The decrease as a percentage of net revenue was attributable to a reduction in domestic direct costs. International direct costs as a percentage of net revenue remained consistent with the prior year period. The decrease in domestic direct costs as a percentage of net revenue was primarily attributable to increased domestic net revenue and the nature of certain fixed costs associated with the Company's North American fulfillment center and television production facility. SELLING, GENERAL AND ADMINISTRATIVE Selling, general and administrative expenses were $29.7 million for the nine months ended December 31, 1998 as compared to $35.8 million for the nine months ended December 31, 1997, a decrease of $6.1 million or 17.0%. The decrease in selling, general and administrative costs reflects the Company's continued cost reduction and restructuring efforts. Selling, general and administrative expenses as a percentage of net revenue decreased from 19.2% for the nine months ended December 31, 1997 to 11.8% for the nine months ended December 31, 1998, principally due to the Company's cost reduction and restructuring efforts combined with the 35.5% increase in net revenue. DEPRECIATION AND AMORTIZATION Depreciation and amortization were $4.2 million for the nine months ended December 31, 1998 as compared to $5.4 million for the nine months ended December 31, 1997, a decrease of $1.2 million, or 21.2%. The decrease in depreciation and amortization was attributable to the write-off of goodwill and other intellectual properties associated with the Company's PRTV subsidiary that was recognized during the fourth quarter of fiscal 1998. -20- UNUSUAL CHARGES In connection with the Transaction, the Company adopted a revised business plan under the direction of its new management team and board of directors. As a result, the Company has undertaken specific actions to dramatically reduce its overall cost structure and transition its business model from a television direct marketing company to an electronic commerce company. Certain of these actions had resulted in pre-tax restructuring and unusual charges during the nine months ended December 31, 1998 of $20.5 million. The Company is continuing to evaluate all areas of its business, however, as a result of the plans discussed below, the Company expects to remove in excess of $10.0 million from its cost structure in fiscal year 2000 and beyond. These savings are predominantly due to wage related costs; reduced carrying costs of property, plant and equipment; reduced office rent and satellite leasing charges; and other miscellaneous savings. The restructuring charges are primarily attributable to the following: CLOSURE OF PHILADELPHIA, PENNSYLVANIA HEADQUARTERS. The Company made a decision to close its former corporate headquarters in Philadelphia, Pennsylvania and relocate its headquarters to its offices in Los Angeles, California. Included in restructuring charges are $4.1 million of costs associated with the termination of employees, cancellation of lease and other commitments, and the write-down of assets that are no longer in use. Such assets shall be sold or abandoned during the first quarter of fiscal year 2000. A total of 17 employees were terminated as part of the Company's plans to close its corporate offices. Of the 17 employees affected, 11 have been paid and/or left the Company as of December 31, 1998, and 6 shall receive their severance packages and leave the Company during the fourth fiscal quarter of 1999 or first fiscal quarter of 2000. CONSOLIDATION OF NEW ZEALAND AND FAR EAST BUSINESS OFFICES AND CLOSURE OF AUSTRALIAN RETAIL STORES. The Company made a decision to reduce the size of its New Zealand work force, and consolidate its previously separate New Zealand and Far East business offices within one location and shut-down unprofitable Australian retail stores. The restructuring charges of $826,000 are primarily comprised of costs associated with the termination of employees, cancellation of lease and commitments, and the write-down of assets that are no longer in use. Such assets have been sold or abandoned as of December 31, 1998. A total of 46 employees were terminated as part of the Company's plans to consolidate the two offices and close certain retail stores. Of the 46 employees affected, 32 have been paid and/or left the Company as of December 31, 1998, and 14 shall receive their severance packages and leave the Company during the fourth fiscal quarter of 1999 or first fiscal quarter of 2000. OUTSOURCING OF CERTAIN NORTH AMERICAN OPERATIONS. The Company is in the process of outsourcing various aspects of its North American fulfillment center, customer service operations, and media agency business. As a result, during the quarter ended December 31, 1998 the Company disposed of its media agency subsidiary and is in the process of transitioning its fulfillment and customer service functions to third parties. The costs incurred to date of $4.4 million include costs primarily associated with the termination of employees, cancellation of lease and other commitments, and the write-down of assets to their fair market value. CLOSURE OF THE COMPANY'S OPERATIONS IN CERTAIN ASIAN AND EASTERN EUROPEAN MARKETS. Due to the economic downturn in Asia and Eastern Europe, the forecasted sales and opportunities in these regions has decreased significantly from the Company's original plans. Accordingly, the Company has made a decision to exit certain Asian and Eastern European markets and/or transfer such markets to third party licensee arrangements. The costs included in these restructuring charges of $1.9 million are costs incurred to date in connection with the termination of 12 employees, all of which terminations were completed and paid as of December 31, 1998, and the write-down of inventories and uncollectable trade accounts receivable in the affected markets. WRITE-DOWN OF PREPAID PRODUCTION. The Company has included in restructuring charges $2.6 million of costs related to the write-down of certain prepaid costs attributable to the production of its infomercials. The Company wrote-down these costs due to the fundamental change in its strategy involving the use of its infomercials. In connection with its revised business model, new electronic commerce platform and other initiatives, the Company has begun utilizing its infomercials not only for the sale of underlying products, but has begun leveraging its infomercial programs and television media to drive memberships in its membership shopping -21- club, "Everything-4-Less", to exploit a retail market and continuity programs for its products, and to create list rental opportunities with respect to its customer base. Other Unusual charges consist of the following: SHOPPING CLUB START-UP COSTS. The Company has included in unusual charges $1.2 million of start-up costs associated with the development and production of commercials related to the Company's "Everything-4-Less" membership shopping club. EUTELSTAT SATELLITE CONTRACT. The Company entered into a long-term commitment to lease a transponder on the Eutelstat/Q-24 satellite for the life of the satellite. The satellite launched in April 1998, and the Company has an estimated commitment of 10 to 12 years. The Company has classified the satellite contract as unfavorable, as it has estimated that it will be unable to recover certain costs relating to its lease. Accordingly, the Company has included in unusual charges $4.7 million relating to its inability to recover the costs attributable to the Satellite lease. CHANGE OF CONTROL PAYMENTS. As part of the Transaction the Company recorded severance charges of $1.8 million associated with the waiver of the change of control provisions contained in the employment agreements of three former executive officers. CONSULTING FEES. In connection with the Transaction, the Company recorded a non-cash charge of $210,000 in connection with a five year option to purchase up to 212,500 shares of the Company's common stock at an exercise price of $1.32 per share. The stock options were granted under a consulting agreement to a management company of which Mr. Lehman and two of his associates are managing members. WRITE-OFF OF MERGER COSTS. In June 1998, the Company wrote-off capitalized costs of $0.7 million related to the termination of the Company's intended merger with ValueVision. NON-CASH EXECUTIVE COMPENSATION. The Company had previously recorded compensation expense of $1.9 million in connection with 750,000 stock options issued to three executive officers during fiscal 1998. $750,000 of this charge was recorded during the three months ended December 31, 1997. The stock options contained provisions that, upon the occurrence of certain triggering events prior to June 30, 1998, the exercise price of the stock options would be reduced. The previously recorded expense was reversed in the first fiscal quarter of 1999 as no triggering events occurred as of the June 30, 1998 expiration date. INTEREST EXPENSE Interest expense was $3.0 million for the nine months ended December 31, 1998, as compared to $2.3 million for the nine months ended December 31, 1997, an increase of $700,000. This increase was primarily attributable to the interest rate on the Company's loan from its principal lender being approximately three percentage points higher during the current nine month period. INCOME TAXES The Company recorded income tax expense of $335,000 and $300,000 for the nine months ended December 31, 1998 and 1997, respectively, attributable to its Asian operations. Income tax benefits have not been recorded during the respective periods on domestic and European losses and have been fully reserved for. These benefits will be recorded when realized, reducing the effective tax rate on future domestic and European earnings. EXTRAORDINARY ITEM - GAIN ON EXTINGUISHMENT OF LONG-TERM DEBT The gain on extinguishment of long-term debt resulted from the Company's retirement of its approximately $21.5 million debt outstanding under a revolving credit and term loan with its then principal lender at a twenty-five percent discount. -22- EARNINGS BEFORE INTEREST, DEPRECIATION AND AMORTIZATION (EBITDA) EBITDA deficit, exclusive of the unusual charges and gain on extinguishment of debt, was $10.9 million for the nine months ended December 31, 1998 as compared to an EBITDA deficit of $26.8 million for the nine months ended December 31, 1997, an improvement of $15.9 million or 59.4%. EBITDA margin, exclusive of the above items, was (4.3)% and (14.4)% for the nine months ended December 31, 1998 and 1997, respectively. The improvements in EBITDA and EBITDA margin were primarily attributable to the improvement in the Company's domestic and European results of operations. NET INCOME The Company incurred a net loss of $34.1 million for the nine months ended December 31, 1998, as compared to a net loss of $35.5 million for the nine months ended December 31, 1997. The current nine month period includes unusual charges of $20.5 million and a gain on extinguishment of debt of $4.9 million. The nine month period ended December 31, 1997 included unusual charges of $750,000. Excluding these items, the Company incurred a net loss of $18.5 million for the nine months ended December 31, 1998 compared to a net loss of $34.7 million for the nine months ended December 31, 1997. This represents a $16.3 million or 46.8% improvement over the loss for the nine months ended December 31, 1997. LIQUIDITY AND CAPITAL RESOURCES The Company's working capital was $13.8 million at December 31, 1998 as compared to a $9.4 million at March 31, 1998, an increase of $4.4 million. The increase was primarily attributable to the $5.7 million increase in securities available for sale, the reduction of debt with proceeds from the sale of Series E Preferred Stock and the exercise of stock options and warrants. The Company met its current period cash needs primarily through the sale of inventory and cash proceeds from the aforementioned equity transactions. Operating activities for the nine months ended December 31, 1998 resulted in a use of cash of $10.8 million. The Company's cash flow from operations during the nine months ended December 31, 1998 was adversely impacted by the net loss of approximately $34.1 million. Consolidated accounts receivable decreased by $400,000, or 1.1%, primarily due to an increase in domestic accounts receivables of $1.6 million offset by a decrease in international accounts receivable of $2.0 million. Domestic accounts receivable increased due to an increase in time payment receivables related to sales of higher priced products. International accounts receivable have decreased due to the decrease in sales volume in the Asian and South Pacific regions. This decrease was principally attributable to a decrease in net revenue for the month of December as compared to the month of March for these regions. March has historically been one of the Company's stronger revenue months. Consolidated inventories decreased $6.1 million or 28.9%. This was attributable to a $2.5 million or 29.4% decrease in domestic inventory. This decrease resulted from higher domestic sales volume and increased inventory turnover. International inventories decreased $3.6 million or 28.6% attributable to the Company's continued efforts to reduce global inventory levels and a write-down of certain Asian, South Pacific, Eastern European and Latin American inventories. Accrued expenses increased from $29.7 million at March 31, 1998 to $37.6 million at December 31, 1998 primarily due to the restructuring reserve discussed in Note 8 to the unaudited Condensed Consolidated Financial Statements. The Company received approximately $17.9 million in net proceeds from the Transaction, as more fully described in Note 5 to the unaudited Condensed Consolidated Financial Statements. The Series E Preferred Stock sold in connection with the Transaction carries a 4.0% coupon for one year and is convertible into 13,333,333 shares of the Company's common stock based on a fixed conversion price of $1.50 per share (subject to adjustment). In connection with the Transaction, the Company issued five year options and warrants to purchase up to 212,500 and 3,762,500 shares of the Company's common stock, respectively, at exercise prices ranging from $1.32 to $3.00 per share. Approximately $16.1 million of the proceeds of the Transaction was used to retire the Company's outstanding indebtedness to its principal lender at a twenty-five percent discount. The repayment of debt resulted in an extraordinary gain on extinguishment of approximately $4.9 million which is recorded in the Company's statement of operations for the three and nine months ended December 31, 1998. The remaining proceeds were used for costs related to the Transaction and for working capital purposes. The Company is currently in dispute with a former financial advisor regarding a $1.9 million fee related to the Transaction. Amounts that may be paid, if any, related to this fee shall be recorded as a reduction of stockholders' equity. -23- In December 1998, the Company repaid a $10.0 million loan to ValueVision with existing working capital and proceeds of approximately $2.0 million related to the exercise of 750,000 stock options held by ValueVision. In addition, during December 1998 the Company also entered into a new revolving credit facility in the amount of $20.0 million as more fully described in Note 3 to the unaudited Condensed Consolidated Financial Statements. At December 31, 1998, the Company had $13.6 million of remaining availability under this facility and $636,000 was outstanding. Stockholders' equity of the Company at December 31, 1998 included an unrealized gain of $5.2 million on securities available-for-sale. The securities were sold subsequent to December 31, 1998 resulting in a realized gain of approximately $6.5 million. In June 1998, the Company announced the termination of its proposed merger with ValueVision. As a result, the maximum conversion price of the Company's Series D preferred stock and the exercise price of the 1,489,413 warrants held by holders of the Series D Preferred Stock were automatically adjusted to $1.073125 per share. As a result of the Transaction, the Series D conversion price was subsequently fixed at $1.073125 per share. Based on such conversion price, the $19.6 million of outstanding shares of Series D preferred stock at December 31, 1998 are convertible into 18,241,899 shares of the Company's common stock, not including shares of the Company's common stock issuable upon conversion of any accrued premium. In addition, certain anti-dilution provisions of the Series B Stock and Series B Warrants were triggered resulting in an increase in the total shares of common stock underlying these securities to increase from approximately 5.5 million shares to approximately 10.7 million shares, and a decrease in the exercise price of the warrants from approximately $4.80 per share to approximately $2.37 per share. The Company's foreign revenue is subject to exchange risk. To the extent the Company incurs local currency expenses that are based on locally denominated sales volume (order fulfillment and media costs), the exposure is reduced significantly. The Company monitors exchange rate and/or forward contracts when appropriate. As a result of the aforementioned capital infusion and new credit facility the Company has an ability to hedge its currency risk. During the third fiscal quarter of 1999 the Company entered into forward contracts to hedge its Japanese Yen position. In the long term, the Company has the ability to change prices to a certain extent in a timely manner in order to react to major currency fluctuations; which may reduce a portion of the risk associated with local currency fluctuations. However, the significant currency devaluation and economic downturn being experienced in certain foreign regions will have a negative impact on the Company's operating results and cash flows in fiscal 1999. Currently, the Company's three major foreign currencies are the European Economic Union's Euro, German deutsch mark and the Japanese yen, each of which has been subject to recent fluctuations. In addition, certain other currencies utilized by the Company, especially the Australian and New Zealand dollar, have experienced devaluation from the prior year. The Company's cash position continues to be pressured by the losses incurred in the first nine months of fiscal 1999 and the continued downturn in its Asian and South Pacific operations, however the Company's recent $20.0 million equity infusion, its new $20.0 million new credit facility and corresponding repayment of its outstanding indebtedness has greatly improved the Company's liquidity position. The Company needs to continue to implement certain plans and actions designed to rebuild its business, including the continued introduction of successful new shows and products, more successfully leverage its media, and to return the Company to profitability in order to continue as a going concern. No assurance can be given that any of these actions will be successful. YEAR 2000 IMPLICATIONS The Company has reviewed the implications of Year 2000 (i.e., "Y2K") compliance and is presently undertaking the process to ensure that the Company's information systems and software applications will manage dates beyond 1999. The Company believes that it has allocated adequate resources for this purpose and those planned software upgrades, which are underway and in the normal course of business, will address the Company's internal Year 2000 needs. While the Company expects that efforts on the part of current employees of the Company will be required to monitor Year 2000 issues, no assurances can be given that these efforts will be successful. The Company does not expect the cost of addressing any Year 2000 issue to be a material event or uncertainty that would have a material, adverse effect on future results of operations or financial condition. The Year 2000 issue developed because most computer systems and programs were designed to record years (e.g. "1998") as two-digit fields (e.g. "98"). When the year 2000 begins, these systems may interpret "00" as the year 1900 and may stop processing date-related computations or process them incorrectly. To prevent this occurrence, the Company has begun examining its computer systems and programs, correcting the problems and testing the results. The Company on or before December 31, 1999 must achieve Year 2000 compliance. Also, due to the nature of the Company's time payment offers within its infomercials, certain systems currently refer to dates beyond December 31, 1999 and, therefore, require earlier compliance. -24- The Company, as with all direct marketing and electronic commerce companies, is heavily dependent upon computer systems for all phases of its operations. For this reason, it is aggressively addressing the Year 2000 issue to mitigate the effect on software performance. During late fiscal 1998, the Company commenced a comprehensive effort to identify and correct the Year 2000 programming issues. By early fiscal 1999 the Company had identified all potential Year 2000 hardware and software issues within both its mainframe processing systems and personal computers worldwide. The Company has initiated a project to address all of the identified Year 2000 issues within its systems, utilizing both internal and external resources. Also during early fiscal 1999, the Company formed a Year 2000 Compliance Task Force to oversee the project, address all related business issues, and facilitate communication with significant suppliers and service providers. The project was divided into the following phases: (i) identification and inventorying of all systems and software with potential Year 2000 problems; (ii) evaluation of scope of Year 2000 issues and assignment of priorities to each item based upon its importance in the Company's operations; (iii) rectification of Year 2000 issues in accordance with assigned priorities, by correction, upgrade, replacement, or retirement; and (iv) testing for and validation of Year 2000 compliance. Because the Company uses a variety of systems, internally developed and third party provided software, and embedded chip equipment, depending on the business function and location, various aspects of the Company's Year 2000 efforts are in different phases and are proceeding parallel. The Company's operations are also dependent on the Year 2000 readiness of third parties that do business with the Company. In particular, the Company's systems interact with automated clearing-houses to handle the transfer of cash relating to the sale of the Company's receivables. The Company is also dependent on third-party suppliers of such infrastructure elements as, but not limited to, telephone services, electric power, and water. In addition, the Company depends upon various vendors that manufacture its products, are responsible for in-bound telemarketing, and fulfill customer orders. The Company has identified and initiated formal communications with key suppliers and merchandise vendors to determine the extent to which the Company will be vulnerable to such parties' failures to address and resolve their Year 2000 issues. In addition, the Company now requires its vendors to provide representations and warranties in all new contracts that there are no Year 2000 issues that could impact vendor performance, and the Company also obtains indemnification for damages it may suffer due to a vendor's failure to comply with Year 2000 requirements. Although the Company is not aware of any known third party problem that will not be corrected, the Company has limited information concerning the Year 2000 readiness of third parties. The Company estimates that its systems will be Year 2000 compliant by mid-1999. Aggregate costs for work related to Year 2000 efforts are anticipated to range from approximately $1 to $2 million. Operating costs related to the Year 2000 compliance project will be incurred over several quarters and will be expensed as incurred. The Company incurred approximately $350,000 and $750,000 in expenses during the three month and nine month period ended December 31, 1998, respectively in connection with its Year 2000 compliance efforts. The Company expects to implement the changes necessary to address the Year 2000 issue for systems and equipment used within the Company. The Company presently believes that, with modifications to existing software, conversions to new software, and appropriate replacement of equipment, the Year 2000 issue is not likely to pose significant operational problems. However, if unforeseen difficulties arise or such modification, conversions and replacements are not completed in a timely manner, or if the Company's vendors' or suppliers' systems are not modified to become Year 2000 compliant, the Year 2000 issue may have a material impact on the results of operations and financial condition of the Company. The Company is presently unable to assess the likelihood that it will experience significant operational problems due to unresolved Year 2000 problems of third parties. The Company's estimates of the costs of achieving Year 2000 compliance and the date by which Year 2000 compliance will be achieved are based on management's best estimates. These estimates are derived using numerous assumptions about future events including the continued availability of resources, third party modification plans and other factors. However, there can be no assurance that these estimates will be achieved, and actual results could differ materially from these estimates. Specific factors that might cause such differences include, but are not limited to, the availability and cost of personnel trained in Year 2000 issues, the ability to locate, correct, and test all relevant computer codes, the success achieved by the Company's suppliers in reaching Year 2000 readiness, the timely availability of necessary replacement equipment, and similar uncertainties. -25- The Company believes the most likely worst-case scenarios that it might confront with respect to the Year 2000 issues have to do with the possible failure in one or more geographic regions of third party systems over which the Company has no control, such as, but not limited to, power and telephone service, and vendors that supply manufactured products and services. The Company is developing a Year 2000 contingency plan, which it expects to complete during the first half of fiscal 2000. OTHER The Company announced that it will hold a special meeting of stockholders on February 25, 1999 to consider and vote upon an amendment of the Company's Certificate of Incorporation to change the name of the Company to e4L, Inc. FACTORS THAT MAY EFFECT FUTURE PERFORMANCE RECENT LOSSES; CASH FLOW The Company incurred significant losses in four of its last five fiscal years. The Company also reported a net loss of approximately $34.1 million for the first nine months of fiscal 1999. Because of the Company's financial condition as well as other unfavorable conditions, including cash flow problems, the Company's independent auditors stated, on June 29, 1998, that substantial doubt exists as to the Company's ability to continue as a going concern. In response to these issues, the Company developed a business plan and has begun implementing new initiatives designed to increase revenues, reduce costs and return it to profitability; however, if the business plan does not adequately address the circumstances and situations which resulted in the Company's poor performance, the Company would be required to seek alternative forms of financing, the availability of which is uncertain, or be forced to go out of business. NATURE OF THE DIRECT RESPONSE MARKETING AND ELECTRONIC COMMERCE INDUSTRIES. The Company experiences extreme competition for products, customers and media access in the direct response marketing and electronic commerce industries. Accordingly, to be successful, the Company must: o Accurately predict consumer needs, market conditions and competition; o Introduce successful products; o Produce compelling infomercials; o Acquire appropriate amounts of media time; o Manage its media time effectively; o Fulfill customer orders timely and efficiently; o Provide courteous and informative customer service; o Maintain adequate vendor relationship and terms; o Enhance successful products to generate additional sales; o Expand the methods used to sell products; o Expand in existing geographic markets; and o Integrate acquired companies and businesses efficiently. The Company's recent operating results were primarily caused by delays in product introductions, a lack of successful products, failure to adequately leverage its global spending and deteriorating economic conditions in the Asian and South Pacific markets. The Company actively seeks out new products, new sources of products and alternative distribution channels, including retail and the Internet. The Company cannot be sure that inventors and product manufacturers will select it to market their products. Significant delays in product introductions or a lack of -26- successful products could prevent the Company from selling adequate amounts of its products and otherwise have a negative effect on the Company's business. DEPENDENCE AND FOREIGN SALES The Company markets products to consumers in over 70 countries. In recent years the Company has derived approximately half of its net revenues from sales to customers outside the United States and Canada. The Company's largest international markets are Germany, Asia, primarily Japan and the South Pacific. The economic downturn in the Asian and South Pacific regions has had and, for the foreseeable future, is expected to have, an adverse effect on the Company. The Company's international expansion has increased its working capital requirements due to the additional time required to deliver products abroad and receive payment from foreign countries. While the Company's foreign operations have the advantage of airing infomercials that have already proven successful in the United States, as well as successful infomercials produced by other infomercial companies with limited media access and distribution capabilities, there can be no assurance that the Company's foreign operations will continue to generate similar revenues or operate profitability. Competition in the international marketplace is increasing rapidly. In addition, the Company is subject to many risks associated with doing business abroad including: o Adverse fluctuations in currency exchange rates; o Transportation delays and interruptions; o Political and economic disruptions; o The imposition of tariffs and import and export controls; and o Increased customs or local regulations. The occurrence of any of these risks could have a negative effect on the Company's business. ENTERING INTO NEW MARKETS As the Company enters new markets, it is faced with the uncertainty of never having done business in that country's particular commercial, political and social environment. Accordingly, despite the Company's best efforts, likelihood of success is unpredictable for reasons particular to each new market. It is also possible that, despite the Company's apparently successful entrance into a new market, some unforeseen circumstance could arise which would limit the Company's ability to continue to do business, operate profitability or to expand in that new market. DEPENDENCE ON SUCCESSFUL PRODUCTS; UNPREDICTABLE MARKET LIFE; INVENTORY MANAGEMENT AND PRODUCT RETURNS The Company is dependent on its continuing ability to introduce successful new products to supplement or replace existing products as they mature through their product life cycles. The Company's five most successful products each year typically account for a substantial amount of the Company's annual net revenues. Generally, the Company's successful products change from year to year. Accordingly, the Company's future results of operations depend on its ability to introduce successful products consistently and to capture the full revenue potential of each product at all stages of consumer marketing and distribution channel's during the product's life cycle. In addition to a supply of successful new products, the Company's revenues and results of operations depend on a positive customer response to its infomercials, the effective management of product inventory and other factors. Customer response to infomercials depends on many variables, including the appeal of the products being marketed, the effectiveness of the infomercial, the availability of competing products and the timing and frequency of airings. There can be no assurance that the Company's infomercials will receive market acceptance. The Company must have an adequate supply of inventory to meet consumer demand. Most of the Company's products have a limited market life, so it is extremely important that the Company generate maximum sales during this time period. If production delays or shortages, poor inventory management or inadequate cash flow prevent the Company from maintaining sufficient inventory, the Company could lose potential product sales, which may never be recouped. In addition, unanticipated obsolescence of a product may occur or problems may arise regarding -27- regulatory, intellectual property, product liability or other issues which adversely affect future sales of a product even though the Company may still hold a large quantity of the product in inventory. Accordingly, the Company's ability to maintain systems and procedures to effectively manage its inventory is of critical importance to the Company's cash flow and results of operations. The average domestic and international market life of a product is less than two years. Generally, products generate their most significant revenues in their first year of sales. In addition, the Company must adapt to market conditions and competition as well as other factors which may cut short a product's life cycle and adversely affect the Company's results of operations. The Company offers a limited money-back guarantee on all of its products if the customer is not fully satisfied. Accordingly, the Company's results of operations may be adversely affected by product returns under the Company's guarantee, its product warranty or otherwise. Although the Company establishes reserves against product returns which it believes are adequate based on product mix and returns history, there can be no assurance that the Company will not experience unexpectedly high levels of product returns which exceed the reserves for that product. If product returns do exceed reserves, the Company's results of operations would be adversely affected. DEPENDENCE ON THIRD PARTY MANUFACTURERS AND SERVICE PROVIDERS Substantially all of the Company's products are manufactured by other domestic and foreign companies. In addition, the Company sometimes uses other companies to fulfill orders placed for the Company's products and to provide telemarketing services. If the Company's suppliers are unable, either temporarily or permanently, to deliver products to the Company in time to fulfill sales orders, it could have a material adverse effect on the Company's results of operations. Moreover, because the time from the initial approval of a product by the Company's product development department until the first sale of a product must be short, the Company must be able to cause its product manufacturers to quickly produce high-quality, reasonable priced products for the Company to sell. However, because the Company's primary product manufacturers are foreign companies which require longer lead times for products, any delay in production or delivery would adversely affect sales of the product and the Company's results of operations. In addition, utilization of foreign manufacturers further exposes the Company to the general risks of doing business abroad. DEPENDENCE OF MEDIA ACCESS; EFFECTIVE MANAGEMENT OF MEDIA TIME The Company must have access to media time to televise its infomercials on cable and broadcast networks, network affiliates and local stations. The Company purchases a significant amount of media time to from cable television and satellite networks, which assemble programming for transmission to cable system operators. If demand for air time increases, cable system operators and broadcasters may limit the amount of time available for these broadcasts. Larger multiple cable system operators have begun selling "dark" time, (i.e., the hours during which a network does not broadcast its own programming) to third parties which may cause prices for such media to rise. Significant increases in the cost of media time or significant decreases in the Company's access to domestic or international media time could negatively affect the Company. In addition, periodic world events may limit the Company's access to air time and reduce the number of persons viewing the Company's infomercials in one or more markets, which would negatively affect the Company for these periods. Recently, international media suppliers have begun to negotiate for fixed media rates and minimum revenue guarantees, each of which increase the Company's cost of media and risk. In addition to acquiring adequate amounts of media time, the Company's business depends on its ability to manage efficiently its acquisitions of media time, by analyzing the need for, and making purchases of, long term media and spot media. The Company must also properly allocate its available air time among its current library of infomercials. Whenever the Company makes advance purchases and commitments to purchase media time, it must manage the media time effectively, because the failure to do so could negatively affect the Company's business. If the Company cannot use all of the media time it has acquired, it attempts to sell its excess media time to others. However, there can be no assurance that the Company will be able to use or sell all of its media time. -28- The Company is currently in discussions with certain international media vendors regarding contract extentions. If the Company is unable to extend its long-term media agreements on reasonable terms as they expire, or to purchase replacement media time at favorable prices, the Company's business could be negatively affected. In April 1998, the Company began leasing a twenty-four hour transponder on a newly-launched Eutelstat satellite, the "Hotbird IV," which broadcasts across Europe. The Company has incurred significant start-up costs in connection with the transponder lease. If the Company is unable to use effectively or sell the transponder media time, the Company's business could be negatively affected. During the three months ended December 31, 1998, the Company recorded a $4.7 million loss relating to its inability to recover certain costs attributable to this satellite lease. LITIGATION AND REGULATORY ACTIONS There have been many lawsuits against companies in the infomercial industry. In recent years, the Company has been involved in significant legal proceedings and regulatory actions by the Federal Trade Commission and Consumer Product Safety Commission, which have resulted in significant costs and charges to the Company. In addition, the Company, its wholly-owned subsidiary, Positive Response Television, Inc. and its chief executive officer, Michael Levey, are subject to FTC consent orders which require them to submit periodic compliance reports to the FTC. Any additional FTC or CPSC violations or significant new litigation could have a negative effect on the Company's business. In August 1998, the Company received notice from the New York Stock Exchange ("NYSE") that it did not meet the NYSE's standards for continued listing. Representatives from the Company met with the NYSE staff and proposed actions to the NYSE designed to restore its compliance with the listing standards. The NYSE reviewed the Company's compliance plan and informed the Company that, while it would continue to monitor the Company's compliance plan and performance, no action by the NYSE was presently contemplated. If the Company's common stock is delisted from trading on the NYSE, it would have severe negative effects on the Company and its stockholders. PRODUCT LIABILITY CLAIMS Products sold by the Company may expose it to potential liability from damages claims by users of the products. In certain instances, the Company is able to obtain contractual indemnification rights against these liabilities from the manufacturers of the products. In addition, the Company generally requires its manufacturers to carry product liability insurance. However, National Media cannot be certain that manufacturers will maintain this insurance or that their coverage will be adequate to cover all claims. In addition, the Company cannot be certain that it will be able to maintain its insurance coverage or obtain additional coverage on acceptable terms, or that its insurance will provide adequate coverage against all claims. COMPETITION The Company competes directly with companies which generate sales from infomercials and other direct marketing and electronic commerce companies. The Company also competes with a large number of consumer product retailers, many of which have substantially greater financial, marketing and other resources than the Company. Some of these retailers have recently begun, or indicated that they intend to begin, selling products through direct response marketing methods, including sales in various e-commerce channels, such as via the Internet. The Company also competes with companies that make imitations of the Company's products at substantially lower prices, which may be sold in department stores, pharmacies, general merchandise stores and through magazines, newspapers, direct mail advertising, catalogs and the Internet. DEPENDENCE ON KEY PERSONNEL The Company's executive officers have substantial experience and expertise in direct response sales and marketing, electronic commerce and media. In particular, the Company is highly dependent on certain of its employees responsible for product development and production of infomercials. If any of these individuals leave the Company, the Company's business could be negatively affected. Steven Lehman, the Company's Chairman of the Board and Chief Executive Officer, Eric Weiss, the Company's Vice Chairman of the Board and Chief Operating Officer and Daniel Yukelson, the Company's Executive Vice President/Finance and Chief Financial Officer are currently compensated pursuant to the terms of a consulting agreement. While the Company expects to enter into -29- employment agreements with each of Messrs. Lehman, Weiss and Yukelson, the loss of any of them would negatively affect the Company's business. YEAR 2000 ISSUES The operation of the Company's business is dependent on its computer hardware, software programs and operating systems. Computer technology is used in several key areas of the Company's business, including merchandise purchasing, inventory management, pricing, sales, shipping and financial reporting, as well as in various administrative functions. The Company has been evaluating its computer technology to identify potential Year 2000 compliance problems and has begun an implementation process with respect thereto. It is anticipated that modification or replacement of some of the Company's computer technology will be necessary to enable the Company's computer to recognize the Year 2000. The Company does not expect that the costs associated with achieving Year 2000 compliance will have a significant effect on its business. In addition, the Company is also dependent on third-party suppliers and vendors and will be vulnerable to such parties failures to address and resolve their Year 2000 issues. While the Company is not aware of any known third party problems that will not be corrected, the Company has limited information concerning the Year 2000 readiness of third parties. If management is incorrect, Year 2000 problems could have a negative effect on the Company and its business. See "Year 2000 Implications". SEASONALITY The Company's revenues vary throughout the year. The Company's revenues have historically been highest in its third and fourth fiscal quarters and lower in its first and second fiscal quarters due to fluctuations in the number of television viewers. These seasonal trends have been and may continue to be affected by the timing and success of new product offerings and the potential growth in the Company's electronic commerce businesses. CONVERTIBLE SECURITIES; SHARES FOR FUTURE SALE Sales of a substantial number of shares of the Company's common stock in the public market could adversely affect the market price of the Company's common stock outstanding. There are currently 30.6 million shares of the Company's common stock outstanding, nearly all of which are freely tradeable. In addition, approximately 49.0 million shares of the Company's common stock are currently reserved for issuance upon the exercise of outstanding options and warrants and the conversion of convertible preferred stock. -30- Part II. Other Information Item 1. Legal Proceedings The information contained in Note 11, "Commitments and Contingencies," to the unaudited Condensed Consolidated Financial Statements in Part I of this report is incorporated herein by reference. All of the matters referred to in Note 11 have been the subject of disclosure in prior reports on Form 10-Q and/or Form 10-K. Other Matters The Company, in the normal course of business, is a party to litigation relating to trademark patent and copyright infringement, product liability, contract-related disputes, and other actions. It is the Company's policy to vigorously defend all such claims and enforce its rights in these areas. The Company does not believe any of these actions either individually or in the aggregate, will have a material adverse effect on the Company's results of operations or financial condition. Item 4. Submission of Matters to a Vote of Security Holders The Company held a special meeting of stockholders on October 23, 1998 for the following purposes: 1. To approve the transactions (the "Lehman Transaction") contemplated by the Stock Purchase Agreement, dated as of August 11, 1998, by and between the Company and NM Acquisition Co., LLC ("ACO"), including among other things, (i) the issuance of 20,000 shares of the Company's Series E Convertible Preferred Stock; (ii) the amendment of the Company's Certificate of Incorporation increasing the authorized number of shares of Common Stock to 150,000,000 shares; (iii) an agreement with ValueVision International, Inc. ("ValueVision") amending, among other things, certain terms of a $10,000,000 promissory note, payable to ValueVision and certain warrants of the Company held by ValueVision; and (iv) the grant to Temporary Media Co., LLC ("TMC"), an affiliate of ACO, of options to purchase up to 212,500 shares of Common Stock and warrants to purchase up to 3,762,500 shares of Common Stock, 2,612,500 of which may be exercised by TMC. 2. To elect nine directors; 3. To amend the Company's Stock Option Plan to increase the number of shares of Common Stock available for awards by 800,000; and 4. To ratify Ernst & Young LLP, independent certified public accountants, as auditors for the Company for the fiscal year ending March 31, 1999. -31- All proposals were approved as follows:
Against or For Withheld Abstain --- ---------- ------- 1. Approval of the Lehman Transaction 14,231,665 205,758 100,597 2. Election of Directors Albert R. Dowden 23,339,889 207,901 0 William M. Goldstein 23,064,289 483,501 0 Frederick S. Hammer 22,136,222 1,411,568 0 John W. Kirby 23,360,462 187,328 0 Stephen C. Lehman 23,361,327 186,463 0 Andrew M. Schuon 23,359,897 187,893 0 Robert N. Verratti 22,238,462 1,309,328 0 Eric R. Weiss 23,361,747 186,043 0 Jon W. Yoskin II 23,338,539 209,251 0 3. Amendments to the Company's 1991 Stock Option Plan 22,994,381 1,232,054 121,355 4. Ratification of Ernst & Young LLP, as independent certified public accountants, and auditors for the Company for the fiscal year ending March 31, 1999 24,208,363 82,728 56,699
Item 6. Exhibits and Reports on Form 8-K (a) The following exhibits are included herein or incorporated by reference herein: 3.1 Certificate of Amendment of the Certificate of Incorporation of the Company, dated October 23, 1998 (1). 4.1 Certificate of Designations Preferences and Rights of Series E Preferred Stock, dated October 23, 1998 (1). 4.2 Registration Rights Agreement, dated October 23, 1998, between the Company and NM Acquisition Co., LLC (1). 10.1 Loan and Security Agreement, by and between Quantum North America, Inc. ("QNA") and Foothill Capital Corporation ("Foothill"), dated as of December 1, 1998 (2). 10.2 Copyright Security Agreement, by QNA in favor of Foothill, dated as of December 1, 1998 (2). 10.3 Patent Security Agreement, by QNA in favor of Foothill, dated as of December 1, 1998 (2). 10.4 Trademark Security Agreement, by QNA in favor of Foothill, dated as of December 1, 1998 (2). 10.5 Stock Pledge Agreement, between QNA and Foothill, dated as of December 1, 1998 (2). 10.6 Holdings Trademark Security Agreement, by the Company in favor of Foothill, dated as of December 1, 1998 (2). -32- 10.7 Patent Security Agreement, by the Company in favor of Foothill, dated as of December 1, 1998 (2). 10.8 Stock Pledge Agreement, among Positive Response Television, Inc., National Media Holdings, Inc., Suzanne Paul Holdings Pty Limited and Foothill, dated as of December 1, 1998 (2). 10.9 Copyright Security Agreement, by the Company in favor of Foothill, dated as of December 1, 1998 (2). 10.10 Subordination Agreement, between Foothill and the subsidiaries of the Company, dated as of December 1, 1998 (2). 10.11 Subordination Agreement, between Foothill and the Company, dated as of December 1, 1998 (2). 10.12 Stock Pledge Agreement, between the Company and Foothill, dated as of December 1, 1998 (2). 27.1 Financial Data Schedule (2). (1) Incorporated by reference to the Company's Current Report on Form 8-K dated October 23, 1998. (2) Filed herewith. (b) The Company filed the following Current Reports on Form 8-K during the three month period ended December 31, 1998: Current Report on Form 8-K, dated October 23, 1998. The Company filed a Current Report on Form 8-K reporting, under Item 1, the consummation of a transaction pursuant to which, among other things, there was a change in control in which operational control of the Company was assumed by an investor group led by Stephen C. Lehman, Eric R. Weiss and Daniel M. Yukelson and the investor group purchased $20.0 million of the Company's newly issued Series E Convertible Preferred Stock. -33- 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. NATIONAL MEDIA CORPORATION Date: February 19, 1999 /s/ Stephen C. Lehman ---------------------------------------------- Stephen C. Lehman Chairman of the Board and Chief Executive Officer Date: February 19, 1999 /s/ Daniel M. Yukelson ---------------------------------------------- Daniel M. Yukelson Executive Vice President/Finance and Chief Financial Officer, and Secretary EXHIBIT INDEX 10.1 Loan and Security Agreement, by and between Quantum North America, Inc. ("QNA") and Foothill Capital Corporation ("Foothill"), dated as of December 1, 1998. 10.2 Copyright Security Agreement, by QNA in favor of Foothill, dated as of December 1, 1998. 10.3 Patent Security Agreement, by QNA in favor of Foothill, dated as of December 1, 1998. 10.4 Trademark Security Agreement, by QNA in favor of Foothill, dated as of December 1, 1998. 10.5 Stock Pledge Agreement, between QNA and Foothill, dated as of December 1, 1998. 10.6 Holdings Trademark Security Agreement, by the Company in favor of Foothill, dated as of December 1, 1998. 10.7 Patent Security Agreement, by the Company in favor of Foothill, dated as of December 1, 1998. 10.8 Stock Pledge Agreement, among Positive Response Television, Inc., National Media Holdings, Inc., Suzanne Paul Holdings Pty Limited and Foothill, dated as of December 1, 1998. 10.9 Copyright Security Agreement, by the Company in favor of Foothill, dated as of December 1, 1998. 10.10 Subordination Agreement, between Foothill and the subsidiaries of the Company, dated as of December 1, 1998. 10.11 Subordination Agreement, between Foothill and the Company, dated as of December 1, 1998. 10.12 Stock Pledge Agreement, between the Company and Foothill, dated as of December 1, 1998. 27.1 Financial Data Schedule. EX-10.1 2 EX-10.1 Exhibit 10.1 - -------------------------------------------------------------------------------- LOAN AND SECURITY AGREEMENT BY AND BETWEEN QUANTUM NORTH AMERICA, INC. AND FOOTHILL CAPITAL CORPORATION DATED AS OF DECEMBER 1, 1998 - -------------------------------------------------------------------------------- TABLE OF CONTENTS
PAGE ---- 1. DEFINITIONS AND CONSTRUCTION.......................................................................1 1.1 Definitions...............................................................................1 1.2 Accounting Terms.........................................................................20 1.3 Code.....................................................................................20 1.4 Construction.............................................................................20 1.5 Schedules and Exhibits...................................................................20 2. LOAN AND TERMS OF PAYMENT.........................................................................20 2.1 Revolving Advances.......................................................................21 2.2 Letters of Credit........................................................................22 2.3 [Intentionally Omitted.].................................................................24 2.4 [Intentionally Omitted.].................................................................24 2.5 Overadvances.............................................................................25 2.6 Interest and Letter of Credit Fees: Rates, Payments, and Calculations...................25 2.7 Collection of Accounts...................................................................26 2.8 Crediting Payments; Application of Collections...........................................26 2.9 Designated Account.......................................................................27 2.10 Maintenance of Loan Account; Statements of Obligations...................................27 2.11 Fees.....................................................................................28 2.12 LIBOR Rate Advances......................................................................28 3. CONDITIONS; TERM OF AGREEMENT.....................................................................31 3.1 Conditions Precedent to the Initial Advance or Letter of Credit..........................31 3.2 Conditions Precedent to all Advances and all Letters of Credit...........................35 3.3 Condition Subsequent.....................................................................36 3.4 Term; Automatic Renewal..................................................................36 3.5 Effect of Termination....................................................................36 3.6 Early Termination by Borrower............................................................36 3.7 Termination Upon Event of Default........................................................37 4. CREATION OF SECURITY INTEREST.....................................................................37 4.1 Grant of Security Interest...............................................................37 4.2 Negotiable Collateral....................................................................37 4.3 Collection of Accounts, General Intangibles, Investment Property, and Negotiable Collateral...............................................................................37 4.4 Delivery of Additional Documentation Required............................................38 4.5 Power of Attorney........................................................................38 4.6 Right to Inspect.........................................................................38
i 5. REPRESENTATIONS AND WARRANTIES....................................................................39 5.1 No Encumbrances..........................................................................39 5.2 Eligible Accounts........................................................................39 5.3 Eligible Inventory.......................................................................39 5.4 Equipment................................................................................39 5.5 Location of Inventory and Equipment......................................................39 5.6 Inventory Records........................................................................39 5.7 Location of Chief Executive Office; FEIN.................................................39 5.8 Due Organization and Qualification; Subsidiaries.........................................40 5.9 Due Authorization; No Conflict...........................................................40 5.10 Litigation...............................................................................41 5.11 No Material Adverse Change...............................................................41 5.12 Solvency.................................................................................41 5.13 Benefit Plans............................................................................41 5.14 Environmental Condition..................................................................41 5.15 Brokerage Fees...........................................................................42 5.16 Year 2000 Compliance.....................................................................42 5.17 Consent Decrees..........................................................................42 6. AFFIRMATIVE COVENANTS.............................................................................42 6.1 Accounting System........................................................................42 6.2 Collateral Reporting.....................................................................43 6.3 Financial Statements, Reports, Certificates..............................................43 6.4 Tax Returns..............................................................................45 6.5 Guarantor Reports........................................................................45 6.6 Returns..................................................................................45 6.7 Title to Equipment.......................................................................45 6.8 Maintenance of Equipment.................................................................45 6.9 Taxes....................................................................................45 6.10 Insurance................................................................................46 6.11 No Setoffs or Counterclaims..............................................................46 6.12 Location of Inventory and Equipment......................................................46 6.13 Compliance with Laws.....................................................................47 6.14 [Intentionally Omitted.].................................................................47 6.15 Leases...................................................................................47 6.16 Brokerage Commissions....................................................................47 6.17 Royalties................................................................................47 6.18 Copyrights...............................................................................47 6.19 License Agreements.......................................................................48 7. NEGATIVE COVENANTS................................................................................48 7.1 Indebtedness.............................................................................48 7.2 Liens....................................................................................48 7.3 Restrictions on Fundamental Changes......................................................49
ii 7.4 Disposal of Assets.......................................................................49 7.5 Change Name..............................................................................49 7.6 Guarantee................................................................................49 7.7 Nature of Business.......................................................................49 7.8 Prepayments and Amendments...............................................................49 7.9 Change of Control........................................................................49 7.10 Consignments.............................................................................50 7.11 Distributions............................................................................50 7.12 Accounting Methods.......................................................................50 7.13 Investments..............................................................................50 7.14 Transactions with Affiliates.............................................................50 7.15 Suspension...............................................................................51 7.16 [Intentionally omitted]..................................................................51 7.17 Use of Proceeds..........................................................................51 7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees.......51 7.19 Telemarketing Services Agreements........................................................51 7.20 Financial Covenants......................................................................51 7.21 Capital Expenditures.....................................................................52 7.22 Credit Card Processing Agreements........................................................52 7.23 Licensing Agreements.....................................................................52 7.24 Purchases of Inventory...................................................................52 8. EVENTS OF DEFAULT.................................................................................52 9. FOOTHILL'S RIGHTS AND REMEDIES....................................................................55 9.1 Rights and Remedies......................................................................55 9.2 Remedies Cumulative......................................................................57 10. TAXES AND EXPENSES................................................................................57 11. WAIVERS; INDEMNIFICATION..........................................................................57 11.1 Demand; Protest; etc.....................................................................57 11.2 Foothill's Liability for Collateral......................................................57 11.3 Indemnification..........................................................................58 12. NOTICES...........................................................................................58 13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER........................................................59 14. DESTRUCTION OF BORROWER'S DOCUMENTS...............................................................60 15. GENERAL PROVISIONS................................................................................60 15.1 Effectiveness............................................................................60 15.2 Successors and Assigns...................................................................60
iii 15.3 Section Headings.........................................................................61 15.4 Interpretation...........................................................................61 15.5 Severability of Provisions...............................................................61 15.6 Amendments in Writing....................................................................61 15.7 Counterparts; Telefacsimile Execution....................................................61 15.8 Revival and Reinstatement of Obligations.................................................61 15.9 Integration..............................................................................61
iv SCHEDULES AND EXHIBITS Schedule E-1 Eligible Inventory Locations Schedule P-1 Permitted Liens Schedule 2.2(g) Letter of Credit Authorized Persons Schedule 5.10 Litigation Schedule 5.17 Consent Decrees Schedule 6.12 Location of Inventory and Equipment Schedule 7.1 Permitted Indebtedness Exhibit C-1 Form of Compliance Certificate Exhibit 2.12(b) Form of LIBOR Notice v LOAN AND SECURITY AGREEMENT THIS LOAN AND SECURITY AGREEMENT (THIS "AGREEMENT"), is entered into as of December 1, 1998, between 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 and QUANTUM NORTH AMERICA, INC., a Delaware corporation ("Borrower"), with its chief executive office located at 15821 Ventura Boulevard, 5th Floor, Encino, California 91436. 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, General Intangible, Investment Property, or Negotiable Collateral. "ACCOUNTS" means all currently existing and hereafter arising accounts, contract rights, and all other forms of obligations owing to Borrower arising out of the sale or lease of goods or the rendition of services by Borrower, 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 Stock having ordinary voting power for the election of directors (or comparable managers) 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. "APPLICABLE EARLY TERMINATION PREMIUM" means (a) $600,000 from and after the Closing Date to the first anniversary of the Closing Date, (b) $400,000 from and after the first anniversary of the Closing Date to the second anniversary of the Closing Date, and (c) $200,000 from and after the second anniversary of the Closing Date, and including any Renewal Period; PROVIDED, HOWEVER, that if this Agreement is terminated in connection with the consummation of a sale of all or substantially all of the assets of, or Stock in, Borrower, then the foregoing amounts shall be (a) $300,000 from and after the Closing Date through the first anniversary of the Closing Date, (b) $200,000 from and after the first anniversary of the Closing Date to the second anniversary of the Closing Date, and (c) $0 thereafter. 1 "AUTHORIZED PERSON" means any officer or other employee of Borrower or such other Person as Borrower may authorize in writing. "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 Letter of Credit Usage during the immediately preceding month. "BANKRUPTCY CODE" means the United States Bankruptcy Code (11 U.S.C. Section 101 ET SEQ.), as amended, and any successor statute. "BASE LIBOR RATE" means the rate per annum (rounded upwards, if necessary, to the next 1/16%) at which United States dollar deposits are offered to major banks in the London Interbank market on or about 11:00 a.m. (California time) 2 Business Days prior to the commencement of the applicable Interest Period, for a term and in amounts comparable to the Interest Period and amount of the LIBOR Rate Advance requested by Borrower in accordance with this Agreement. "BENEFIT PLAN" means a "defined benefit plan" (as defined in Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA) within the past six years. "BORROWER" has the meaning set forth in the preamble to this Agreement. "BORROWER'S BOOKS" means all of Borrower's books and records including: ledgers; records indicating, summarizing, or evidencing Borrower's properties or assets (including the Collateral) or liabilities; all information relating to Borrower's business operations or financial condition; and all computer programs, disk or tape files, printouts, runs, or other computer prepared information. "BORROWER STOCK PLEDGE AGREEMENT" means that certain Stock Pledge Agreement, dated as of even date herewith, between Borrower and Foothill, with respect to Borrower's pledge of its ownership interest in the Stock of each of its Subsidiaries, in form and substance satisfactory to Foothill. "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 and, with respect to provisions of the Agreement dealing with LIBOR Rate Advances, also means a day on which banks in London, England are open for the transaction of banking business. "CHANGE OF CONTROL" shall be deemed to have occurred at such time as (a) Holding's shall cease to own beneficially and of record 100% of the issued and outstanding shares of Stock of Borrower, (b) the Lehman Group's paid in capital in Holdings shall cease 2 to be at least 70% of the Lehman Group's paid-in capital in Holdings as of the Closing Date, or (c) a "person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the Securities Exchange Act of 1934), other than the Permitted Holders, becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly, of more than 20% of the total voting power of all classes of Stock then outstanding of Holdings entitled to vote in the election of directors. "CLASS C INVENTORY" means Inventory of Borrower that: (a) is obsolete, slow moving, or a custom item; (b) is more than 9 months old; (c) based upon Borrower's reasonable determination, cannot be sold through Borrower's ordinary retail or direct marketing distribution channels in the twelve-month period following the date of such determination; or (d) Borrower intends to sell or dispose of as scrap, through a rack jobber, or by other means outside of Borrower's regular distribution channels. "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 all of Borrower's right, title, and interest in and to each of the following: (a) the Accounts, (b) Borrower's Books, (c) the Equipment, (d) the General Intangibles, (e) the Investment Property; (f) the Inventory, (g) the Negotiable Collateral, (i) any money, or other assets of Borrower that now or hereafter come into the possession, custody, or control of Foothill, and (j) the proceeds and products, whether tangible or intangible, of any of the foregoing, including proceeds of insurance covering any or all of the Collateral, and any and all Accounts, Borrower's Books, Equipment, General Intangibles, Inventory, Investment Property, Negotiable Collateral, Real Property, 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. 3 "COLLATERAL ACCESS AGREEMENT" means a landlord waiver, mortgagee waiver, bailee letter, or acknowledgement agreement of any warehouseman, processor, lessor, consignee, or other Person in possession of, having a Lien upon, or having rights or interests in the Equipment or Inventory, 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 Borrower to Foothill. "COPYRIGHT INVENTORY" means Inventory of Borrower with respect to which material copyrightable by Borrower or Holdings is the principal component of such Inventory; "COPYRIGHT SECURITY AGREEMENT" means that certain Copyright Security Agreement, dated as of even date herewith, between Borrower and Foothill. "CREDIT CARD ACCOUNT" means an Account submitted for payment to a Credit Card Processor and with respect to which Borrower has received from such Credit Card Processor an authorization to charge the credit card underlying such Account. "CREDIT CARD PROCESSING AGREEMENTS" means those agreements between Borrower and the Credit Card Processors for the processing of Borrower's credit card transactions. "CREDIT CARD PROCESSOR" means, individually and collectively, First USA Paymenttech, Novus Network Services, American Express Travel Related Services Company, Inc., and any other Person with whom Borrower has entered or may hereafter enter into an agreement for the processing of Borrower's credit card transactions. "CREDIT CARD PROCESSOR SERVICE SUMMARY" means that certain First USA Service Summary received by Borrower from First USA Paymenttech, and such similar reports received from other Credit Card Processors, in each case, detailing the amount to be wire transferred to Borrower relative to the Credit Card Accounts. "DAILY BALANCE" means the amount of an Obligation owed at the end of a given 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. 4 "DESIGNATED ACCOUNT" means account number 4759626930 of Borrower maintained with Borrower's Designated Account Bank, or such other deposit account of Borrower (located within the United States) that has been designated, in writing and from time to time, by Borrower to Foothill. "DESIGNATED ACCOUNT BANK" means Wells Fargo Bank, N.A., whose office is located at 100 West Washington, Phoenix, Arizona 85003, and whose ABA number is 121000248. "DILUTION" means, as of any date of determination, in each case based upon the experience of the 90-day period ending on the date that is 30 days prior to such date of determination, the result of dividing the Dollar amount of (a) bad debt write-downs, discounts, cooperative advertising credits, returns, promotions, credits, or other dilution with respect to the Accounts, by (b) the sum of (i) Borrower's Collections (excluding extraordinary items) in respect of the Accounts, plus (ii) the Dollar amount of clause (a). "DILUTION RESERVE" means, as of any date of determination, the number of percentage points by which Dilution is in excess of 10%. "DISBURSEMENT LETTER" means an instructional letter executed and delivered by Borrower 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. "ELIGIBLE ACCOUNTS" means those Accounts created by Borrower in the ordinary course of business, that arise out of Borrower's sale of goods or rendition of services (net of unapplied cash and general ledger to aging variances), that strictly comply with each and all of the representations and warranties respecting Accounts made by Borrower to Foothill in the Loan Documents. Eligible Accounts shall not include the following: (a) Accounts, other than Installment Accounts, that the Account Debtor has failed to pay within 90 days of invoice date or Accounts with selling terms of more than 60 days, unless such 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 by Foothill; (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) are deemed ineligible or, in the absence of a letter of credit supporting such Accounts, would be deemed ineligible under clause (a) above, unless such Accounts are 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 by Foothill;; 5 (c) Installment Accounts, as of any date of determination, with respect to which (i) the last installment of such Installment Accounts is to be billed more than 12 months after the initial date of the sale giving rise to such Installment Account, or (ii) the last installment of such Installment Account is to be billed more than 10 months after such date of determination, to the extent of the aggregate amount of installments to be billed more than 10 months after such date of determination; (d) Accounts with respect to which the Account Debtor is an employee, Affiliate, or agent of Borrower; (e) 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; (f) Accounts that are not payable in Dollars; (g) Accounts with respect to which the Account Debtor: (i) does not maintain its chief executive office in the United States, or (ii) is not organized under the laws of the United States, any State 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 (x) 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 by Foothill, (y) the Account is covered by credit insurance in form and amount, and by an insurer, satisfactory to Foothill, or (z) with respect to an Account Debtor that maintains its chief executive office in Canada or that is organized under the Laws of Canada, such Account Debtor shall have been approved in writing by Foothill in its reasonable credit judgment; (h) 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 Borrower has complied, to the satisfaction of Foothill, with the Assignment of Claims Act, 31 U.S.C. Section 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); (i) Accounts with respect to which the Account Debtor is a creditor of Borrower, has or has asserted a right of setoff, has disputed its liability, or has made any claim with respect to the Account; (j) Accounts with respect to an Account Debtor whose total obligations owing to Borrower exceed 10% of all Eligible Accounts, to the extent of the obligations owing by such Account Debtor in excess of such percentage, unless any such 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 by Foothill; 6 (k) Accounts with respect to which the Account Debtor is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of business, unless any such 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 by Foothill; (l) Accounts the collection of which Foothill, in its reasonable credit judgment, believes to be doubtful by reason of the Account Debtor's financial condition; (m) Accounts with respect to which the goods giving rise to such Account have not been shipped to the purchaser of such goods, the services giving rise to such Account have not been performed and accepted by the purchaser of such services, or the Account otherwise does not represent a final sale; (n) Accounts arising from the sale of Copyright Inventory, unless such Copyright Inventory is Eligible Inventory; and (o) Credit Card Accounts. "ELIGIBLE CREDIT CARD ACCOUNTS" means Accounts that do not qualify as Eligible Accounts solely because they are (1) Credit Card Accounts. "ELIGIBLE IN-TRANSIT INVENTORY" means those items of Inventory that do not qualify as Eligible Landed Inventory solely because they are not in a location set forth on SCHEDULE E-1 but: (a) such Inventory is currently in-transit from a location not set forth on SCHEDULE E-1 to a location set forth on SCHEDULE E-1, (b) title to such Inventory has passed to Borrower, (c) documents of title with respect to such Inventory have been delivered to Foothill or its agent; (d) such Inventory is insured against types of loss, damage, hazards, and risks, and in amounts, satisfactory to Foothill in its discretion; and (e) (i) such Inventory has been paid for or is the subject of an Inventory Letter of Credit, or (ii) Foothill is named as consignee on the documents of title with respect to such Inventory. "ELIGIBLE INVENTORY" means the Eligible In-Transit Inventory and the Eligible Landed Inventory. "ELIGIBLE LANDED INVENTORY" means Inventory consisting of first quality finished goods held for sale in the ordinary course of Borrower's business, that are located at or in-transit between Borrower's premises identified on SCHEDULE E-1, that strictly comply with each and all of the representations and warranties respecting Inventory made by Borrower to Foothill in the Loan Documents, and that are and at all times continue to be reasonably acceptable to Foothill in all respects. In determining the amount to be so included, Inventory shall be valued at the lower of cost or market on a basis consistent with Borrower's current and historical accounting practices. An item of Inventory shall not be included in Eligible Landed Inventory if: 7 (a) it is not owned solely by Borrower or Borrower does not have good, valid, and marketable title thereto; (b) it is not located at one of the locations set forth on SCHEDULE E-1; (c) it is not located on property owned or leased by Borrower or in a contract warehouse, in each case, subject to a Collateral Access Agreement executed by the mortgagee, lessor, the warehouseman, or other third party, as the case may be, and segregated or otherwise separately identifiable from goods of others, if any, stored on the premises; (d) it is not subject to a valid and perfected first priority security interest in favor of Foothill; (e) it consists of goods returned or rejected by Borrower's customers that are not returned to Borrower's stock or goods in transit; (f) the aggregate value of all items of a particular product exceed 40% of the aggregate value of all items of Eligible Inventory, to the extent of the amount in excess of such percentage; (g) it is Copyright Inventory unless the copyrightable material that is the principal component thereof has been registered with the United States Copyright Office and Foothill shall have a perfected first priority security interest therein; or (h) it is Class C Inventory, or constitutes spare parts, packaging and shipping materials, supplies used or consumed in Borrower's business, Inventory subject to a Lien in favor of any third Person, bill and hold goods, defective goods, "seconds," or Inventory acquired on consignment; or (i) Each license agreement relative to such item of Inventory has not been reviewed by Foothill or such license agreement is not reasonably acceptable to Foothill with respect to the rights of Borrower or Holdings, as applicable, under such license agreement and the perfection of Foothill's Liens in and to such item of Inventory. "EQUIPMENT" means all of Borrower'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 Borrower in any of the foregoing, 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. Sections 1000 et seq., amendments thereto, successor statutes, and regulations or guidance promulgated thereunder. 8 "ERISA AFFILIATE" means (a) any corporation subject to ERISA whose employees are treated as employed by the same employer as the employees of 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 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 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 Borrower and whose employees are aggregated with the employees of Borrower under IRC Section 414(o). "EVENT OF DEFAULT" has the meaning set forth in SECTION 8. "EXCESS AVAILABILITY" means the amount, as of the date any determination thereof is to be made, equal to: (a) the lesser of (i) the aggregate amount of Advances available to Borrower as of such time (based on the applicable advance rates set forth in SECTION 2.1 hereof and calculated as if no Advances are outstanding), subject to the sublimits and availability reserves established by Foothill under the terms of the Agreement, and (ii) the Maximum Amount, MINUS (b) the sum of (i) the amount of all then outstanding Advances, (ii) the amount (not less than $0) by which Borrower's past due trade payables has increased during the period from the initial prospect audit through such date of determination, and (iii) the aggregate amount of Borrower's book overdrafts. "FAMILY MEMBERS" means, with respect to any individual, any other individual having a relationship by blood (to the second degree of consanguinity), marriage, or adoption to such individual. "FAMILY TRUSTS" means, with respect to any individual, trusts or other estate planning vehicles established for the benefit of the Family Members of such individual and in respect of which such individual serves as trustee or in a similar capacity. "FEDERAL RESERVE BOARD" means the Board of Governors of the Federal Reserve System or any successor thereto. "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. 9 "FOOTHILL EXPENSES" means all: costs or expenses (including taxes, and insurance premiums) required to be paid by Borrower under any of the Loan Documents that are paid or incurred by Foothill; reasonable fees or charges paid or incurred by Foothill in connection with Foothill's transactions with Borrower, including, fees or charges for photocopying, notarization, couriers and messengers, telecommunication, public record searches (including tax lien, litigation, and UCC searches and including searches with the patent and trademark office, the copyright office, or the department of motor vehicles), filing, recording, publication, appraisal (including periodic Collateral appraisals), real estate surveys, real estate title policies and endorsements, and environmental audits; costs and expenses incurred by Foothill in the disbursement of funds to Borrower (by wire transfer or otherwise); charges paid or incurred by Foothill resulting from the dishonor of checks; reasonable costs and expenses paid or incurred 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 or incurred by Foothill in examining Borrower's Books; reasonable costs and expenses of third party claims or any other suit paid or incurred 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 Borrower or any guarantor; and Foothill's reasonable attorneys fees and expenses incurred in advising, structuring, drafting, reviewing, administering, amending, terminating, enforcing (including attorneys fees and expenses incurred in connection with a "workout," a "restructuring," or an Insolvency Proceeding concerning Borrower or any guarantor of the Obligations), defending, or concerning the Loan Documents, irrespective of whether suit is brought. "FUNDING LOSSES" shall have the meaning set forth in SECTION 2.12(B)(II). "GAAP" means generally accepted accounting principles as in effect from time to time in the United States, consistently applied. "GENERAL INTANGIBLES" means all of Borrower'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, Investment Property, and Negotiable Collateral. "GOVERNING DOCUMENTS" means the certificate or articles of incorporation, by-laws, or other organizational or governing documents of any Person. "HAZARDOUS MATERIALS" means (a) substances that are defined or listed in, or otherwise classified pursuant to, any applicable laws or regulations as "hazardous 10 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 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 applicable federal, state or local limits. "HOLDINGS" means National Media Corporation, a Delaware corporation. "HOLDINGS COPYRIGHT SECURITY AGREEMENT" means that certain Copyright Security Agreement, dated as of even date herewith, between Holdings and Foothill. "HOLDINGS GUARANTY" means that certain General Continuing Guaranty, dated as of even date herewith, between Holdings and Foothill, in form and substance satisfactory to Foothill. "HOLDINGS PATENT SECURITY AGREEMENT" means that certain Patent Security Agreement, dated as of even date herewith, between Holdings and Foothill. "HOLDINGS SECURITY AGREEMENT" means that certain Security Agreement, dated as of even date herewith, between Holdings and Foothill, in form and substance satisfactory to Foothill. "HOLDINGS STOCK PLEDGE AGREEMENT" means that certain Stock Pledge Agreement, dated as of even date herewith, between Holdings and Foothill, with respect to Holding's pledge of its ownership interest in the Stock of each of its Subsidiaries, in form and substance satisfactory to Foothill. "HOLDINGS SUBORDINATION AGREEMENT" means that certain Subordination Agreement, dated as of even date herewith, among Holdings, Borrower, and Foothill, in form and substance satisfactory to Foothill.. "HOLDINGS TRADEMARK SECURITY AGREEMENT" means that certain Trademark Security Agreement, dated as of even date herewith, between Holdings and Foothill. "INDEBTEDNESS" means: (a) all obligations of Borrower for borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures, notes, or other similar instruments and all reimbursement or other obligations of Borrower in respect of letters of credit, bankers acceptances, interest rate swaps, or other financial products, (c) all obligations of Borrower under capital leases, (d) all obligations or liabilities of others secured by a Lien on any property or asset of Borrower, irrespective of whether such obligation or liability is assumed, and (e) any obligation of Borrower guaranteeing or intended to guarantee (whether 11 guaranteed, endorsed, co-made, discounted, or sold with recourse to Borrower) 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. "INSTALLMENT ACCOUNTS" means Accounts, that at the time of the sale giving rise to such Account, was payable by the Account Debtor in two or more installments. Installment Accounts shall not include amounts which, by reason of being submitted to a Credit Card Processor for payment, have become Credit Card Accounts. "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. "INTERCOMPANY SUBORDINATION AGREEMENT" means that certain Subordination Agreement, dated as of even date herewith, among Borrower, each other Subsidiary of Holdings, and Foothill, in form and substance satisfactory to Foothill.. "INTEREST PERIOD" means, with respect to each LIBOR Rate Advance, a period commencing on the date of the making of such LIBOR Rate Advance and ending 1, 2, or 3 months thereafter; PROVIDED, HOWEVER, that (a) if any Interest Period would end on a day that is not a Business Day, such Interest Period shall be extended (subject to clauses (c)-(e) below) to the next succeeding Business Day, (b) interest shall accrue from and including the first day of each Interest Period to, but excluding, the day on which any Interest Period expires, (c) any Interest Period that would end on a day that is not a Business Day shall be extended to the next succeeding Business Day unless such Business Day falls in another calendar month, in which case such Interest Period shall on the next preceding Business Day, (d) with respect to an 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 Interest Period), the Interest Period shall end on the last Business Day of the calendar month that is 1, 2, or 3 months after the date on which the Interest Period began, as applicable, and (e) Borrower may not elect an Interest Period which will end after the Maturity Date. "INVENTORY" means all present and future inventory in which Borrower has any interest, including goods held for sale or lease or to be furnished under a contract of service and all of Borrower's present and future raw materials, work in process, finished goods, and packing and shipping materials, wherever located. "INVENTORY LETTER OF CREDIT" means a documentary Letter of Credit issued to support the purchase by Borrower of Inventory prior to transit to a location set forth on SCHEDULE E-1, that provides that all draws thereunder must require presentation of customary documentation (including, if applicable, commercial invoices, packing list, certificate of 12 origin, bill of lading or airwaybill, customs clearance documents, quota statement, inspection certificate, beneficiaries statement, and bill of exchange, bills of lading, dock warrants, dock receipts, warehouse receipts, or other documents of title) in form and substance satisfactory to Foothill and reflecting the passage to Borrower of title to first quality Inventory conforming to Borrower's contract with the seller thereof. Any such Letter of Credit shall cease to be an "Inventory Letter of Credit" at such time, if any, as the goods purchased thereunder become Eligible Landed Inventory. "INVENTORY RESERVES" means reserves (determined from time to time by Foothill in its reasonable discretion) for (a) the estimated costs relating to unpaid freight charges, warehousing or storage charges, taxes, duties, and other similar unpaid costs associated with the acquisition of Eligible In-Transit Inventory by Borrower, PLUS (b) the estimated reclamation claims of unpaid sellers of Inventory sold to Borrower. "INVESTMENT PROPERTY" means "investment property" as that term is defined in the Code, whether now owned or hereafter acquired.. "IRC" means the Internal Revenue Code of 1986, as amended, and the regulations thereunder. "LANDLORD LIEN RESERVES" means, with respect to each leased location of Borrower that is not the subject of a Collateral Access Agreement, reserves (determined from time to time by Foothill in its reasonable discretion) for (a) past due rent or other past due amounts under the lease relative to such location, PLUS (b) the amount, reasonably estimated by Foothill, of rent or other amounts payable under the lease relative to such location necessary to be paid by Foothill in order to exercises its remedies under the Loan Documents with respect to the Collateral located at such location. "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). "LEHMAN GROUP" means, individually and collectively, Stephen C. Lehman, Bruce M. Goodman, John W. Kirby, Eric R. Weiss, Daniel M. Yukelson, and their respective Family Members and Family Trusts. "LETTER OF CREDIT" means an L/C or an L/C Guaranty, as the context requires. "LETTER OF CREDIT USAGE" means the sum of (a) the undrawn amount of outstanding Letters of Credit PLUS (b) the amount of unreimbursed drawings under Letters of Credit. "LIBOR RATE" means, for each Interest Period for each LIBOR Rate Advance, the rate per annum (rounded upwards, if necessary, to the next 1/16%) determined pursuant to the following formula: 13 LIBOR Rate = Base LIBOR Rate for such Interest Period ---------------------------------------- 100% minus the Reserve Percentage. "LIBOR RATE ADVANCE" means each portion of an Advance bearing interest at a rate determined by reference to the LIBOR Rate. "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 Letters of Credit, the Lockbox Agreements, the Copyright Security Agreement, the Patent Security Agreement, the Trademark Security Agreement, the Borrower Stock Pledge Agreement, the Holdings Guaranty, the Holdings Security Agreement, the Holdings Stock Pledge Agreement, the Holdings Copyright Security Agreement, the Holdings Patent Security Agreement, the Holdings Trademark Security Agreement, the Holdings Subordination Agreement, the Intercompany Subordination Agreement, the Provenance Agreement, the Subsidiary Stock Pledge Agreement, any note or notes executed by 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 Borrower, Foothill, and the Lockbox Bank. "LOCKBOX BANK" means Wells Fargo Bank. "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 Borrower, (b) the material impairment of Borrower's ability to perform its obligations under the Loan Documents to which it is a party or of Foothill to enforce the 14 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 material impairment of the priority of Foothill's Liens with respect to the Collateral. "MAXIMUM AMOUNT" means $20,000,000. "MULTIEMPLOYER PLAN" means a "multiemployer plan" (as defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to contribute, within the past six years. "NEGOTIABLE COLLATERAL" means all of a Person's present and future letters of credit, notes, drafts, instruments, documents, personal property leases (wherein such Person is the lessor), chattel paper, and Books relating to any of the foregoing. "NET ELIGIBLE CREDIT CARD PROCEEDS" means, as of any date of determination, the aggregate Dollar amount of proceeds of Eligible Credit Card Accounts to be received by Borrower, net of all credits, commissions, fees, discounts, and other amounts payable by Borrower relative thereto, as evidenced by the Credit Card Processor Service Summaries. "NOTICES TO DEPOSITORY INSTITUTIONS" means one or more letters notifying the depository institutions with which Borrower maintains deposit accounts of Foothill's security interest in such deposit accounts. "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 the Applicable Early Termination Premium), liabilities (including all amounts charged to Borrower's 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 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 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 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 Borrower is required to pay or reimburse by the Loan Documents, by law, or otherwise. "OBSOLETE COPYRIGHT" means, as of any date of determination, any copyright that (a) does not have a material fair market value, (b) is not the principal component of any Copyright Inventory of Borrower that has been sold or marketed by Borrower in 3 years preceding such date of determination, and (c) the fair market value, in the aggregate, of a such Copyright Inventory to which such copyright is the principal component is not material. 15 "OVERADVANCE" has the meaning set forth in SECTION 2.5. "PARTICIPANT" means any Person to which Foothill has sold a participation interest in its rights under the Loan Documents. "PATENT SECURITY AGREEMENT" means that certain Patent Security Agreement, dated as of even date herewith, in form and substance satisfactory to Foothill. "PAY-OFF LETTER" means a letter, in form and substance reasonably satisfactory to Foothill, from ValueVision respecting the amount necessary to repay in full all of the obligations of Borrower owing to ValueVision and obtain a termination or release of all of the Liens existing in favor of ValueVision in and to the properties or assets of Borrower. "PBGC" means the Pension Benefit Guaranty Corporation as defined in Title IV of ERISA, or any successor thereto. "PERMITTED DISPOSITION" means (a) the sale of Inventory in the ordinary course of Borrower's business (including the disposition of Class C Inventory in accordance with Borrower's customary procedures for such dispositions) and (b) the sale, exchange, or other disposition of Borrower's Equipment that is substantially worn, damaged, or obsolete in the ordinary course of Borrower's business. "PERMITTED DISTRIBUTIONS" means dividends or distributions by Borrower to Holdings, for the purpose of paying (a) the reasonable company overhead, public filing costs, accounting costs, and like expenses of Holdings reasonably allocable to Borrower and not reasonably allocable to any other Subsidiary of Holdings, and (b) the Permitted Holdings Distributions reasonably allocable to Borrower and not reasonably allocable to any other Subsidiary of Holdings. "PERMITTED HOLDERS" means (a) the Lehman Group, (b) Jacor Communications, Inc., (c) Gruber/McBain Management, (d) Capital Ventures International, (e) RGC International Investors, LDC, and (f) such other Person, reasonably acceptable to Foothill, of which Borrower may notify Foothill in writing prior to or on the Closing Date. "PERMITTED HOLDINGS DISTRIBUTIONS" means (a) the "Premium" (as defined in the Series D Certificate of Designation) accruing at a rate of 6% per annum on the Series D Preferred Stock of Holdings and payable upon conversion of such Series D Preferred Stock, to the extent such Premium is paid, or to be paid, in Dollars pursuant to Section IV.A.(ii) of the Series D Certificate of Designation, (b) the "Retained Premium" (as defined in the Series D Stock Purchase Agreement) payable upon the conversion of the Series D Preferred Stock of Holdings owned by Capital Ventures International ("CVI") or RGC International Investors, LDC ("RGC"), and (c) the payment to CVI of $513,000.00, and to RGC of $171,000.00, on or about August 14, 1999, pursuant to that certain letter agreement, dated as of August 11, 1998, among CVI, RGC, Holdings, and NM Acquisition Co., LLC, a Delaware limited liability company. 16 "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) (i) the interests of lessors under operating leases, and (ii) purchase money Liens and the interests of lessors under capital leases to the extent that the acquisition or lease of the underlying asset is permitted under 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, (e) 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 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, (f) Liens arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (g) 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 Borrower and not in connection with the borrowing of money, (h) Liens arising by reason of security for surety or appeal bonds in the ordinary course of business of Borrower, (i) Liens of or resulting from any judgment or award that reasonably could not be expected to result in 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 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, (j) 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 Borrower or the value of Foothill's Lien thereon or therein, or materially interfere with the ordinary conduct of the business of Borrower. "PERMITTED PROTEST" means the right of 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), royalties, commissions, or other amounts due under a licensing agreement, or rental payment, provided that (a) a reserve with respect to such obligation is established on the books of Borrower in an amount that is reasonably satisfactory to Foothill, (b) any such protest is instituted and diligently prosecuted by 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 Borrower or with respect to which it may incur liability. 17 "PREFERRED STOCK DOCUMENTS" means (a) the Series D Stock Purchase Agreement, (b) the Series E Stock Purchase Agreement, (c) the Certificate of Designations, Preferences, and Rights of Series B Preferred Stock of Holdings, (d) the Certificate of Designations, Preferences, and Rights of Series D Preferred Stock of Holdings, and (e) the Certificate of Designations, Preferences, and Rights of Series E Preferred Stock of Holdings. "PROVENANCE AGREEMENT" means that certain Provenance Agreement, dated as of the date hereof, between Holdings and Borrower for the express benefit of Foothill. "REAL PROPERTY" means any estates or interests in real property now owned or hereafter acquired by Borrower. "REFERENCE RATE" means the variable rate of interest, per annum, most recently announced by Norwest Bank Minnesota, National Association, or any successor thereto, as its "base rate," irrespective of whether such announced rate is the best rate available from such financial institution. "REFERENCE RATE LOAN" means any Advance (or any portion thereof) made or outstanding hereunder during any period when interest on such Advance (or portion thereof) is payable based on the Reference Rate. "RENEWAL DATE" has the meaning set forth in SECTION 3.4. "RENEWAL PERIOD" has the meaning set forth in SECTION 3.4. "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. "RESERVE PERCENTAGE" means, on any day, that percentage prescribed by the Board of Governors of the Federal Reserve System (or any successor Governmental Authority) for determining the reserve requirements (including any basic, supplemental, marginal, or emergency reserves) that is in effect on such date with respect to deposits of Dollars in a non-United States or an international banking office of a bank used to fund a LIBOR Rate Advance. The LIBOR Rate shall be adjusted on and as of the effective day of any change in the Reserve Percentage. "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. "SERIES D CERTIFICATE OF DESIGNATION" means the Certificate of Designations, Preferences, and Rights of Series D Preferred Stock of Holdings. "SERIES D STOCK PURCHASE AGREEMENT" means that certain letter agreement, dated as of August 10, 1998, among Holdings, Capital Ventures International, RGC 18 International Investors, LDC, and NM Acquisition Co., LLC, relative to Holdings' Series D Preferred Stock. "SERIES E STOCK PURCHASE AGREEMENT" means that certain Stock Purchase Agreement, dated as of August 11, 1998, between Holdings and NM Acquisition Co., LLC, relative to Holdings' Series E Preferred Stock. "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. "STOCK" means all shares, options, warrants, interests, participations, or other equivalents (regardless of how designated) of or in a corporation or equivalent entity, whether voting or nonvoting, including common stock, preferred stock, or any other "equity security" (as such term is defined in Rule 3a11-1 of the General Rules and Regulations promulgated by the SEC under the Exchange Act). "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 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. "SUBSIDIARY STOCK PLEDGE AGREEMENT" means that certain Stock Pledge Agreement, dated as of even date herewith, among each of the Subsidiaries of Holdings (other than Borrower) and Foothill, with respect to such Subsidiaries' pledge of its ownership interest in the Stock of each of its Subsidiaries, in form and substance satisfactory to Foothill. "TANGIBLE NET WORTH" means, with respect to any Person, as of any date of determination, the difference of (a) such 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 (other than prepaid media time), and (iii) all amounts due to such Person from Affiliates of such Person. 19 "TRADEMARK SECURITY AGREEMENT" means that certain Trademark Security Agreement, dated as of even date herewith, in form and substance satisfactory to Foothill. "VALUEVISION" means ValueVision International, Inc., a Minnesota corporation. "VALUEVISION AGREEMENT" means that certain letter agreement, dated as of August 11, 1998, among ValueVision, NM Acquisition Co., LLC, and Holdings. "VOIDABLE TRANSFER" has the meaning set forth in SECTION 15.8. "YEAR 2000 COMPLIANT" means, with regard to any Person, that all software in goods produced, sold, or utilized by and material to the business operations or financial condition of such Person are able to interpret and manipulate data on and involving all calendar dates correctly and without causing an abnormal ending scenario, including in relation to dates in and after the Year 2000. 1.2 ACCOUNTING TERMS. 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" or "Holdings" is used in respect of a financial covenant, financial test, or a related definition, it shall be understood to mean Borrower or Holdings, as applicable, 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. 20 2.1 REVOLVING ADVANCES. (a) Subject to the terms and conditions of this Agreement, Foothill agrees to make advances ("Advances") to Borrower in an amount outstanding not to exceed at any one time the lesser of (i) the Maximum Amount LESS the Letter of Credit Usage, and (ii) the Borrowing Base LESS (A) the Letter of Credit Usage, LESS (B) the aggregate amount of the Inventory Reserves, LESS (C) the aggregate amount of the Landlord Lien Reserves. For purposes of this Agreement, "Borrowing Base", as of any date of determination, shall mean the result of: (x) THE LESSER OF (i) the sum of (A) (1) 75% minus the Dilution Reserve in respect of Accounts, TIMES (2) the aggregate amount of Eligible Accounts, PLUS (B) the lesser of (1) 75% of the Net Eligible Credit Card Proceeds and (2) $3,000,000; and (ii) an amount equal to Borrower's Collections with respect to Accounts for the immediately preceding 45 day period, PLUS (y) THE LOWEST OF (i) $6,000,000, (ii) the sum of (A) 40% of the value of Eligible Landed Inventory, PLUS (B) the lesser of $5,000,000, and 40% of the value of Eligible In Transit Inventory, (iii) 85% of the net realizable value of Eligible Inventory (which shall constitute its orderly liquidation value less estimated expenses of liquidation thereof in each case as reasonably determined by Foothill), and (iv) 50% of the amount of credit availability created by CLAUSE (X) above, MINUS 21 (z) the aggregate amount of reserves, if any, established by Foothill under SECTION 2.1(B). (b) Anything to the contrary in this Section notwithstanding, Foothill shall have the right to 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 (after consultation in good faith with Borrower so long as no Default or Event of Default shall have occurred and is continuing), including reserves on account of (i) sums that Borrower is required to pay (such as taxes, assessments, insurance premiums, commissions, royalties or other amounts payable under a licensing agreement, 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 (ii) 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 ad valorem taxes, or sales taxes where given priority under applicable law) in and to such item of the Collateral. (c) Foothill shall have no obligation to make Advances hereunder to the extent they would cause the outstanding Obligations to exceed the Maximum Amount. (d) 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 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 Borrower. Foothill shall have no obligation to issue a Letter of Credit if any of the following would result: (i) the Letter of Credit Usage would exceed the Borrowing Base LESS the amount of outstanding Advances LESS the aggregate amount of Inventory Reserves and reserves established under SECTION 2.1(B); or (ii) the aggregate amount of all undrawn or unreimbursed Letters of Credit (including Inventory Letters of Credit) would exceed the lower of: (x) the Maximum Amount LESS the amount of outstanding Advances LESS the aggregate amount of Inventory Reserves and reserves established under SECTION 2.1(B); or (y) $7,500,000; or 22 (iii) the outstanding Obligations would exceed the Maximum Amount. 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, Borrower 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. (b) 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. 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 Borrower's account or by Foothill's interpretations of any L/C issued by Foothill to or for Borrower's account, even though this interpretation may be different from Borrower's own, and Borrower understands and agrees that Foothill shall not be liable for any error, negligence, or mistake, whether of omission or commission, in following Borrower's instructions or those contained in the Letter of Credit or any modifications, amendments, or supplements thereto. 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 Borrower against such issuing bank. 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) 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. 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 Borrower to Foothill. (e) Immediately upon the termination of this Agreement, Borrower agrees to either (i) provide cash collateral to be held by Foothill in an amount equal to 105% 23 of the maximum amount of Foothill's obligations under 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). (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): (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 Borrower, and Borrower 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. (g) Unless otherwise agreed by Borrower and Foothill, Foothill is authorized to issue the Letters of Credit under this Agreement based upon the telephonic or other instruction of any Person identified on SCHEDULE 2.2(G). 2.3 [INTENTIONALLY OMITTED.] 2.4 [INTENTIONALLY OMITTED.] 24 2.5 OVERADVANCES. If, at any time or for any reason, the amount of Obligations owed by Borrower to Foothill pursuant to SECTIONS 2.1 AND 2.2 is greater than either the Dollar or percentage limitations set forth in SECTIONS 2.1 AND 2.2 (an "Overadvance"), Borrower 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 (c) below, all Obligations (except for undrawn Letters of Credit) shall bear interest as follows: (i) each LIBOR Rate Advance shall bear interest at a per annum rate of 3.00 percentage points above the Base LIBOR Rate; and (ii) all other Obligations shall bear interest at a per annum rate of 0.25 percentage points above the Reference Rate. (b) Letter of Credit Fee. Borrower shall pay Foothill a fee (in addition to the charges, commissions, fees, and costs set forth in SECTION 2.2(D)) equal to 1.25% per annum times the aggregate undrawn amount of all outstanding Letters of Credit. (c) Default Rate. Upon the occurrence and during the continuation of an Event of Default: (i) each LIBOR Rate Advance shall bear interest at a per annum rate of 6.00 percentage points above the Base LIBOR Rate, (ii) the Letter of Credit fee provided in SECTION 2.6(B) shall be increased to 4.25% per annum times the aggregate undrawn amount of all outstanding Letters of Credit, and (iii) all other Obligations shall bear interest at a per annum rate equal to 3.25 percentage points above the Reference Rate, and. (d) Minimum Interest. In no event shall the rate of interest chargeable hereunder for any day be less than 7.0% 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. Borrower hereby authorizes Foothill, at its option, without prior notice to 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 installments or other payments due under any Loan Document to Borrower's 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. In the event the Reference Rate is changed from time to time hereafter, the applicable rate of interest hereunder automatically and immediately 25 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. Borrower 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, Borrower is and shall be liable only for the payment of such maximum as allowed by law, and payment received from Borrower 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. Borrower 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, Investment Property, and Negotiable Collateral of Borrower to remit all Collections in respect thereof to such Lockboxes; PROVIDED, HOWEVER, that (a) Account Debtors with respect to Credit Card Accounts shall remit Collections in respect thereof to the Credit Card Processor which shall then wire transfer the amount of such Collections to the Lockbox Account, and (b) Borrower may permit Account Debtors to remit DE MINIMIS Collections to Borrower, so long as the aggregate amount of such Collections shall not exceed $100,000 in any one year and such Collections immediately upon receipt by Borrower shall be deposited into a Lockbox Account. Borrower, Foothill, and the Lockbox Bank shall enter into the Lockbox Agreements, which among other things shall provide for the opening of a Lockbox Account for the deposit of Collections at a Lockbox Bank. Borrower agrees that all Collections and other amounts received by 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 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. 2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The receipt of any Collections by Foothill (whether from transfers to Foothill by the Lockbox Bank 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 26 Borrower for 1 Business Day 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 Bank to Foothill, whether provisionally applied to reduce the Obligations under SECTION 2.1, or otherwise). This across-the-board 1 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 Borrower, and shall apply irrespective of the characterization of whether receipts are owned by 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 1 Business Day of interest on such Collections. Should any Collection item not be honored when presented for payment, then Borrower 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 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). Borrower agrees to establish and maintain the Designated Account with the Designated Account Bank for the purpose of receiving the proceeds of the Advances requested by Borrower and made by Foothill hereunder. Unless otherwise agreed by Foothill and Borrower, any Advance requested by Borrower and made by Foothill hereunder shall be made to the Designated Account. 2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS. Foothill shall maintain an account on its books in the name of Borrower (the "Loan Account") on which Borrower will be charged with all Advances made by Foothill to Borrower or for Borrower's account, including, accrued interest, Foothill Expenses, and any other payment Obligations of Borrower. In accordance with SECTION 2.8, the Loan Account will be credited with all payments received by Foothill from Borrower or for Borrower's account, including all amounts received in the Foothill Account from any Lockbox Bank. Foothill shall render statements regarding the Loan Account to Borrower, 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 Borrower and Foothill unless, within 30 days after receipt thereof by Borrower, Borrower shall deliver to Foothill written objection thereto describing the error or errors contained in any such statements. Foothill, upon the written request of Borrower, shall provide to Borrower such information supporting the amounts charged to the Loan Account as Borrower may reasonably request. 27 2.11 FEES. Borrower shall pay to Foothill the following fees: (a) Origination Fee. On the Closing Date, an origination fee of $150,000; (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 0.25% per annum times the Average Unused Portion of the Maximum Amount. (c) [intentionally omitted]; (d) Financial Examination, Documentation, and Appraisal Fees. (i) Foothill's customary fee of $650 per day per examiner, plus out-of-pocket expenses for each financial analysis and examination (i.e., audits) of Borrower 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 analysis and examinations (i.e. audits) of Borrower, PROVIDED, HOWEVER, that so long as no Event of Default has occurred and is continuing, Borrower shall have no obligation to pay such fees, out-of-pocket expenses, or charges for such financial analysis and examinations in excess of 20 days per calendar year; and (ii) Foothill's customary appraisal fee of $1,500 per day per appraiser, plus out-of-pocket expenses for each appraisal of the Collateral 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, PROVIDED, HOWEVER, that Borrower shall have no obligation to pay such fees, out-of-pocket costs, and charges for appraisals performed more frequently than (A) annually, so long as Excess Availability is equal to or greater than $10,000,000, (B) semi-annually, so long as Excess Availability is equal to or greater than $5,000,000 and less than $10,000,000, and (C) quarterly so long as Excess Availability is less than $5,000,000; and (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 $1,500. 2.12 LIBOR RATE ADVANCES. (a) INTEREST AND INTEREST PAYMENT DATES. Borrower shall have the option (the "LIBOR Option") to have interest on a portion of the Advances be charged at the LIBOR Rate. Interest on that portion of the Advances bearing interest at the LIBOR Rate ("LIBOR Rate Advances") shall be payable on the last day of each month and on the last day of each Interest Period applicable thereto and may, at Foothill's option, be charged directly to the Loan Account. Interest at the LIBOR Rate shall be calculated for each month (or portion thereof) based on the number of days elapsed and a year of 360 days. On the last day of each applicable Interest Period, unless Borrower has properly exercised the LIBOR Option with respect thereto, the interest rate applicable to such LIBOR Rate Advances automatically shall convert to the rate of interest then applicable to non-LIBOR Rate Advances under SECTION 2.6. 28 At any time that an Event of Default has occurred and is continuing, Foothill shall have the right to convert the interest rate on all outstanding LIBOR Rate Advances to the rate then applicable to non-LIBOR Rate Advances under SECTION 2.6. (b) LIBOR ELECTION. (i) Borrower may, at any time and from time to time, so long as no Event of Default has occurred and is continuing, elect to exercise the LIBOR Option by notifying Foothill prior to 11:00 a.m. (California time) at least 3 Business Days prior to the commencement of the proposed Interest Period (the "LIBOR Deadline"). Notice of Borrower's election of the LIBOR Option for a permitted portion of the Advances and an Interest Period pursuant to this Section shall be made by delivery to Foothill of a LIBOR Notice in the form of EXHIBIT 2.12(B) hereto received by Foothill before the LIBOR Deadline, or by telephonic notice received by Foothill before the LIBOR Deadline (to be confirmed by delivery to Foothill of the LIBOR Notice received by Foothill prior to 5:00 p.m. (California time) on the same day; PROVIDED, HOWEVER, that Borrower's failure to deliver such confirming LIBOR Notice shall not affect the applicability of such rate if Borrower's election is implemented by Foothill. (ii) Each LIBOR Notice pursuant to this Section shall be irrevocable and binding on Borrower. In connection with each LIBOR Rate Advance, Borrower shall indemnify, defend, and hold Foothill harmless against any loss, cost, or expense incurred by Foothill as a result of any failure to fulfill, on or before the date specified in the LIBOR Notice, the applicable conditions set forth herein or the termination, prior to the end of the applicable Interest Period, of the applicability of interest at the LIBOR Rate, as provided hereunder, including any loss (including loss of anticipated profits), cost, or expense incurred by reason of the liquidation or reemployment of deposits or other funds acquired or committed to be acquired by Foothill or its participants to fund the requested LIBOR Rate Advances which, as a result of such failure, are not so employed on such date (such losses, costs, and expenses, collectively, "Funding Losses"). (iii) Borrower shall have not more than five Interest Periods in effect at any given time. Borrower only may exercise the LIBOR Option for LIBOR Rate Advances of at least $1,000,000 and integral multiples of $500,000 in excess thereof. 29 (c) PREPAYMENTS. Borrower may prepay LIBOR Rate Advances at any time; PROVIDED, HOWEVER, that in the event that LIBOR Rate Advances are prepaid on any date that is not the last day of the Interest Period applicable thereto, including as a result of any automatic prepayment through the required application by Foothill of proceeds of Accounts and other Collateral received by Foothill or for any other reason, including early termination of the term of this Agreement or acceleration of the Obligations pursuant to the terms hereof, Borrower shall indemnify, defend, and hold Foothill harmless against any and all Funding Losses that arise in connection with such prepayment. Anything to the contrary contained herein notwithstanding, if the outstanding Advances are reduced below the balance of the outstanding LIBOR Rate Advances by virtue of automatic prepayment from proceeds of Accounts and other Collateral, then Foothill automatically will make an Advance to Borrower so that the outstanding Advances will equal the outstanding LIBOR Rate Advances so long as Borrower has sufficient borrowing availability under the formulas set forth herein and subject to the reserves and applicable sublimits hereunder. (d) ADJUSTMENTS TO THE LIBOR RATE. The LIBOR Rate may be automatically adjusted by Foothill on a prospective basis to take into account the additional or increased cost to Foothill of maintaining any necessary reserves for Eurodollar deposits or increased costs due to change in applicable law occurring subsequent to the commencement of the then applicable Interest Period, including but not limited to changes in tax laws (except changes of general applicability in corporate income tax laws) and changes in the reserve requirements imposed by the Board of Governors of the Federal Reserve System (or any successor), excluding the Reserve Percentage, that increase or would increase the costs of funding loans bearing interest at the LIBOR Rate. Foothill shall give Borrower notice of such a determination and adjustment and Borrower may, by notice to Foothill: (i) require Foothill to furnish to Borrower a statement setting forth the basis for adjusting such LIBOR Rate and the method for determining the amount of such adjustment; and/or (ii) repay the LIBOR Rate Advances, or portions thereof, with respect to which such adjustment is made, as appropriate. (e) TERMINATION OF LIBOR OPTION. In the event that any change in circumstances or any law, regulation, treaty or directive, or any change therein or in the interpretation of application thereof, shall at any time after the date hereof, in the reasonable opinion of Foothill, make it unlawful or impractical for Foothill to fund or maintain an LIBOR Advance or to continue such funding or maintaining, or to determine or charge interest rates at the LIBOR Rate, Foothill shall give notice of such circumstances to the Borrower and (i) in the case of any LIBOR Rate Advances which are outstanding, the date specified in Foothill's notice shall be deemed to be the last day of the Interest Period of such LIBOR Rate Advances, and interest upon the LIBOR Rate Advances then outstanding shall thereafter accrue at the rate then applicable to Advances as provided in SECTION 2.6(A)(I) OR 2.6(C)(III)(1), as the case may be, and (ii) Foothill shall not be obligated to permit Borrower to elect the LIBOR Option as to any Advances until Foothill determines that it would no longer be unlawful or impractical to do so. 30 (f) NO REQUIREMENT OF MATCHED FUNDING. Notwithstanding anything to the contrary contained herein, neither Foothill nor any participant is required to actually acquire United States dollar deposits on the London Interbank Market to fund or otherwise match fund any Advances as to which interest accrues at the LIBOR Rate. Provisions of this SECTION 2.12 shall apply as if Foothill and/or its participants had match funded any Advances as to which interest is accruing at the LIBOR Rate by acquiring United States dollar deposits in the London Interbank Market for each Interest Period in the amount of the LIBOR Rate Advances. Funding Losses of Foothill shall include the aggregate Funding Losses of Foothill and its participants in the LIBOR Rate Advances. 3. CONDITIONS; TERM OF AGREEMENT. 3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE OR LETTER OF CREDIT. The obligation of Foothill to make the initial Advance or to issue the initial Letter of Credit 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 December 11, 1998; (b) Foothill shall have received searches reflecting the filing of its financing statements and fixture filings; (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 Copyright Security Agreement; (iv) the Patent Security Agreement; (v) the Trademark Security Agreement; (vi) the Borrower Stock Pledge Agreement, together with the certificates of Stock pledged pursuant thereto and stock powers, executed in blank, in respect of such certificates of Stock; (vii) the Holdings Guaranty; (viii) the Holdings Security Agreement; 31 (ix) the Holdings Stock Pledge Agreement, together with the certificates of Stock pledged pursuant thereto and stock powers, executed in blank in respect of such certificates of Stock; (x) the Holdings Subordination Agreement; (xi) the Notices to Depository Institutions; (xii) the Pay-Off Letter; (xiii) the Holdings Copyright Security Agreement; (xiv) the Holdings Patent Security Agreement; (xv) the Holdings Trademark Security Agreement; (xvi) the Provenance Agreement; (xvii) the Subsidiary Stock Pledge Agreement, together with the certificates of Stock Pledged pursuant thereto and stock powers, executed in blank in respect of such certificates of Stock; and (xviii) the Intercompany Subordination Agreement; (d) Foothill shall have received a certificate from the Secretary of Borrower attesting to the resolutions of Borrower's Board of Directors authorizing its execution, delivery, and performance of this Agreement and the other Loan Documents to which Borrower is a party and authorizing specific officers of Borrower to execute the same; (e) Foothill shall have received copies of Borrower's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Borrower; (f) Foothill shall have received a certificate of status with respect to Borrower, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Borrower, which certificate shall indicate that Borrower is in good standing in such jurisdiction; (g) Foothill shall have received certificates of status with respect to 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 Borrower is in good standing in such jurisdictions; (h) Foothill shall have received a certificate from the Secretary of Holdings attesting to the resolutions of Holdings' Board of Directors authorizing the 32 executive committee of such Board of Directors to act on behalf of the Board of Directors relative to execution, delivery, and performance of the Loan Documents to which Holdings is a party, and the resolutions of such executive committing authorizing Holdings' execution, delivery, and performance of the Holdings Guaranty and the other Loan Documents to which Holdings is a party and authorizing specific officers of Holdings to execute the same; (i) Foothill shall have received copies of Holding's Governing Documents, as amended, modified, or supplemented to the Closing Date, certified by the Secretary of Holdings; (j) Foothill shall have received a certificate of status with respect to Holdings, dated within 10 days of the Closing Date, such certificate to be issued by the appropriate officer of the jurisdiction of organization of Holdings, which certificate shall indicate that Holdings is in good standing in such jurisdiction; (k) Foothill shall have received certificates of status with respect to Holdings, 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 Holdings is in good standing in such jurisdictions; (l) 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; (m) Foothill shall have received duly executed certificates of title with respect to that portion of the Collateral that is subject to certificates of title; (n) either (i) Foothill shall have received a Collateral Access Agreement with respect to Borrower's facility in Phoenix, Arizona, or (ii) Foothill shall have implemented Landlord Lien Reserves with respect to such facility; (o) Foothill shall have received an opinion of Borrower's counsel in form and substance satisfactory to Foothill in its sole discretion; (p) Foothill shall have received appraisals of the Equipment, satisfactory to Foothill; (q) Foothill shall have received copies of all Credit Card Processing Agreements certified by an officer of Borrower, which shall be satisfactory to Foothill and its counsel; (r) Foothill shall have entered into an agreement, in form and substance satisfactory to Foothill, with each Credit Card Processor pursuant to which such Credit Card Processor has agreed to wire transfer the proceeds of all Credit Card Accounts received by such Credit Card Processor to the Lockbox Account. 33 (s) Foothill shall have received satisfactory evidence that all tax returns required to be filed by Borrower have been timely filed and all taxes upon Borrower or its properties, assets, income, and franchises (including real property taxes and payroll taxes) have been paid prior to delinquency, except such taxes that are the subject of a Permitted Protest; (t) Foothill shall have received reference checks regarding key management of Borrower, the results of which shall in each case satisfactory to Foothill; (u) Foothill shall have received copies of the Preferred Stock Documents, certified by an officer of Holdings, which shall have been reviewed by Foothill's counsel, the results of such review to be satisfactory to Foothill; (v) Foothill shall have received copies of the ValueVision Agreement, certified by an officer of Holdings, which shall have been reviewed by Foothill's counsel, the results of such review to be satisfactory to Foothill; (w) Foothill shall have received satisfactory evidence that Borrower or Holdings, as applicable, has filed applications for the registration of Borrower's copyrights or Holdings' copyrights, as applicable, other than Obsolete Copyrights, that are the principal components of Borrower's Copyright Inventory; (x) Foothill shall have received satisfactory evidence that: (i) Borrower shall have received an amendment to the financing statement filed by Alexander G. Langer with the Pennsylvania Secretary of the Commonwealth, amending the collateral covered thereby to be limited to the Flying Lure product; (ii) Borrower shall have received termination statements relative to the financing statements filed by T-Fal Corporation with the Pennsylvania Secretary of the Commonwealth, and the Arizona Secretary of State; and (iii) Borrower shall have satisfied the tax obligations for the tax period January 1, 1988 through June 30, 1990 represented by that certain Certified Copy of Lien in the almount of $104,834.17, recorded with the Court of Common Pleas of Philadelphia County, Pennsylvania against Media Arts International Ltd. and that such Lien has been terminated. (y) Foothill shall have received copies of such of Borrower's or Holdings licensing agreements as Foothill shall request, which shall have been reviewed by Foothill's counsel, the results of such review to be satisfactory to Foothill; (z) Foothill shall have received a certificate of an officer of Holdings certifying that all actions and proceedings required by the Series E Stock Purchase Agreement, applicable law or regulation have been taken and the transactions required thereunder (including the receipt by Holdings of cash proceeds of not less than $20,000,000 less expenses and costs permitted by the Series E Stock Purchase Agreement) have been duly and validly taken and consummated, and that no court of competent jurisdiction has issued any injunction, restraining order, or other order which prohibits the consummation of the transactions described in the Series E Stock Purchase Agreement; 34 (aa) Foothill shall have received a certificate of an officer of Holdings certifying that all actions and proceedings required by the Series D Stock Purchase Agreement, applicable law or regulation have been taken and the transactions required thereunder have been duly and validly taken and consummated, and that no court of competent jurisdiction has issued any injunction, restraining order, or other order which prohibits the consummation of the transactions described in the Series D Stock Purchase Agreement; (bb) Foothill shall have received satisfactory evidence that the Indebtedness of Borrower and Holdings to First Union National Bank ("First Union") has been satisfied in full and the liens in favor of First Union have been released, together with copies of the termination statements relative to all financing statements filed by First Union, and evidence that such termination statements have been filed; (cc) Borrower shall have entered into a sub-lease with Holdings with respect to Borrower's facilities in Phoenix, Arizona; (dd) Borrower shall have (i) entered into a sub-license agreement, in form and substance reasonably satisfactory to Foothill, with respect to each license agreement entered into by Holdings as licensee, and (ii) into a license agreement, subject to SECTION 7.23, with respect to any copyrights, trademarks, patents, or other intellectual property owned by Holdings, in each case, relative to products currently sold or marketed by Borrower; (ee) Foothill shall have entered into an agreement, in form and substance satisfactory to Foothill, with West Teleservices Corp. ("West"), pursuant to which West has agreed to provide telemarketing services to Foothill in connection with Foothill's exercise of its remedies hereunder; (ff) Borrower shall have Excess Availability, as of the Closing Date, after giving effect to the initial Advances and Letters of Credit of not less than $6,000,000; and (gg) 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); 35 (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 Borrower, Foothill, or any of their Affiliates. 3.3 CONDITION SUBSEQUENT. As a condition subsequent to the closing hereunder, Borrower shall perform or cause to be performed the following (the failure by Borrower 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. 3.4 TERM; AUTOMATIC RENEWAL. This Agreement shall become effective upon the execution and delivery hereof by Borrower and Foothill and shall continue in full force and effect for a term ending on the date (the "Renewal Date") that is 3 years from the Closing Date and automatically shall be renewed for successive 1 year periods thereafter (each such successive 1 year period, a "Renewal Period"), unless sooner terminated pursuant to the terms hereof. Either party may terminate this Agreement effective on the Renewal Date or on any 1 year anniversary of the Renewal Date by giving the other party at least 90 days prior written notice. 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 Borrower 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 Borrower of Borrower's 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 Borrower has sent a notice of termination pursuant to the provisions of SECTION 3.4, but fails to pay the Obligations in full on the date set forth in said notice, then Foothill may, but shall not be required to, renew this Agreement for an additional term of 1 year. 3.6 EARLY TERMINATION BY BORROWER. The provisions of SECTION 3.4 that allow termination of this Agreement by Borrower only on the Renewal Date and certain anniversaries thereof notwithstanding, Borrower has the option, at any time upon 90 days prior written notice to Foothill, to terminate this Agreement by paying to Foothill, in cash, 36 the Obligations (including an amount equal to 105% of the undrawn amount of the Letters of Credit), in full, together with the Applicable Early Termination Premium. 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, Borrower shall pay to Foothill upon the effective date of such termination, a premium in an amount equal to the Applicable Early Termination Premium. The Applicable Early Termination Premium shall be presumed to be the amount of damages sustained by Foothill as the result of the early termination and Borrower agrees that it is reasonable under the circumstances currently existing. The Applicable 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. Borrower hereby grants to Foothill a continuing security interest in all 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 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 Borrower. Anything contained in this Agreement or any other Loan Document to the contrary notwithstanding, except for the sale of Inventory to buyers in the ordinary course of business, Borrower has no 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, Borrower, immediately upon the written request of Foothill, shall endorse and deliver physical possession of such Negotiable Collateral to Foothill. 4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, INVESTMENT PROPERTY, AND NEGOTIABLE COLLATERAL. At any time an Event of Default has occurred and is continuing, Foothill or Foothill's designee may (a) notify customers or Account Debtors of Borrower that the Accounts, General Intangibles, Investment Property, or Negotiable Collateral have been assigned to Foothill or that Foothill has a security interest therein, and (b) collect the Accounts, General Intangibles, Investment Property, and Negotiable Collateral directly and charge the collection costs and expenses to the Loan Account. 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. 37 4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time upon the request of Foothill, Borrower shall execute and deliver to Foothill all financing statements, continuation financing statements, fixture filings, security agreements, pledges, assignments, endorsements of certificates of title, applications for title, 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. Borrower hereby irrevocably makes, constitutes, and appoints Foothill (and any of Foothill's officers, employees, or agents designated by Foothill) as Borrower's true and lawful attorney, with power to (a) if Borrower refuses to, or fails timely to execute and deliver any of the documents described in SECTION 4.4, sign the name of 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 or Foothill deems itself insecure, sign Borrower's name on any invoice or bill of lading relating to any Account, drafts against Account Debtors, schedules and assignments of Accounts, verifications of Accounts, and notices to Account Debtors, (c) send requests for verification of Accounts, (d) endorse 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 or Foothill deems itself insecure, notify the post office authorities to change the address for delivery of Borrower's mail to an address designated by Foothill, to receive and open all mail addressed to Borrower, and to retain all mail relating to the Collateral and forward all other mail to Borrower, (f) at any time that an Event of Default has occurred and is continuing or Foothill deems itself insecure, make, settle, and adjust all claims under 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 or Foothill deems itself insecure, settle and adjust disputes and claims respecting the Accounts 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 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, to inspect Borrower's Books and to check, test, and appraise the Collateral in order to verify Borrower's financial condition or the amount, quality, value, condition of, or any other matter relating to, the Collateral. 38 5. REPRESENTATIONS AND WARRANTIES. In order to induce Foothill to enter into this Agreement, 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 or issuance of each Letter of Credit thereafter, as though made on and as of the date of such Advance or 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. Borrower has good and indefeasible title to the Collateral, free and clear of Liens except for Permitted Liens. 5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide existing obligations created by the sale and delivery of Inventory or the rendition of services to purchasers in the ordinary course of Borrower's business, unconditionally owed to Borrower without defenses, disputes, offsets, counterclaims, or rights of return or cancellation, other than such Eligible Accounts with respect to which the Inventory giving rise to such Account is the subject of a 30 day free trial period. The property giving rise to such Eligible Accounts has been delivered to the purchaser, or to the purchaser's agent for immediate shipment to and unconditional acceptance by the purchaser. Borrower has 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 ELIGIBLE INVENTORY. All Eligible Inventory is of good and merchantable quality. 5.4 EQUIPMENT. All of the Equipment is used or held for use in Borrower's business and is fit for such purposes. 5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and Equipment are not stored with a bailee, warehouseman, or similar party (without Foothill's prior written consent) and are located only at the locations identified on SCHEDULE 6.12 or otherwise permitted by SECTION 6.12. 5.6 INVENTORY RECORDS. Borrower keeps correct and accurate records itemizing and describing the kind, type, quality, and quantity of the Inventory, and Borrower's cost therefor. 5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive office of Borrower is located at the address indicated in the preamble to this Agreement and Borrower's FEIN is 86-0468696. 39 5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. (a) 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 have a Material Adverse Change. (b) Set forth on SCHEDULE 5.8, is a complete and accurate list of 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 Borrower. All of the outstanding Stock of each such Subsidiary has been validly issued and is fully paid and non-assessable. (c) Except as set forth on SCHEDULE 5.8, no 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 Stock) of any direct or indirect Subsidiary of 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 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 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 Borrower, the Governing Documents of Borrower, or any order, judgment, or decree of any court or other Governmental Authority binding on 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 Borrower, (iii) result in or require the creation or imposition of any Lien of any nature whatsoever upon any properties or assets of 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 Borrower. (c) Other than the filing of appropriate financing statements, fixture filings, and mortgages, the execution, delivery, and performance by Borrower of this Agreement and the Loan Documents to which 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. 40 (d) This Agreement and the Loan Documents to which Borrower is a party, and all other documents contemplated hereby and thereby, when executed and delivered by Borrower will be the legally valid and binding obligations of Borrower, enforceable against 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 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 Borrower before any court or administrative agency and Borrower does not have knowledge or belief of any pending, threatened, or imminent litigation, governmental investigations, or claims, complaints, actions, consent decrees, or prosecutions involving Borrower or any guarantor of the Obligations, except for: (a) ongoing collection matters in which Borrower is the plaintiff; (b) matters disclosed on SCHEDULE 5.10; and (c) matters arising after the date hereof that, if decided adversely to Borrower, reasonably could not be expected to result in a Material Adverse Change. 5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating to Borrower or any guarantor of the Obligations that have been delivered by 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 Borrower's (or such guarantor's, as applicable) financial condition as of the date thereof and Borrower's results of operations for the period then ended. There has not been a Material Adverse Change with respect to 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. Borrower is Solvent. No transfer of property is being made by Borrower and no obligation is being incurred by 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 Borrower. 5.13 BENEFIT PLANS. None of Borrower, its Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any Benefit Plan. 5.14 ENVIRONMENTAL CONDITION. None of Borrower's properties or assets has ever been used by Borrower or, to the best of 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 Borrower's 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 Borrower. Borrower has 41 not 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 Borrower resulting in the releasing or disposing of Hazardous Materials into the environment. 5.15 BROKERAGE FEES. No brokerage commission or finders fees has or shall be incurred or payable in connection with or as a result of Borrower's obtaining financing from Foothill under this Agreement, and Borrower has not utilized the services of any broker or finder in connection with Borrower's obtaining financing from Foothill under this Agreement. 5.16 YEAR 2000 COMPLIANCE. (a) On the basis of a comprehensive inventory, review and assessment currently being undertaken by Borrower of the computer applications utilized by Borrower or contained in products produced or sold by Borrower, and upon inquiry made of such Obligor's material suppliers and vendors, to the best of the knowledge of Borrower's management, Borrower, each of its products, and all such suppliers and vendors will be Year 2000 Compliant before October 1, 1999. (b) Borrower (i) has undertaken a detailed inventory, review and assessment of all areas within Borrower's business and operations that could be adversely affected by the failure of Borrower or its products to be Year 2000 Compliant on a timely basis, (ii) is developing a detailed plan and timeline for becoming Year 2000 Compliant on a timely basis, and (iii) to date, is implementing that plan in accordance with that timetable in all material respects. Borrower reasonably anticipates that Borrower will be Year 2000 Compliant on a timely basis. 5.17 CONSENT DECREES. Borrower is not selling or marketing any products that are the subject of the consent decrees set forth on SCHEDULE 5.17. 6. AFFIRMATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, and unless Foothill shall otherwise consent in writing, Borrower shall do all of the following: 6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of accounting that enables Borrower to produce financial statements in accordance with GAAP, and maintain records pertaining to the Collateral that contain information as from time to time may be requested by Foothill. Borrower also shall keep a modern inventory reporting system that shows all additions, sales, claims, returns, and allowances with respect to the Inventory. 42 6.2 COLLATERAL REPORTING. Provide Foothill with the following documents at the following times in form satisfactory to Foothill: (a) on each Business Day, a report detailing the aggregate amount of Credit Card Accounts together with a reconciliation to the previous such report provided to Foothill, and (ii) a copy of each Credit Card Processor Service Summary specifying the amount to be wire transferred to Borrower by such Credit Card Processor, (b) on a weekly basis and, in any event, by no later than the 3rd Business Day following the end of each week, (i) a detailed calculation of the Borrowing Base together with a reconciliation to the detailed calculation of the Borrowing Base previously provided to Foothill, (ii) a detailed aging, by total, of the Installment Accounts, (iii) a detailed aging, by total, of the Accounts (other than Installment Accounts), (iv) Inventory reports specifying the value of Borrower's Inventory, at the lower of cost or market on a basis consistent with Borrower's current and historical accounting practices, by category, (v) documents of title relative to Eligible In-Transit Inventory, together with evidence of Borrower's payment for such Eligible In-Transit Inventory, and (vi) a report summarizing the Eligible In-Transit Inventory; (c) on a monthly basis and, in any event, by no later than the 30th day of each month during the term of this Agreement, (i) a summary aging, by vendor, of Borrower's accounts payable and any book overdraft, and (ii) a summary of royalties, commissions, and other amounts payable pursuant to any licensing agreement together with a detailed listing of any such royalties, commissions, and other amounts that are past due, a calculation of the Dilution for the prior month; (d) on a monthly basis and, in any event, by no later than the first Business Day after each payment of rent or other amounts due under the lease relative to Borrower's Phoenix facility, evidence, reasonably satisfactory to Foothill, that such payment has been made; (e) on a quarterly basis, a copy of Borrower's computer system back-up tapes; (f) upon request, copies of invoices in connection with the Accounts, customer statements, credit memos, remittance advices and reports, deposit slips, shipping and delivery documents in connection with the Accounts and for Inventory and Equipment acquired by Borrower, purchase orders and invoices; and (g) such other reports as to the Collateral or the financial condition of Borrower as Foothill may request from time to time. 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 Holdings' fiscal years, a company prepared balance sheet and income statement (in each case, on a consolidated and consolidating basis) covering the operations of Holdings and its 43 Subsidiaries during such period; (b) as soon as available, but in any event within 50 days of the end of each of Holdings' fiscal quarters, a company prepared balance sheet, income statement, and statement of cash flows (in each case, on a consolidated and, except for such statement of cash flows, a consolidating basis) covering the operations of Holdings and its Subsidiaries during such period; and (c) as soon as available, but in any event within 105 days after the end of each of Holdings' fiscal years, financial statements (on a consolidated and consolidating basis) of Holdings 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. 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 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, Borrower agrees to deliver financial statements prepared on a consolidating basis so as to present Borrower and each such related entity separately, and on a consolidated basis. Together with the above, Borrower also shall deliver to Foothill Holdings' Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and Form 8-K Current Reports, and any other filings made by Holdings with the Securities and Exchange Commission, if any, within 3 Business Days after the same are filed, or any other information that is provided by Holdings to its shareholders, and any other report reasonably requested by Foothill relating to the financial condition of Borrower. Each month, together with the financial statements provided pursuant to SECTION 6.3(A), Borrower shall deliver to Foothill a 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 Borrower, (ii) to the best of such officer's knowledge the representations and warranties of 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, a Compliance Certificate demonstrating in reasonable detail compliance at the end of such period with the applicable financial covenants contained in SECTION 7.20, 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 Borrower has taken, is taking, or proposes to take with respect thereto). 44 Borrower shall, from time to time, upon Foothill's written request, issue written instructions to its independent certified public accountants authorizing them to communicate with Foothill and to release to Foothill whatever financial information concerning Borrower that Foothill may reasonably request. Borrower hereby irrevocably authorizes and directs all auditors, accountants, or other third parties to deliver to Foothill, at Borrower's expense, copies of Borrower's financial statements, papers related thereto, and other accounting records of any nature in their possession, and to disclose to Foothill any information they may have regarding Borrower's business affairs and financial conditions. 6.4 TAX RETURNS. Deliver to Foothill copies of each future federal income tax return of Borrower or any consolidated tax group as to which Borrower belongs, 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 Borrower provides Holdings' audited financial statements to Foothill and copies of all 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. 6.6 RETURNS. Cause returns and allowances, if any, as between Borrower and its Account Debtors to be on the same basis and in accordance with the usual customary practices of Borrower, as they exist at the time of the execution and delivery of this Agreement. If any Account Debtor returns any Inventory to Borrower, Borrower promptly shall determine the reason for such return (in accordance with Borrower's historical practices) and, if Borrower accepts such return, issue a credit memorandum in the appropriate amount to such Account Debtor. Borrower shall make all such credit memoranda available for Foothill's reasonable inspection. 6.7 TITLE TO EQUIPMENT. Upon Foothill's written request, Borrower immediately shall deliver to Foothill, properly endorsed, any and all evidences of ownership of, certificates of title, or applications for title to any items of Equipment. 6.8 MAINTENANCE OF EQUIPMENT. Maintain the 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. Other than those items of Equipment that constitute fixtures on the Closing Date, Borrower shall not permit any item of Equipment to become a fixture to real estate or an accession to other property, and such Equipment shall at all times remain personal property. 6.9 TAXES. Cause all assessments and taxes, whether real, personal, or otherwise, due or payable by, or imposed, levied, or assessed against 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. 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 Foothill's written demand, appropriate certificates 45 attesting to the payment thereof or deposit with respect thereto. 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 Borrower has made such payments or deposits. 6.10 INSURANCE. (a) At its expense, maintain insurance respecting the Collateral wherever located, covering loss or damage by fire, theft, explosion, and all other hazards and risks as ordinarily are insured against by other Persons engaged in the same or similar businesses. Borrower also shall maintain business interruption, public liability, and product liability insurance, as well as insurance against larceny, embezzlement, and criminal misappropriation All such policies of insurance shall be in such amounts and with such insurance companies as are reasonably satisfactory to Foothill. Borrower shall deliver the originals of all such policies to Foothill with 438 BFU lender's loss payable endorsements or other satisfactory lender's loss payable endorsements, naming Foothill as sole loss payee or additional insured, as appropriate. Each policy of insurance or endorsement shall contain a clause requiring the insurer to give not less than 30 days prior written notice to Foothill in the event of cancellation of the policy for any reason whatsoever. If Borrower fails to provide and pay for such insurance, Foothill may, at its option, but shall not be required to, procure the same and charge Borrower's Loan Account therefor. (b) Borrower shall give Foothill prompt notice of any material loss covered by such insurance and payable to Borrower. Borrower agrees that Foothill shall have the exclusive right to adjust any casualty losses payable to Borrower under any such insurance policies in excess of $50,000, without any liability to Borrower whatsoever in respect of such adjustments. Any monies received as payment for any loss under any insurance policy mentioned above (other than liability insurance policies) or as payment of any award or compensation for condemnation or taking by eminent domain, 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 Borrower under staged payment terms reasonably satisfactory to Foothill for application to the cost of repairs, replacements, or restorations. 6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and under the other Loan Documents by or on behalf of 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 AND EQUIPMENT. Keep the Inventory and Equipment only at the locations identified on SCHEDULE 6.12; provided, however, that Borrower may amend SCHEDULE 6.12 so long as such amendment occurs by written notice to Foothill not less than 30 days prior to the date on which the Inventory or Equipment is moved to such new location, so long as such new location is within the continental United 46 States, and so long as, at the time of such written notification, Borrower provides any financing statements or fixture filings necessary to perfect and continue perfected Foothill's security interests in such assets and also provides to Foothill a Collateral Access Agreement. 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 result in and reasonably could not be expected to result in a Material Adverse Change. 6.14 [INTENTIONALLY OMITTED.] 6.15 LEASES. Pay when due all rents and other amounts payable under any leases to which Borrower is a party or by which Borrower's properties and assets are bound, unless such payments are the subject of a Permitted Protest. 6.16 BROKERAGE COMMISSIONS. Pay any and all brokerage commission or finders fees incurred by in connection with or as a result of Borrower's obtaining financing from Foothill under this Agreement. 6.17 ROYALTIES. Pay when due all royalties, commissions, and other amounts payable under any licensing agreement to which Borrower is a party, unless such payments are the subject of a Permitted Protest; PROVIDED, HOWEVER, that Borrower, in its reasonable business judgment, may elect to not pay such royalties, commissions, and other amounts when due, so long as (i) the failure to pay such royalties, commissions, and other amounts when due does not result in any licensing agreement from being terminated, and (ii) reports submitted by Borrower to Foothill pursuant to SECTION 6.2 include such unpaid royalties, commissions, and other amounts as past due. If Borrower so elects to not pay such royalties, commissions, and other amounts when due, then Foothill shall have the right to establish reserves against the Borrowing Base in accordance with SECTION 2.1(B). 6.18 COPYRIGHTS. Record, or cause Holdings to record, with the United States Copyright Office, copyrights relative to copyrightable material that is the principal component of any of Borrower's Copyright Inventory, prior to or contemporaneously with the completion of a test-market period (which period shall not exceed 8 weeks) with respect to such Copyright Inventory; PROVIDED, HOWEVER, that, if Borrower elects to discontinue any such Copyright Inventory after such test market period, then Borrower shall have no obligation to record, or cause Holdings to record, with the United States Copyright Office the copyrightable material that is the principal component of such Copyright Inventory. At such time as Borrower or Holdings shall record such copyrightable material with the United States Copyright Office, Borrower shall provide to Foothill such information relative to such copyrightable material as Foothill shall reasonably require in order to perfect Foothill's security interests in such copyrightable material. 47 6.19 LICENSE AGREEMENTS. Borrower shall enter into a sub-license agreement, in form and substance reasonably satisfactory to Foothill, with respect to each license agreement heretofore or hereafter entered into by Holdings as licensee, relative to products marketed by Borrower. Borrower shall enter into a license agreement, subject to SECTION 7.23, with respect to any copyrights, trademarks, patents, or other intellectual property owned by Holdings relative to products marketed by Borrower. 7. NEGATIVE COVENANTS. Borrower covenants and agrees that, so long as any credit hereunder shall be available and until full and final payment of the Obligations, Borrower will not do any of the following without Foothill's prior written consent: 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 are the subject of L/C Guarantees; (b) Indebtedness set forth in SCHEDULE 7.1; (c) Indebtedness secured by Permitted Liens; (d) Indebtedness to Holdings, PROVIDED, that such Indebtedness is the subject of the Holdings Subordination Agreement; (e) Indebtedness to other Holdings' Subsidiaries, PROVIDED, that such Indebtedness is the subject of the Intercompany Subordination Agreement; 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 Borrower, (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 that are replacements of Permitted Liens to the extent that the original Indebtedness is 48 refinanced under SECTION 7.1(F) and so long as the replacement Liens only encumber those assets or property that secured the original Indebtedness). 7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter into any merger, consolidation, reorganization, or recapitalization, or reclassify its 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 Borrower's properties or assets other than Permitted Dispositions. 7.5 CHANGE NAME. Without 30 days prior written notice to Foothill, change Borrower's name, FEIN, corporate structure (within the meaning of Section 9402(7) of the Code), or identity, or add any new fictitious name. 7.6 GUARANTEE. Guarantee or otherwise become in any way liable with respect to the obligations of any third Person except by endorsement of instruments or items of payment for deposit to the account of Borrower or which are transmitted or turned over to Foothill. 7.7 NATURE OF BUSINESS. Make any change in the principal nature of Borrower's business; PROVIDED, HOWEVER, that Borrower may enter into an agreement to outsource Borrower's fulfillment, customer service, and information systems operations currently being performed by Borrower. 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, PROVIDED, HOWEVER, that Borrower may make payments of principal and interest on Borrower's Indebtedness to Holdings or the other Holdings' Subsidiaries, if any, so long as (i) no Event of Default shall have occurred and be continuing or would result from such payment, and (ii) after giving effect to such payment, Borrower shall have Excess Availability of not less than $3,000,000; 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), (D), (E), OR (F). 7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or indirectly, any Change of Control. 49 7.10 CONSIGNMENTS. Consign any Inventory or sell any Inventory on bill and hold, sale or return, sale on approval, or other conditional terms of sale; PROVIDED, HOWEVER, that Borrower may sell Inventory subject to a 30 day free trial period. 7.11 DISTRIBUTIONS. Make any distribution or declare or pay any dividends (in cash or other property, other than Stock) on, or purchase, acquire, redeem, or retire any of Borrower's Stock, of any class, whether now or hereafter outstanding ; PROVIDED, HOWEVER, that Borrower may make Permitted Distributions so long as (a) no Event of Default has occurred and is continuing or would result therefrom, and (b) after giving effect thereto, Borrower has Excess Availability of not less than $3,000,000. The foregoing notwithstanding, nothing in this section shall prohibit payments by Borrower to Holdings (y) on account of Borrower's Indebtedness to Holdings permitted under to SECTION 7.8, or (z) pursuant to the terms of an agreement between Holdings and Borrower permitted under SECTION 7.14 (including, but not limited to, royalties, commissions, or other amounts due under any licensing agreements or sub-licensing agreements between Holdings and Borrower), in each case, to the extent such payments are not a distribution or a dividend on any of Borrower's Stock. 7.12 ACCOUNTING METHODS. Modify or change its method of accounting (except such modifications or changes that are in accordance with GAAP, in which Borrower's independent certified public accounting firm agrees, and that are fully disclosed to Foothill) 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 Borrower's accounting records without said accounting firm or service bureau agreeing to provide Foothill information regarding the Collateral or Borrower's financial condition. 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, other than loans to employees in the ordinary course of business, in an aggregate amount outstanding at any one time not to exceed $25,000, or (c) the acquisition of all or substantially all of the properties or assets of a Person. 7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter into or permit to exist any material transaction with any Affiliate of Borrower (including Borrower's arrangements with Direct America Corporation for the production of infomercials) except for transactions that are in the ordinary course of Borrower's business, upon fair and reasonable terms, that are fully disclosed to Foothill, and that are no less favorable to Borrower than would be obtained in an arm's length transaction with a non-Affiliate. 50 7.15 SUSPENSION. Suspend or go out of a substantial portion of its business; PROVIDED, HOWEVER, that Borrower may enter into an agreement to outsource Borrower's fulfillment, customer service, and information systems operations currently being performed by Borrower. 7.16 [INTENTIONALLY OMITTED]. 7.17 USE OF PROCEEDS. Use the proceeds of the Advances made hereunder for any purpose other than (a) on the Closing Date, (i) to pay transactional costs and expenses incurred in connection with this Agreement, or (ii) to repay, in part, Borrower's Indebtedness to Holdings in accordance with SECTION 7.8, provided that in connection with such repayment, Holdings' Indebtedness to ValueVision shall be repaid in full, and (b) thereafter, consistent with the terms and conditions hereof, for its lawful and permitted corporate purposes. 7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND EQUIPMENT WITH BAILEES. Relocate its chief executive office or Borrower's Inventory or Equipment to a new location, in each case, without providing 30 days prior written notification thereof to Foothill and so long as, at the time of such written notification, 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. The Inventory and Equipment shall not at any time now or hereafter be stored with a bailee, warehouseman, or similar party without Foothill's prior written consent. 7.19 TELEMARKETING SERVICES AGREEMENTS. Enter into any agreement with any Person to provide telemarketing services to Borrower unless Foothill shall have entered into an agreement, in form and substance satisfactory to Foothill, with such Person, pursuant to which such Person agrees to provide telemarketing services to Foothill in connection with Foothill's exercise of its remedies hereunder. 7.20 FINANCIAL COVENANTS. Fail to maintain: (a) Tangible Net Worth. Tangible Net Worth of at least the amount set forth below as of the end of the quarter corresponding thereto:
--------------------------------------------- ------------------------------------------- QUARTER ENDING TANGIBLE NET WORTH --------------------------------------------- ------------------------------------------- December 31, 1998 $6,000,000 --------------------------------------------- ------------------------------------------- March 31, 1999 and as of the end of each $5,000,000 fiscal quarter thereafter --------------------------------------------- -------------------------------------------
51 7.21 CAPITAL EXPENDITURES. Make capital expenditures in any fiscal year in excess of $2,000,000. 7.22 CREDIT CARD PROCESSING AGREEMENTS. Enter into any Credit Card Processing Agreement or amend, modify, or supplement any Credit Card Processing, except on terms that are reasonably satisfactory to Foothill. 7.23 LICENSING AGREEMENTS. Enter into any licensing agreement unless (a) Borrower's rights under such licensing agreement are assignable (i) to Foothill, and (ii) in connection with the sale of all or substantially all of the assets or Stock of Borrower, (b) royalties, commissions, and other amounts payable by Borrower under such licensing agreement are not held in trust by Borrower, and (c) the terms and conditions of such licensing agreement relative to the liquidation of Borrower's Inventory are reasonably satisfactory to Foothill. 7.24 PURCHASES OF INVENTORY. Enter into purchase orders or other agreements for the purchase of Inventory to be sold by Borrower in the name of Holdings or any other Person other than Borrower except such master purchase agreements entered into by Holdings for the benefit of Holdings' Subsidiaries, provided, that the purchase orders placed pursuant to such master purchase agreements shall be placed in the name of Borrower. 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 If Borrower fails 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 Borrower fails or neglects to perform, keep, or observe (a) any term, provision, condition, covenant, or agreement: (i) contained in SECTIONS 6.2 (Collateral Reporting), 6.3 (Financial Statements, Reports, Certificates), 6.4 (Tax Returns), 6.7 (Title to Equipment), 6.13 (Compliance with Laws), 6.15 (Leases), 6.17 (Royalties), or 6.18 (Copyrights) of this Agreement and such failure continues for a period of 5 Business Days; (ii) contained in SECTIONS 6.1 (Accounting System), 6.6 (Returns), 6.8 (Maintenance of Equipment), or 6.12 (Location of Inventory and Equipment) of this Agreement and such failure continues for a period of 15 Business Days; or (b) any other term, provision, condition, covenant, or agreement contained in this Agreement or in any of the other Loan Documents (giving effect to any grace periods, cure periods, or required notices, if any, expressly provided for in such other Loan Documents; in each case, other than any term, provision, condition, covenant, or agreement that is the subject of another provisions of this SECTION 8, in which event such other provision of this SECTION 8 shall govern); PROVIDED, that, 52 during any period of time that any such failure or neglect of such Obligor referred to in this SECTION 8.2 exists, even if such failure or neglect is not yet an Event of Default by virtue of the existence of a grace or cure period or the pre-condition of the giving of a notice, Foothill shall not be required to make Advances; 8.3 If there is a Material Adverse Change; 8.4 If any material portion of Borrower's properties or assets comes into the possession of any third Person (other than as expressly permitted by this Loan Agreement or the other Loan Documents), is attached, seized, subjected to a writ or distress warrant, or is levied upon; 8.5 If an Insolvency Proceeding is commenced by Borrower; 8.6 If an Insolvency Proceeding is commenced against Borrower and any of the following events occur: (a) 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 45 calendar days of the date of the filing thereof; PROVIDED, HOWEVER, that, during the pendency of such period, 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, Borrower; or (e) an order for relief shall have been issued or entered therein; 8.7 If 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 (a) If a notice of Lien, levy, or assessment is filed of record with respect to any of Borrower's properties or assets by the United States, or if any taxes or debts owing at any time hereafter to the United States becomes a Lien, whether choate or otherwise, upon any of Borrower's properties or assets; or (b)If one or more notices of Lien, levy, or assessment with respect to taxes or debts owing is filed of record with respect to any of Borrower's properties or assets by any state, county, municipal, or other non-federal 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 Borrower's properties or assets and the Lien, levy, or assessment is not (i) released, discharged, or bonded against before the earlier of 30 days of the date it first arises or 5 days of the date when such property or asset is subject to being forfeited, or (ii) the subject of a Permitted Protest; 8.9 If a judgment or other claim becomes a Lien or encumbrance upon any material portion of Borrower's properties or assets; 8.10 If there is a default in any material agreement to which Borrower is a party with one or more third Persons and such default (a) occurs at the final maturity of the 53 obligations thereunder, or (b) results in a right by such third Person(s), irrespective of whether exercised, to accelerate the maturity of Borrower's obligations thereunder; 8.11 If 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 misstatement or misrepresentation exists now or hereafter in any warranty, representation, statement, or report made to Foothill by Borrower or any officer, employee, agent, or director of Borrower, or if any such warranty or representation is withdrawn; 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; or 8.14 If Holdings shall have Tangible Net Worth of less than the amount set forth below as of the end of the quarter corresponding thereto:
--------------------------------------------- ------------------------------------------- QUARTER ENDING TANGIBLE NET WORTH --------------------------------------------- ------------------------------------------- December 31, 1998 ($1,900,000) --------------------------------------------- ------------------------------------------- March 31, 1999 ($1,100,000) --------------------------------------------- ------------------------------------------- June 30, 1999 ($2,400,000) --------------------------------------------- ------------------------------------------- September 30, 1999 ($6,400,000) --------------------------------------------- ------------------------------------------- December 31, 1999 ($5,200,000) --------------------------------------------- ------------------------------------------- March 31, 2000 ($400,000) --------------------------------------------- ------------------------------------------- June 30, 2000 ($500,000) --------------------------------------------- ------------------------------------------- September 30, 2000 ($2,500,000) --------------------------------------------- ------------------------------------------- December 31, 2000 $1,600,000 --------------------------------------------- ------------------------------------------- March 31, 2001 $6,800,000 --------------------------------------------- ------------------------------------------- June 30, 2001 $7,700,000 --------------------------------------------- ------------------------------------------- September 30, 2001 $7,600,000 --------------------------------------------- -------------------------------------------
54 --------------------------------------------- ------------------------------------------- December 31, 2001 $12,600,000 --------------------------------------------- -------------------------------------------
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 Borrower: (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 Borrower under this Agreement, under any of the Loan Documents, or under any other agreement between Borrower 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 Borrower's 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 Borrower to hold all returned Inventory in trust for Foothill, segregate all returned Inventory from all other property of Borrower or in Borrower's possession and conspicuously label said returned Inventory as the property of Foothill; (f) Without notice to or demand upon 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. Borrower agrees to assemble the Collateral if Foothill so requires, and to make the Collateral available to Foothill as Foothill may designate. 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 Borrower's owned or leased premises, 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; 55 (g) Without notice to 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 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 Borrower held by Foothill; (h) Hold, as cash collateral, any and all balances and deposits of 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 hereby granted a license or other right to use, without charge, Borrower's labels, patents, copyrights, rights of use of any name, trade secrets, trade names, trademarks, service marks, and advertising matter, or any property of a similar nature, as it pertains to the Collateral, in completing production of, advertising for sale, and selling any Collateral and Borrower's rights under all licenses and all franchise agreements shall inure to 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 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 Borrower 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 Borrower as provided in SECTION 12, at least 5 days before the date fixed for the sale, or at least 5 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 Borrower 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 5 days 56 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 Borrower. Any excess will be returned, without interest and subject to the rights of third Persons, by Foothill to Borrower. 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. 10. TAXES AND EXPENSES. If 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 Borrower could result in a Material Adverse Change, in its discretion and without prior notice to Borrower, 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 Borrower's 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. 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 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 57 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 Borrower. 11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend, and hold Foothill, each Participant, and each of their 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 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"). Borrower 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. 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 Borrower: QUANTUM NORTH AMERICA, INC. c/o National Media Corporation 15821 Ventura Boulevard, 5th Floor Encino, California 91436 Attn: Mr. Daniel M. Yukelson Fax No. 818.461.6530 58 With copies to: BUCHALTER, NEMER, FIELDS & YOUNGER 601 South Figueroa Street, Suite 2400 Los Angeles, California 90017 Attn: William Jarblum, Esq. Fax No. 213.896.0400 If to Borrower: 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: BROBECK, PHLEGER & HARRISON LLP 550 South Hope Street Los Angeles, California 90071 Attn: John Francis Hilson, Esq. Fax No. 213.745.3345 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 actual receipt or 3 days after the deposit thereof in the mail. 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 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 59 PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF 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. BORROWER AND FOOTHILL HEREBY WAIVE THEIR 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 OF 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 BORROWER'S DOCUMENTS. All documents, schedules, invoices, agings, or other papers delivered to Foothill may be destroyed or otherwise disposed of by Foothill in accordance with Foothill's standard document retention procedures, unless Borrower requests, in writing, the return of said documents, schedules, or other papers and makes arrangements, at Borrower's expense, for their return. 15. GENERAL PROVISIONS. 15.1 EFFECTIVENESS. This Agreement shall be binding and deemed effective when executed by Borrower 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 Borrower may not 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 Borrower from its Obligations. Foothill may assign this Agreement and its rights and duties hereunder and no consent or approval by Borrower 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 Borrower or 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 Borrower and such assignment shall effect a novation between Borrower and such third Person. 60 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 Borrower, 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 Borrower. 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 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 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 Borrower or such guarantor automatically shall be revived, reinstated, and restored and shall exist as though such Voidable Transfer had never been made. 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. 61 [Remainder of page left intentionally blank.] 62 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed in Los Angeles, California. QUANTUM NORTH AMERICA, INC. a Delaware corporation By ------------------------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By ------------------------------------------------- S-1 EX-10.2 3 EXHIBIT 10.2 EXHIBIT 10.2 COPYRIGHT SECURITY AGREEMENT This COPYRIGHT SECURITY AGREEMENT (this "Agreement"), dated as of December , 1998 is made by QUANTUM NORTH AMERICA, INC., a Delaware corporation ("Borrower"), in favor of FOOTHILL CAPITAL CORPORATION, a California corporation ("Secured Party"). RECITALS A. Borrower and Secured Party have entered into that certain Loan and Security Agreement, dated as of even date herewith (as amended and as otherwise amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which Secured Party has agreed to make certain financial accommodations to Borrower, and pursuant to which Borrower has granted to Secured Party a security interest in (among other things) all general intangibles of Borrower. B. Pursuant to the Loan Agreement and as one of the conditions to the obligations of Secured Party under the Loan Agreement, Borrower has agreed to execute and deliver this Agreement to Secured Party for filing with the United States Copyright Office and with any other relevant recording systems in any domestic jurisdiction, and as further evidence of and to effectuate Secured Party's existing security interests in the copyrights and other general intangibles described herein. ASSIGNMENT NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, Borrower hereby agrees in favor of Secured Party as follows: 1. DEFINITIONS; INTERPRETATION. (a) CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "COPYRIGHT COLLATERAL" has the meaning set forth in SECTION 2. "COPYRIGHTS" has the meaning set forth in SECTION 2. "EVENT OF DEFAULT" shall have the meaning ascribed thereto in the Loan Agreement. "LIEN" means any pledge, security interest, assignment, charge or encumbrance, lien (statutory or other), or other preferential arrangement (including any agreement to give any security interest). 1 "OBLIGATIONS" shall have the meaning ascribed thereto in the Loan Agreement. "BORROWER" shall have the meaning ascribed to such term in the introductory paragraph of this Agreement. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of California. "UNITED STATES" and "U.S." each mean the United States of America, including all territories thereof and all protectorates thereof. (b) TERMS DEFINED IN UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings ascribed to them in the UCC. (c) INTERPRETATION. In this Agreement, except to the extent the context otherwise requires: (i) Any reference to a Section or a Schedule is a reference to a section hereof, or a schedule hereto, respectively, and to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent amendments, restatements, supplements, refinancings, renewals, extensions, and other modifications thereto and thereof. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. (viii) Capitalized words not otherwise defined herein shall have the respective meanings ascribed to them in the Loan Agreement. 2 (ix) In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; PROVIDED, HOWEVER, that the inclusion herein of additional -------- ------- obligations on the part of Borrower and supplemental rights and remedies in favor of Secured Party (whether under California law or applicable federal law), in each case in respect of the Copyright Collateral, shall not be deemed a conflict with the Loan Agreement. 2. SECURITY INTEREST. (a) ASSIGNMENT AND GRANT OF SECURITY. Borrower, as security for the payment and performance of the Obligations, hereby grants, assigns, transfers and conveys to Secured Party a continuing security interest in all of Borrower's right, title and interest in, to and under the following property, whether now existing or hereafter acquired or arising or in which Borrower now has or hereafter acquires or develops an interest and wherever the same may be located (the "Copyright Collateral"): (i) all copyrights, rights, titles and interests in and to published and unpublished works of authorship that Borrower owns or uses in its business or will in the future adopt and so use, and all copyrights in any original or derivative works of authorship and all works protectable by copyright that are presently, or in the future may be, owned, created, authored (excluding all works for hire created by Borrower for any other Person), acquired or used (whether pursuant to a license or otherwise) by Borrower, in whole or in part (collectively, the "Copyrights"), all copyright registrations and applications for copyright registration that have heretofore been or may hereafter be issued thereon or applied for in the United States, including registrations, recordings, supplemental registrations and pending applications for registration in the United States Copyright Office (the "Registrations"), all common law and other rights in and to the Copyrights throughout the world, including all copyright licenses (collectively, the "Copyright Rights"), and all renewals and extensions thereof, throughout the world, including all proceeds thereof (such as, by way of example and not by limitation, license royalties and proceeds of infringement suits), the right (but not the obligation) to renew and extend such Copyrights, Registrations and Copyright Rights and to register works protectable by copyright and the right (but not the obligation) to sue or bring proceedings in the name of Borrower or in the name of Secured Party for past, present and future infringements or violations of the Copyrights, Registrations and Copyright Rights, and recover damages for past, present and future infringements or violations thereof, and all rights corresponding thereto throughout the world, including: (A) all of Borrower's right, title and interest in and to all copyrights or rights or interests in copyrights registered or recorded in the 3 United States Copyright Office, including the Registrations listed on SCHEDULE A attached hereto, as the same may be amended or supplemented pursuant hereto from time to time; (B) all of Borrower's right, title and interest in and to all renewals and extensions of any such copyrights, including renewals or extensions of the Registrations listed on SCHEDULE A attached hereto, that may be secured under the law now or hereafter in force and effect; (C) all of Borrower's right, title and interest to make and exploit all derivative works based on or adopted from all works covered by any of the Copyright Collateral; and (D) all of Borrower's right, title and interest pursuant to or under licensing or other contracts in favor of Borrower pertaining to copyrights and works protectable by copyright presently or in the future owned or used by third parties; (ii) all inventions, designs, registrations, trade secrets, proprietary rights, corporate or other business records, computer programs, source codes, object codes, data bases and all other intangible personal property at any time used in connection with the businesses of Borrower (referred to herein as "Proprietary Rights"); (iii) all general intangibles (as defined in the UCC) and all intangible intellectual or other similar property of Borrower of any kind or nature, whether now owned or hereafter acquired or developed, associated with or arising out of any of the Copyrights, Registrations, Copyright Rights or Proprietary Rights and not otherwise described above; and (iv) all proceeds of any and all of the foregoing Copyright Collateral (including license royalties, rights to payment, accounts receivable and proceeds of infringement suits) and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof) or any indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to the foregoing Copyright Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Copyright Collateral or proceeds are sold, licensed, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto. (b) CONTINUING SECURITY INTEREST. Borrower agrees that this Agreement shall create a continuing security interest in the Copyright Collateral which shall remain in effect until terminated in accordance with SECTION 17. 4 (c) INCORPORATION INTO LOAN AGREEMENT. This Agreement shall be fully incorporated into the Loan Agreement and all understandings, agreements and provisions contained in the Loan Agreement shall be fully incorporated into this Agreement. Without limiting the foregoing, the Copyright Collateral described in this Agreement shall constitute part of the Collateral in the Loan Agreement. (d) PERMITTED LICENSING. Anything in the Loan Agreement or this Agreement to the contrary notwithstanding, Borrower may license to any other Person the Copyright Collateral on a non-exclusive basis, free and clear of Secured Party's security interest (other than its security interest in the proceeds of such license). 3. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Secured Party and for the benefit of Secured Party, in each case to the best of its knowledge, information, and belief, the following: (a) TRUE AND COMPLETE LIST. Set forth in SCHEDULE A is a true and complete list of all Copyrights, Registrations, and Copyright Rights owned, held, or used (whether pursuant to a license or otherwise) by Borrower, in whole or in part; (b) POWERS. Borrower has full power, authority and legal right to pledge and to grant to Secured Party a security interest in all right, title, and interest of Borrower in and to the Copyright Collateral pursuant to this Agreement, and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person except as already obtained; (c) VALIDITY. Each of the Registrations of Borrower referred to in SCHEDULE A is valid, subsisting and enforceable, and Borrower has properly complied in all material respects with all applicable statutory and regulatory requirements, including all notice requirements, in connection with each of such Registrations, and, no claim has been made that the use of any of such Copyrights does or may infringe or otherwise violate the rights of any third Person, except as set forth in Schedule 5.10 of the Loan Agreement; (d) TITLE. Borrower has rights in and good title to the Copyright Collateral shown on the schedules hereto as being owned by it, is the sole and exclusive owner of the entire and unencumbered right, title and interest in and to such Copyright Collateral, free and clear of any Liens (other than Liens in favor of Secured Party); for any Copyright Collateral for which Borrower is either a licensor or a licensee pursuant to a license or licensing agreement regarding such Copyright Collateral, each such license or licensing agreement is in full force and effect, Borrower is not in material default of any of its obligations thereunder and, other than (i) the parties to such licenses or licensing agreements, or (ii) in the case of any non-exclusive license or license agreement entered into by Borrower or any such licensor regarding such Copyright Collateral, the parties to any other such non-exclusive licenses or license agreements entered into by Borrower or any such licensor with any other Person, no other Person has any rights in or to any of such Copyright Collateral; 5 (e) NO VIOLATION. The execution, delivery and performance by Borrower of this Agreement do not violate any provision of law or the articles of incorporation or by-laws of Borrower or result in a breach of or constitute a default under any contract, obligation, indenture or other instrument to which Borrower is a party or by which Borrower may be bound; (f) AUTHORIZATION. This Agreement has been duly authorized, executed and delivered, and constitutes a legal, valid and binding agreement of Borrower enforceable in accordance with its terms; and (g) SECRECY. Borrower has taken and will continue to take all reasonable steps to protect the secrecy of all trade secrets relating to any of its unpublished Copyright Collateral and its Proprietary Rights. 4. COVENANTS. Borrower covenants that so long as this Agreement shall be in effect, Borrower shall: (a) FURTHER ACTS. On a continuing basis, make, execute, acknowledge and deliver, and file and record in the proper filing and recording places, all such instruments and documents, including appropriate financing and continuation statements and security agreements, and take all such action as may be necessary or advisable or may be requested by Secured Party to carry out the intent and purposes of this Agreement, or for assuring, confirming or protecting the grant or perfection of the security interest granted or purported to be granted hereby, to ensure Borrower's compliance with this Agreement or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to the Copyright Collateral. Without limiting the generality of the foregoing sentence, Borrower: (i) hereby authorizes Secured Party in its sole discretion if Borrower refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Secured Party, to modify this Agreement without first obtaining Borrower's approval of or signature to such modification by amending SCHEDULE A hereof to include a reference to any right, title or interest ---------- in any existing Copyright, Registration or Copyright Right or any Copyright, Registration or Copyright Right acquired or developed by Borrower after the execution hereof, or to delete any reference to any right, title or interest in any Copyright, Registration or Copyright Right in which Borrower no longer has or claims any right, title or interest; and (ii) hereby authorizes Secured Party, in its sole discretion, to file one or more financing or continuation statements, if Borrower refuses to execute and deliver, or fails timely to execute and deliver, any such amendment thereto it is requested to execute and deliver by Secured Party, any amendments thereto, relative to all or any portion of the Copyright Collateral, without the signature of Borrower where permitted by law; 6 (b) COMPLIANCE WITH LAW. Comply, in all material respects, with all applicable statutory and regulatory requirements in connection with any and all of the Copyright Collateral that is the subject of the Registrations and give such notice of copyright, prosecute such material claims, and do all other acts and take all other measures which, in Borrower's reasonable business judgment, may be necessary or desirable to preserve, protect and maintain such Copyright Collateral and all of Borrower's rights therein, including diligently prosecute any material copyright application pending as of the date of this Agreement or thereafter; (c) COMPLIANCE WITH AGREEMENT. Comply with each of the terms and provisions of this Agreement, and not enter into any agreement (for example, a license agreement) which is inconsistent with the obligations of Borrower under this Agreement without Secured Party's prior written consent; and (d) LIEN PROTECTION. Not permit the inclusion in any contract to which Borrower becomes a party of any provision that could or might impair or prevent the creation of a security interest in favor of Secured Party in Borrower's rights and interest in any property included within the definitions of the Copyrights, Registrations and Copyright Rights acquired under such contracts. 5. NEW COPYRIGHTS, REGISTRATIONS AND COPYRIGHT RIGHTS. If Borrower shall obtain rights to or develop any new works protectable by copyright, or become entitled to the benefit of any Copyright Rights, Registration or application for Registration not described on the schedules hereto, or any renewals or extension of any Copyright, Copyright Rights or Registration, the provisions of this Agreement shall automatically apply thereto. Borrower shall give Secured Party written notice (a) of any such work or such rights of material value to Borrower or the operation of its businesses and (b) any such Registration, applications for Registration or renewal or extension of any Copyright. Concurrently with its filing of an application for any Registration for any Copyright, Borrower shall execute and deliver a supplement to this Agreement in form and substance satisfactory to the Secured Party (or, at the election of Secured Party, a new Copyright Security Agreement substantially in the form of this Agreement and otherwise in form and substance satisfactory to the Secured Party), pursuant to which Borrower shall grant and reaffirm its grant of a security interest to the extent of its interest in such Registration as provided herein to Secured Party, and Borrower shall cause such agreement to be recorded in the offices and jurisdictions indicated by Secured Party. 6. COPYRIGHT REGISTRATION, RENEWAL AND LITIGATION. (a) REGISTRATION. Except to the extent otherwise permitted under the Loan Agreement, Borrower shall have the duty diligently to make any application for Registration on any existing or future unregistered but copyrightable works that are material to Borrower's business or operations and to do any and all acts which are reasonably necessary or desirable to preserve, renew and maintain all rights in all Copyrights, Registrations and Copyright Rights; PROVIDED, HOWEVER, that Borrower shall not be obligated 7 to renew any Obsolete Copyrights. Any expenses incurred in connection therewith shall be borne solely by Borrower. Except as otherwise permitted in the Loan Agreement or this SECTION 6(A), Borrower shall not do any act or omit to do any act whereby any of the Copyright Collateral may become abandoned or fall into the public domain or fail to renew any Copyright, Registration or Copyright Right owned by Borrower without the prior written consent of Secured Party. (b) PROTECTION. Except as provided in SECTION 8 and notwithstanding SECTION 1, Borrower shall have the right and obligation to commence and diligently prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement or other damage as are in its reasonable business judgment necessary to protect the Copyright Collateral or any of Borrower's rights therein. Borrower shall provide to Secured Party any information with respect thereto requested by Secured Party. Secured Party shall provide at Borrower's expense all necessary cooperation in connection with any such suit, proceeding or action including joining as a nominal party if Secured Party shall have been satisfied that it is not incurring any risk of liability because of such joinder. Borrower shall provide at its expense representation acceptable to Secured Party for the common interest of Borrower and Secured Party with respect to such proceedings. (c) NOTICE. Borrower shall, promptly upon its becoming aware thereof, notify Secured Party in writing of the institution of, or any adverse determination in, any proceeding, application, suit or action of any kind described in SECTION 6(A) OR 6(B), or regarding Borrower's claim of ownership in any of the Copyrights, Registrations or Copyright Rights, its right to register the same, or its right to keep and maintain such registration, whether before the United States Copyright Office or any United States court or governmental agency. Borrower shall provide promptly to Secured Party any information with respect thereto requested from time to time by Secured Party. 7. REMEDIES. Following the occurrence and during the continuation of an Event of Default, Secured Party shall have all rights and remedies available to it under the Loan Agreement and the other Loan Documents and applicable law (which rights and remedies are cumulative) with respect to its security interests in any of the Copyright Collateral or any other Collateral. Borrower agrees that such rights and remedies include the right of Secured Party as a secured party to sell or otherwise dispose of its Collateral after default, pursuant to UCC Section 9504. Borrower agrees that Secured Party shall at all times have such royalty free licenses, to the extent permitted by law, for any Copyright, Copyright Rights, Proprietary Right and any other Copyright Collateral that is reasonably necessary to permit the exercise of any of Secured Party's rights or remedies upon the occurrence and during the continuation of an Event of Default with respect to (among other things) any asset of Borrower in which Secured Party has a security interest, including Secured Party's rights to sell or license general intangibles, inventory, tooling or packaging which is acquired by Borrower (or its successors, permitted assignees, or trustee in bankruptcy). In addition to and without limiting any of the foregoing, upon the occurrence and during the continuance of an Event of Default, Secured Party shall have the right but shall in no way be obligated to 8 bring suit, or to take such other action as Secured Party deems necessary or advisable, in the name of Borrower or Secured Party, to enforce or protect any Copyright, Registration, Copyright Right or Proprietary Right, and any license thereunder, in which event Borrower shall, at the request of Secured Party, do any and all lawful acts and execute any and all documents required by Secured Party in aid of such enforcement. To the extent that Secured Party shall elect not to bring suit to enforce any Copyright, Registration, Copyright Rights, Proprietary Right, or any license thereunder, Borrower, in the exercise of its reasonable business judgment, agrees to use all reasonable measures and its diligent efforts, whether by action, suit, proceeding or otherwise, to prevent the infringement, misappropriation or violation thereof by others and for that purpose agrees diligently to maintain any action, suit or proceeding against any Person necessary to prevent such infringement, misappropriation or violation. 8. AUTHORIZATION. If Borrower fails to comply with any of its obligations hereunder, Secured Party may do so in Borrower's name or in Secured Party's name, but at Borrower's expense, and Borrower hereby agrees to reimburse Secured Party in full upon demand for all reasonable expenses, including reasonable attorneys fees, incurred by Secured Party in protecting, defending and maintaining any of the Copyright Collateral or any right, title or interest of Borrower or Secured Party therein. Borrower hereby appoints Secured Party, and authorizes, directs and empowers Secured Party to make, constitute and appoint any officer or agent of Secured Party as Secured Party may select, in its exclusive discretion, as the true and lawful attorney-in-fact of Borrower, with the power, (a) if Borrower refuses or fails to do so timely, to execute in the name of Borrower any financing statement or other instrument and any modification, supplement or amendment to this Agreement or any supplemental Copyright Security Agreement described in SECTIONS 4(A) OR 5 hereof, and do such other acts on Borrower's behalf, that Secured Party may deem necessary or advisable to accomplish the purposes hereof, and (b) upon the occurrence and during continuation of any Event of Default, (i) to endorse Borrower's name on all applications, documents, papers and instruments necessary for Secured Party to use any of the Copyright Collateral, (ii) to assert or retain any rights under any license agreement for any of the Copyright Collateral, including any rights of Borrower arising under Section 365(n) of the Bankruptcy Code, and (iii) to grant or issue any exclusive or nonexclusive license under any of the Copyright Collateral to anyone else, or as may be necessary for Secured Party to assign, pledge, convey or otherwise transfer title in or dispose of any of the Copyright Collateral or any other collateral to anyone else. Borrower hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and is irrevocable until termination of this Agreement. 9. NOTICES. All notices and other communications hereunder to or from Secured Party and Borrower shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. 10. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, except to the extent that the validity or perfection of the security interests hereunder in respect of any Copyright 9 Collateral are governed by federal law, in which case such choice of California law shall not be deemed to deprive Secured Party of such rights and remedies as may be available under federal law. 11. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Loan Agreement, together with the Schedules and Exhibits hereto and thereto, which are incorporated herein by this reference, contains the entire agreement of the parties with respect to the subject matter hereof and supersede all prior drafts and communications relating to such subject matter. Neither this Agreement nor any provision hereof may be modified, amended or waived except by the written agreement of the parties, as provided in the Loan Agreement. Notwithstanding the foregoing, Secured Party may re-execute this Agreement, modify, amend or supplement the Schedules hereto or execute a supplemental Copyright Security Agreement, as provided herein, and the terms of any such modification, amendment, supplement or supplemental Copyright Security Agreement shall be deemed to be incorporated herein by this reference. 12. SEVERABILITY. If one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to such party shall, to the fullest extent permitted by applicable law, not invalidate or render illegal or unenforceable any such provision in any other jurisdiction or with respect to any other party, or any other provisions of this Agreement. 13. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as 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 14. LOAN AGREEMENT. Borrower acknowledges that the rights and remedies of Secured Party with respect to the security interest in the Copyright Collateral granted hereby are more fully set forth in the Loan Agreement and the other Loan Documents and all such rights and remedies are cumulative. 15. NO INCONSISTENT REQUIREMENTS. Borrower acknowledges that this Agreement and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and Borrower agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. 10 16. TERMINATION. Upon the final payment in full in cash of the Obligations and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate, and Secured Party shall execute and deliver such documents and instruments and take such further action reasonably requested by Borrower, at Borrower's expense, as shall be necessary to evidence termination of the security interests granted by Borrower to Secured Party hereunder. [Remainder of page intentionally left blank] 11 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. QUANTUM NORTH AMERICA, INC., a Delaware corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By: ------------------------------------ Name ---------------------------------- Title: --------------------------------- S-1 STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On , 1998, before me, ______________________________, Notary Public, personally appeared , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------------- Signature [SEAL] STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On , 1998, before me, ______________________________, Notary Public, personally appeared , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------------- Signature [SEAL] S-2 SCHEDULE A COPYRIGHT REGISTRATIONS
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COPYRIGHT APPLICATIONS
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*Note: Reference Attached Form TX Applications, application number to be provided upon receipt from Copyright Office. A-1 EX-10.3 4 EXHIBIT 10.3 Exhibit 10.3 PATENT SECURITY AGREEMENT THIS PATENT SECURITY AGREEMENT (this "Agreement"), dated as of December , 1998 is made by QUANTUM NORTH AMERICA, INC., a Delaware corporation ("Borrower"), in favor of FOOTHILL CAPITAL CORPORATION, a California corporation ("Lender"). RECITALS A. Borrower and Lender have entered into that certain Loan and Security Agreement, dated as of the date hereof (as amended, modified, renewed or extended from time to time, the "Loan Agreement"), pursuant to which Lender has agreed to make certain financial accommodations to Borrower, and pursuant to which Borrower has granted to Lender a security interest in (among other things) certain of the general intangibles of Borrower. B. Pursuant to the Loan Agreement and as one of the conditions precedent to the obligations of Lender under the Loan Agreement, Borrower has agreed to execute and deliver this Agreement to Lender for filing with the PTO and with any other relevant recording systems in any domestic or foreign jurisdiction, and as further evidence of and to effectuate Lender's existing security interests in the patents and other general intangibles described herein. ASSIGNMENT NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, Borrower hereby agrees in favor of Lender as follows: 1. DEFINITIONS; INTERPRETATION. (a) CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "BANKRUPTCY CODE" means the United States Bankruptcy Code (11 U.S.C.ss.101 Et SEQ.), as amended, and any successor statute. "EVENT OF DEFAULT" shall have the meaning ascribed to such thereto in the Loan Agreement. "LIEN" means any pledge, security interest, assignment, charge or encumbrance, lien (statutory or other), or other preferential arrangement (including any agreement to give any security interest). 1 "PATENT COLLATERAL" has the meaning set forth in SECTION 2. "PATENTS" has the meaning set forth in SECTION 2. "PROCEEDS" means whatever is receivable or received from or upon the sale, lease, license, collection, use, exchange or other disposition, whether voluntary or involuntary, of any Patent Collateral, including "proceeds" as defined at UCC Section 9306, and all proceeds of proceeds. Proceeds shall include (i) any and all accounts, chattel paper, instruments, general intangibles, cash and other proceeds, payable to or for the account of Borrower, from time to time in respect of any of the Patent Collateral, (ii) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to or for the account of Borrower from time to time with respect to any of the Patent Collateral, (iii) any and all claims and payments (in any form whatsoever) made or due and payable to Borrower from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Patent Collateral by any Person acting under color of governmental authority, and (iv) any and all other amounts from time to time paid or payable under or in connection with any of the Patent Collateral or for or on account of any damage or injury to or conversion of any Patent Collateral by any Person. "PTO" means the United States Patent and Trademark Office and any successor thereto. "SECURED OBLIGATIONS" means all Obligations owing by Borrower to Lender of any kind or description arising out of or outstanding under, advanced or issued pursuant to, this Agreement or the other Loan Documents, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest (including interest that accrues after the filing of a case under the Bankruptcy Code) and any and all costs, fees (including attorneys fees), and expenses which Borrower is required to pay pursuant to any of the foregoing, by law, or otherwise. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of California. "UNITED STATES" and "U.S." each mean the United States of America. (b) TERMS DEFINED IN UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings ascribed to them in the UCC. (c) INTERPRETATION. In this Agreement, except to the extent the context otherwise requires: 2 (i) Any reference to a Section or a Schedule is a reference to a section hereof, or a schedule hereto, respectively, and to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. (viii) Capitalized words not otherwise defined herein shall have the respective meanings ascribed to them in the Loan Agreement. (ix) In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; PROVIDED, HOWEVER, that the inclusion herein of additional obligations on the part of the Borrower and supplemental rights and remedies in favor of Lender (whether under California law or applicable federal law), in each case in respect of the Patent Collateral, shall not be deemed a conflict with the Loan Agreement. 2. SECURITY INTEREST. (a) ASSIGNMENT AND GRANT OF SECURITY INTEREST. As security for the payment and performance of the Secured Obligations, Borrower hereby grants, assigns, 3 transfers, and conveys to Lender a continuing security interest in all of Borrower's right, title and interest in, to and under the following property, whether now existing or hereafter acquired or arising (collectively, the "Patent Collateral"): (i) all letters patent of the U.S. or any other country, all registrations and recordings thereof, and all applications for letters patent of the U.S. or any other country, owned, held, or used by Borrower in whole or in part, including all existing U.S. patents and patent applications of Borrower which are described in SCHEDULE A hereto, as the same may be amended or supplemented pursuant hereto from time to time, and together with and including all patent licenses held by Borrower, including such patent licenses which are described in SCHEDULE A hereto, together with all reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof and the inventions disclosed therein, and all rights corresponding thereto throughout the world, including the right to make, use, lease, sell and otherwise transfer the inventions disclosed therein, and all proceeds thereof, including all license royalties and proceeds of infringement suits (collectively, the "Patents"); (ii) all claims, causes of action and rights to sue for past, present and future infringement or unconsented use of any of the Patents and all rights arising therefrom and pertaining thereto; (iii) all general intangibles (as defined in the UCC) and all intangible intellectual or other similar property of Borrower of any kind or nature, whether now owned or hereafter acquired or developed, associated with or arising out of any of the Patents and not otherwise described above; and (iv) all products and Proceeds of any and all of the foregoing. (b) CONTINUING SECURITY INTEREST. Borrower agrees that this Agreement shall create a continuing security interest in the Patent Collateral which shall remain in effect until terminated in accordance with SECTION 16. (c) INCORPORATION INTO LOAN AGREEMENT. This Agreement shall be fully incorporated into the Loan Agreement and all understandings, agreements and provisions contained in the Loan Agreement shall be fully incorporated into this Agreement. Without limiting the foregoing, the Patent Collateral described in this Agreement shall constitute part of the Collateral in the Loan Agreement. (d) LICENSES. Anything in the Loan Agreement or this Agreement to the contrary notwithstanding, Borrower may grant non-exclusive licenses of the Patent Collateral (subject to the security interest (if any) of Lender therein) in the ordinary course of business and consistent with past practice. 4 3. FURTHER ASSURANCES; APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT. Borrower at its expense shall execute and deliver, or cause to be executed and delivered, to Lender any and all documents and instruments, in form and substance satisfactory to Lender, and take any and all action, which Lender may reasonably request from time to time, to perfect and continue perfected, maintain the priority of or provide notice of Lender's security interest in the Patent Collateral and to accomplish the purposes of this Agreement. If Borrower refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Lender in accordance with the foregoing, Lender shall have the right to, in the name of Borrower, or in the name of Lender or otherwise, without notice to or assent by Borrower, and Borrower hereby irrevocably constitutes and appoints Lender (and any of Lender's officers or employees or agents designated by Lender) as Borrower's true and lawful attorney-in-fact with full power and authority, (i) to sign the name of Borrower on all or any of such documents or instruments, and perform all other acts, that Lender deems necessary or advisable in order to perfect or continue perfected, maintain the priority or enforceability of or provide notice of Lender's security interest in, the Patent Collateral, and (ii) to execute any and all other documents and instruments, and to perform any and all acts and things for and on behalf of Borrower, which Lender may deem necessary or advisable to maintain, preserve and protect the Patent Collateral and to accomplish the purposes of this Agreement, including (A) upon the occurrence and during the continuance of any Event of Default, to defend, settle, adjust or institute any action, suit or proceeding with respect to the Patent Collateral, (B) upon the occurrence and during the continuance of any Event of Default, to assert or retain any rights under any license agreement for any of the Patent Collateral, including any rights of Borrower arising under Section 365(n) of the Bankruptcy Code, and (C) upon the occurrence and during the continuance of any Event of Default, to execute any and all applications, documents, papers and instruments for Lender to use the Patent Collateral, to grant or issue any exclusive or non-exclusive license with respect to any Patent Collateral (it being understood that so long as no Event of Default has occurred and is continuing, Borrower may grant or issue non-exclusive licenses in the ordinary course of business and consistent with past practice with respect to the Patent Collateral and subject to the security interest (if any) of Lender therein), and to assign, convey or otherwise transfer title in or dispose of the Patent Collateral. The power of attorney set forth in this SECTION 3, being coupled with an interest, is irrevocable so long as this Agreement shall not have terminated in accordance with SECTION 16. Nothing in this Agreement shall obligate Borrower to commence any suit, proceeding or other action for infringement of any of the Patents that are immaterial to Borrower's business. 4. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, in each case to the best of its knowledge, information, and belief, as follows: 5 (a) NO OTHER PATENTS. A true and correct list of all of the existing Patents owned, held (whether pursuant to a license or otherwise) or used by Borrower, in whole or in part, is set forth in SCHEDULE A. (b) VALIDITY. Each of the Patents listed on SCHEDULE A is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, all maintenance fees required to be paid on account of any Patents have been timely paid for maintaining such Patents in force, and, to the best of Borrower's knowledge, each of the Patents is valid and enforceable. (c) OWNERSHIP OF PATENT COLLATERAL; NO VIOLATION. (i) Borrower has rights in and good title to the existing Patent Collateral, (ii) with respect to the Patent Collateral shown on SCHEDULE A hereto as owned by it, Borrower is the sole and exclusive owner thereof, free and clear of any Liens and rights of others (other than the security interest created hereunder), including licenses, shop rights and covenants by Borrower not to sue third persons and (iii) with respect to any Patent for which Borrower is either a licensor or a licensee pursuant to a license or licensee agreement regarding such Patent, each such license or licensing agreement is in full force and effect, Borrower is not in default of any of its obligations thereunder and, other than the parties to such licenses or licensing agreements, no other Person is known by Borrower to have any rights in or to any of the Patent Collateral. To the best of Borrower's knowledge, the past, present and contemplated future use of the Patent Collateral by Borrower has not, does not and will not infringe upon or violate any right, privilege or license agreement of or with any other Person. (d) NO INFRINGEMENT. To the best of Borrower's knowledge, no material infringement or unauthorized use presently is being made of any of the Patent Collateral by any Person. (e) POWERS. Borrower has the unqualified right, power and authority to pledge and to grant to Lender a security interest in all of the Patent Collateral pursuant to this Agreement, and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person except as already obtained. 5. COVENANTS. So long as any of the Secured Obligations remain unsatisfied, Borrower shall comply with all of the covenants, terms and provisions of this Agreement, the Loan Agreement and the other Loan Documents, and Borrower will promptly give Lender written notice of the occurrence of any event that could have a material adverse effect on any of the Patents or the Patent Collateral, including any petition under the Bankruptcy Code filed by or against any licensor of any of the Patents for which Borrower is a licensee. 6. FUTURE RIGHTS. Except as otherwise expressly agreed to in writing by Lender, for so long as any of the Secured Obligations shall remain outstanding, or, if earlier, 6 until Lender shall have released or terminated, in whole but not in part, its interest in the Patent Collateral, if and when Borrower shall obtain rights to any new patentable inventions, or become entitled to the benefit of any Patent, or any reissue, division, continuation, renewal, extension or continuation-in-part of any Patent or Patent Collateral or any improvement thereof (whether pursuant to any license or otherwise), the provisions of SECTION 2 shall automatically apply thereto and Borrower shall give to Lender prompt notice thereof. Borrower shall do all things deemed necessary or advisable by Lender to ensure the validity, perfection, priority and enforceability of the security interests of Lender in such future acquired Patent Collateral. Borrower hereby authorizes Lender to modify, amend or supplement the Schedules hereto and to re-execute this Agreement from time to time on Borrower's behalf and as its attorney-in-fact to include any future patents which are or become Patent Collateral and to cause such re-executed Agreement or such modified, amended or supplemented Schedules to be filed with the PTO. 7. REMEDIES. Upon the occurrence and during the continuance of an Event of Default, Lender shall have all rights and remedies available to it under the Loan Agreement and applicable law (which rights and remedies are cumulative) with respect to the security interests in any of the Patent Collateral or any other Collateral. Borrower agrees that such rights and remedies include the right of Lender as a Lender to sell or otherwise dispose of its Collateral after default, pursuant to UCC Section 9504. Borrower agrees that Lender shall at all times have such royalty free licenses, to the extent permitted by law, for any Patent Collateral that is reasonably necessary to permit the exercise of any of Lender's rights or remedies upon the occurrence and during the continuation of an Event of Default with respect to (among other things) any tangible asset of Borrower in which Lender has a security interest, including Lender's rights to sell inventory, tooling or packaging which is acquired by Borrower (or its successor, assignee or trustee in bankruptcy). In addition to and without limiting any of the foregoing, upon the occurrence and during the continuance of an Event of Default, Lender shall have the right but shall in no way be obligated to bring suit, or to take such other action as Lender deems necessary or advisable, in the name of Borrower or Lender, to enforce or protect any of the Patent Collateral, in which event Borrower shall, at the request of Lender, do any and all lawful acts and execute any and all documents required by Lender in aid of such enforcement. To the extent that Lender shall elect not to bring suit to enforce such Patent Collateral, upon the occurrence and during the continuation of an Event of Default, Borrower, in the exercise of its reasonable business judgment, agrees to use all reasonable measures and its diligent efforts, whether by action, suit, proceeding or otherwise, to prevent the infringement, misappropriation or violations thereof by others and for that purpose agrees diligently to maintain any action, suit or proceeding against any Person necessary to prevent such infringement, misappropriation or violation. 8. BINDING EFFECT. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Borrower and Lender and their respective successors and assigns. 7 9. NOTICES. All notices and other communications hereunder shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. 10. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, except to the extent that the validity or perfection of the security interests hereunder in respect of the Patent Collateral are governed by federal law, in which case such choice of California law shall not be deemed to deprive Lender of such rights and remedies as may be available under federal law. 11. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Loan Agreement, together with the Schedules hereto and thereto, contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior drafts and communications relating to such subject matter. Neither this Agreement nor any provision hereof may be modified, amended or waived except by the written agreement of the parties, as provided in the Loan Agreement. Notwithstanding the foregoing, Lender may re-execute this Agreement or modify, amend or supplement the Schedules hereto as provided in SECTION 6 hereof. 12. SEVERABILITY. If one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to such party shall, to the fullest extent permitted by applicable law, not invalidate or render illegal or unenforceable any such provision in any other jurisdiction or with respect to any other party, or any other provisions of this Agreement. 13. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as 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 14. LOAN AGREEMENT. Borrower acknowledges that the rights and remedies of Lender with respect to the security interest in the Patent Collateral granted hereby are more fully set forth in the Loan Agreement and all such rights and remedies are cumulative. 15. NO INCONSISTENT REQUIREMENTS. Borrower acknowledges that this Agreement and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and Borrower agrees that 8 all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. 16. TERMINATION. Upon the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate and Lender shall execute and deliver such documents and instruments and take such further action reasonably requested by Borrower and at Borrower's expense as shall be necessary to evidence termination of the security interest granted by Borrower to Lender hereunder. [Remainder of page intentionally left blank] 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. QUANTUM NORTH AMERICA, INC., a Delaware corporation By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By: -------------------------------------------- Name: ------------------------------------------ Title: ----------------------------------------- S-1 STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On , 1998, before me, ______________________________, Notary Public, personally appeared , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------------- Signature [SEAL] STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On , 1998, before me, ______________________________, Notary Public, personally appeared , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------------- Signature [SEAL] S-2 SCHEDULE A to the Patent Security Agreement UNITED STATES PATENTS AND PATENT APPLICATIONS
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A-1 EX-10.4 5 EXHIBIT 10.4 Exhibit 10.4 TRADEMARK SECURITY AGREEMENT This TRADEMARK SECURITY AGREEMENT (this "Agreement"), dated as of December ___, 1998 is made by QUANTUM NORTH AMERICA, INC., a Delaware corporation ("Borrower"), in favor of FOOTHILL CAPITAL CORPORATION, a California corporation, ("Lender"). RECITALS A. Borrower and Lender have entered into that certain Loan and Security Agreement, of even date herewith (as amended, restated, modified, renewed or extended from time to time, the "Loan Agreement"), pursuant to which Lender has agreed to make certain financial accommodations to Borrower, and pursuant to which Borrower has granted to Lender a security interest in (among other things) all of the general intangibles of Borrower. B. Pursuant to the Loan Agreement and as one of the conditions precedent to the obligations of Lender under the Loan Agreement, Borrower has agreed to execute and deliver this Agreement to Lender for filing with the PTO and with any other relevant recording systems in any domestic jurisdiction, and as further evidence of and to effectuate Lender's existing security interests in the trademarks and other general intangibles described herein. ASSIGNMENT NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, Borrower hereby agrees in favor of Lender as follows: 1. DEFINITIONS; INTERPRETATION. (a) CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "EVENT OF DEFAULT" shall have the meaning ascribed thereto in the Loan Agreement. "LIEN" means any pledge, security interest, assignment, charge or encumbrance, lien (statutory or other), or other preferential arrangement (including any agreement to give any security interest). "OBLIGATIONS" shall have the meaning ascribed thereto in the Loan Agreement. "BORROWER" shall have the meaning ascribed to such term in the introductory paragraph of this Agreement. 1 "PROCEEDS" means whatever is receivable or received from or upon the sale, lease, license, collection, use, exchange or other disposition, whether voluntary or involuntary, of any Trademark Collateral, including "proceeds" as defined at UCC Section 9306, all insurance proceeds and all proceeds of proceeds. Proceeds shall include (i) any and all accounts, chattel paper, instruments, general intangibles, cash and other proceeds, payable to or for the account of Borrower, from time to time in respect of any of the Trademark Collateral, (ii) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to or for the account of Borrower from time to time with respect to any of the Trademark Collateral, (iii) any and all claims and payments (in any form whatsoever) made or due and payable to Borrower from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Trademark Collateral by any Person acting under color of governmental authority, and (iv) any and all other amounts from time to time paid or payable under or in connection with any of the Trademark Collateral or for or on account of any damage or injury to or conversion of any Trademark Collateral by any Person. "PTO" means the United States Patent and Trademark Office and any successor thereto. "TRADEMARK COLLATERAL" has the meaning set forth in SECTION 2. "TRADEMARKS" has the meaning set forth in SECTION 2. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of California. "UNITED STATES" and "U.S." each mean the United States of America. (b) TERMS DEFINED IN UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings assigned to them in the UCC. (c) INTERPRETATION. In this Agreement, except to the extent the context otherwise requires: (i) Any reference to a Section or a Schedule is a reference to a section hereof, or a schedule hereto, respectively, and to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. 2 (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. (viii) Capitalized words not otherwise defined herein shall have the respective meanings ascribed to them in the Loan Agreement. (ix) In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; PROVIDED, HOWEVER, that the inclusion herein of additional obligations on the part of Borrower and supplemental rights and remedies in favor of Lender (whether under federal law or applicable California law), in each case in respect of the Trademark Collateral, shall not be deemed a conflict in the Loan Agreement. 2. SECURITY INTEREST. (a) ASSIGNMENT AND GRANT OF SECURITY INTEREST. To secure the Obligations, Borrower hereby grants, assigns, transfers and conveys to Lender a continuing security interest in all of Borrower's right, title and interest in and to the following property, whether now existing or hereafter acquired or arising and whether registered or unregistered (collectively, the "Trademark Collateral"): (i) all state (including common law) and federal trademarks, service marks and trade names, corporate names, company names, business names, fictitious business names, trade styles, trade dress, logos, other source or business identifiers, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, together with and including all licenses therefor held by Borrower, and all registrations and recordings thereof, and all applications filed or to be filed in connection therewith, including registrations and applications in the PTO, any State of the United States (but excluding each application to register any trademark, service mark or other mark prior to the filing under applicable law of a verified statement of use (or the equivalent) for such trademark or service mark) and 3 all extensions or renewals thereof, including without limitation any of the foregoing identified on SCHEDULE A hereto (as the same may be amended, modified or supplemented from time to time), and the right (but - not the obligation) to register claims under any state or federal trademark law or regulation and to apply for, renew and extend any of the same, to sue or bring opposition or cancellation proceedings in the name of Borrower or in the name of Lender for past, present or future infringement or unconsented use thereof, and all rights arising therefrom throughout the world (collectively, the "Trademarks"); (ii) all claims, causes of action and rights to sue for past, present or future infringement or unconsented use of any Trademarks and all rights arising therefrom and pertaining thereto; (iii) all general intangibles related to or arising out of any of the Trademarks and all the goodwill of Borrower's business symbolized by the Trademarks or associated therewith; and (iv) all proceeds of any and all of the foregoing Trademark Collateral (including license royalties, rights to payment, accounts receivable and proceeds of infringement suits) and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof) or any indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to the foregoing Trademark Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Trademark Collateral or proceeds are sold, licensed, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto. (b) CONTINUING SECURITY INTEREST. Debtor agrees that this Agreement shall create a continuing security interest in the Trademark Collateral which shall remain in effect until terminated in accordance with SECTION 17. (c) INCORPORATION INTO LOAN AGREEMENT. This Agreement shall be fully incorporated into the Loan Agreement and all understandings, agreements and provisions contained in the Loan Agreement shall be fully incorporated into this Agreement. Without limiting the foregoing, the Trademark Collateral described in this Agreement shall constitute part of the Collateral in the Loan Agreement. (d) PERMITTED LICENSES. Anything in the Loan Agreement or this Agreement to the contrary notwithstanding, Borrower may grant non-exclusive licenses of the Trademark Collateral (subject to the security interest (if any) of Secured Party therein) in the ordinary course of business consistent with past practice. 3. FURTHER ASSURANCES; APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT. Borrower at its expense shall execute and deliver, or cause to be executed and delivered, to 4 Lender any and all documents and instruments, in form and substance reasonably satisfactory to Lender, and take any and all action, which Lender may reasonably request from time to time, to perfect and continue perfected, maintain the priority of or provide notice of Lender's security interest in the Trademark Collateral and to accomplish the purposes of this Agreement. If Borrower refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Lender in accordance with the foregoing, Lender shall have the right, in the name of Borrower, or in the name of Lender or otherwise, without notice to or assent by Borrower, and Borrower hereby irrevocably constitutes and appoints Lender (and any of Lender's officers or employees or agents designated by Lender) as Borrower's true and lawful attorney-in-fact with full power and authority, (i) to sign the name of Borrower on all or any of such documents or instruments and perform all other acts that Lender reasonably deems necessary or advisable in order to perfect or continue perfected, maintain the priority or enforceability of or provide notice of Lender's security interest in, the Trademark Collateral, and (ii) to execute any and all other documents and instruments, and to perform any and all acts and things for and on behalf of Borrower, which Lender reasonably may deem necessary or advisable to maintain, preserve and protect the Trademark Collateral and to accomplish the purposes of this Agreement, including (A) after the occurrence and during the continuance of any Event of Default, to defend, settle, adjust or institute any action, suit or proceeding with respect to the Trademark Collateral, (B) after the occurrence and during the continuance of any Event of Default, to assert or retain any rights under any license agreement for any of the Trademark Collateral, and (C) after the occurrence and during the continuance of any Event of Default, to execute any and all applications, documents, papers and instruments for Lender to use the Trademark Collateral, to grant or issue any exclusive or non-exclusive license with respect to any Trademark Collateral, and to assign, convey or otherwise transfer title in or dispose of the Trademark Collateral. The power of attorney set forth in this SECTION 3, being coupled with an interest, is irrevocable so long as this Agreement shall not have terminated in accordance with SECTION 17. 4. REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, in each case to the best of its knowledge, information, and belief, as follows: (a) NO OTHER TRADEMARKS. SCHEDULE A sets forth, as of the Closing Date, a true and correct list of all of the existing Trademarks (whether registered or otherwise), or for which any application for registration has been filed with the PTO or any corresponding or similar trademark office of any other U.S. jurisdiction, and that are owned or held (whether pursuant to a license or otherwise) and used by Borrower. (b) TRADEMARKS SUBSISTING. Each of the Trademarks listed in SCHEDULE A is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and, to the best of Borrower's knowledge, each of the Trademarks is valid and enforceable. (c) OWNERSHIP OF TRADEMARK COLLATERAL; NO VIOLATION. (i) Borrower has rights in and good and defensible title to the existing Trademark Collateral, (ii) with respect to the Trademark Collateral shown on SCHEDULE A hereto as owned by it, Borrower is 5 the sole and exclusive owner thereof, free and clear of any Liens and rights of others (other than the security interest created hereunder and other than Permitted Liens), including licenses, registered user agreements and covenants by Borrower not to sue third persons, and (iii) with respect to any Trademarks for which Borrower is either a licensor or a licensee pursuant to a license or licensee agreement regarding such Trademark, each such license or licensing agreement is in full force and effect, Borrower is not in material default of any of its obligations thereunder and, (i) other than the parties to such licenses or licensing agreements, or (ii) in the case of any non-exclusive license or license agreement entered into by Borrower or any such licensor regarding such Trademark, the parties to any other such non-exclusive licenses or license agreements entered into by Borrower or any such licensor with any other Person, no other Person has any rights in or to any of the Trademark Collateral. To the best of Borrower's knowledge, the past, present and contemplated future use of the Trademark Collateral by Borrower has not, does not and will not infringe upon or violate any right, privilege or license agreement of or with any other Person. (d) NO INFRINGEMENT. To the best of Borrower's knowledge, no material infringement or unauthorized use presently is being made of any of the Trademark Collateral by any Person. (e) POWERS. Borrower has the unqualified right, power and authority to pledge and to grant to Lender a security interest in all of the Trademark Collateral pursuant to this Agreement, and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person except as already obtained. 5. COVENANTS. Until such time as this agreement is terminated pursuant to SECTION 17, Borrower agrees that it will comply with all of the covenants, terms and provisions of this Agreement, the Loan Agreement and the other Loan Documents, and Borrower will promptly give Lender written notice of the occurrence of any event that could have a material adverse effect on any of the Trademarks or the Trademark Collateral, including any petition under the Bankruptcy Code filed by or against any licensor of any of the Trademarks for which Borrower is a licensee. 6. FUTURE RIGHTS. For so long as any of the Obligations shall remain outstanding, or, if earlier, until Lender shall have released or terminated, in whole but not in part, its interest in the Trademark Collateral, if and when Borrower shall obtain rights to any new Trademarks, or any reissue, renewal or extension of any Trademarks, the provisions of SECTION 2 shall automatically apply thereto and Borrower shall give to Lender prompt notice thereof. Borrower shall do all things reasonably deemed necessary or advisable by Lender to ensure the validity, perfection, priority and enforceability of the security interests of Lender in such future acquired Trademark Collateral. If Borrower refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Lender in connection herewith, Borrower hereby authorizes Lender to modify, amend or supplement the Schedules hereto and to re-execute this Agreement from time to time on Borrower's behalf and as its attorney-in-fact to include any future Trademarks which 6 are or become Trademark Collateral and to cause such re-executed Agreement or such modified, amended or supplemented Schedules to be filed with the PTO. 7. LENDER'S DUTIES. Notwithstanding any provision contained in this Agreement, Lender shall have no duty to exercise any of the rights, privileges or powers afforded to it and shall not be responsible to Borrower or any other Person for any failure to do so or delay in doing so. Except for the accounting for moneys actually received by Lender hereunder or in connection herewith, Lender shall have no duty or liability to exercise or preserve any rights, privileges or powers pertaining to the Trademark Collateral. 8. REMEDIES. Upon the occurrence and during the continuation of an Event of Default, Lender shall have all rights and remedies available to it under the Loan Agreement and applicable law (which rights and remedies are cumulative) with respect to the security interests in any of the Trademark Collateral or any other Collateral. Borrower agrees that such rights and remedies include the right of Lender as a secured party to sell or otherwise dispose of its Collateral after default, pursuant to UCC Section 9504. Borrower agrees that Lender shall at all times have such royalty-free licenses, to the extent permitted by law, for any Trademark Collateral that is reasonably necessary to permit the exercise of any of Lender's rights or remedies upon or after the occurrence of (and during the continuance of) an Event of Default with respect to (among other things) any tangible asset of Borrower in which Lender has a security interest, including Lender's rights to sell inventory, tooling or packaging which is acquired by Borrower (or its successor, assignee or trustee in bankruptcy). In addition to and without limiting any of the foregoing, upon the occurrence and during the continuance of an Event of Default, Lender shall have the right but shall in no way be obligated to bring suit, or to take such other action as Lender deems necessary or advisable, in the name of Borrower or Lender, to enforce or protect any of the Trademark Collateral, in which event Borrower shall, at the request of Lender, do any and all lawful acts and execute any and all documents required by Lender in aid of such enforcement. To the extent that Lender shall elect not to bring suit to enforce such Trademark Collateral, Borrower, in the exercise of its reasonable business judgment, agrees to use all reasonable measures and its diligent efforts, whether by action, suit, proceeding or otherwise, to prevent the infringement, misappropriation or violation thereof by others and for that purpose agrees diligently to maintain any action, suit or proceeding against any Person necessary to prevent such infringement, misappropriation or violation. 9. BINDING EFFECT. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Borrower and Lender and their respective successors and assigns. 10. NOTICES. All notices and other communications hereunder shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. 11. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, except to the extent that the validity or perfection of the security interests hereunder in respect of any Trademark Collateral are governed by federal law, in which case such choice of California law shall not 7 be deemed to deprive Lender of such rights and remedies as may be available under federal law. 12. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Loan Agreement, together with the Schedules hereto and thereto, contains the entire agreement of the parties with respect to the subject matter hereof and supersede all prior drafts and communications relating to such subject matter. Neither this Agreement nor any provision hereof may be modified, amended or waived except by the written agreement of the parties as provided in the Loan Agreement. Notwithstanding the foregoing, Lender may re-execute this Agreement or modify, amend or supplement the Schedules hereto as provided in SECTION 6 hereof. 13. SEVERABILITY. If one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to such party shall, to the fullest extent permitted by applicable law, not invalidate or render illegal or unenforceable any such provision in any other jurisdiction or with respect to any other party, or any other provisions of this Agreement. 14. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as 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. LOAN AGREEMENT. Borrower acknowledges that the rights and remedies of Lender with respect to the security interest in the Trademark Collateral granted hereby are more fully set forth in the Loan Agreement and all such rights and remedies are cumulative. 16. NO INCONSISTENT REQUIREMENTS. Borrower acknowledges that this Agreement and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and Borrower agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. 17. TERMINATION. Upon the payment in full of the Obligations, including the cash collateralization, expiration, or cancellation of all Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate, and Lender shall execute and deliver such documents and instruments and take such further action reasonably requested by Borrower, at Borrower's expense, as shall be necessary to evidence 8 termination of the security interest granted by Borrower to Lender hereunder, including cancellation of this Agreement by written notice from Lender to the PTO. [Remainder of page intentionally left blank] 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. QUANTUM NORTH AMERICA, INC., a Delaware corporation By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By: ------------------------------------------ Name: ---------------------------------------- Title: --------------------------------------- S-1 STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On , 1998, before me, _________________________, Notary Public, personally appeared , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------------- Signature [SEAL] STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On , 1998, before me, ___________________________, Notary Public, personally appeared , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------------- Signature [SEAL] S-2 SCHEDULE A to the Trademark Security Agreement TRADEMARKS OF BORROWER
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A-1 EX-10.5 6 EXHIBIT 10.5 Exhibit 10.5 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of December , 1998, is entered into between QUANTUM NORTH AMERICA, INC., a Delaware corporation ("Pledgor"), and FOOTHILL CAPITAL CORPORATION, a California corporation ("Secured Party"), with reference to the following: WHEREAS, Pledgor beneficially owns the specified number of shares identified as Pledged Shares in the Persons identified as Issuers on SCHEDULE A attached hereto (or any addendum thereto); WHEREAS, Pledgor and Secured Party are parties to that certain Loan and Security Agreement (the "Loan Agreement"), of even date herewith, pursuant to which Secured Party has agreed to make certain financial accommodations to Pledgor; WHEREAS, to induce Secured Party to make the financial accommodations provided to Pledgor pursuant to the Loan Agreement, Pledgor desires to pledge, grant, transfer, and assign to Secured Party a security interest in the Collateral (as hereinafter defined) to secure the Secured Obligations (as hereinafter defined), as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: 1. DEFINITIONS AND CONSTRUCTION. (a) DEFINITIONS. All initially capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed thereto in the Loan Agreement. As used in this Agreement: "AGREEMENT" shall mean this Stock Pledge Agreement. "CHIEF EXECUTIVE OFFICE" shall mean where Pledgor is deemed located pursuant to ss.9103(3)(d) of the Code. "COLLATERAL" shall mean the Pledged Shares, the Future Rights, and the Proceeds, collectively. "FUTURE RIGHTS" shall mean: (a) all shares of stock (other than Pledged Shares) of the Issuers, and all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase, shares of stock of the Issuers; (b) to the extent 1 of Pledgor's interest therein, all shares of, all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase shares of stock of any Person in which Pledgor, after the date of this Agreement, acquires a direct equity interest, irrespective of whether such Person is or becomes a Subsidiary of Pledgor; and (c) the certificates or instruments representing such additional shares, convertible or exchangeable securities, warrants, and other rights and all dividends, cash, options, warrants, rights, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of such shares. "HOLDER" and "HOLDERS" shall have the meanings ascribed thereto in SECTION 3 of this Agreement. "ISSUERS" shall mean each of the Persons identified as an Issuer on SCHEDULE A attached hereto (or any addendum thereto), and any successors thereto, whether by merger or otherwise. "LIEN" shall mean any lien, mortgage, pledge, assignment (including any assignment of rights to receive payments of money), security interest, charge, or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, or any agreement to give any security interest). "LOAN AGREEMENT" shall have the meaning ascribed thereto in the recitals to this Agreement. "PLEDGED SHARES" shall mean all of the shares identified as Pledged Shares on SCHEDULE A attached hereto (or any addendum thereto). "PLEDGOR" shall have the meaning ascribed thereto in the preamble to this Agreement. "PROCEEDS" shall mean all proceeds (including proceeds of proceeds) of the Pledged Shares and Future Rights including all: (a) rights, benefits, distributions, premiums, profits, dividends, interest, cash, instruments, documents of title, accounts, contract rights, inventory, equipment, general intangibles, deposit accounts, chattel paper, and other property from time to time received, receivable, or otherwise distributed in respect of or in exchange for, or as a replacement of or a substitution for, any of the Pledged Shares, Future Rights, or proceeds thereof (including any cash, stock, or other securities or instruments issued after any recapitalization, readjustment, reclassification, merger or consolidation with respect to the Issuers and any claims against financial intermediaries under ss.8313(2) of the Code or otherwise); (b) "proceeds," as such term is used in ss.9306 of the Code; (c) proceeds of any insurance, indemnity, warranty, oR guaranty (including guaranties of delivery) payable from time to time with respect to any of the Pledged Shares, Future Rights, or proceeds thereof; (d) payments (in any form whatsoever) made or due and payable 2 to Pledgor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Pledged Shares, Future Rights, or proceeds thereof; and (e) other amounts from time to time paid or payable under or in connection with any of the Pledged Shares, Future Rights, or proceeds thereof. "SECURED OBLIGATIONS" shall mean all Obligations owing by Pledgor to Secured Party of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement, the other Loan Documents, or this Agreement, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest (including interest that accrues after the filing of a case under the Bankruptcy Code) and any and all costs, fees (including attorneys fees), and expenses which Pledgor is required to pay pursuant to any of the foregoing, by law, or otherwise. "SECURED PARTY" shall have the meaning ascribed thereto in the preamble to this Agreement, together with its successors or assigns. "SECURITIES ACT" shall have the meaning ascribed thereto in SECTION 9(C) of this Agreement. (b) CONSTRUCTION. (i) Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular and to the singular include the plural, the part includes the whole, 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 other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless otherwise specified. All of the exhibits or schedules attached to this Agreement shall be deemed incorporated herein by reference. Any reference to any of the following documents includes any and all alterations, amendments, restatements, extensions, modifications, renewals, or supplements thereto or thereof, as applicable: this Agreement, the Loan Agreement, or any of the other Loan Documents. (ii) Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Secured Party or Pledgor, whether under any rule of construction or otherwise. This Agreement has been reviewed by both of the parties and their respective counsel 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 the parties hereto. 3 (iii) In the event of any direct conflict between the express terms and provisions of this Agreement and of the Loan Agreement, the terms and provisions of the Loan Agreement shall control. 2. PLEDGE. (a) As security for the prompt payment and performance of the Secured Obligations in full by Pledgor when due, whether at stated maturity, by acceleration or otherwise (including amounts that would become due but for the operation of the provisions of the Bankruptcy Code), Pledgor hereby pledges, grants, transfers, and assigns to Secured Party a security interest in all of Pledgor's right, title, and interest in and to the Collateral. (b) If any wholly owned Subsidary of Pledgor shall at any time be merged into any other wholly owned Subsidiary of Pledgor, or shall be dissolved, then, in either case, upon delivery to Secured Party of evidence, reasonably satisfactory to Secured Party, of such merger or dissolution, Secured Party shall deliver to Pledgor the pledged certificates representing the pledged shares of such wholly owned Subsidiary. 3. DELIVERY AND REGISTRATION OF COLLATERAL. (a) All certificates or instruments representing or evidencing the Collateral shall be promptly delivered by Pledgor to Secured Party or Secured Party's designee pursuant hereto at a location designated by Secured Party and shall be held by or on behalf of Secured Party pursuant hereto, and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party (b) Upon the occurrence and during the continuance of an Event of Default, Secured Party shall have the right, at any time in its discretion and without notice to Pledgor, to transfer to or to register on the books of the Issuers (or of any other Person maintaining records with respect to the Collateral) in the name of Secured Party or any of its nominees any or all of the Collateral. In addition, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations. (c) If, at any time and from time to time, any Collateral (including any certificate or instrument representing or evidencing any Collateral) is in the possession of a Person other than Secured Party or Pledgor (a "Holder"), then Pledgor shall immediately, at Secured Party's option, either cause such Collateral to be delivered into Secured Party's possession, or execute and deliver to such Holder a written notification/instruction, and take all other steps necessary to perfect the security interest of Secured Party in such Collateral, including obtaining from such Holder a written acknowledgement that such Holder holds such 4 Collateral for Secured Party, all pursuant to ss.9115 of the Code or other applicable law governing the perfectioN of Secured Party's security interest in the Collateral in the possession of such Holder. Each such notification/instruction and acknowledgement shall be in form and substance satisfactory to Secured Party. (d) Any and all Collateral (including dividends, interest, and other cash distributions) at any time received or held by Pledgor shall be so received or held in trust for Secured Party, shall be segregated from other funds and property of Pledgor and shall be forthwith delivered to Secured Party in the same form as so received or held, with any necessary endorsements; PROVIDED that cash dividends or distributions received by Pledgor, if and to the extent they are not prohibited by the Loan Agreement, may be retained by Pledgor in accordance with SECTION 4 and used in the ordinary course of Pledgor's business. (e) If at any time and from time to time any Collateral consists of an uncertificated security or a security in book entry form, then Pledgor shall immediately cause such Collateral to be registered or entered, as the case may be, in the name of Secured Party, or otherwise cause Secured Party's security interest thereon to be perfected in accordance with applicable law. 4. VOTING RIGHTS AND DIVIDENDS. (a) So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of the Loan Documents and shall be entitled to receive and retain any cash dividends or distributions paid in respect of the Collateral. (b) Upon the occurrence and during the continuance of an Event of Default, all rights of Pledgor to receive and retain cash dividends or distributions that it would otherwise be entitled to exercise or receive and retain pursuant to SECTION 4(a) shall cease, and all such rights shall thereupon become vested in Secured Party, who shall thereupon have the sole right to receive and retain such cash dividends and distributions. Pledgor shall execute and deliver (or cause to be executed and delivered) to Secured Party all such instruments as Secured Party may reasonably request for the purpose of enabling Secured Party to receive the dividends and distributions that it is entitled to receive and retain pursuant to the preceding sentence. (c) Upon the occurrence and during the continuance of an Event of Default in respect of which Secured Party has accelerated the Obligations, all rights of Pledgor to exercise the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to SECTION 4(A) shall cease, and all such rights shall thereupon become vested in Secured Party, who shall thereupon have the sole right to exercise such voting or other consensual rights. Pledgor shall execute and deliver (or cause to be executed and 5 delivered) to Secured Party all such proxies and other instruments as Secured Party may reasonably request for the purpose of enabling Secured Party to exercise the voting and other rights which it is entitled to exercise pursuant to the preceding sentence. 5. REPRESENTATIONS AND WARRANTIES. Pledgor represents, warrants, and covenants, in each case to the best of its knowledge, information, and belief, as follows: (a) Pledgor has taken all steps it deems necessary or appropriate to be informed on a continuing basis of changes or potential changes affecting the Collateral (including rights of conversion and exchange, rights to subscribe, payment of dividends, reorganizations or recapitalization, tender offers and voting rights), and Pledgor agrees that Secured Party shall have no responsibility or liability for informing Pledgor of any such changes or potential changes or for taking any action or omitting to take any action with respect thereto; (b) All information herein or hereafter supplied to Secured Party by or on behalf of Pledgor in writing with respect to the Collateral is, or in the case of information hereafter supplied will be, accurate and complete in all material respects; (c) Pledgor is and will be the sole legal and beneficial owner of the Collateral (including the Pledged Shares and all other Collateral acquired by Pledgor after the date hereof) free and clear of any adverse claim, Lien, or other right, title, or interest of any party other than Liens in favor of Secured Party; (d) This Agreement, and the delivery to Secured Party, or its designee, of the Pledged Shares representing Collateral (or the delivery to all Holders of the Pledged Shares representing Collateral of the notification/instruction referred to in SECTION 3 of this Agreement), creates a valid, perfected, and first priority security interest in one hundred percent (100%) of the Pledged Shares in favor of Secured Party securing payment of the Secured Obligations, and all actions necessary to achieve such perfection have been duly taken; (e) SCHEDULE A to this Agreement is true and correct and complete in all material respects; without limiting the generality of the foregoing: (i) all the Pledged Shares are in certificated form, and, except to the extent registered in the name of Secured Party or its nominee pursuant to the provisions of this Agreement, are registered in the name of Pledgor; and (ii) the Pledged Shares as to each of the Issuers constitute at least the percentage of all the fully diluted issued and outstanding shares of stock of such Issuer as set forth in SCHEDULE A to this Agreement; (f) There are no presently existing Future Rights or Proceeds owned by Pledgor, except as set forth in SCHEDULE C hereto; 6 (g) The Pledged Shares have been duly authorized and validly issued and are fully paid and nonassessable; and (h) Neither the pledge of the Collateral pursuant to this Agreement nor the extensions of credit represented by the Secured Obligations violates Regulation T, U or X of the Board of Governors of the Federal Reserve System. 6. FURTHER ASSURANCES. (a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or reasonably desirable, or that Secured Party may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) at the request of Secured Party, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance reasonably satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby; (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or reasonably desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (iii) allow inspection of the Collateral by Secured Party or Persons designated by Secured Party; and (iv) appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in the Collateral. (b) Pledgor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Pledgor where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) Pledgor will furnish to Secured Party, upon the request of Secured Party: (i) a certificate executed by an authorized officer of Pledgor, and dated as of the date of delivery to Secured Party, itemizing in such detail as Secured Party may request, the Collateral which, as of the date of such certificate, has been delivered to Secured Party by Pledgor pursuant to the provisions of this Agreement; and (ii) such statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may request. 7. COVENANTS OF PLEDGOR. Pledgor shall: 7 (a) Perform each and every covenant in the Loan Documents applicable to Pledgor; (b) At all times keep at least one complete set of its records concerning substantially all of the Collateral at its Chief Executive Office as set forth in SCHEDULE B hereto, and not change the location of its Chief Executive Office or such records without giving Secured Party at least thirty (30) days prior written notice thereof; (c) To the extent it may lawfully do so, use its best efforts to prevent the Issuers from issuing Future Rights or Proceeds, except for cash dividends and other distributions, if any, that are not prohibited by the terms of the Loan Agreement to be paid by any Issuer to Pledgor; (d) Upon receipt by Pledgor of any material notice, report, or other communication from any of the Issuers or any Holder relating to all or any part of the Collateral, deliver such notice, report or other communication to Secured Party as soon as possible, but in no event later than five (5) days following the receipt thereof by Pledgor; and 8. SECURED PARTY AS PLEDGOR'S ATTORNEY-IN-FACT. (a) Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to time at Secured Party's discretion, to take any action and to execute any instrument that Secured Party may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including: (i) upon the occurrence and during the continuance of an Event of Default, to receive, endorse, and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof to the extent permitted hereunder and to give full discharge for the same and to execute and file governmental notifications and reporting forms; (ii) to issue any notifications/instructions Secured Party deems necessary pursuant to SECTION 3 of this Agreement; or (iii) to arrange for the transfer of the Collateral on the books of any of the Issuers or any other Person to the name of Secured Party or to the name of Secured Party's nominee. (b) In addition to the designation of Secured Party as Pledgor's attorney-in-fact in SUBSECTION (A), Pledgor hereby irrevocably appoints Secured Party as Pledgor's agent and attorney-in-fact to make, execute and deliver any and all documents and writings which may be necessary or appropriate for approval of, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or any of the Issuers engage in business, in order to transfer or to more effectively transfer any of the Pledged Shares or otherwise enforce Secured Party's rights hereunder. 8 9. REMEDIES UPON DEFAULT. Upon the occurrence and during the continuance of an Event of Default: (a) Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein, under the Loan Agreement, or otherwise available to it, all the rights and remedies of a secured party on default under the Code (irrespective of whether the Code applies to the affected items of Collateral), and Secured Party may also without notice (except as specified below) sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Collateral. To the maximum extent permitted by applicable law, Secured Party may be the purchaser of any or all of the Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply all or any part of the Secured Obligations as a credit on account of the purchase price of any Collateral payable at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay, or appraisal that it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Pledgor agrees that, to the extent notice of sale shall be required by law, at least ten (10) calendar days notice to Pledgor of the time and place of any public sale or the time after which a private sale is to be made shall constitute reasonable notification. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the maximum extent permitted by law, Pledgor hereby waives any claims against Secured Party arising because the price at which any Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. (b) Pledgor hereby agrees that any sale or other disposition of the Collateral conducted in conformity with reasonable commercial practices of banks, insurance companies, or other financial institutions in the City of Los Angeles, California in disposing of property similar to the Collateral shall be deemed to be commercially reasonable. (c) Pledgor hereby acknowledges that the sale by Secured Party of any Collateral pursuant to the terms hereof in compliance with the Securities Act of 1933 as now in effect or as hereafter amended, or any similar statute hereafter adopted with similar purpose or effect (the "Securities Act"), as well as applicable "Blue Sky" or other state securities laws may require strict limitations as to the manner in which Secured Party or any 9 subsequent transferee of the Collateral may dispose thereof. Pledgor acknowledges and agrees that in order to protect Secured Party's interest it may be necessary to sell the Collateral at a price less than the maximum price attainable if a sale were delayed or were made in another manner, such as a public offering under the Securities Act. Pledgor has no objection to sale in such a manner and agrees that Secured Party shall have no obligation to obtain the maximum possible price for the Collateral. Without limiting the generality of the foregoing, Pledgor agrees that, upon the occurrence and during the continuation of an Event of Default, Secured Party may, subject to applicable law, from time to time attempt to sell all or any part of the Collateral by a private placement, restricting the bidders and prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for distribution. In so doing, Secured Party may solicit offers to buy the Collateral or any part thereof for cash, from a limited number of investors deemed by Secured Party, in its reasonable judgment, to be institutional investors or other responsible parties who might be interested in purchasing the Collateral. If Secured Party shall solicit such offers, then the acceptance by Secured Party of one of the offers shall be deemed to be a commercially reasonable method of disposition of the Collateral. (d) If Secured Party shall determine to exercise its right to sell all or any portion of the Collateral pursuant to this Section, Pledgor agrees that, upon request of Secured Party, Pledgor will, at its own expense: (i) use its best efforts to execute and deliver, and cause the Issuers and the directors and officers thereof to execute and deliver, all such instruments and documents, and to do or cause to be done all such other acts and things, as may be necessary or, in the opinion of Secured Party, advisable to register such Collateral under the provisions of the Securities Act, and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectuses which, in the opinion of Secured Party, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (ii) use its best efforts to qualify the Collateral under the state securities laws or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Collateral, as requested by Secured Party; (iii) cause the Issuers to make available to their respective security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act; (iv) execute and deliver, or cause the officers and directors of the Issuers to execute and deliver, to any person, entity or governmental authority as Secured Party may choose, any and all documents and writings which, in Secured Party's 10 reasonable judgment, may be necessary or appropriate for approval, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or the Issuers engage in business, in order to transfer or to more effectively transfer the Pledged Shares or otherwise enforce Secured Party's rights hereunder; and (v) do or cause to be done all such other acts and things as may be necessary to make such sale of the Collateral or any part thereof valid and binding and in compliance with applicable law. Pledgor acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section may be specifically enforced. (e) PLEDGOR EXPRESSLY WAIVES TO THE MAXIMUM EXTENT PERMITTED BY LAW: (I) ANY CONSTITUTIONAL OR OTHER RIGHT TO A JUDICIAL HEARING PRIOR TO THE TIME SECURED PARTY DISPOSES OF ALL OR ANY PART OF THE COLLATERAL AS PROVIDED IN THIS SECTION; (II) ALL RIGHTS OF REDEMPTION, STAY, OR APPRAISAL THAT IT NOW HAS OR MAY AT ANY TIME IN THE FUTURE HAVE UNDER ANY RULE OF LAW OR STATUTE NOW EXISTING OR HEREAFTER ENACTED; AND (III) EXCEPT AS SET FORTH IN SUBSECTION (a) OF THIS SECTION, ANY REQUIREMENT OF NOTICE, DEMAND, OR ADVERTISEMENT FOR SALE. 10. APPLICATION OF PROCEEDS. Upon the occurrence and during the continuance of an Event of Default, any cash held by Secured Party as Collateral and all cash proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral pursuant to the exercise by Secured Party of its remedies as a secured creditor as provided in SECTION 9 shall be applied from time to time by Secured Party as provided in the Loan Agreement. 11. DUTIES OF SECURED PARTY. The powers conferred on Secured Party hereunder are solely to protect its interests in the Collateral and shall not impose on it any duty to exercise such powers. Except as provided in Section 9207 of the Code, Secured Party shall have no duty with respect to the Collateral or any responsibility for taking any necessary steps to preserve rights against any Persons with respect to any Collateral. 12. CHOICE OF LAW AND VENUE. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO 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 11 AGREEMENT 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 SECURED PARTY, IN ANY OTHER JURISDICTION IN WHICH THE COLLATERAL IS LOCATED IN CONNECTION WITH THE EXERCISE OF SECURED PARTY'S RIGHTS AND REMEDIES AS A SECURED CREDITOR WITH RESPECT TO SUCH COLLATERAL. EACH OF PLEDGOR AND SECURED PARTY 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 12. 13. AMENDMENTS; ETC. No amendment or waiver of any provision of this Agreement nor consent to any departure by Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of Secured Party to exercise, and no delay in exercising any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations preclude any other or further exercise thereof or the exercise of any other right. The remedies provided for in this Agreement or otherwise with respect to any of the Secured Obligations are cumulative and not exclusive of any remedies provided by law. 14. NOTICES. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and shall be delivered in the manner set forth in the Loan Agreement. 15. CONTINUING SECURITY INTEREST. This Agreement shall create a continuing security interest in the Collateral and shall: (i) remain in full force and effect until the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement; (ii) be binding upon Pledgor and its successors and assigns; and (iii) inure to the benefit of Secured Party and its successors, transferees, and assigns. Upon the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, the security interests granted herein shall automatically terminate and all rights to the Collateral shall revert to Pledgor. Upon any such termination, Secured Party will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination. Such documents 12 shall be prepared by Pledgor and shall be in form and substance reasonably satisfactory to Secured Party. 16. SECURITY INTEREST ABSOLUTE. To the maximum extent permitted by law, all rights of Secured Party, all security interests hereunder, and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any of the Secured Obligations or any other agreement or instrument relating thereto, including any of the Loan Documents; (b) any change in the time, manner, or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from any of the Loan Documents, or any other agreement or instrument relating thereto; (c) any exchange, release, or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Secured Obligations; or (d) any other circumstances that might otherwise constitute a defense available to, or a discharge of, Pledgor. To the maximum extent permitted by law, Pledgor hereby waives any right to require Secured Party to: (A) proceed against or exhaust any security held from Pledgor; or (B) pursue any other remedy in Secured Party's power whatsoever. 17. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 18. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 19. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as 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 13 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. 20. WAIVER OF MARSHALING. Each of Pledgor and Secured Party acknowledges and agrees that in exercising any rights under or with respect to the Collateral: (i) Secured Party is under no obligation to marshal any Collateral; (ii) may, in its absolute discretion, realize upon the Collateral in any order and in any manner it so elects; and (iii) may, in its absolute discretion, apply the proceeds of any or all of the Collateral to the Secured Obligations in any order and in any manner it so elects. Pledgor and Secured Party waive any right to require the marshaling of any of the Collateral. 21. WAIVER OF JURY TRIAL. PLEDGOR AND SECURED PARTY HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. PLEDGOR AND SECURED PARTY REPRESENT THAT EACH 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. [signature page to follow] 14 IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement to be duly executed and delivered by their officers thereunto duly authorized as of the date first written above. FOOTHILL CAPITAL CORPORATION, a California corporation By ---------------------------------- Title: ------------------------------ QUANTUM NORTH AMERICA, INC., a Delaware corporation By ---------------------------------- Title: ------------------------------ S-1 SCHEDULE A TO STOCK PLEDGE AGREEMENT Pledgor: Quantum North America, Inc. PLEDGED SHARES
Former Name, if Pledgor's Number of Certificate any, in which Percentage Jurisdiction of Issuer Shares Class Number(s) Certificate Issued Ownership Incorporation - ------ ------ ----- --------- ----------------- --------- -------------
SCHEDULE B TO STOCK PLEDGE AGREEMENT Pledgor: QUANTUM NORTH AMERICA, INC., a Delaware corporation Address of Chief Executive Office: 15821 Ventura Boulevard 5th Floor Encino, California 91436 SCHEDULE C TO STOCK PLEDGE AGREEMENT Existing Future Rights and Proceeds EX-10.6 7 EXHIBIT 10.6 TRADEMARK SECURITY AGREEMENT (HOLDINGS) This TRADEMARK SECURITY AGREEMENT (this "Agreement"), dated as of December ___, 1998 is made by NATIONAL MEDIA CORPORATION, a Delaware corporation ("Holdings"), in favor of FOOTHILL CAPITAL CORPORATION, a California corporation, ("Lender"). RECITALS A. Borrower and Secured Party are contemporaneously herewith entering into that certain Loan and Security Agreement dated as of the date hereof (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which Secured Party has agreed to make certain financial accommodations to Holdings. B. Holdings has executed in favor of Secured Party that certain General Continuing Guaranty, dated as of the date hereof (the "Guaranty"), in favor of Secured Party, respecting certain obligations of Borrower owing to Secured Party under the Loan Agreement. C. Holdings and Secured Party are contemporaneously herewith entering into that certain Security Agreement, dated as of the date hereof (the "Security Agreement"), pursuant to which Holdings has granted to Secured Party a security interest in (among other things) all general intangibles of Holdings. D. As one of the conditions precedent to the obligations of Lender under the Loan Agreement, Holdings has agreed to execute and deliver this Agreement to Lender for filing with the PTO and with any other relevant recording systems in any domestic jurisdiction, and as further evidence of and to effectuate Lender's existing security interests in the trademarks and other general intangibles described herein. ASSIGNMENT NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, Holdings hereby agrees in favor of Lender as follows: 1. DEFINITIONS; INTERPRETATION. (a) CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "BORROWER" means Quantum North America, Inc., a Delaware corporation. 1 "EVENT OF DEFAULT" shall have the meaning ascribed thereto in the Loan Agreement. "GUARANTIED OBLIGATIONS" shall have the meaning ascribed thereto in the Loan Agreement. "LIEN" means any pledge, security interest, assignment, charge or encumbrance, lien (statutory or other), or other preferential arrangement (including any agreement to give any security interest). "PROCEEDS" means whatever is receivable or received from or upon the sale, lease, license, collection, use, exchange or other disposition, whether voluntary or involuntary, of any Trademark Collateral, including "proceeds" as defined at UCC Section 9306, all insurance proceeds and all proceeds of proceeds. Proceeds shall include (i) any and all accounts, chattel paper, instruments, general intangibles, cash and other proceeds, payable to or for the account of Holdings, from time to time in respect of any of the Trademark Collateral, (ii) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to or for the account of Holdings from time to time with respect to any of the Trademark Collateral, (iii) any and all claims and payments (in any form whatsoever) made or due and payable to Holdings from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Trademark Collateral by any Person acting under color of governmental authority, and (iv) any and all other amounts from time to time paid or payable under or in connection with any of the Trademark Collateral or for or on account of any damage or injury to or conversion of any Trademark Collateral by any Person. "PTO" means the United States Patent and Trademark Office and any successor thereto. "TRADEMARK COLLATERAL" has the meaning set forth in SECTION 2. "TRADEMARKS" has the meaning set forth in SECTION 2. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of California. "UNITED STATES" and "U.S." each mean the United States of America. (b) TERMS DEFINED IN UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings assigned to them in the UCC. (c) INTERPRETATION. In this Agreement, except to the extent the context otherwise requires: 2 (i) Any reference to a Section or a Schedule is a reference to a section hereof, or a schedule hereto, respectively, and to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. (viii) Capitalized words not otherwise defined herein shall have the respective meanings ascribed to them in the Security Agreement. (ix) In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; PROVIDED, HOWEVER, that the inclusion herein of additional obligations on the part of Holdings and supplemental rights and remedies in favor of Lender (whether under federal law or applicable California law), in each case in respect of the Trademark Collateral, shall not be deemed a conflict in the Loan Agreement. 2. SECURITY INTEREST. (a) ASSIGNMENT AND GRANT OF SECURITY INTEREST. To secure the Guarantied Obligations, Holdings hereby grants, assigns, transfers and conveys to Lender a continuing security interest in all of Holdings' right, title and interest in and to the following 3 property, whether now existing or hereafter acquired or arising and whether registered or unregistered (collectively, the "Trademark Collateral"): (i) all state (including common law) and federal trademarks, service marks and trade names, corporate names, company names, business names, fictitious business names, trade styles, trade dress, logos, other source or business identifiers, designs and general intangibles of like nature, now existing or hereafter adopted or acquired, together with and including all licenses therefor held by Holdings, and all registrations and recordings thereof, and all applications filed or to be filed in connection therewith, including registrations and applications in the PTO, any State of the United States (but excluding each application to register any trademark, service mark, or other mark prior to the filing under applicable law of a verified statement of use (or the equivalent) for such trademark or service mark) and all extensions or renewals thereof, including without limitation any of the foregoing identified on SCHEDULE A hereto (as the same may be amended, modified or supplemented from time to time), and the right (but not the obligation) to register claims under any state or federal trademark law or regulation and to apply for, renew and extend any of the same, to sue or bring opposition or cancellation proceedings in the name of Holdings or in the name of Lender for past, present or future infringement or unconsented use thereof, and all rights arising therefrom throughout the world (collectively, the "Trademarks"); (ii) all claims, causes of action and rights to sue for past, present or future infringement or unconsented use of any Trademarks and all rights arising therefrom and pertaining thereto; (iii) all general intangibles related to or arising out of any of the Trademarks and all the goodwill of Holdings' business symbolized by the Trademarks or associated therewith; and (iv) all proceeds of any and all of the foregoing Trademark Collateral (including license royalties, rights to payment, accounts receivable and proceeds of infringement suits) and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof) or any indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to the foregoing Trademark Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Trademark Collateral or proceeds are sold, licensed, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto. (b) CONTINUING SECURITY INTEREST. Debtor agrees that this Agreement shall create a continuing security interest in the Trademark Collateral which shall remain in effect until terminated in accordance with SECTION 17. 4 (c) INCORPORATION INTO SECURITY AGREEMENT. This Agreement shall be fully incorporated into the Security Agreement and all understandings, agreements and provisions contained in the Security Agreement shall be fully incorporated into this Agreement. Without limiting the foregoing, the Trademark Collateral described in this Agreement shall constitute part of the Collateral in the Security Agreement. (d) PERMITTED LICENSES. Anything in the Loan Agreement or this Agreement to the contrary notwithstanding, Holdings may grant non-exclusive licenses of the Trademark Collateral (subject to the security interest (if any) of Secured Party therein) in the ordinary course of business consistent with past practice. 3. FURTHER ASSURANCES; APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT. Holdings at its expense shall execute and deliver, or cause to be executed and delivered, to Lender any and all documents and instruments, in form and substance reasonably satisfactory to Lender, and take any and all action, which Lender may reasonably request from time to time, to perfect and continue perfected, maintain the priority of or provide notice of Lender's security interest in the Trademark Collateral and to accomplish the purposes of this Agreement. If Holdings refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Lender in accordance with the foregoing, Lender shall have the right, in the name of Holdings, or in the name of Lender or otherwise, without notice to or assent by Holdings, and Holdings hereby irrevocably constitutes and appoints Lender (and any of Lender's officers or employees or agents designated by Lender) as Holdings' true and lawful attorney-in-fact with full power and authority, (i) to sign the name of Holdings on all or any of such documents or instruments and perform all other acts that Lender reasonably deems necessary or advisable in order to perfect or continue perfected, maintain the priority or enforceability of or provide notice of Lender's security interest in, the Trademark Collateral, and (ii) to execute any and all other documents and instruments, and to perform any and all acts and things for and on behalf of Holdings, which Lender reasonably may deem necessary or advisable to maintain, preserve and protect the Trademark Collateral and to accomplish the purposes of this Agreement, including (A) after the occurrence and during the continuance of any Event of Default, to defend, settle, adjust or institute any action, suit or proceeding with respect to the Trademark Collateral, (B) after the occurrence and during the continuance of any Event of Default, to assert or retain any rights under any license agreement for any of the Trademark Collateral, and (C) after the occurrence and during the continuance of any Event of Default, to execute any and all applications, documents, papers and instruments for Lender to use the Trademark Collateral, to grant or issue any exclusive or non-exclusive license with respect to any Trademark Collateral, and to assign, convey or otherwise transfer title in or dispose of the Trademark Collateral. The power of attorney set forth in this SECTION 3, being coupled with an interest, is irrevocable so long as this Agreement shall not have terminated in accordance with SECTION 17. 4. REPRESENTATIONS AND WARRANTIES. Holdings represents and warrants to Lender, in each case to the best of its knowledge, information, and belief, as follows: 5 (a) NO OTHER TRADEMARKS. SCHEDULE A sets forth, as of the Closing Date, a true and correct list of all of the existing Trademarks (whether registered or otherwise), or for which any application for registration has been filed with the PTO or any corresponding or similar trademark office of any other U.S. jurisdiction, and that are owned or held (whether pursuant to a license or otherwise) and used by Holdings. (b) TRADEMARKS SUBSISTING. Each of the Trademarks listed in SCHEDULE A is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, and, to the best of Holdings' knowledge, each of the Trademarks is valid and enforceable. (c) OWNERSHIP OF TRADEMARK COLLATERAL; NO VIOLATION. (i) Holdings has rights in and good and defensible title to the existing Trademark Collateral, (ii) with respect to the Trademark Collateral shown on SCHEDULE A hereto as owned by it, Holdings is the sole and exclusive owner thereof, free and clear of any Liens and rights of others (other than the security interest created hereunder and other than Permitted Liens), including licenses, registered user agreements and covenants by Holdings not to sue third persons, and (iii) with respect to any Trademarks for which Holdings is either a licensor or a licensee pursuant to a license or licensee agreement regarding such Trademark, each such license or licensing agreement is in full force and effect, Holdings is not in material default of any of its obligations thereunder and, (i) other than the parties to such licenses or licensing agreements, or (ii) in the case of any non-exclusive license or license agreement entered into by Holdings or any such licensor regarding such Trademark, the parties to any other such non-exclusive licenses or license agreements entered into by Holdings or any such licensor with any other Person, no other Person has any rights in or to any of the Trademark Collateral. To the best of Holdings' knowledge, the past, present and contemplated future use of the Trademark Collateral by Holdings has not, does not and will not infringe upon or violate any right, privilege or license agreement of or with any other Person. (d) NO INFRINGEMENT. To the best of Holdings' knowledge, no material infringement or unauthorized use presently is being made of any of the Trademark Collateral by any Person. (e) POWERS. Holdings has the unqualified right, power and authority to pledge and to grant to Lender a security interest in all of the Trademark Collateral pursuant to this Agreement, and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person except as already obtained. 5. COVENANTS. Until such time as this agreement is terminated pursuant to SECTION 17, Holdings agrees that it will comply with all of the covenants, terms and provisions of this Agreement, the Loan Agreement and the other Loan Documents, and Holdings will promptly give Lender written notice of the occurrence of any event that could have a material adverse effect on any of the Trademarks or the Trademark Collateral, including any petition under the Bankruptcy Code filed by or against any licensor of any of the Trademarks for which Holdings is a licensee. 6 6. FUTURE RIGHTS. For so long as any of the Guarantied Obligations shall remain outstanding, or, if earlier, until Lender shall have released or terminated, in whole but not in part, its interest in the Trademark Collateral, if and when Holdings shall obtain rights to any new Trademarks, or any reissue, renewal or extension of any Trademarks, the provisions of SECTION 2 shall automatically apply thereto and Holdings shall give to Lender prompt notice thereof. Holdings shall do all things reasonably deemed necessary or advisable by Lender to ensure the validity, perfection, priority and enforceability of the security interests of Lender in such future acquired Trademark Collateral. If Holdings refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Lender in connection herewith, Holdings hereby authorizes Lender to modify, amend or supplement the Schedules hereto and to re-execute this Agreement from time to time on Holdings' behalf and as its attorney-in-fact to include any future Trademarks which are or become Trademark Collateral and to cause such re-executed Agreement or such modified, amended or supplemented Schedules to be filed with the PTO. 7. LENDER'S DUTIES. Notwithstanding any provision contained in this Agreement, Lender shall have no duty to exercise any of the rights, privileges or powers afforded to it and shall not be responsible to Holdings or any other Person for any failure to do so or delay in doing so. Except for the accounting for moneys actually received by Lender hereunder or in connection herewith, Lender shall have no duty or liability to exercise or preserve any rights, privileges or powers pertaining to the Trademark Collateral. 8. REMEDIES. Upon the occurrence and during the continuation of an Event of Default, Lender shall have all rights and remedies available to it under the Security Agreement and applicable law (which rights and remedies are cumulative) with respect to the security interests in any of the Trademark Collateral or any other Collateral. Holdings agrees that such rights and remedies include the right of Lender as a secured party to sell or otherwise dispose of its Collateral after default, pursuant to UCC Section 9504. Holdings agrees that Lender shall at all times have such royalty-free licenses, to the extent permitted by law, for any Trademark Collateral that is reasonably necessary to permit the exercise of any of Lender's rights or remedies upon or after the occurrence of (and during the continuance of) an Event of Default with respect to (among other things) any tangible asset of Holdings in which Lender has a security interest, including Lender's rights to sell inventory, tooling or packaging which is acquired by Holdings (or its successor, assignee or trustee in bankruptcy). In addition to and without limiting any of the foregoing, upon the occurrence and during the continuance of an Event of Default, Lender shall have the right but shall in no way be obligated to bring suit, or to take such other action as Lender deems necessary or advisable, in the name of Holdings or Lender, to enforce or protect any of the Trademark Collateral, in which event Holdings shall, at the request of Lender, do any and all lawful acts and execute any and all documents required by Lender in aid of such enforcement. To the extent that Lender shall elect not to bring suit to enforce such Trademark Collateral, Holdings, in the exercise of its reasonable business judgment, agrees to use all reasonable measures and its diligent efforts, whether by action, suit, proceeding or otherwise, to prevent the infringement, misappropriation or violation thereof by others and 7 for that purpose agrees diligently to maintain any action, suit or proceeding against any Person necessary to prevent such infringement, misappropriation or violation. 9. BINDING EFFECT. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Holdings and Lender and their respective successors and assigns. 10. NOTICES. All notices and other communications hereunder shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. 11. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, except to the extent that the validity or perfection of the security interests hereunder in respect of any Trademark Collateral are governed by federal law, in which case such choice of California law shall not be deemed to deprive Lender of such rights and remedies as may be available under federal law. 12. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Security Agreement, together with the Schedules hereto and thereto, contains the entire agreement of the parties with respect to the subject matter hereof and supersede all prior drafts and communications relating to such subject matter. Neither this Agreement nor any provision hereof may be modified, amended or waived except by the written agreement of the parties as provided in the Loan Agreement. Notwithstanding the foregoing, Lender may re-execute this Agreement or modify, amend or supplement the Schedules hereto as provided in SECTION 6 hereof. 13. SEVERABILITY. If one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to such party shall, to the fullest extent permitted by applicable law, not invalidate or render illegal or unenforceable any such provision in any other jurisdiction or with respect to any other party, or any other provisions of this Agreement. 14. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as 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. SECURITY AGREEMENT. Holdings acknowledges that the rights and remedies of Lender with respect to the security interest in the Trademark Collateral granted hereby are 8 more fully set forth in the Security Agreement and all such rights and remedies are cumulative. 16. NO INCONSISTENT REQUIREMENTS. Holdings acknowledges that this Agreement and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and Holdings agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. 17. TERMINATION. Upon the payment in full of the Guarantied Obligations, including the cash collateralization, expiration, or cancellation of all Guarantied Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate, and Lender shall execute and deliver such documents and instruments and take such further action reasonably requested by Holdings, at Holdings' expense, as shall be necessary to evidence termination of the security interest granted by Holdings to Lender hereunder, including cancellation of this Agreement by written notice from Lender to the PTO. [Remainder of page intentionally left blank] 9 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. NATIONAL MEDIA CORPORATION, a Delaware corporation By: --------------------------------- Name: -------------------------------- Title: ------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By: --------------------------------- Name: -------------------------------- Title: ------------------------------- S-1 STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On _____________, 1998, before me, __________________, Notary Public, personally appeared ________________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ------------------------------------------ Signature [SEAL] STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On ___________, 1998, before me, _____________________, Notary Public, personally appeared ___________________________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. ------------------------------------------ Signature [SEAL] S-2 SCHEDULE A to the Trademark Security Agreement TRADEMARKS OF HOLDINGS
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A-1 EX-10.7 8 EXHIBIT 10.7 EXHIBIT 10.7 PATENT SECURITY AGREEMENT (HOLDINGS) THIS PATENT SECURITY AGREEMENT (this "Agreement"), dated as of December , 1998 is made by NATIONAL MEDIA CORPORATION, a Delaware corporation ("Holdings"), in favor of FOOTHILL CAPITAL CORPORATION, a California corporation ("Lender"). RECITALS A. Borrower and Secured Party are contemporaneously herewith entering into that certain Loan and Security Agreement dated as of the date hereof (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which Secured Party has agreed to make certain financial accommodations to Holdings. B. Holdings has executed in favor of Secured Party that certain General Continuing Guaranty, dated as of the date hereof (the "Guaranty"), in favor of Secured Party, respecting certain obligations of Borrower owing to Secured Party under the Loan Agreement. C. Holdings and Secured Party are contemporaneously herewith entering into that certain Security Agreement, dated as of the date hereof (the "Security Agreement"), pursuant to which Holdings has granted to Secured Party a security interest in (among other things) all general intangibles of Holdings. D. As one of the conditions precedent to the obligations of Lender under the Loan Agreement, Holdings has agreed to execute and deliver this Agreement to Lender for filing with the PTO and with any other relevant recording systems in any domestic or foreign jurisdiction, and as further evidence of and to effectuate Lender's existing security interests in the patents and other general intangibles described herein. ASSIGNMENT NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, Holdings hereby agrees in favor of Lender as follows: 1. DEFINITIONS; INTERPRETATION. (a) CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: -1- "BANKRUPTCY CODE" means the United States Bankruptcy Code (11 U.S.C. Section 101 ET SEQ.), as amended, and any successor statute. "BORROWER" means Quantum North America, Inc., a Delaware corporation. "EVENT OF DEFAULT" shall have the meaning ascribed to such thereto in the Security Agreement. "GUARANTIED OBLIGATIONS" shall have the meaning ascribed thereto in the Guaranty. "LIEN" means any pledge, security interest, assignment, charge or encumbrance, lien (statutory or other), or other preferential arrangement (including any agreement to give any security interest). "PATENT COLLATERAL" has the meaning set forth in SECTION 2. "PATENTS" has the meaning set forth in SECTION 2. "PROCEEDS" means whatever is receivable or received from or upon the sale, lease, license, collection, use, exchange or other disposition, whether voluntary or involuntary, of any Patent Collateral, including "proceeds" as defined at UCC Section 9306, and all proceeds of proceeds. Proceeds shall include (i) any and all accounts, chattel paper, instruments, general intangibles, cash and other proceeds, payable to or for the account of Holdings, from time to time in respect of any of the Patent Collateral, (ii) any and all proceeds of any insurance, indemnity, warranty or guaranty payable to or for the account of Holdings from time to time with respect to any of the Patent Collateral, (iii) any and all claims and payments (in any form whatsoever) made or due and payable to Holdings from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Patent Collateral by any Person acting under color of governmental authority, and (iv) any and all other amounts from time to time paid or payable under or in connection with any of the Patent Collateral or for or on account of any damage or injury to or conversion of any Patent Collateral by any Person. "PTO" means the United States Patent and Trademark Office and any successor thereto. "UCC" means the Uniform Commercial Code as in effect from time to time in the State of California. "UNITED STATES" and "U.S." each mean the United States of America. -2- (b) TERMS DEFINED IN UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings ascribed to them in the UCC. (c) INTERPRETATION. In this Agreement, except to the extent the context otherwise requires: (i) Any reference to a Section or a Schedule is a reference to a section hereof, or a schedule hereto, respectively, and to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. (viii) Capitalized words not otherwise defined herein shall have the respective meanings ascribed to them in the Security Agreement. (ix) In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; PROVIDED, HOWEVER, that the inclusion herein of additional obligations on the part of the Holdings and supplemental rights and remedies in favor of Lender (whether under California law or -3- applicable federal law), in each case in respect of the Patent Collateral, shall not be deemed a conflict with the Loan Agreement. 2. SECURITY INTEREST. (a) ASSIGNMENT AND GRANT OF SECURITY INTEREST. As security for the payment and performance of the Guarantied Obligations, Holdings hereby grants, assigns, transfers, and conveys to Lender a continuing security interest in all of Holdings' right, title and interest in, to and under the following property, whether now existing or hereafter acquired or arising (collectively, the "Patent Collateral"): (i) all letters patent of the U.S. or any other country, all registrations and recordings thereof, and all applications for letters patent of the U.S. or any other country, owned, held, or used by Holdings in whole or in part, including all existing U.S. patents and patent applications of Holdings which are described in SCHEDULE A hereto, as the same may be amended or supplemented pursuant hereto from time to time, and together with and including all patent licenses held by Holdings, including such patent licenses which are described in SCHEDULE A hereto, together with all reissues, divisions, continuations, renewals, extensions and continuations-in-part thereof and the inventions disclosed therein, and all rights corresponding thereto throughout the world, including the right to make, use, lease, sell and otherwise transfer the inventions disclosed therein, and all proceeds thereof, including all license royalties and proceeds of infringement suits (collectively, the "Patents"); (ii) all claims, causes of action and rights to sue for past, present and future infringement or unconsented use of any of the Patents and all rights arising therefrom and pertaining thereto; (iii) all general intangibles (as defined in the UCC) and all intangible intellectual or other similar property of Holdings of any kind or nature, whether now owned or hereafter acquired or developed, associated with or arising out of any of the Patents and not otherwise described above; and (iv) all products and Proceeds of any and all of the foregoing. (b) CONTINUING SECURITY INTEREST. Holdings agrees that this Agreement shall create a continuing security interest in the Patent Collateral which shall remain in effect until terminated in accordance with SECTION 16. (c) INCORPORATION INTO SECURITY AGREEMENT. This Agreement shall be fully incorporated into the Security Agreement and all understandings, agreements and provisions contained in the Security Agreement shall be fully incorporated into this -4- Agreement. Without limiting the foregoing, the Patent Collateral described in this Agreement shall constitute part of the Collateral in the Security Agreement. (d) LICENSES. Anything in the Security Agreement or this Agreement to the contrary notwithstanding, Holdings may grant non-exclusive licenses of the Patent Collateral (subject to the security interest (if any) of Lender therein) in the ordinary course of business and consistent with past practice. 3. FURTHER ASSURANCES; APPOINTMENT OF LENDER AS ATTORNEY-IN-FACT. Holdings at its expense shall execute and deliver, or cause to be executed and delivered, to Lender any and all documents and instruments, in form and substance satisfactory to Lender, and take any and all action, which Lender may reasonably request from time to time, to perfect and continue perfected, maintain the priority of or provide notice of Lender's security interest in the Patent Collateral and to accomplish the purposes of this Agreement. If Holdings refuses to execute and deliver, or fails timely to execute and deliver, any of the documents it is requested to execute and deliver by Lender in accordance with the foregoing, Lender shall have the right to, in the name of Holdings, or in the name of Lender or otherwise, without notice to or assent by Holdings, and Holdings hereby irrevocably constitutes and appoints Lender (and any of Lender's officers or employees or agents designated by Lender) as Holdings' true and lawful attorney-in-fact with full power and authority, (i) to sign the name of Holdings on all or any of such documents or instruments, and perform all other acts, that Lender deems necessary or advisable in order to perfect or continue perfected, maintain the priority or enforceability of or provide notice of Lender's security interest in, the Patent Collateral, and (ii) to execute any and all other documents and instruments, and to perform any and all acts and things for and on behalf of Holdings, which Lender may deem necessary or advisable to maintain, preserve and protect the Patent Collateral and to accomplish the purposes of this Agreement, including (A) upon the occurrence and during the continuance of any Event of Default, to defend, settle, adjust or institute any action, suit or proceeding with respect to the Patent Collateral, (B) upon the occurrence and during the continuance of any Event of Default, to assert or retain any rights under any license agreement for any of the Patent Collateral, including any rights of Holdings arising under Section 365(n) of the Bankruptcy Code, and (C) upon the occurrence and during the continuance of any Event of Default, to execute any and all applications, documents, papers and instruments for Lender to use the Patent Collateral, to grant or issue any exclusive or non-exclusive license with respect to any Patent Collateral (it being understood that so long as no Event of Default has occurred and is continuing, Holdings may grant or issue non-exclusive licenses in the ordinary course of business and consistent with past practice with respect to the Patent Collateral and subject to the security interest (if any) of Lender therein), and to assign, convey or otherwise transfer title in or dispose of the Patent Collateral. The power of attorney set forth in this SECTION 3, being coupled with an interest, is irrevocable so long as this Agreement shall not have terminated in accordance with SECTION 16. -5- Nothing in this Agreement shall obligate Holdings to commence any suit, proceeding or other action for infringement of any of the Patents that are immaterial to Holdings' business. 4. REPRESENTATIONS AND WARRANTIES. Holdings represents and warrants to Lender, in each case to the best of its knowledge, information, and belief, as follows: (a) NO OTHER PATENTS. A true and correct list of all of the existing Patents owned, held (whether pursuant to a license or otherwise) or used by Holdings, in whole or in part, is set forth in SCHEDULE A. (b) VALIDITY. Each of the Patents listed on SCHEDULE A is subsisting and has not been adjudged invalid or unenforceable, in whole or in part, all maintenance fees required to be paid on account of any Patents have been timely paid for maintaining such Patents in force, and, to the best of Holdings' knowledge, each of the Patents is valid and enforceable. (c) OWNERSHIP OF PATENT COLLATERAL; NO VIOLATION. (i) Holdings has rights in and good title to the existing Patent Collateral, (ii) with respect to the Patent Collateral shown on SCHEDULE A hereto as owned by it, Holdings is the sole and exclusive owner thereof, free and clear of any Liens and rights of others (other than the security interest created hereunder), including licenses, shop rights and covenants by Holdings not to sue third persons and (iii) with respect to any Patent for which Holdings is either a licensor or a licensee pursuant to a license or licensee agreement regarding such Patent, each such license or licensing agreement is in full force and effect, Holdings is not in default of any of its obligations thereunder and, other than the parties to such licenses or licensing agreements, no other Person is known by Holdings to have any rights in or to any of the Patent Collateral. To the best of Holdings' knowledge, the past, present and contemplated future use of the Patent Collateral by Holdings has not, does not and will not infringe upon or violate any right, privilege or license agreement of or with any other Person. (d) NO INFRINGEMENT. To the best of Holdings' knowledge, no material infringement or unauthorized use presently is being made of any of the Patent Collateral by any Person. (e) POWERS. Holdings has the unqualified right, power and authority to pledge and to grant to Lender a security interest in all of the Patent Collateral pursuant to this Agreement, and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person except as already obtained. 5. COVENANTS. So long as any of the Guarantied Obligations remain unsatisfied, Holdings shall comply with all of the covenants, terms and provisions of this Agreement, the Security Agreement and the other Loan Documents, and Holdings will -6- promptly give Lender written notice of the occurrence of any event that could have a material adverse effect on any of the Patents or the Patent Collateral, including any petition under the Bankruptcy Code filed by or against any licensor of any of the Patents for which Holdings is a licensee. 6. FUTURE RIGHTS. Except as otherwise expressly agreed to in writing by Lender, for so long as any of the Guarantied Obligations shall remain outstanding, or, if earlier, until Lender shall have released or terminated, in whole but not in part, its interest in the Patent Collateral, if and when Holdings shall obtain rights to any new patentable inventions, or become entitled to the benefit of any Patent, or any reissue, division, continuation, renewal, extension or continuation-in-part of any Patent or Patent Collateral or any improvement thereof (whether pursuant to any license or otherwise), the provisions of SECTION 2 shall automatically apply thereto and Holdings shall give to Lender prompt notice thereof. Holdings shall do all things deemed necessary or advisable by Lender to ensure the validity, perfection, priority and enforceability of the security interests of Lender in such future acquired Patent Collateral. Holdings hereby authorizes Lender to modify, amend or supplement the Schedules hereto and to re-execute this Agreement from time to time on Holdings' behalf and as its attorney-in-fact to include any future patents which are or become Patent Collateral and to cause such re-executed Agreement or such modified, amended or supplemented Schedules to be filed with the PTO. 7. REMEDIES. Upon the occurrence and during the continuance of an Event of Default, Lender shall have all rights and remedies available to it under the Security Agreement and applicable law (which rights and remedies are cumulative) with respect to the security interests in any of the Patent Collateral or any other Collateral. Holdings agrees that such rights and remedies include the right of Lender as a Lender to sell or otherwise dispose of its Collateral after default, pursuant to UCC Section 9504. Holdings agrees that Lender shall at all times have such royalty free licenses, to the extent permitted by law, for any Patent Collateral that is reasonably necessary to permit the exercise of any of Lender's rights or remedies upon the occurrence of an Event of Default with respect to (among other things) any tangible asset of Holdings in which Lender has a security interest, including Lender's rights to sell inventory, tooling or packaging which is acquired by Holdings (or its successor, assignee or trustee in bankruptcy). In addition to and without limiting any of the foregoing, upon the occurrence and during the continuance of an Event of Default, Lender shall have the right but shall in no way be obligated to bring suit, or to take such other action as Lender deems necessary or advisable, in the name of Holdings or Lender, to enforce or protect any of the Patent Collateral, in which event Holdings shall, at the request of Lender, do any and all lawful acts and execute any and all documents required by Lender in aid of such enforcement. To the extent that Lender shall elect not to bring suit to enforce such Patent Collateral, upon the occurrence and during the continuation of an Event of Default, Holdings, in the exercise of its reasonable business judgment, agrees to use all reasonable measures and its diligent efforts, whether by action, suit, proceeding or otherwise, to prevent the infringement, misappropriation or violations thereof by others and for that purpose agrees -7- diligently to maintain any action, suit or proceeding against any Person necessary to prevent such infringement, misappropriation or violation. 8. BINDING EFFECT. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Holdings and Lender and their respective successors and assigns. 9. NOTICES. All notices and other communications hereunder shall be in writing and shall be mailed, sent or delivered in accordance with the Loan Agreement. 10. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, except to the extent that the validity or perfection of the security interests hereunder in respect of the Patent Collateral are governed by federal law, in which case such choice of California law shall not be deemed to deprive Lender of such rights and remedies as may be available under federal law. 11. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Security Agreement, together with the Schedules hereto and thereto, contains the entire agreement of the parties with respect to the subject matter hereof and supersedes all prior drafts and communications relating to such subject matter. Neither this Agreement nor any provision hereof may be modified, amended or waived except by the written agreement of the parties, as provided in the Security Agreement. Notwithstanding the foregoing, Lender may re-execute this Agreement or modify, amend or supplement the Schedules hereto as provided in SECTION 6 hereof. 12. SEVERABILITY. If one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to such party shall, to the fullest extent permitted by applicable law, not invalidate or render illegal or unenforceable any such provision in any other jurisdiction or with respect to any other party, or any other provisions of this Agreement. 13. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as 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 -8- 14. SECURITY AGREEMENT. Holdings acknowledges that the rights and remedies of Lender with respect to the security interest in the Patent Collateral granted hereby are more fully set forth in the Security Agreement and all such rights and remedies are cumulative. 15. NO INCONSISTENT REQUIREMENTS. Holdings acknowledges that this Agreement and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and Holdings agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. 16. TERMINATION. Upon the indefeasible payment in full of the Guarantied Obligations, including the cash collateralization, expiration, or cancellation of all Guarantied Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate and Lender shall execute and deliver such documents and instruments and take such further action reasonably requested by Holdings and at Holdings' expense as shall be necessary to evidence termination of the security interest granted by Holdings to Lender hereunder. [Remainder of page intentionally left blank] -9- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. NATIONAL MEDIA CORPORATION, a Delaware corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By: ------------------------------------ Name: ---------------------------------- Title: --------------------------------- S-1 STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On _______________, 1998, before me, ______________________________, Notary Public, personally appeared ________________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------------- Signature [SEAL] STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On _________________, 1998, before me, ______________________________, Notary Public, personally appeared ___________________, personally known to me (or proved to me on the basis of satisfactory evidence) to be the person(s) whose name(s) is/are subscribed to the within instrument and acknowledged to me that he/she/they executed the same in his/her/their authorized capacity(ies), and that by his/her/their signature(s) on the instrument the person(s), or the entity upon behalf of which the person(s) acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------------- Signature [SEAL] S-2 SCHEDULE A to the Patent Security Agreement UNITED STATES PATENTS, PATENT APPLICATIONS, AND PATENT LICENSE
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A-1 EX-10.8 9 EXHIBIT 10.8 Exhibit 10.8 STOCK PLEDGE AGREEMENT (SUBSIDIARIES) THIS STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of December ___, 1998, is entered into among POSITIVE RESPONSE TELEVISION, INC., a Delaware corporation, NATIONAL MEDIA HOLDINGS, INC., a Delaware corporation, and SUZANNE PAUL HOLDINGS PTY LIMITED, a company organized under the laws of Australia (each a "Pledgor", and collectively "Pledgors"), and FOOTHILL CAPITAL CORPORATION, a California corporation ("Secured Party"), with reference to the following: WHEREAS, each Pledgor beneficially owns the specified number of shares identified as Pledged Shares in the Persons identified as Issuers on SCHEDULE A attached hereto (or any addendum thereto); WHEREAS, Borrower and Secured Party are parties to that certain Loan and Security Agreement (the "Loan Agreement"), of even date herewith, pursuant to which Secured Party has agreed to make certain financial accommodations to Borrower; WHEREAS, to induce Secured Party to make the financial accommodations provided to Borrower pursuant to the Loan Agreement, Pledgors desire to pledge, grant, transfer, and assign to Secured Party a security interest in the Collateral (as hereinafter defined) to secure the Secured Obligations (as hereinafter defined), as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: 1. DEFINITIONS AND CONSTRUCTION. Definitions.All initially capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed thereto in the Loan Agreement. As used in this Agreement: "AGREEMENT" shall mean this Stock Pledge Agreement. "BORROWER" shall mean Quantum North America, a Delaware corporation. "CHIEF EXECUTIVE OFFICE" shall mean where each Pledgor is deemed located pursuant to Section 9103(3)(d) of the Code. "COLLATERAL" shall mean the Pledged Shares, the Future Rights, and the Proceeds, collectively. "FUTURE RIGHTS" shall mean: (a) all shares of stock (other than Pledged Shares) of the Issuers, and all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase, shares of stock of the Issuers; (b) to the extent of any Pledgor's interest therein, all shares of, all securities convertible or exchangeable into, and all 1 warrants, options, or other rights to purchase shares of stock of any Person in which any Pledgor, after the date of this Agreement, acquires a direct equity interest, irrespective of whether such Person is or becomes a Subsidiary of Pledgor; and (c) the certificates or instruments representing such additional shares, convertible or exchangeable securities, warrants, and other rights and all dividends, cash, options, warrants, rights, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of such shares. "HOLDER" and "HOLDERS" shall have the meanings ascribed thereto in SECTION 3 of this Agreement. "ISSUERS" shall mean each of the Persons identified as an Issuer on SCHEDULE A attached hereto (or any addendum thereto), and any successors thereto, whether by merger or otherwise. "LIEN" shall mean any lien, mortgage, pledge, assignment (including any assignment of rights to receive payments of money), security interest, charge, or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, or any agreement to give any security interest). "LOAN AGREEMENT" shall have the meaning ascribed thereto in the recitals to this Agreement. "PERMITTED LIENS" means, with respect to each Pledgor, (a) Liens held by Secured Party, (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 arising from deposits made in connection with obtaining worker's compensation or other unemployment insurance, (e) Liens or deposits to secure performance of bids, tenders, or leases, incurred in the ordinary course of business of such Pledgor and not in connection with the borrowing of money, (f) Liens arising by reason of security for surety or appeal bonds in the ordinary course of business of such Pledgor, and (g) Liens of or resulting from any judgment or award that reasonably could not be expected to result in 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 such Pledgor 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. "PLEDGED SHARES" shall mean all of the shares identified as Pledged Shares on SCHEDULE A attached hereto (or any addendum thereto). "PLEDGOR" and "PLEDGORS" shall have the meaning ascribed thereto in the preamble to this Agreement. "PROCEEDS" shall mean all proceeds (including proceeds of proceeds) of the Pledged Shares and Future Rights including all: (a) rights, benefits, distributions, premiums, profits, dividends, interest, cash, instruments, documents of title, accounts, contract rights, inventory, equipment, general intangibles, deposit accounts, chattel paper, and other property from time to time received, receivable, or otherwise distributed in respect of or in exchange for, or as a replacement of or a substitution for, any of the Pledged Shares, Future Rights, or proceeds 2 thereof (including any cash, stock, or other securities or instruments issued after any recapitalization, readjustment, reclassification, merger or consolidation with respect to the Issuers and any claims against financial intermediaries under Section 8313(2) of the Code or otherwise); (b) "proceeds," as such term is used in Section 9306 of the Code; (c) proceeds of any insurance, indemnity, warranty, or guarantY (including guaranties of delivery) payable from time to time with respect to any of the Pledged Shares, Future Rights, or proceeds thereof; (d) payments (in any form whatsoever) made or due and payable to any Pledgor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Pledged Shares, Future Rights, or proceeds thereof; and (e) other amounts from time to time paid or payable under or in connection with any of the Pledged Shares, Future Rights, or proceeds thereof. "SECURED OBLIGATIONS" shall mean all Obligations owing by Borrower to Secured Party of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement or the other Loan Documents, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest (including interest that accrues after the filing of a case under the Bankruptcy Code) and any and all costs, fees (including attorneys fees), and expenses which Borrower is required to pay pursuant to any of the foregoing, by law, or otherwise. "SECURED PARTY" shall have the meaning ascribed thereto in the preamble to this Agreement, together with its successors or assigns. "SECURITIES ACT" shall have the meaning ascribed thereto in SECTION 9(C) of this Agreement. (A) CONSTRUCTION. (i) Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular and to the singular include the plural, the part includes the whole, 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 other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless otherwise specified. All of the exhibits or schedules attached to this Agreement shall be deemed incorporated herein by reference. Any reference to any of the following documents includes any and all alterations, amendments, restatements, extensions, modifications, renewals, or supplements thereto or thereof, as applicable: this Agreement, the Loan Agreement, or any of the other Loan Documents. 3 (ii) Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Secured Party or any Pledgor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by all of the parties and their respective counsel 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 the parties hereto. (iii) In the event of any direct conflict between the express terms and provisions of this Agreement and of the Loan Agreement, the terms and provisions of the Loan Agreement shall control. 2. PLEDGE. (a) As security for the prompt payment and performance of the Secured Obligations in full by Borrower when due, whether at stated maturity, by acceleration or otherwise (including amounts that would become due but for the operation of the provisions of the Bankruptcy Code), Pledgor hereby pledges, grants, transfers, and assigns to Secured Party a security interest in all of Pledgor's right, title, and interest in and to the Collateral. (b) If any Person whose shares of stock are pledged by any Pledgor pursuant hereto shall at any time have earnings and profits which, because of such pledge, will result in taxable income to such Pledgor pursuant to IRC Section 952, then Secured Party, upon written notice of the foregoing, shall (i) release its liens in the shares of stock of such Person to the extent necessary to avoid the recognition of income by such Pledgor pursuant to IRC Section 952, and (ii) deliver to such Pledgor the pledged certificates representing the number of shares of stock in which Secured Party has released its lien; PROVIDED, HOWEVER, Secured Party shall have no obligation to deliver such shares unless and until such Pledgor shall have delivered, or caused to be delivered to Secured Party, certificates in such denominations as are necessary (if any) for Secured Party to deliver such certificates while retaining certificates representing the number of shares of stock in which Secured Party has retained its liens. (c) If any wholly owned Subsidiary of any Pledgor shall at any time be merged into any other wholly owned Subsidiary of such Pledgor, or shall be dissolved, then, in either case, upon delivery to Secured Party of evidence, reasonably satisfactory to Secured Party, of such merger or dissolution, Secured Party shall deliver to the applicable Pledgor the pledged certificates representing the pledged shares of such wholly owned Subsidiary. 3. DELIVERY AND REGISTRATION OF COLLATERAL. (a) All certificates or instruments representing or evidencing the Collateral shall be promptly delivered by each Pledgor to Secured Party or Secured Party's designee pursuant hereto at a location designated by Secured Party and shall be held by or on behalf of Secured Party pursuant hereto, and shall be in suitable form for transfer by delivery, or 4 shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party. (b) Upon the occurrence and during the continuance of an Event of Default, Secured Party shall have the right, at any time in its discretion and without notice to any Pledgor, to transfer to or to register on the books of the Issuers (or of any other Person maintaining records with respect to the Collateral) in the name of Secured Party or any of its nominees any or all of the Collateral. In addition, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations. (c) If, at any time and from time to time, any Collateral (including any certificate or instrument representing or evidencing any Collateral) is in the possession of a Person other than Secured Party or any Pledgor (a "Holder"), then the applicable Pledgor shall immediately, at Secured Party's option, either cause such Collateral to be delivered into Secured Party's possession, or execute and deliver to such Holder a written notification/instruction, and take all other steps necessary to perfect the security interest of Secured Party in such Collateral, including obtaining from such Holder a written acknowledgement that such Holder holds such Collateral for Secured Party, all pursuant to Sections 9115 of the Code or other applicable law governing the perfectIon of Secured Party's security interest in the Collateral in the possession of such Holder. Each such notification/instruction and acknowledgement shall be in form and substance satisfactory to Secured Party. (d) Any and all Collateral (including dividends, interest, and other cash distributions) at any time received or held by any Pledgor shall be so received or held in trust for Secured Party, shall be segregated from other funds and property of such Pledgor and shall be forthwith delivered to Secured Party in the same form as so received or held, with any necessary endorsements; PROVIDED that cash dividends or distributions received by such Pledgor, if and to the extent they are not prohibited by the Loan Agreement, may be retained by such Pledgor in accordance with SECTION 4 and used in the ordinary course of Pledgor's business; (e) If at any time and from time to time any Collateral consists of an uncertificated security or a security in book entry form, then the applicable Pledgor shall immediately cause such Collateral to be registered or entered, as the case may be, in the name of Secured Party, or otherwise cause Secured Party's security interest thereon to be perfected in accordance with applicable law. 4. VOTING RIGHTS AND DIVIDENDS. (a) So long as no Event of Default shall have occurred and be continuing, each Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of the Loan Documents and shall be entitled to receive and retain any cash dividends or distributions paid in respect of the Collateral. (b) Upon the occurrence and during the continuance of an Event of Default, all rights of each Pledgor to receive and retain cash dividends or distributions that it 5 would otherwise be entitled to receive and retain pursuant to SECTION 4(A), shall cease, and all such rights shall thereupon become vested in Secured Party, who shall thereupon have the sole right to receive and retain such cash dividends and distributions. Each Pledgor shall execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies and other instruments as Secured Party may reasonably request for the purpose of enabling Secured Party to receive the dividends and distributions that it is entitled to receive and retain pursuant to the preceding sentence. (c) Upon the occurrence and during the continuance of an Event of Default in respect of which Secured Party has accelerated the Obligations, all rights of each Pledgor to exercise the voting and other consensual rights that it would otherwise be entitled to exercise pursuant to SECTION 4(A) shall cease, and all such rights shall thereupon become vested in Secured Party, who shall thereupon have the sole right to exercise such voting or other consensual rights. Each Pledgor shall execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies and other instruments as Secured Party may reasonably request for the purpose of enabling Secured Party to exercise the voting and other rights which it is entitled to exercise pursuant to the preceding sentence. 5. REPRESENTATIONS AND WARRANTIES. Each Pledgor represents, warrants, and covenants, in each case, to the best of its knowledge, information, and belief, as follows: (a) such Pledgor has taken all steps it deems necessary or appropriate to be informed on a continuing basis of changes or potential changes affecting the Collateral (including rights of conversion and exchange, rights to subscribe, payment of dividends, reorganizations or recapitalization, tender offers and voting rights), and such Pledgor agrees that Secured Party shall have no responsibility or liability for informing such Pledgor of any such changes or potential changes or for taking any action or omitting to take any action with respect thereto; (b) All information herein or hereafter supplied to Secured Party by or on behalf of such Pledgor in writing with respect to the Collateral is, or in the case of information hereafter supplied will be, accurate and complete in all material respects; (c) such Pledgor is and will be the sole legal and beneficial owner of the Collateral (including the Pledged Shares and all other Collateral acquired by such Pledgor after the date hereof) free and clear of any adverse claim, Lien, or other right, title, or interest of any Person other than Permitted Liens; (d) This Agreement, and the delivery to Secured Party of the Pledged Shares representing Collateral (or the delivery to all Holders of the Pledged Shares representing Collateral of the notification/instruction referred to in SECTION 3 of this Agreement), creates a valid, perfected, and first priority security interest in one hundred percent (100%) of the Pledged Shares in favor of Secured Party securing payment of the Secured Obligations, and all actions necessary to achieve such perfection have been duly taken; (e) SCHEDULE A to this Agreement is true and correct and complete in all material respects; without limiting the generality of the foregoing: (i) all the Pledged Shares 6 are in certificated form, and, except to the extent registered in the name of Secured Party or its nominee pursuant to the provisions of this Agreement, are registered in the name of the applicable Pledgor; and (ii) the Pledged Shares as to each of the Issuers constitute at least the percentage of all the fully diluted issued and outstanding shares of stock of such Issuer as set forth in SCHEDULE A to this Agreement; (f) There are no presently existing Future Rights or Proceeds owned by Pledgor, except as set forth in SCHEDULE C hereto; (g) The Pledged Shares have been duly authorized and validly issued and are fully paid and nonassessable; and (h) Neither the pledge of the Collateral pursuant to this Agreement nor the extensions of credit represented by the Secured Obligations violates Regulation T, U or X of the Board of Governors of the Federal Reserve System. 6. FURTHER ASSURANCES. (a) Each Pledgor agrees that from time to time, at the expense of such Pledgor, such Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or reasonably desirable, or that Secured Party may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, such Pledgor will: (i) at the request of Secured Party, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance reasonably satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby; (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or reasonably desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (iii) allow inspection of the Collateral by Secured Party or Persons designated by Secured Party; and (iv) appear in and defend any action or proceeding that may affect such Pledgor's title to or Secured Party's security interest in the Collateral. (b) Each Pledgor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of such Pledgor where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) Each Pledgor will promptly furnish to Secured Party, upon the request of Secured Party: (i) a certificate executed by an authorized officer of such Pledgor, and dated as of the date of delivery to Secured Party, itemizing in such detail as Secured Party may request, the Collateral which, as of the date of such certificate, has been delivered to Secured Party by such Pledgor pursuant to the provisions of this Agreement; and (ii) such statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may request. 7 7. COVENANTS OF PLEDGORS. Each Pledgor shall: (a) Perform each and every covenant in the Loan Documents applicable to such Pledgor; (b) At all times keep at least one complete set of its records concerning substantially all of the Collateral at its Chief Executive Office as set forth in SCHEDULE B hereto, and not change the location of its Chief Executive Office or such records without giving Secured Party at least thirty (30) days prior written notice thereof; (c) To the extent it may lawfully do so, use its best efforts to prevent the Issuers from issuing Future Rights or Proceeds, except for cash dividends and other distributions, if any, that are not prohibited by the terms of the Loan Agreement to be paid by any Issuer to such Pledgor; and (d) Upon receipt by such Pledgor of any material notice, report, or other communication from any of the Issuers or any Holder relating to all or any part of the Collateral, deliver such notice, report or other communication to Secured Party as soon as possible, but in no event later than five (5) days following the receipt thereof by such Pledgor. 8. SECURED PARTY AS EACH PLEDGOR'S ATTORNEY-IN-FACT. (a) Each Pledgor hereby irrevocably appoints Secured Party as such Pledgor's attorney-in-fact, with full authority in the place and stead of such Pledgor and in the name of such Pledgor, Secured Party or otherwise, from time to time at Secured Party's discretion, to take any action and to execute any instrument that Secured Party may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including: (i) upon the occurrence and during the continuance of an Event of Default, to receive, endorse, and collect all instruments made payable to such Pledgor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof to the extent permitted hereunder and to give full discharge for the same and to execute and file governmental notifications and reporting forms; (ii) to issue any notifications/instructions Secured Party deems necessary pursuant to SECTION 3 of this Agreement; or (iii) to arrange for the transfer of the Collateral on the books of any of the Issuers or any other Person to the name of Secured Party or to the name of Secured Party's nominee. (b) In addition to the designation of Secured Party as such Pledgor's attorney-in-fact in SUBSECTION (A), each Pledgor hereby irrevocably appoints Secured Party as such Pledgor's agent and attorney-in-fact to make, execute and deliver any and all documents and writings which may be necessary or appropriate for approval of, or be required by, any regulatory authority located in any city, county, state or country where such Pledgor or any of the Issuers engage in business, in order to transfer or to more effectively transfer any of the Pledged Shares or otherwise enforce Secured Party's rights hereunder. 9. REMEDIES UPON DEFAULT. Upon the occurrence and during the continuance of an Event of Default: 8 (a) Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein, under the Loan Agreement, or otherwise available to it, all the rights and remedies of a secured party on default under the Code (irrespective of whether the Code applies to the affected items of Collateral), and Secured Party may also sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Collateral. To the maximum extent permitted by applicable law, Secured Party may be the purchaser of any or all of the Collateral at any such sale and shall be entitled, for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply all or any part of the Secured Obligations as a credit on account of the purchase price of any Collateral payable at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of any Pledgor, and each Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay, or appraisal that it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. (b) Foothill shall give notice of the disposition of the Collateral as follows: (i) Foothill shall give the applicable Pledgor 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; (ii) the notice shall be personally delivered or mailed, postage prepaid, to the applicable Pledgor at the address of its Chief Executive Office, as set forth on SCHEDULE B, at least 5 days before the date fixed for the sale, or at least 5 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 threatens to decline speedily in value or that is of a type customarily sold on a recognized market. Notice to Persons other than the applicable Pledgor shall be sent to such addresses as they have furnished to Foothill; 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 5 days before the date of the sale in a newspaper of general circulation in the county in which the sale is to be held; (c) Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the maximum extent permitted by law, each Pledgor hereby waives any claims against Secured Party arising because the price at which any Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. (d) Each Pledgor hereby agrees that any sale or other disposition of the Collateral conducted in conformity with reasonable commercial practices of banks, insurance companies, or other financial institutions in the City of Los Angeles, California in disposing of property similar to the Collateral shall be deemed to be commercially reasonable. 9 (e) Each Pledgor hereby acknowledges that the sale by Secured Party of any Collateral pursuant to the terms hereof in compliance with the Securities Act of 1933 as now in effect or as hereafter amended, or any similar statute hereafter adopted with similar purpose or effect (the "Securities Act"), as well as applicable "Blue Sky" or other state securities laws may require strict limitations as to the manner in which Secured Party or any subsequent transferee of the Collateral may dispose thereof. Each Pledgor acknowledges and agrees that in order to protect Secured Party's interest it may be necessary to sell the Collateral at a price less than the maximum price attainable if a sale were delayed or were made in another manner, such as a public offering under the Securities Act. No Pledgor has an objection to sale in such a manner and agrees that Secured Party shall have no obligation to obtain the maximum possible price for the Collateral. Without limiting the generality of the foregoing, each Pledgor agrees that, upon the occurrence and during the continuation of an Event of Default, Secured Party may, subject to applicable law, from time to time attempt to sell all or any part of the Collateral by a private placement, restricting the bidders and prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for distribution. In so doing, Secured Party may solicit offers to buy the Collateral or any part thereof for cash, from a limited number of investors deemed by Secured Party, in its reasonable judgment, to be institutional investors or other responsible parties who might be interested in purchasing the Collateral. If Secured Party shall solicit such offers, then the acceptance by Secured Party of one of the offers shall be deemed to be a commercially reasonable method of disposition of the Collateral. (f) If Secured Party shall determine to exercise its right to sell all or any portion of the Collateral pursuant to this Section, each Pledgor agrees that, upon request of Secured Party, such Pledgor will, at its own expense: (i) use its best efforts to execute and deliver, and cause the Issuers and the directors and officers thereof to execute and deliver, all such instruments and documents, and to do or cause to be done all such other acts and things, as may be necessary or, in the opinion of Secured Party, advisable to register such Collateral under the provisions of the Securities Act, and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectuses which, in the opinion of Secured Party, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (ii) use its best efforts to qualify the Collateral under the state securities laws or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Collateral, as requested by Secured Party; 10 (iii) cause the Issuers to make available to their respective security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act; (iv) execute and deliver, or cause the officers and directors of the Issuers to execute and deliver, to any person, entity or governmental authority as Secured Party may choose, any and all documents and writings which, in Secured Party's reasonable judgment, may be necessary or appropriate for approval, or be required by, any regulatory authority located in any city, county, state or country where such Pledgor or the Issuers engage in business, in order to transfer or to more effectively transfer the Pledged Shares or otherwise enforce Secured Party's rights hereunder; and (v) do or cause to be done all such other acts and things as may be necessary to make such sale of the Collateral or any part thereof valid and binding and in compliance with applicable law. Each Pledgor acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section may be specifically enforced. (e) EACH PLEDGOR EXPRESSLY WAIVES TO THE MAXIMUM EXTENT PERMITTED BY LAW: (i) ANY CONSTITUTIONAL OR OTHER RIGHT TO A JUDICIAL HEARING PRIOR TO THE TIME SECURED PARTY DISPOSES OF ALL OR ANY PART OF THE COLLATERAL AS PROVIDED IN THIS SECTION; (ii) ALL RIGHTS OF REDEMPTION, STAY, OR APPRAISAL THAT IT NOW HAS OR MAY AT ANY TIME IN THE FUTURE HAVE UNDER ANY RULE OF LAW OR STATUTE NOW EXISTING OR HEREAFTER ENACTED; AND (iii) EXCEPT AS SET FORTH IN SUBSECTION (A) OF THIS SECTION, ANY REQUIREMENT OF NOTICE, DEMAND, OR ADVERTISEMENT FOR SALE. 10. APPLICATION OF PROCEEDS. Upon the occurrence and during the continuance of an Event of Default, any cash held by Secured Party as Collateral and all cash proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral pursuant to the exercise by Secured Party of its remedies as a secured creditor as provided in SECTION 9 shall be applied from time to time by Secured Party as provided in the Loan Agreement. 11. DUTIES OF SECURED PARTY. The powers conferred on Secured Party hereunder are solely to protect its interests in the Collateral and shall not impose on it any duty to exercise such powers. Except as provided in Section 9207 of the Code, Secured Party shall have no duty 11 with respect to the Collateral or any responsibility for taking any necessary steps to preserve rights against any Persons with respect to any Collateral. 12. CHOICE OF LAW AND VENUE. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO 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 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 SECURED PARTY, IN ANY OTHER COURT IN WHICH SECURED PARTY SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH PLEDGOR AND SECURED PARTY 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 12. 13. AMENDMENTS; ETC. No amendment or waiver of any provision of this Agreement nor consent to any departure by any Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of Secured Party to exercise, and no delay in exercising any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations preclude any other or further exercise thereof or the exercise of any other right. The remedies provided for in this Agreement or otherwise with respect to any of the Secured Obligations are cumulative and not exclusive of any remedies provided by law. 14. NOTICES. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and shall be delivered to Secured Party, and to each Pledgor in care of Borrower, in the manner set forth in the Loan Agreement. 15. CONTINUING SECURITY INTEREST. This Agreement shall create a continuing security interest in the Collateral and shall: (i) remain in full force and effect until the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement; (ii) be binding upon each Pledgor and its successors and assigns; and (iii) inure to the benefit of Secured Party and its successors, transferees, and assigns. Upon the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, the security interests granted herein shall automatically terminate and all 12 rights to the Collateral shall revert to the applicable Pledgor. Upon any such termination, Secured Party will, at any Pledgor's expense, execute and deliver to such Pledgor such documents as such Pledgor shall reasonably request to evidence such termination. Such documents shall be prepared by such Pledgor and shall be in form and substance reasonably satisfactory to Secured Party. 16. SECURITY INTEREST ABSOLUTE. To the maximum extent permitted by law, all rights of Secured Party, all security interests hereunder, and all obligations of each Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any of the Secured Obligations or any other agreement or instrument relating thereto, including any of the Loan Documents; (b) any change in the time, manner, or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from any of the Loan Documents, or any other agreement or instrument relating thereto; (c) any exchange, release, or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Secured Obligations; or (d) any other circumstances that might otherwise constitute a defense available to, or a discharge of, such Pledgor. To the maximum extent permitted by law, each Pledgor hereby waives any right to require Secured Party to: (A) proceed against or exhaust any security held from such Pledgor; or (B) pursue any other remedy in Secured Party's power whatsoever. 17. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 18. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 19. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as 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 13 20. WAIVER OF MARSHALING. Each Pledgor and Secured Party acknowledges and agrees that in exercising any rights under or with respect to the Collateral: (i) Secured Party is under no obligation to marshal any Collateral; (ii) may, in its absolute discretion, realize upon the Collateral in any order and in any manner it so elects; and (iii) may, in its absolute discretion, apply the proceeds of any or all of the Collateral to the Secured Obligations in any order and in any manner it so elects. Each Pledgor and Secured Party waive any right to require the marshaling of any of the Collateral. 21. WAIVER OF JURY TRIAL. EACH PLEDGOR AND SECURED PARTY HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH PLEDGOR AND SECURED PARTY REPRESENTS THAT EACH 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. 22. WAIVERS. (a) To the maximum extent permitted by law, each Pledgor hereby waives: (i) notice of acceptance hereof; (ii) notice of any loans or other financial accommodations made or extended under the Loan Agreement, or the creation or existence of any Obligations; (iii) notice of the amount of the Obligations, subject, however, to such Pledgor's right to make inquiry of Secured Party to ascertain the amount of the Obligations at any reasonable time; (iv) notice of any adverse change in the financial condition of Borrower or of any other fact that might increase such Pledgor's risk hereunder; (v) notice of presentment for payment, demand, protest, and notice thereof as to any instrument among the Loan Documents; (vi) notice of any unmatured Event of Default or Event of Default under the Loan Agreement; and (vii) all other notices (except if such notice is specifically required to be given to such Pledgor under this Agreement) and demands to which such Pledgor might otherwise be entitled. (b) To the fullest extent permitted by applicable law, each Pledgor waives the right by statute or otherwise to require Secured Party to institute suit against Borrower or to exhaust any rights and remedies which Secured Party has or may have against Borrower. Each Pledgor further waives any defense arising by reason of any disability or other defense (other than the defense that the Secured Obligations shall have been fully and finally indefeasibly paid) of Borrower or by reason of the cessation from any cause (other than that the Secured Obligations shall have been fully and finally indefeasibly paid) whatsoever of the liability of Borrower in respect thereof. (c) To the maximum extent permitted by law, each Pledgor hereby waives: (i) any rights to assert against Secured Party any defense (legal or equitable), set-off, 14 counterclaim, or claim which such Pledgor may now or at any time hereafter have against Borrower or any other party liable to Secured Party on account of or with respect to the Secured Obligations; (ii) any defense, set-off, counterclaim, or claim, of any kind or nature, arising directly or indirectly from the present or future sufficiency, validity, or enforceability of the Secured Obligations; (iii) any defense arising by reason of any claim or defense based upon an election of remedies by Secured Party including, to the extent applicable, the provisions of ss.ss. 580d and 726 of the California Code of Civil Procedure, or any similar law of California or any other jurisdiction; (iv) the benefit of any statute of limitations affecting such Pledgor's liability hereunder or the enforcement thereof. (d) To the maximum extent permitted by law, each Pledgor hereby waives any right of subrogation such Pledgor has or may have as against Borrower with respect to the Secured Obligations. In addition, each Pledgor hereby waives any right to proceed against Borrower, now or hereafter, for contribution, indemnity, reimbursement, or any other suretyship rights and claims (irrespective of whether direct or indirect, liquidated or contingent), with respect to the Secured Obligations. Each Pledgor also hereby waives any right to proceed or to seek recourse against or with respect to any property or asset of Borrower. Each Pledgor hereby agrees that, in light of the waivers contained in this Section, such Pledgor shall not be deemed to be a "creditor" (as that term is defined in the Bankruptcy Code or otherwise) of Borrower, whether for purposes of the application of Sections 547 or 550 of the United States Bankruptcy Code or otherwise. (e) If any of the Secured Obligations at any time are secured by a mortgage or deed of trust upon real property, Secured Party may elect, in its sole discretion, upon the occurrence or during the continuance of an Event of Default, to foreclose such mortgage or deed of trust judicially or nonjudicially in any manner permitted by law, before or after enforcing this Agreement, without diminishing or affecting the liability of each Pledgor hereunder. Each Pledgor understands that (a) by virtue of the operation of California's antideficiency law applicable to nonjudicial foreclosures, an election by Secured Party nonjudicially to foreclose such a mortgage or deed of trust probably would have the effect of impairing or destroying rights of subrogation, reimbursement, contribution, or indemnity of such Pledgor against Borrower or guarantors or sureties, and (b) absent the waiver given by such Pledgor herein, such an election might estop Secured Party from enforcing this Agreement against such Pledgor. Understanding the foregoing, and understanding that such Pledgor is hereby relinquishing a defense to the enforceability of this Agreement, each Pledgor hereby waives any right to assert against Secured Party any defense to the enforcement of this Agreement, whether denominated "estoppel" or otherwise, based on or arising from an election by Secured Party nonjudicially to foreclose any such mortgage or deed of trust. Each Pledgor understands that the effect of the foregoing waiver may be that such Pledgor may have liability hereunder for amounts with respect to which such Pledgor may be left without rights of subrogation, reimbursement, contribution, or indemnity against Borrower or guarantors or sureties. Each Pledgor also agrees that the "fair market value" provisions of Section 580a of the California Code of Civil Procedure shall have no applicability with respect to the determination of such Pledgor's liability under this Agreement. 23. WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, EACH PLEDGOR HEREBY WAIVES, TO THE MAXIMUM EXTENT SUCH WAIVER IS 15 PERMITTED BY LAW, ANY AND ALL DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE SECTIONS 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2838, 2839, 2845, 2848, 2849, AND 2850, TO THE EXTENT APPLICABLE, CALIFORNIA CODE OF CIVIL PROCEDURE SECTIONS 580A, 580B, 580C, 580D, AND 726, AND, TO THE EXTENT APPLICABLE, CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE. (A) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, EACH PLEDGOR HEREBY WAIVES ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF REMEDIES BY SECURED PARTY, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH AS A NONJUDICIAL FORECLOSURE WITH RESPECT TO SECURITY FOR A SECURED OBLIGATION, HAS DESTROYED SUCH PLEDGOR'S RIGHTS OF SUBROGATION AND REIMBURSEMENT AGAINST THE PRINCIPAL BY THE OPERATION OF SECTION 580D OF THE CODE OF CIVIL PROCEDURE OR OTHERWISE. 24. SUBORDINATION. If at any time, or from time to time, any Subsidiary of any Pledgor shall enter into financing arrangements, then Secured Party shall subordinate, on terms and conditions reasonably satisfactory to Secured Party, its Liens on the Stock of such Subsidiary to the Liens of the lender providing such financing. [Remainder of page intentionally left blank] 16 IN WITNESS WHEREOF, the Pledgors and Secured Party have caused this Agreement to be duly executed and delivered by their officers thereunto duly authorized as of the date first written above. POSITIVE RESPONSE TELEVISION, INC., a Delaware corporation By ---------------------------------------------- Title: ------------------------------------------- NATIONAL MEDIA HOLDINGS, INC., a Delaware corporation By ----------------------------------------------- Title: ------------------------------------------- SUZANNE PAUL HOLDINGS PTY LIMITED, a company organized under the laws of Australia By ----------------------------------------------- Title: ------------------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By ----------------------------------------------- Title: ------------------------------------------- S-1 SCHEDULE A TO STOCK PLEDGE AGREEMENT Pledgor: POSITIVE RESPONSE TELEVISION, INC. PLEDGED SHARES
FORMER NAME, IF PLEDGOR'S NUMBER OF CERTIFICATE ANY, IN WHICH PERCENTAGE JURISDICTION OF ISSUER SHARES CLASS NUMBER(S) CERTIFICATE ISSUED OWNERSHIP INCORPORATION - ------ -------- ----- ----------- ------------------ ---------- ---------------
SCHEDULE A TO STOCK PLEDGE AGREEMENT Pledgor: NATIONAL MEDIA HOLDINGS, INC. PLEDGED SHARES
FORMER NAME, IF PLEDGOR'S NUMBER OF CERTIFICATE ANY, IN WHICH PERCENTAGE JURISDICTION OF ISSUER SHARES CLASS NUMBER(S) CERTIFICATE ISSUED OWNERSHIP INCORPORATION - ------ -------- ----- ----------- ------------------ ---------- ---------------
SCHEDULE A TO STOCK PLEDGE AGREEMENT Pledgor: SUZANNE PAUL HOLDINGS PTY LIMITED, PLEDGED SHARES
FORMER NAME, IF PLEDGOR'S NUMBER OF CERTIFICATE ANY, IN WHICH PERCENTAGE JURISDICTION OF ISSUER SHARES CLASS NUMBER(S) CERTIFICATE ISSUED OWNERSHIP INCORPORATION - ------ -------- ----- ----------- ------------------ ---------- ---------------
SCHEDULE B TO STOCK PLEDGE AGREEMENT Pledgor: POSITIVE RESPONSE TELEVISION, INC., a Delaware corporation Address of Chief Executive Office: 15821 Ventura Boulevard, 5th Floor Encino, California 91436 Pledgor: NATIONAL MEDIA HOLDINGS, INC., a Delaware corporation Address of Chief Executive Office: 15821 Ventura Boulevard, 5th Floor Encino, California 91436 Pledgor: SUZANNE PAUL HOLDINGS PTY LIMITED, a company organized under the laws of Australia Address of Chief Executive Office: 15821 Ventura Boulevard, 5th Floor Encino, California 91436 SCHEDULE C TO STOCK PLEDGE AGREEMENT Existing Future Rights and Proceeds: [None.] EX-10.9 10 EXHIBIT 10.9 COPYRIGHT SECURITY AGREEMENT ---------------------------- (HOLDINGS) This COPYRIGHT SECURITY AGREEMENT (this "Agreement"), dated as of December , 1998 is made by NATIONAL MEDIA CORPORATION, a Delaware corporation ("Holdings"), in favor of FOOTHILL CAPITAL CORPORATION, a California corporation ("Secured Party"). RECITALS -------- A. Borrower and Secured Party are contemporaneously herewith entering into that certain Loan and Security Agreement dated as of the date hereof (as amended, restated, modified, supplemented, refinanced, renewed, or extended from time to time, the "Loan Agreement"), pursuant to which Secured Party has agreed to make certain financial accommodations to Holdings. B. Holdings has executed in favor of Secured Party that certain General Continuing Guaranty, dated as of the date hereof (the "Guaranty"), in favor of Secured Party, respecting certain obligations of Borrower owing to Secured Party under the Loan Agreement. C. Holdings and Secured Party are contemporaneously herewith entering into that certain Security Agreement, dated as of the date hereof (the "Security Agreement"), pursuant to which Holdings has granted to Secured Party a security interest in (among other things) all general intangibles of Holdings. D. As one of the conditions to the obligations of Secured Party under the Loan Agreement, Holdings has agreed to execute and deliver this Agreement to Secured Party for filing with the United States Copyright Office and with any other relevant recording systems in any domestic jurisdiction, and as further evidence of and to effectuate Secured Party's existing security interests in the copyrights and other general intangibles described herein. ASSIGNMENT ---------- NOW, THEREFORE, for valuable consideration, the receipt and adequacy of which is hereby acknowledged, Holdings hereby agrees in favor of Secured Party as follows: 1. DEFINITIONS; INTERPRETATION. (a) CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: 1 "BORROWER" means Quantum North America, Inc., a Delaware corporation. "COPYRIGHT COLLATERAL" has the meaning set forth in SECTION 2. "COPYRIGHTS" has the meaning set forth in SECTION 2. "EVENT OF DEFAULT" shall have the meaning ascribed thereto in the Security Agreement. "GUARANTIED OBLIGATIONS" shall have the meaning ascribed thereto in the Guaranty. "LIEN" means any pledge, security interest, assignment, charge or encumbrance, lien (statutory or other), or other preferential arrangement (including any agreement to give any security interest). "UCC" means the Uniform Commercial Code as in effect from time to time in the State of California. "UNITED STATES" and "U.S." each mean the United States of America, including all territories thereof and all protectorates thereof. (b) TERMS DEFINED IN UCC. Where applicable and except as otherwise defined herein, terms used in this Agreement shall have the meanings ascribed to them in the UCC. (c) INTERPRETATION. In this Agreement, except to the extent the context otherwise requires: (i) Any reference to a Section or a Schedule is a reference to a section hereof, or a schedule hereto, respectively, and to a subsection or a clause is, unless otherwise stated, a reference to a subsection or a clause of the Section or subsection in which the reference appears. (ii) The words "hereof," "herein," "hereto," "hereunder" and the like mean and refer to this Agreement as a whole and not merely to the specific Section, subsection, paragraph or clause in which the respective word appears. (iii) The meaning of defined terms shall be equally applicable to both the singular and plural forms of the terms defined. (iv) The words "including," "includes" and "include" shall be deemed to be followed by the words "without limitation." (v) References to agreements and other contractual instruments shall be deemed to include all subsequent amendments, restatements, 2 supplements, refinancings, renewals, extensions, and other modifications thereto and thereof. (vi) References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. (vii) Any captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. (viii) Capitalized words not otherwise defined herein shall have the respective meanings ascribed to them in the Security Agreement. (ix) In the event of a direct conflict between the terms and provisions of this Agreement and the Loan Agreement, it is the intention of the parties hereto that both such documents shall be read together and construed, to the fullest extent possible, to be in concert with each other. In the event of any actual, irreconcilable conflict that cannot be resolved as aforesaid, the terms and provisions of the Loan Agreement shall control and govern; PROVIDED, HOWEVER, that the inclusion herein of additional obligations on the part of Holdings and supplemental rights and remedies in favor of Secured Party (whether under California law or applicable federal law), in each case in respect of the Copyright Collateral, shall not be deemed a conflict with the Loan Agreement. 2. SECURITY INTEREST. (a) ASSIGNMENT AND GRANT OF SECURITY. Holdings, as security for the payment and performance of the Guarantied Obligations, hereby grants, assigns, transfers and conveys to Secured Party a continuing security interest in all of Holdings' right, title and interest in, to and under the following property, whether now existing or hereafter acquired or arising or in which Holdings now has or hereafter acquires or develops an interest and wherever the same may be located (the "Copyright Collateral"): (i) all copyrights, rights, titles and interests in and to published and unpublished works of authorship that Holdings owns or uses in its business or will in the future adopt and so use, and all copyrights in any original or derivative works of authorship and all works protectable by copyright that are presently, or in the future may be, owned, created, authored (excluding all works for hire created by Holdings for any other Person), acquired or used (whether pursuant to a license or otherwise) by Holdings, in whole or in part (collectively, the "Copyrights"), all copyright registrations and applications for copyright registration that have heretofore been or may hereafter be issued thereon or applied for in the United States, including registrations, recordings, supplemental registrations and pending applications for registration in the United States Copyright Office (the "Registrations"), all common law and other rights in and to the Copyrights throughout the world, including all copyright licenses (collectively, the "Copyright Rights"), and 3 all renewals and extensions thereof, throughout the world, including all proceeds thereof (such as, by way of example and not by limitation, license royalties and proceeds of infringement suits), the right (but not the obligation) to renew and extend such Copyrights, Registrations and Copyright Rights and to register works protectable by copyright and the right (but not the obligation) to sue or bring proceedings in the name of Holdings or in the name of Secured Party for past, present and future infringements or violations of the Copyrights, Registrations and Copyright Rights, and recover damages for past, present and future infringements or violations thereof, and all rights corresponding thereto throughout the world, including: (A) all of Holdings' right, title and interest in and to all copyrights or rights or interests in copyrights registered or recorded in the United States Copyright Office, including the Registrations listed on SCHEDULE A attached hereto, as the same may be amended or supplemented pursuant hereto from time to time; (B) all of Holdings' right, title and interest in and to all renewals and extensions of any such copyrights, including renewals or extensions of the Registrations listed on SCHEDULE A attached hereto, that may be secured under the law now or hereafter in force and effect; (C) all of Holdings' right, title and interest to make and exploit all derivative works based on or adopted from all works covered by any of the Copyright Collateral; and (D) all of Holdings' right, title and interest pursuant to or under licensing or other contracts in favor of Holdings pertaining to copyrights and works protectable by copyright presently or in the future owned or used by third parties; (ii) all inventions, designs, registrations, trade secrets, proprietary rights, corporate or other business records, computer programs, source codes, object codes, data bases and all other intangible personal property at any time used in connection with the businesses of Holdings (referred to herein as "Proprietary Rights"); (iii) all general intangibles (as defined in the UCC) and all intangible intellectual or other similar property of Holdings of any kind or nature, whether now owned or hereafter acquired or developed, associated with or arising out of any of the Copyrights, Registrations, Copyright Rights or Proprietary Rights and not otherwise described above; and (iv) all proceeds of any and all of the foregoing Copyright Collateral (including license royalties, rights to payment, accounts receivable and proceeds of infringement suits) and, to the extent not otherwise included, all payments under insurance (whether or not Secured Party is the loss payee thereof) or any 4 indemnity, warranty or guaranty payable by reason of loss or damage to or otherwise with respect to the foregoing Copyright Collateral. For purposes of this Agreement, the term "proceeds" includes whatever is receivable or received when Copyright Collateral or proceeds are sold, licensed, collected, exchanged or otherwise disposed of, whether such disposition is voluntary or involuntary, and includes, without limitation, all rights to payment, including returned premiums, with respect to any insurance relating thereto. (b) CONTINUING SECURITY INTEREST. Holdings agrees that this Agreement shall create a continuing security interest in the Copyright Collateral which shall remain in effect until terminated in accordance with SECTION 17. (c) INCORPORATION INTO SECURITY AGREEMENT. This Agreement shall be fully incorporated into the Security Agreement and all understandings, agreements and provisions contained in the Security Agreement shall be fully incorporated into this Agreement. Without limiting the foregoing, the Copyright Collateral described in this Agreement shall constitute part of the Collateral in the Security Agreement. (d) PERMITTED LICENSING. Anything in the Security Agreement or this Agreement to the contrary notwithstanding, Holdings may license to any other Person the Copyright Collateral on a non-exclusive basis, free and clear of Secured Party's security interest (other than its security interest in the proceeds of such license). 3. REPRESENTATIONS AND WARRANTIES. Holdings represents and warrants to Secured Party and for the benefit of Secured Party, in each case to the best of its knowledge, information, and belief, the following: (a) TRUE AND COMPLETE LIST. Set forth in SCHEDULE A is a true and complete list of Copyrights, Registrations, and Copyright Rights owned, held, or used (whether pursuant to a license or otherwise) by Holdings, in whole or in part; (b) POWERS. Holdings has full power, authority and legal right to pledge and to grant to Secured Party a security interest in all right, title, and interest of Holdings in and to the Copyright Collateral pursuant to this Agreement, and to execute, deliver and perform its obligations in accordance with the terms of this Agreement, without the consent or approval of any other Person except as already obtained; (c) VALIDITY. Each of the Registrations of Holdings referred to in SCHEDULE A is valid, subsisting and enforceable, and Holdings has properly complied in all material respects with all applicable statutory and regulatory requirements, including all notice requirements, in connection with each of such Registrations, and, no claim has been made that the use of any of such Copyrights does or may infringe or otherwise violate the rights of any third Person, except as set forth in Schedule 3.8 of the Security Agreement; (d) TITLE. Holdings has rights in and good title to the Copyright Collateral shown on the schedules hereto as being owned by it, is the sole and exclusive 5 owner of the entire and unencumbered right, title and interest in and to such Copyright Collateral, free and clear of any Liens (other than Liens in favor of Secured Party); for any Copyright Collateral for which Holdings is either a licensor or a licensee pursuant to a license or licensing agreement regarding such Copyright Collateral, each such license or licensing agreement is in full force and effect, Holdings is not in material default of any of its obligations thereunder and, other than (i) the parties to such licenses or licensing agreements, or (ii) in the case of any non-exclusive license or license agreement entered into by Holdings or any such licensor regarding such Copyright Collateral, the parties to any other such non-exclusive licenses or license agreements entered into by Holdings or any such licensor with any other Person, no other Person has any rights in or to any of such Copyright Collateral; (e) NO VIOLATION. The execution, delivery and performance by Holdings of this Agreement do not violate any provision of law or the articles of incorporation or by-laws of Holdings or result in a breach of or constitute a default under any contract, obligation, indenture or other instrument to which Holdings is a party or by which Holdings may be bound; (f) AUTHORIZATION. This Agreement has been duly authorized, executed and delivered, and constitutes a legal, valid and binding agreement of Holdings enforceable in accordance with its terms; and (g) SECRECY. Holdings has taken and will continue to take all reasonable steps to protect the secrecy of all trade secrets relating to any of its unpublished Copyright Collateral and its Proprietary Rights. 4. COVENANTS. Holdings covenants that so long as this Agreement shall be in effect, Holdings shall: (a) FURTHER ACTS. On a continuing basis, make, execute, acknowledge and deliver, and file and record in the proper filing and recording places, all such instruments and documents, including appropriate financing and continuation statements and security agreements, and take all such action as may be necessary or advisable or may be requested by Secured Party to carry out the intent and purposes of this Agreement, or for assuring, confirming or protecting the grant or perfection of the security interest granted or purported to be granted hereby, to ensure Holdings' compliance with this Agreement or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to the Copyright Collateral. Without limiting the generality of the foregoing sentence, Holdings: (i) hereby authorizes Secured Party in its sole discretion if Holdings refuses to execute and deliver, or fails timely to execute and deliver , any of the documents it is requested to execute and deliver by Secured Party, to modify this Agreement without first obtaining Holdings' approval of or signature to such modification by amending SCHEDULE A hereof to include a reference to any right, title or interest in any existing Copyright, Registration or Copyright Right or any Copyright, Registration or Copyright Right acquired or developed by Holdings after 6 the execution hereof, or to delete any reference to any right, title or interest in any Copyright, Registration or Copyright Right in which Holdings no longer has or claims any right, title or interest; and (ii) hereby authorizes Secured Party, in its sole discretion, to file one or more financing or continuation statements if Holdings refuses to execute and deliver, or fails timely to execute and deliver, any such amendment thereto it is requested to execute and deliver by Secured Party, any amendments thereto, relative to all or any portion of the Copyright Collateral, without the signature of Holdings where permitted by law; (b) COMPLIANCE WITH LAW. Comply, in all material respects, with all applicable statutory and regulatory requirements in connection with any and all of the Copyright Collateral that is the subject of the Registrations and give such notice of copyright, prosecute such material claims, and do all other acts and take all other measures which, in Holdings' reasonable business judgment, may be necessary or desirable to preserve, protect and maintain such Copyright Collateral and all of Holdings' rights therein, including diligently prosecute any material copyright application pending as of the date of this Agreement or thereafter; (c) COMPLIANCE WITH AGREEMENT. Comply with each of the terms and provisions of this Agreement, and not enter into any agreement (for example, a license agreement) which is inconsistent with the obligations of Holdings under this Agreement without Secured Party's prior written consent; and (d) LIEN PROTECTION. Not permit the inclusion in any contract to which Holdings becomes a party of any provision that could or might impair or prevent the creation of a security interest in favor of Secured Party in Holdings' rights and interest in any property included within the definitions of the Copyrights, Registrations and Copyright Rights acquired under such contracts. 5. NEW COPYRIGHTS, REGISTRATIONS AND COPYRIGHT RIGHTS. If Holdings shall obtain rights to or develop any new works protectable by copyright, or become entitled to the benefit of any Copyright Rights, Registration or application for Registration not described on the schedules hereto, or any renewals or extension of any Copyright, Copyright Rights or Registration, the provisions of this Agreement shall automatically apply thereto. Holdings shall give Secured Party written notice (a) of any such work or such rights of material value to Holdings or the operation of its businesses and (b) any such Registration, applications for Registration or renewal or extension of any Copyright. Concurrently with its filing of an application for any Registration for any Copyright, Holdings shall execute and deliver a supplement to this Agreement in form and substance satisfactory to the Secured Party (or, at the election of Secured Party, a new Copyright Security Agreement substantially in the form of this Agreement and otherwise in form and substance satisfactory to the Secured Party), pursuant to which Holdings shall grant and reaffirm its grant of a security interest to the extent of its interest in such Registration as provided herein to Secured Party, and Holdings 7 shall cause such agreement to be recorded in the offices and jurisdictions indicated by Secured Party. 6. COPYRIGHT REGISTRATION, RENEWAL AND LITIGATION. (a) REGISTRATION. Except to the extent otherwise permitted under the Security Agreement, Holdings shall have the duty diligently to make any application for Registration on any existing or future unregistered but copyrightable works that are material to Holdings' business or operations and to do any and all acts which are reasonably necessary or desirable to preserve, renew and maintain all rights in all Copyrights, Registrations and Copyright Rights; PROVIDED, HOWEVER, that Holdings shall not be obligated to renew any Obsolete Copyrights (as defined in the Loan Agreement). Any expenses incurred in connection therewith shall be borne solely by Holdings. Except as otherwise permitted in the Security Agreement or this SECTION 6(A), Holdings shall not do any act or omit to do any act whereby any of the Copyright Collateral may become abandoned or fall into the public domain or fail to renew any Copyright, Registration or Copyright Right owned by Holdings without the prior written consent of Secured Party. (b) PROTECTION. Except as provided in SECTION 8 and notwithstanding SECTION 1, Holdings shall have the right and obligation to commence and diligently prosecute in its own name, as real party in interest, for its own benefit and at its own expense, such suits, proceedings or other actions for infringement or other damage as are in its reasonable business judgment necessary to protect the Copyright Collateral or any of Holdings' rights therein. Holdings shall provide to Secured Party any information with respect thereto requested by Secured Party. Secured Party shall provide at Holdings' expense all necessary cooperation in connection with any such suit, proceeding or action including joining as a nominal party if Secured Party shall have been satisfied that it is not incurring any risk of liability because of such joinder. Holdings shall provide at its expense representation acceptable to Secured Party for the common interest of Holdings and Secured Party with respect to such proceedings. (c) NOTICE. Holdings shall, promptly upon its becoming aware thereof, notify Secured Party in writing of the institution of, or any adverse determination in, any proceeding, application, suit or action of any kind described in SECTION 6(A) OR 6(B), or regarding Holdings' claim of ownership in any of the Copyrights, Registrations or Copyright Rights, its right to register the same, or its right to keep and maintain such registration, whether before the United States Copyright Office or any United States court or governmental agency. Holdings shall provide promptly to Secured Party any information with respect thereto requested from time to time by Secured Party. 7. REMEDIES. Following the occurrence and during the continuation of an Event of Default, Secured Party shall have all rights and remedies available to it under the Security Agreement and the other Loan Documents and applicable law (which rights and remedies are cumulative) with respect to its security interests in any of the Copyright Collateral or any other Collateral. Holdings agrees that such rights and remedies include the 8 right of Secured Party as a secured party to sell or otherwise dispose of its Collateral after default, pursuant to UCC Section 9504. Holdings agrees that Secured Party shall at all times have such royalty free licenses, to the extent permitted by law, for any Copyright, Copyright Rights, Proprietary Right and any other Copyright Collateral that is reasonably necessary to permit the exercise of any of Secured Party's rights or remedies upon the occurrence and during the continuation of an Event of Default with respect to (among other things) any asset of Holdings in which Secured Party has a security interest, including Secured Party's rights to sell or license general intangibles, inventory, tooling or packaging which is acquired by Holdings (or its successors, permitted assignees, or trustee in bankruptcy). In addition to and without limiting any of the foregoing, upon the occurrence and during the continuance of an Event of Default, Secured Party shall have the right but shall in no way be obligated to bring suit, or to take such other action as Secured Party deems necessary or advisable, in the name of Holdings or Secured Party, to enforce or protect any Copyright, Registration, Copyright Right or Proprietary Right, and any license thereunder, in which event Holdings shall, at the request of Secured Party, do any and all lawful acts and execute any and all documents required by Secured Party in aid of such enforcement. To the extent that Secured Party shall elect not to bring suit to enforce any Copyright, Registration, Copyright Rights, Proprietary Right, or any license thereunder, Holdings, in the exercise of its reasonable business judgment, agrees to use all reasonable measures and its diligent efforts, whether by action, suit, proceeding or otherwise, to prevent the infringement, misappropriation or violation thereof by others and for that purpose agrees diligently to maintain any action, suit or proceeding against any Person necessary to prevent such infringement, misappropriation or violation. 8. AUTHORIZATION. If Holdings fails to comply with any of its obligations hereunder, Secured Party may do so in Holdings' name or in Secured Party's name, but at Holdings' expense, and Holdings hereby agrees to reimburse Secured Party in full upon demand for all reasonable expenses, including reasonable attorneys fees, incurred by Secured Party in protecting, defending and maintaining any of the Copyright Collateral or any right, title or interest of Holdings or Secured Party therein. Holdings hereby appoints Secured Party, and authorizes, directs and empowers Secured Party to make, constitute and appoint any officer or agent of Secured Party as Secured Party may select, in its exclusive discretion, as the true and lawful attorney-in-fact of Holdings, with the power, (a) if Holdings refuses or fails to do so timely, to execute in the name of Holdings any financing statement or other instrument and any modification, supplement or amendment to this Agreement or any supplemental Copyright Security Agreement described in SECTIONS 4(A) OR 5 hereof, and do such other acts on Holdings' behalf, that Secured Party may deem necessary or advisable to accomplish the purposes hereof, and (b) upon the occurrence and during continuation of any Event of Default, (i) to endorse Holdings' name on all applications, documents, papers and instruments necessary for Secured Party to use any of the Copyright Collateral, (ii) to assert or retain any rights under any license agreement for any of the Copyright Collateral, including any rights of Holdings arising under Section 365(n) of the Bankruptcy Code, and (iii) to grant or issue any exclusive or nonexclusive license under any of the Copyright Collateral to anyone else, or as may be necessary for Secured Party to assign, pledge, convey or otherwise transfer title in or dispose of any of the Copyright Collateral or any other 9 collateral to anyone else. Holdings hereby ratifies all that such attorney shall lawfully do or cause to be done by virtue hereof. This power of attorney is coupled with an interest and is irrevocable until termination of this Agreement. 9. NOTICES. All notices and other communications hereunder to or from Secured Party and Holdings shall be in writing and shall be mailed, sent or delivered in accordance with the Security Agreement. 10. GOVERNING LAW. This Agreement shall be governed by, and construed and enforced in accordance with, the laws of the State of California, except to the extent that the validity or perfection of the security interests hereunder in respect of any Copyright Collateral are governed by federal law, in which case such choice of California law shall not be deemed to deprive Secured Party of such rights and remedies as may be available under federal law. 11. ENTIRE AGREEMENT; AMENDMENT. This Agreement and the Security Agreement, together with the Schedules and Exhibits hereto and thereto, which are incorporated herein by this reference, contains the entire agreement of the parties with respect to the subject matter hereof and supersede all prior drafts and communications relating to such subject matter. Neither this Agreement nor any provision hereof may be modified, amended or waived except by the written agreement of the parties, as provided in the Security Agreement. Notwithstanding the foregoing, Secured Party may re-execute this Agreement, modify, amend or supplement the Schedules hereto or execute a supplemental Copyright Security Agreement, as provided herein, and the terms of any such modification, amendment, supplement or supplemental Copyright Security Agreement shall be deemed to be incorporated herein by this reference. 12. SEVERABILITY. If one or more provisions contained in this Agreement shall be invalid, illegal or unenforceable in any respect in any jurisdiction or with respect to any party, such invalidity, illegality or unenforceability in such jurisdiction or with respect to such party shall, to the fullest extent permitted by applicable law, not invalidate or render illegal or unenforceable any such provision in any other jurisdiction or with respect to any other party, or any other provisions of this Agreement. 13. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as 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 10 14. SECURITY AGREEMENT. Holdings acknowledges that the rights and remedies of Secured Party with respect to the security interest in the Copyright Collateral granted hereby are more fully set forth in the Security Agreement and the other Loan Documents and all such rights and remedies are cumulative. 15. NO INCONSISTENT REQUIREMENTS. Holdings acknowledges that this Agreement and the other Loan Documents may contain covenants and other terms and provisions variously stated regarding the same or similar matters, and Holdings agrees that all such covenants, terms and provisions are cumulative and all shall be performed and satisfied in accordance with their respective terms. 16. TERMINATION. Upon the final payment in full in cash of the Guarantied Obligations and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, this Agreement shall terminate, and Secured Party shall execute and deliver such documents and instruments and take such further action reasonably requested by Holdings, at Holdings' expense, as shall be necessary to evidence termination of the security interests granted by Holdings to Secured Party hereunder. [Remainder of page intentionally left blank] 11 IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement, as of the date first above written. NATIONAL MEDIA CORPORATION, a Delaware corporation By: --------------------------------------- Name: -------------------------------------- Title: ------------------------------------- FOOTHILL CAPITAL CORPORATION, a California corporation By: ---------------------------------------- Name --------------------------------------- Title: ------------------------------------- S-1 STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On , 1998, before me, ________________________, Notary Public, personally appeared , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------------- Signature [SEAL] STATE OF CALIFORNIA ) ) ss COUNTY OF LOS ANGELES ) On , 1998, before me, _____________________, Notary Public, personally appeared , personally known to me (or proved to me on the basis of satisfactory evidence) to be the person whose name is subscribed to the within instrument and acknowledged to me that he executed the same in his authorized capacity, and that by his signature on the instrument the person, or the entity upon behalf of which the person acted, executed the instrument. WITNESS my hand and official seal. -------------------------------------------- Signature [SEAL] S-2 SCHEDULE A COPYRIGHT REGISTRATIONS
- ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- Holdings Country of Registered Copyright Registration Date Registration Number Registration - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
COPYRIGHT APPLICATIONS
- ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- Holdings Country of Application for Application Date Application Number Application Copyright - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ---------------------- - ------------------------ ---------------------- ---------------------- ---------------------- ----------------------
*Note: Reference Attached Form TX Applications, application number to be provided upon receipt from Copyright Office. A-1 EX-10.10 11 EXHIBIT 10.10 Exhibit 10.10 SUBORDINATION AGREEMENT (INTERCOMPANY) THIS SUBORDINATION AGREEMENT (this "Agreement"), is entered into as of December ___, 1998 between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill") and the undersigned Subsidiaries of NATIONAL MEDIA CORPORATION, a Delaware corporation (individually and collectively, the "Holdings Subsidiaries"), with reference to the following recitals of fact: WHEREAS, Quantum North America, Inc., a Delaware corporation ("Debtor") and Foothill have entered into that certain Loan and Security Agreement dated as of the date hereof (as amended, modified, renewed, extended, or replaced from time to time, the "Loan Agreement"), pursuant to which Foothill has agreed to make certain loans to Debtor; WHEREAS, the Holdings Subsidiaries have made or hereafter may make loans and other advances to Debtor; and WHEREAS, the Holdings Subsidiaries have agreed to the subordination of such indebtedness to it, upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants, conditions, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: SECTION 1 DEFINITIONS; INTERPRETATION. (a) TERMS DEFINED IN LOAN AGREEMENT. All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Loan Agreement. (b) CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "Dollars" means and refers to United States of America dollars or such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts in the United States of America. "Insolvency Event" has the meaning set forth in SECTION 3. "Senior Debt" shall mean all indebtedness and liabilities (including all principal, interest (including interest accruing after the commencement of a Proceeding whether or not such interest is allowed as a claim therein), default interest, fees, charges, and collection expenses) now or hereafter owed by Debtor under the Loan Agreement or any other Loan Document. "Subordinated Debt" means all indebtedness, liabilities and other monetary obligations of Debtor owing to the Holdings Subsidiaries, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined, including all principal, all interest accrued thereon, all fees, and all other amounts payable by Debtor to the Holdings Subsidiaries. "Subordinated Debt Documents" means any agreement, note, or other document evidencing the Subordinated Debt. "Subordinated Debt Payment" means any payment or distribution by or on behalf of Debtor, directly or indirectly, of assets of Debtor of any kind or character, whether in cash, property or securities, including on account of the purchase, redemption or other acquisition of Subordinated Debt, as a result of any collection, sale or other disposition of collateral, or by setoff, exchange or in any other manner, for or on account of the Subordinated Debt. "Subordinated Lender Remedies" means any action which results in (i) the sale, foreclosure, realization on or liquidation of any of Debtor's assets or properties (ii) the execution on any judgment obtained against Debtor, (iii) the acceleration of the Subordinated Debt, (iv) the filing of any petition or lien under any bankruptcy, insolvency or creditors' rights laws with respect to Debtor, or (v) the institution or exercise against Debtor of any suit, legal action, arbitration or other enforcement remedy. (c) INTERPRETATION. 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. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. References to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto. References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. The captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. SECTION 2 SUBORDINATION TO PAYMENT OF SENIOR DEBT. All payments on account of the Subordinated Debt shall be subject, subordinate and junior, in right of payment and exercise of remedies, to the extent and in the manner set forth herein, to the prior payment, in full, in cash (or other consideration acceptable to Foothill in its sole discretion and agreed to by Foothill) of the Senior Debt. SECTION 3 SUBORDINATION UPON ANY DISTRIBUTION OF ASSETS OF DEBTOR. In the event of any payment or distribution of assets or properties of Debtor of any kind or character, whether in cash, property, or securities, upon the dissolution, winding up, or total or partial liquidation or reorganization, readjustment, arrangement, or similar proceeding relating to Debtor or its property, whether voluntary or involuntary, or in bankruptcy, insolvency, -2- receivership, arrangement or similar proceedings or upon an assignment for the benefit of creditors, or upon any other marshaling or composition of the assets and liabilities of Debtor, or otherwise (such events, collectively, the "Insolvency Events"): (i) all amounts owing on account of the Senior Debt shall first be paid, in full, in cash, or payment provided for in cash (or other consideration acceptable to Foothill in its sole discretion and agreed to by Foothill), before any Subordinated Debt Payment is made; and (ii) to the extent permitted by applicable law, any Subordinated Debt Payment to which any Holdings Subsidiary would be entitled except for the provisions hereof, shall, in the event of any such Insolvency Event, be paid or delivered by the trustee in bankruptcy, receiver, assignee for the benefit of creditors, or other liquidating agent making such payment or distribution directly to Foothill for application to the payment of the Senior Debt in accordance with clause (i), after giving effect to any concurrent payment or distribution or provision therefor to Foothill in respect of such Senior Debt. SECTION 4 PAYMENTS ON SUBORDINATED DEBT. (a) PERMITTED PAYMENTS. So long as (i) no Event of Default has occurred and is continuing or would result therefrom, and (ii) after giving effect to such Subordinated Debt Payments Debtor shall have Excess Availability of not less than $3,000,000, Debtor may make, and the Holdings Subsidiaries shall be entitled to receive, Subordinated Debt Payments made in the ordinary course of business. (b) PROHIBITION ON PAYMENTS. Notwithstanding the provisions of SUBSECTION 4(A) above, (i) upon the occurrence and during the continuation of any Event of Default, or (ii) if, after giving effect to such Subordinated Debt Payment, Debtor shall have Excess Availability of less than $3,000,000 then, in either case, no Subordinated Debt Payment shall be made or agreed to be made by Debtor or accepted by any Holdings Subsidiary on account of the principal of, premium or interest on, or any other amounts in respect of the Subordinated Debt, and Debtor shall not segregate or hold in trust money for any such payment or distribution SECTION 5 SUBORDINATION OF REMEDIES. As long as any Senior Debt shall remain outstanding and unpaid, no Holdings Subsidiary shall, without the prior written consent of Foothill: (i) accelerate, make demand, or otherwise make due and payable prior to the original stated maturity thereof any Subordinated Debt or bring suit or institute any other actions or proceedings to enforce its rights or interests in respect of the obligations of Debtor owing to such Holdings Subsidiary; (ii) exercise any rights under or with respect to guaranties of the Subordinated Debt, if any; (iii) exercise any rights to setoffs and counterclaims in respect of any indebtedness, liabilities or obligations of such Holdings Subsidiary to Debtor against any of the Subordinated Debt; or -3- (iv) commence, or cause to be commenced, or join with any creditor other than Foothill in commencing, any bankruptcy, insolvency or receivership proceeding against Debtor. SECTION 6 PAYMENT OVER TO FOOTHILL. Notwithstanding the provisions of SECTIONS 3, 4, AND 5, in the event that any Subordinated Debt Payments shall be received in contravention of such SECTIONS 3, 4, AND 5 by any Holdings Subsidiary before all Senior Debt is paid, in full, in cash (or other consideration acceptable to Foothill in its sole discretion and agreed to by Foothill), such Subordinated Debt Payments shall be held in trust for the benefit of Foothill and shall be paid over or delivered to Foothill for application to the payment, in full, in cash (or other consideration acceptable to Foothill in its sole discretion and agreed to by Foothill) of all Senior Debt remaining unpaid to the extent necessary to give effect to such SECTIONS 3, 4, AND 5, after giving effect to any concurrent payments or distributions to Foothill in respect of the Senior Debt. SECTION 7 AUTHORIZATION TO FOOTHILL. If, while any Subordinated Debt is outstanding, any Insolvency Event shall occur relating to Debtor or its property: (i) Foothill is hereby irrevocably authorized and empowered (in the name of any one or more Holdings Subsidiaries or otherwise), but shall have no obligation, to demand, sue for, collect, and receive every payment or distribution in respect of the Subordinated Debt and give acquittance therefor and to file claims and proofs of claim (if any Holdings Subsidiary refuses to file, or does not timely file, such claims or proofs of claims) and take such other action as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of Foothill; and (ii) each Holdings Subsidiary shall promptly take such action as Foothill reasonably may request (A) to collect the Subordinated Debt for the account of Foothill and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (B) to execute and deliver to Foothill such powers of attorney, assignments, and other instruments as it may request to enable it to enforce any and all claims with respect to the Subordinated Debt, and (C) to collect and receive any and all Subordinated Debt Payments to the extent permitted by applicable law. SECTION 8 CERTAIN AGREEMENTS OF THE HOLDINGS SUBSIDIARIES. (a) NO BENEFITS. Each Holdings Subsidiary understands that there may be various agreements among Foothill and Debtor evidencing and governing the Senior Debt, and such Holdings Subsidiary acknowledges and agrees that such agreements are not intended to confer any benefits on such Holdings Subsidiary and that Foothill shall have no obligation to such Holdings Subsidiary or any other Person to exercise any rights, enforce any remedies, or take any actions which may be available to them under such agreements. (b) NO INTERFERENCE. Each Holdings Subsidiary acknowledges that Debtor has granted Foothill a security interest in all of Debtor's assets, and agrees that, so long as such Holdings Subsidiary holds Subordinated Debt, such Holdings Subsidiary will not interfere with or in any manner oppose a disposition of any Collateral by Foothill in accordance with the terms of the agreements governing such grants and applicable law. -4- (c) RELIANCE BY FOOTHILL. Each Holdings Subsidiary acknowledges and agrees that Foothill will have relied upon and will continue to rely upon the subordination provisions provided for herein and the other provisions hereof in entering into the Loan Documents and making or making the Advances thereunder. (d) WAIVERS. Each Holdings Subsidiary waives any and all notice of the incurrence of the Senior Debt or any part thereof and any right to require marshaling of assets. (e) OBLIGATIONS OF HOLDINGS SUBSIDIARIES NOT AFFECTED. Each Holdings Subsidiary agrees that at any time and from time to time, without notice to or the consent of such Holdings Subsidiary , without incurring responsibility to such Holdings Subsidiary , and without impairing or releasing the subordination provided for herein or otherwise impairing the rights of Foothill hereunder: (i) the time for Debtor's performance of or compliance with any of its agreements contained in the Loan Documents may be extended or such performance or compliance may be waived by Foothill; (ii) the agreements of Debtor with respect to the Loan Documents may from time to time be modified by Debtor and Foothill for the purpose of adding any requirements thereto or changing in any manner the rights and obligations of Debtor or Foothill thereunder; (iii) the manner, place or terms for payment of Senior Debt or any portion thereof may be altered or the terms for payment extended, or the Senior Debt may be renewed in whole or in part; (iv) the maturity of the Senior Debt may be accelerated in accordance with the terms of any present or future agreement by Debtor and Foothill; (v) any Collateral may be sold, exchanged, released or substituted in accordance with the Loan Documents and any Lien in favor of Foothill may be terminated, subordinated, or fail to be perfected or become unperfected; (vi) any Person liable in any manner for Senior Debt may be discharged, released, or substituted; and (vii) all other rights against Debtor, any other Person, or with respect to any Collateral may be exercised (or Foothill may waive or refrain from exercising such rights) in accordance with the Loan Documents. (f) RIGHTS OF FOOTHILL NOT TO BE IMPAIRED. No right of Foothill to enforce the subordination provided for herein or to exercise its other rights hereunder shall at any time in any way be prejudiced or impaired by any act or failure to act by Debtor hereunder or under or in connection with the other Loan Documents or by any noncompliance by Debtor with the terms and provisions and covenants herein or in any other Loan Document, regardless of any knowledge thereof Foothill may have or otherwise be charged with. (g) FINANCIAL CONDITION OF DEBTOR. No Holdings Subsidiary shall have any right to require Foothill to obtain or disclose any information with respect to: (i) the financial condition or character of Debtor or the ability of Debtor to pay and perform Senior Debt; (ii) the Senior Debt; (iii) the Collateral or other security for any or all of the Senior Debt; (iv) the existence or nonexistence of any guarantees of, or any other subordination agreements with respect to, all or any part of the Senior Debt; (v) any action or inaction on the part of Foothill or any other Person; or (vi) any other matter, except as otherwise expressly required by any provision of any Loan Document or law (except to the extent that any otherwise applicable requirement of law has been waived by such Holdings Subsidiary pursuant to a legally enforceable waiver). -5- (h) ACQUISITION OF LIENS OR GUARANTIES. Unless otherwise expressly permitted under the Loan Documents, no Holdings Subsidiary shall, without the prior consent of Foothill, acquire any right or interest in or to any Collateral or accept any guaranties for the Subordinated Debt. SECTION 9 SUBROGATION. (a) SUBROGATION. Until the payment and performance in full of all Senior Debt, each Holdings Subsidiary shall not have, and shall not directly or indirectly exercise, any rights that it may acquire by way of subrogation under this Agreement, by any payment or distribution to Foothill hereunder or otherwise. (b) PAYMENTS OVER TO THE HOLDINGS SUBSIDIARIES. If any payment or distribution to which the Holdings Subsidiaries would otherwise have been entitled but for the provisions of SECTION 3, 4, OR 5 shall have been applied pursuant to the provisions of SECTION 3, 4, OR 5 to the payment of all amounts payable under the Senior Debt, the Holdings Subsidiaries shall be entitled to receive from Foothill any payments or distributions received by Foothill in excess of the amount sufficient to pay in full all amounts payable under or in respect of the Senior Debt. If any such excess payment is made to Foothill, Foothill shall promptly remit such excess to the Holdings Subsidiaries and until so remitted shall hold such excess payment for the benefit of the Holdings Subsidiaries. Each Holdings Subsidiary hereby agrees that the remittance by Foothill of such excess to any Holdings Subsidiary shall be deemed a remittance for the benefit of all the Holdings Subsidiaries. SECTION 10 CONTINUING AGREEMENT; REINSTATEMENT. (a) CONTINUING AGREEMENT. This Agreement is a continuing agreement of subordination and shall continue in effect and be binding upon the Holdings Subsidiaries until payment and performance in full of the Senior Debt. The subordinations, agreements, and priorities set forth herein shall remain in full force and effect regardless of whether any party hereto in the future seeks to rescind, amend, terminate, or reform, by litigation or otherwise, its respective agreements with Debtor. (b) REINSTATEMENT. This Agreement shall continue to be effective or shall be reinstated, as the case may be, if, for any reason, any payment of the Senior Debt by or on behalf of Debtor shall be rescinded or must otherwise be restored by Foothill, whether as a result of an Insolvency Event or otherwise. SECTION 11 TRANSFER OF SUBORDINATED DEBT. No Holdings Subsidiary may assign or transfer its rights and obligations in respect of the Subordinated Debt or any interest in the Subordinated Debt without the prior written consent of Foothill (which consent shall not be unreasonably withheld), and any such transferee or assignee, as a condition to acquiring an interest in the Subordinated Debt shall agree to be bound hereby, in form reasonably satisfactory to Foothill. -6- SECTION 12 OBLIGATIONS OF DEBTOR NOT AFFECTED. The provisions of this Agreement are intended solely for the purpose of defining the relative rights against Debtor of the Holdings Subsidiaries, on the one hand, and Foothill, on the other hand. Nothing contained in this Agreement shall (i) impair, as between Debtor and the Holdings Subsidiaries, the obligation of Debtor to pay its obligations with respect to the Subordinated Debt as and when the same shall become due and payable in accordance with the terms thereof, or (ii) otherwise affect the relative rights against Debtor of the Holdings Subsidiaries, on the one hand, and the creditors of Debtor (other than Foothill), on the other hand. SECTION 13 FURTHER ASSURANCES AND ADDITIONAL ACTS. (a) ENDORSEMENT OF SUBORDINATED DEBT DOCUMENTS. At the request of Foothill, all documents and instruments evidencing any of the Subordinated Debt shall be endorsed with a legend noting that such documents and instruments are subject to this Agreement, and the Holdings Subsidiaries shall promptly deliver to Foothill evidence of the same. (b) FURTHER ASSURANCES AND ADDITIONAL ACTS. Each of the Holdings Subsidiaries and Debtor shall execute, acknowledge, deliver, file, notarize and register at its own reasonable expense all such further agreements, instruments, certificates, financing statements, documents and assurances, and perform such acts as Foothill reasonably shall deem necessary or appropriate to effectuate the purposes of this Agreement, and promptly provide Foothill with evidence of the foregoing reasonably satisfactory in form and substance to Foothill. SECTION 14 NOTICES. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including by facsimile transmission) and shall be mailed, sent, or delivered at or to the address or facsimile number of the respective party or parties set forth below: If to Foothill: FOOTHILL CAPITAL CORPORATION 11111 Santa Monica Boulevard, Suite 1500 Los Angeles, California 90025 Attn: Business Finance Division Manager Telecopier: 310.478.9788 With a copy to: BROBECK, PHLEGER & HARRISON LLP 550 S. Hope Street, Suite 2100 Los Angeles, CA 90071 Attn: John Francis Hilson, Esq. Telecopier: 213.239.1324 -7- If to any Holdings C/O NATIONAL MEDIA CORPORATION Subsidiary: 15821 Ventura Boulevard, 5th Floor Encino, California 91436 Attn: Daniel M. Yukelson Telecopier: 818.461.6530 With a copy to: BUCHALTER, NEMER, FIELDS & YOUNGER 601 South Figueroa Street, Suite 2400 Los Angeles, California 90017 Attn: William Jarblum, Esq. Telecopier: 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 parties. All notices and communications sent in accordance with this section shall be effective (i) if delivered by hand, when delivered; (ii) if sent by mail, upon the earlier of the date of receipt or five (5) Business Days after deposit in the mail, first class (or air mail, with respect to communications to be sent to or from the United States), postage prepaid; and (iii) if sent by facsimile transmission, when sent. SECTION 15 NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of Foothill to exercise, and no delay in exercising, any right, remedy, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege. The rights and remedies under this Agreement are cumulative and not exclusive of any rights, remedies, powers, and privileges that may otherwise be available to Foothill. SECTION 16 COSTS AND EXPENSES. (a) PAYMENTS BY DEBTOR. Debtor agrees to pay to Foothill on demand the reasonable out-of-pocket costs and expenses of Foothill, and the reasonable fees and disbursements of counsel to Foothill, in connection with the negotiation, preparation, execution, and delivery of this Agreement, and any amendments, modifications, or waivers of the terms thereof. (b) PAYMENTS BY DEBTOR AND THE HOLDINGS SUBSIDIARIES. Each of Debtor and the Holdings Subsidiaries jointly and severally agrees to pay to Foothill on demand all reasonable out-of-pocket costs and expenses of Foothill, and the fees and disbursements of counsel, in connection, following a breach hereof, with the enforcement or attempted enforcement of, and preservation of rights or interests under, this Agreement, including any reasonable out-of-pocket losses, costs and expenses sustained by Foothill as a result of any failure by any of the Holdings Subsidiaries to perform or observe its obligations contained in this Agreement. -8- SECTION 17 SURVIVAL. All covenants, agreements, representations and warranties made in this Agreement shall, except to the extent otherwise provided herein, survive the execution and delivery of this Agreement, and shall continue in full force and effect so long as any Senior Debt remains unpaid. Without limiting the generality of the foregoing, the obligations of Debtor and the Holdings Subsidiaries under SECTION 16 shall survive the satisfaction of the Senior Debt. SECTION 18 BENEFITS OF AGREEMENT. This Agreement is entered into for the sole protection and benefit of the parties hereto and their successors and assigns, and no other Person shall be a direct or indirect beneficiary of, or shall have any direct or indirect cause of action or claim in connection with, this Agreement. SECTION 19 BINDING EFFECT. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Debtor, the Holdings Subsidiaries, and Foothill and their respective successors and assigns. SECTION 20 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA. SECTION 21 SUBMISSION TO JURISDICTION. EACH HOLDINGS SUBSIDIARY HEREBY (i) SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF CALIFORNIA AND THE FEDERAL COURTS OF THE UNITED STATES SITTING IN THE STATE OF CALIFORNIA FOR THE PURPOSE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, (ii) AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS, (iii) IRREVOCABLY WAIVES (TO THE EXTENT PERMITTED BY APPLICABLE LAW) ANY OBJECTION WHICH THEY NOW OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY OF THE FOREGOING COURTS, AND ANY OBJECTION ON THE GROUND THAT ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM AND (iv) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PERMITTED BY LAW. -9- SECTION 22 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. (a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of Debtor, Foothill, and the Holdings Subsidiaries with respect to the matters set forth herein and supersedes any prior agreements, commitments, drafts, communications, discussions, and understandings, oral or written, with respect thereto. (b) AMENDMENTS AND WAIVERS. No amendment to any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed by Debtor, the Holdings Subsidiaries, and Foothill; and no waiver of any provision of this Agreement, or consent to any departure by Debtor or the Holdings Subsidiaries therefrom, shall in any event be effective unless the same shall be in writing and signed by Foothill. Any such amendment, waiver, or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 23 CONFLICTS. In case of any conflict or inconsistency between any terms of this Agreement, on the one hand, and any documents or instruments in respect of the Subordinated Debt, on the other hand, then the terms of this Agreement shall control. SECTION 24 SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Agreement shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of this Agreement or the validity or effectiveness of such provision in any other jurisdiction. SECTION 25 INTERPRETATION. This Agreement is the result of negotiations between, and has been reviewed by counsel to, Foothill, the Holdings Subsidiaries, and Debtor and is the product of all parties hereto. Accordingly, this Agreement shall not be construed against Foothill merely because of Foothill's involvement in the preparation hereof. SECTION 26 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as effective as delivery of an original executed counterpart of this Agreement. Any party delivering -10- 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. SECTION 27 TERMINATION OF AGREEMENT. Upon payment and performance in full of the Senior Debt, this Agreement shall terminate and Foothill shall promptly execute and deliver to Debtor and the Holdings Subsidiaries such documents and instruments as shall be necessary to evidence such termination; provided, however, that the obligations of Debtor and the Holdings Subsidiaries under SECTION 16 shall survive such termination. SECTION 28 AGREEMENTS RELATIVE TO A BANKRUPTCY PETITION. If, while any Subordinated Debt is outstanding, a petition under chapter 11 of the Bankruptcy Code shall be filed by or against Debtor, no Holdings Subsidiary shall accept a plan under chapter 11 of the Bankruptcy Code if the class in which Foothill's claim is place (i) is an impaired class under such plan, and (ii) has not accepted such plan. [Remainder of page left intentionally blank.] -11- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. FOOTHILL CAPITAL CORPORATION, a California Corporation By: --------------------------- Name: ------------------------- Title ------------------------- S-1 NATIONAL MEDIA HOLDINGS, INC., a Delaware corporation NATIONAL MEDIA HOLDINGS, INC, a Delaware corporation QUANTUM INTERNATIONAL LIMITED, a company organized under the laws of the United Kingdom QUANTUM FAR EAST LTD., a company organized under the laws of New Zealand QUANTUM MARKETING INTERNATIONAL, INC., a Delaware corporation QUANTUM INTERNATIONAL JAPAN COMPANY, a company organized under the laws of Japan DIRECT AMERICA CORPORATION, a Delaware corporation NANCY LANGSTON & ASSOCIATES, INC., a Delaware corporation POSITIVE RESPONSE TELEVISION, INC., a Delaware corporation POSITIVE RESPONSE MEDIA, INC., a California corporation QUANTUM PRODUCTIONS AG, a company organized under the laws of Switzerland PRESTIGE MARKETING LIMITED, a company organized under the laws of New Zealand SUZANNE PAUL HOLDINGS PTY LIMITED, a company organized under the laws of Australia SUZANNE PAUL (AUSTRALIA) PTY LIMITED, a company organized under the laws of Australia TELE-SHOPPING PTY LIMITED, a company organized under the laws of Australia QUANTUM POLAND, a company organized under the laws of Poland By: -------------------------------------- Name: ------------------------------------ Title: ----------------------------------- for each of the above name Persons S-2 DEBTOR ACKNOWLEDGEMENT Debtor has received a copy of, and has read, the foregoing Subordination Agreement. Debtor agrees to be bound by such agreement, and not to take any action that would breach or violate the terms thereof. Debtor consents to the execution, delivery, and performance of such agreement by Foothill and the Holdings Subsidiaries, and agrees that Debtor's obligations to Foothill and the Holdings Subsidiaries are not diminished by such agreement. Debtor acknowledges that it has no rights under the foregoing agreement and is not a third party beneficiary of such agreement. Dated as of the date first set forth above: QUANTUM NORTH AMERICA, INC. a Delaware corporation By: ------------------------- Name: ----------------------- Title: ---------------------- S-3 EX-10.11 12 EXHIBIT 10.11 Exhibit 10.11 SUBORDINATION AGREEMENT THIS SUBORDINATION AGREEMENT (this "Agreement"), is entered into as of December ___, 1998 between FOOTHILL CAPITAL CORPORATION, a California corporation ("Foothill") and NATIONAL MEDIA CORPORATION, a Delaware corporation ("Holdings"), with reference to the following recitals of fact: WHEREAS, Quantum North America, Inc., a Delaware corporation ("Debtor") and Foothill have entered into that certain Loan and Security Agreement dated as of the date hereof (as amended, modified, renewed, extended, or replaced from time to time, the "Loan Agreement"), pursuant to which Foothill has agreed to make certain loans to Debtor; WHEREAS, Holdings has made or hereafter may make loans and other advances to Debtor; and WHEREAS, Holdings has agreed to the subordination of such indebtedness to it, upon the terms and subject to the conditions set forth in this Agreement. NOW, THEREFORE, in consideration of the mutual promises, covenants, conditions, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: SECTION 1 Definitions; Interpretation. (a) TERMS DEFINED IN LOAN AGREEMENT. All capitalized terms used in this Agreement and not otherwise defined herein shall have the meanings assigned to them in the Loan Agreement. (b) CERTAIN DEFINED TERMS. As used in this Agreement, the following terms shall have the following meanings: "Dollars" means and refers to United States of America dollars or such coin or currency of the United States of America as at the time of payment shall be legal tender for the payment of public and private debts in the United States of America. "Insolvency Event" has the meaning set forth in SECTION 3. "Senior Debt" shall mean all indebtedness and liabilities (including all principal, interest (including interest accruing after the commencement of a Proceeding whether or not such interest is allowed as a claim therein), default interest, fees, charges, and collection expenses) now or hereafter owed by Debtor under the Loan Agreement or any other Loan Document. "Subordinated Debt" means all indebtedness, liabilities and other monetary obligations of Debtor owing to Holdings, whether now existing or hereafter arising, and whether due or to become due, absolute or contingent, liquidated or unliquidated, determined or undetermined, including all principal, all interest accrued thereon, all fees, and all other amounts payable by Debtor to Holdings. "Subordinated Debt Documents" means any agreement, note, or other document evidencing the Subordinated Debt. "Subordinated Debt Payment" means any payment or distribution by or on behalf of Debtor, directly or indirectly, of assets of Debtor of any kind or character, whether in cash, property or securities, including on account of the purchase, redemption or other acquisition of Subordinated Debt, as a result of any collection, sale or other disposition of collateral, or by setoff, exchange or in any other manner, for or on account of the Subordinated Debt. "Subordinated Lender Remedies" means any action which results in (i) the sale, foreclosure, realization on or liquidation of any of Debtor's assets or properties (ii) the execution on any judgment obtained against Debtor, (iii) the acceleration of the Subordinated Debt, (iv) the filing of any petition or lien under any bankruptcy, insolvency or creditors' rights laws with respect to Debtor, or (v) the institution or exercise against Debtor of any suit, legal action, arbitration or other enforcement remedy. (c) INTERPRETATION. 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. Section, subsection, clause, schedule, and exhibit references are to this Agreement unless otherwise specified. References to agreements and other contractual instruments shall be deemed to include all subsequent amendments and other modifications thereto. References to statutes or regulations are to be construed as including all statutory and regulatory provisions consolidating, amending or replacing the statute or regulation referred to. The captions and headings are for convenience of reference only and shall not affect the construction of this Agreement. SECTION 2 SUBORDINATION TO PAYMENT OF SENIOR DEBT. All payments on account of the Subordinated Debt shall be subject, subordinate and junior, in right of payment and exercise of remedies, to the extent and in the manner set forth herein, to the prior payment, in full, in cash (or other consideration acceptable to Foothill in its sole discretion and agreed to by Foothill) of the Senior Debt. SECTION 3 SUBORDINATION UPON ANY DISTRIBUTION OF ASSETS OF DEBTOR. In the event of any payment or distribution of assets or properties of Debtor of any kind or character, whether in cash, property, or securities, upon the dissolution, winding up, or total or partial liquidation or reorganization, readjustment, arrangement, or similar proceeding relating to Debtor or its property, whether voluntary or involuntary, or in bankruptcy, insolvency, receivership, arrangement or similar proceedings or upon an assignment for the benefit of -2- creditors, or upon any other marshaling or composition of the assets and liabilities of Debtor, or otherwise (such events, collectively, the "Insolvency Events"): (i) all amounts owing on account of the Senior Debt shall first be paid, in full, in cash, or payment provided for in cash (or other consideration acceptable to Foothill in its sole discretion and agreed to by Foothill), before any Subordinated Debt Payment is made; and (ii) to the extent permitted by applicable law, any Subordinated Debt Payment to which Holdings would be entitled except for the provisions hereof, shall, in the event of any such Insolvency Event, be paid or delivered by the trustee in bankruptcy, receiver, assignee for the benefit of creditors, or other liquidating agent making such payment or distribution directly to Foothill for application to the payment of the Senior Debt in accordance with clause (i), after giving effect to any concurrent payment or distribution or provision therefor to Foothill in respect of such Senior Debt. SECTION 4 PAYMENTS ON SUBORDINATED DEBT. (a) PERMITTED PAYMENTS. So long as (i) no Event of Default has occurred and is continuing or would result therefrom, and (ii) after giving effect to such Subordinated Debt Payments Debtor shall have Excess Availability of not less than $3,000,000, Debtor may make, and Holdings shall be entitled to receive, Subordinated Debt Payments made in the ordinary course of business. (b) PROHIBITION ON PAYMENTS. Notwithstanding the provisions of SUBSECTION 4(A) above, (i) upon the occurrence and during the continuation of any Event of Default, or (ii) if, after giving effect to such Subordinated Debt Payment, Debtor shall have Excess Availability of less than $3,000,000 then, in either case, no Subordinated Debt Payment shall be made or agreed to be made by Debtor or accepted by Holdings on account of the principal of, premium or interest on, or any other amounts in respect of the Subordinated Debt, and Debtor shall not segregate or hold in trust money for any such payment or distribution SECTION 5 SUBORDINATION OF REMEDIES. As long as any Senior Debt shall remain outstanding and unpaid, Holdings shall not, without the prior written consent of Foothill: (i) accelerate, make demand, or otherwise make due and payable prior to the original stated maturity thereof any Subordinated Debt or bring suit or institute any other actions or proceedings to enforce its rights or interests in respect of the obligations of Debtor owing to Holdings; (ii) exercise any rights under or with respect to guaranties of the Subordinated Debt, if any; (iii) exercise any rights to setoffs and counterclaims in respect of any indebtedness, liabilities or obligations of Holdings to Debtor against any of the Subordinated Debt; or -3- (iv) commence, or cause to be commenced, or join with any creditor other than Foothill in commencing, any bankruptcy, insolvency or receivership proceeding against Debtor. SECTION 6 PAYMENT OVER TO FOOTHILL. Notwithstanding the provisions of SECTIONS 3, 4, AND 5, in the event that any Subordinated Debt Payments shall be received in contravention of such SECTIONS 3, 4, AND 5 by Holdings before all Senior Debt is paid, in full, in cash (or other consideration acceptable to Foothill in its sole discretion and agreed to by Foothill), such Subordinated Debt Payments shall be held in trust for the benefit of Foothill and shall be paid over or delivered to Foothill for application to the payment, in full, in cash (or other consideration acceptable to Foothill in its sole discretion and agreed to by Foothill) of all Senior Debt remaining unpaid to the extent necessary to give effect to such SECTIONS 3, 4, AND 5, after giving effect to any concurrent payments or distributions to Foothill in respect of the Senior Debt. SECTION 7 AUTHORIZATION TO FOOTHILL. If, while any Subordinated Debt is outstanding, any Insolvency Event shall occur relating to Debtor or its property: (i) Foothill is hereby irrevocably authorized and empowered (in the name of Holdings or otherwise), but shall have no obligation, to demand, sue for, collect, and receive every payment or distribution in respect of the Subordinated Debt and give acquittance therefor and to file claims and proofs of claim (if Holdings refuses to file, or does not timely file, such claims or proofs of claims) and take such other action as it may deem necessary or advisable for the exercise or enforcement of any of the rights or interests of Foothill; and (ii) Holdings shall promptly take such action as Foothill reasonably may request (A) to collect the Subordinated Debt for the account of Foothill and to file appropriate claims or proofs of claim in respect of the Subordinated Debt, (B) to execute and deliver to Foothill such powers of attorney, assignments, and other instruments as it may request to enable it to enforce any and all claims with respect to the Subordinated Debt, and (C) to collect and receive any and all Subordinated Debt Payments to the extent permitted by applicable law. SECTION 8 CERTAIN AGREEMENTS OF HOLDINGS. (a) NO BENEFITS. Holdings understands that there may be various agreements among Foothill and Debtor evidencing and governing the Senior Debt, and Holdings acknowledges and agrees that such agreements are not intended to confer any benefits on Holdings and that Foothill shall have no obligation to Holdings or any other Person to exercise any rights, enforce any remedies, or take any actions which may be available to them under such agreements. (b) NO INTERFERENCE. Holdings acknowledges that Debtor has granted Foothill a security interest in all of Debtor's assets, and agrees that, so long as Holdings holds Subordinated Debt, Holdings will not interfere with or in any manner oppose a disposition of any Collateral by Foothill in accordance with the terms of the agreements governing such grants and applicable law. -4- (c) RELIANCE BY FOOTHILL. Holdings acknowledges and agrees that Foothill will have relied upon and will continue to rely upon the subordination provisions provided for herein and the other provisions hereof in entering into the Loan Documents and making or making the Advances thereunder. (d) WAIVERS. Holdings waives any and all notice of the incurrence of the Senior Debt or any part thereof and any right to require marshaling of assets. (e) OBLIGATIONS OF HOLDINGS NOT AFFECTED. Holdings agrees that at any time and from time to time, without notice to or the consent of Holdings, without incurring responsibility to Holdings, and without impairing or releasing the subordination provided for herein or otherwise impairing the rights of Foothill hereunder: (i) the time for Debtor's performance of or compliance with any of its agreements contained in the Loan Documents may be extended or such performance or compliance may be waived by Foothill; (ii) the agreements of Debtor with respect to the Loan Documents may from time to time be modified by Debtor and Foothill for the purpose of adding any requirements thereto or changing in any manner the rights and obligations of Debtor or Foothill thereunder; (iii) the manner, place or terms for payment of Senior Debt or any portion thereof may be altered or the terms for payment extended, or the Senior Debt may be renewed in whole or in part; (iv) the maturity of the Senior Debt may be accelerated in accordance with the terms of any present or future agreement by Debtor and Foothill; (v) any Collateral may be sold, exchanged, released or substituted in accordance with the Loan Documents and any Lien in favor of Foothill may be terminated, subordinated, or fail to be perfected or become unperfected; (vi) any Person liable in any manner for Senior Debt may be discharged, released, or substituted; and (vii) all other rights against Debtor, any other Person, or with respect to any Collateral may be exercised (or Foothill may waive or refrain from exercising such rights) in accordance with the Loan Documents. (f) RIGHTS OF FOOTHILL NOT TO BE IMPAIRED. No right of Foothill to enforce the subordination provided for herein or to exercise its other rights hereunder shall at any time in any way be prejudiced or impaired by any act or failure to act by Debtor hereunder or under or in connection with the other Loan Documents or by any noncompliance by Debtor with the terms and provisions and covenants herein or in any other Loan Document, regardless of any knowledge thereof Foothill may have or otherwise be charged with. (g) FINANCIAL CONDITION OF DEBTOR. Holdings shall not have any right to require Foothill to obtain or disclose any information with respect to: (i) the financial condition or character of Debtor or the ability of Debtor to pay and perform Senior Debt; (ii) the Senior Debt; (iii) the Collateral or other security for any or all of the Senior Debt; (iv) the existence or nonexistence of any guarantees of, or any other subordination agreements with respect to, all or any part of the Senior Debt; (v) any action or inaction on the part of Foothill or any other Person; or (vi) any other matter, except as otherwise expressly required by any provision of any Loan Document or law (except to the extent that any otherwise applicable requirement of law has been waived by Holdings pursuant to a legally enforceable waiver). -5- (h) ACQUISITION OF LIENS OR GUARANTIES. Unless otherwise expressly permitted under the Loan Documents, Holdings shall not, without the prior consent of Foothill, acquire any right or interest in or to any Collateral or accept any guaranties for the Subordinated Debt. SECTION 9 SUBROGATION. (a) SUBROGATION. Until the payment and performance in full of all Senior Debt, Holdings shall not have, and shall not directly or indirectly exercise, any rights that it may acquire by way of subrogation under this Agreement, by any payment or distribution to Foothill hereunder or otherwise. (b) PAYMENTS OVER TO HOLDINGS. If any payment or distribution to which Holdings would otherwise have been entitled but for the provisions of SECTION 3, 4, OR 5 shall have been applied pursuant to the provisions of SECTION 3, 4, OR 5 to the payment of all amounts payable under the Senior Debt, Holdings shall be entitled to receive from Foothill any payments or distributions received by Foothill in excess of the amount sufficient to pay in full all amounts payable under or in respect of the Senior Debt. If any such excess payment is made to Foothill, Foothill shall promptly remit such excess to Holdings and until so remitted shall hold such excess payment for the benefit of Holdings. SECTION 10 CONTINUING AGREEMENT; REINSTATEMENT. (a) CONTINUING AGREEMENT. This Agreement is a continuing agreement of subordination and shall continue in effect and be binding upon Holdings until payment and performance in full of the Senior Debt. The subordinations, agreements, and priorities set forth herein shall remain in full force and effect regardless of whether any party hereto in the future seeks to rescind, amend, terminate, or reform, by litigation or otherwise, its respective agreements with Debtor. (b) REINSTATEMENT. This Agreement shall continue to be effective or shall be reinstated, as the case may be, if, for any reason, any payment of the Senior Debt by or on behalf of Debtor shall be rescinded or must otherwise be restored by Foothill, whether as a result of an Insolvency Event or otherwise. SECTION 11 TRANSFER OF SUBORDINATED DEBT. Holdings may not assign or transfer its rights and obligations in respect of the Subordinated Debt or any interest in the Subordinated Debt without the prior written consent of Foothill (which consent shall not be unreasonably withheld), and any such transferee or assignee, as a condition to acquiring an interest in the Subordinated Debt shall agree to be bound hereby, in form reasonably satisfactory to Foothill. SECTION 12 OBLIGATIONS OF DEBTOR NOT AFFECTED. The provisions of this Agreement are intended solely for the purpose of defining the relative rights against Debtor of Holdings, on the one hand, and Foothill, on the other hand. -6- Nothing contained in this Agreement shall (i) impair, as between Debtor and Holdings, the obligation of Debtor to pay its obligations with respect to the Subordinated Debt as and when the same shall become due and payable in accordance with the terms thereof, or (ii) otherwise affect the relative rights against Debtor of Holdings, on the one hand, and the creditors of Debtor (other than Foothill), on the other hand. SECTION 13 FURTHER ASSURANCES AND ADDITIONAL ACTS. (a) ENDORSEMENT OF SUBORDINATED DEBT DOCUMENTS. At the request of Foothill, all documents and instruments evidencing any of the Subordinated Debt shall be endorsed with a legend noting that such documents and instruments are subject to this Agreement, and Holdings shall promptly deliver to Foothill evidence of the same. (b) FURTHER ASSURANCES AND ADDITIONAL ACTS. Each of Holdings and Debtor shall execute, acknowledge, deliver, file, notarize and register at its own reasonable expense all such further agreements, instruments, certificates, financing statements, documents and assurances, and perform such acts as Foothill reasonably shall deem necessary or appropriate to effectuate the purposes of this Agreement, and promptly provide Foothill with evidence of the foregoing reasonably satisfactory in form and substance to Foothill. SECTION 14 NOTICES. All notices and other communications provided for hereunder shall, unless otherwise stated herein, be in writing (including by facsimile transmission) and shall be mailed, sent, or delivered at or to the address or facsimile number of the respective party or parties set forth below: If to Foothill: FOOTHILL CAPITAL CORPORATION 11111 Santa Monica Boulevard, Suite 1500 Los Angeles, California 90025 Attn: Business Finance Division Manager Telecopier: 310.478.9788 With a copy to: BROBECK, PHLEGER & HARRISON LLP 550 S. Hope Street, Suite 2100 Los Angeles, CA 90071 Attn: John Francis Hilson, Esq. Telecopier: 213.239.1324 If to Holdings: NATIONAL MEDIA CORPORATION 15821 Ventura Boulevard, 5th Floor Encino, California 91436 Attn: Daniel M. Yukelson Telecopies: 818.461.6530 With a copy to: BUCHALTER, NEMER, FIELDS & YOUNGER 601 South Figueroa Street, Suite 2400 Los Angeles, California 90017 Attn: William Jarblum, Esq. Telecopier: 213.896-0400 -7- 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 parties. All notices and communications sent in accordance with this section shall be effective (i) if delivered by hand, when delivered; (ii) if sent by mail, upon the earlier of the date of receipt or five (5) Business Days after deposit in the mail, first class (or air mail, with respect to communications to be sent to or from the United States), postage prepaid; and (iii) if sent by facsimile transmission, when sent. SECTION 15 NO WAIVER; CUMULATIVE REMEDIES. No failure on the part of Foothill to exercise, and no delay in exercising, any right, remedy, power, or privilege hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right, remedy, power, or privilege preclude any other or further exercise thereof or the exercise of any other right, remedy, power, or privilege. The rights and remedies under this Agreement are cumulative and not exclusive of any rights, remedies, powers, and privileges that may otherwise be available to Foothill. SECTION 16 COSTS AND EXPENSES. (a) PAYMENTS BY DEBTOR. Debtor agrees to pay to Foothill on demand the reasonable out-of-pocket costs and expenses of Foothill, and the reasonable fees and disbursements of counsel to Foothill, in connection with the negotiation, preparation, execution, and delivery of this Agreement, and any amendments, modifications, or waivers of the terms thereof. (b) PAYMENTS BY DEBTOR AND HOLDINGS. Each of Debtor and Holdings jointly and severally agrees to pay to Foothill on demand all reasonable out-of-pocket costs and expenses of Foothill, and the fees and disbursements of counsel, in connection, following a breach hereof, with the enforcement or attempted enforcement of, and preservation of rights or interests under, this Agreement, including any reasonable out-of-pocket losses, costs and expenses sustained by Foothill as a result of any failure by any of Holdings to perform or observe its obligations contained in this Agreement. SECTION 17 SURVIVAL. All covenants, agreements, representations and warranties made in this Agreement shall, except to the extent otherwise provided herein, survive the execution and delivery of this Agreement, and shall continue in full force and effect so long as any Senior Debt remains unpaid. Without limiting the generality of the foregoing, the obligations of Debtor and Holdings under SECTION 16 shall survive the satisfaction of the Senior Debt. -8- SECTION 18 BENEFITS OF AGREEMENT. This Agreement is entered into for the sole protection and benefit of the parties hereto and their successors and assigns, and no other Person shall be a direct or indirect beneficiary of, or shall have any direct or indirect cause of action or claim in connection with, this Agreement. SECTION 19 BINDING EFFECT. This Agreement shall be binding upon, inure to the benefit of and be enforceable by Debtor, Holdings, and Foothill and their respective successors and assigns. SECTION 20 GOVERNING LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE LAW OF THE STATE OF CALIFORNIA. SECTION 21 SUBMISSION TO JURISDICTION. HOLDINGS HEREBY (i) SUBMITS TO THE EXCLUSIVE JURISDICTION OF THE COURTS OF THE STATE OF CALIFORNIA AND THE FEDERAL COURTS OF THE UNITED STATES SITTING IN THE STATE OF CALIFORNIA FOR THE PURPOSE OF ANY ACTION OR PROCEEDING ARISING OUT OF OR RELATING TO THIS AGREEMENT, (ii) AGREES THAT ALL CLAIMS IN RESPECT OF ANY SUCH ACTION OR PROCEEDING MAY BE HEARD AND DETERMINED IN SUCH COURTS, (iii) IRREVOCABLY WAIVES (TO THE EXTENT PERMITTED BY APPLICABLE LAW) ANY OBJECTION WHICH THEY NOW OR HEREAFTER MAY HAVE TO THE LAYING OF VENUE OF ANY SUCH ACTION OR PROCEEDING BROUGHT IN ANY OF THE FOREGOING COURTS, AND ANY OBJECTION ON THE GROUND THAT ANY SUCH ACTION OR PROCEEDING IN ANY SUCH COURT HAS BEEN BROUGHT IN AN INCONVENIENT FORUM AND (iv) AGREES THAT A FINAL JUDGMENT IN ANY SUCH ACTION OR PROCEEDING SHALL BE CONCLUSIVE AND MAY BE ENFORCED IN OTHER JURISDICTIONS BY SUIT ON THE JUDGMENT OR IN ANY OTHER MANNER PERMITTED BY LAW. SECTION 22 ENTIRE AGREEMENT; AMENDMENTS AND WAIVERS. (a) ENTIRE AGREEMENT. This Agreement constitutes the entire agreement of Debtor, Foothill, and Holdings with respect to the matters set forth herein and supersedes any prior agreements, commitments, drafts, communications, discussions, and understandings, oral or written, with respect thereto. (b) AMENDMENTS AND WAIVERS. No amendment to any provision of this Agreement shall in any event be effective unless the same shall be in writing and signed by Debtor, Holdings, and Foothill; and no waiver of any provision of this Agreement, or consent to any departure by Debtor or Holdings therefrom, shall in any event be effective unless the same -9- shall be in writing and signed by Foothill. Any such amendment, waiver, or consent shall be effective only in the specific instance and for the specific purpose for which given. SECTION 23 CONFLICTS. In case of any conflict or inconsistency between any terms of this Agreement, on the one hand, and any documents or instruments in respect of the Subordinated Debt, on the other hand, then the terms of this Agreement shall control. SECTION 24 SEVERABILITY. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under all applicable laws and regulations. If, however, any provision of this Agreement shall be prohibited by or invalid under any such law or regulation in any jurisdiction, it shall, as to such jurisdiction, be deemed modified to conform to the minimum requirements of such law or regulation, or, if for any reason it is not deemed so modified, it shall be ineffective and invalid only to the extent of such prohibition or invalidity without affecting the remaining provisions of this Agreement or the validity or effectiveness of such provision in any other jurisdiction. SECTION 25 INTERPRETATION. This Agreement is the result of negotiations between, and has been reviewed by counsel to, Foothill, Holdings, and Debtor and is the product of all parties hereto. Accordingly, this Agreement shall not be construed against Foothill merely because of Foothill's involvement in the preparation hereof. SECTION 26 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in any number of counterparts and by different parties hereto in separate counterparts, each of which when so executed shall be deemed to be an original and all of which taken together shall constitute but one and the same agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as 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. SECTION 27 TERMINATION OF AGREEMENT. Upon payment and performance in full of the Senior Debt, this Agreement shall terminate and Foothill shall promptly execute and deliver to Debtor and Holdings such documents and instruments as shall be necessary to evidence such termination; provided, however, that the obligations of Debtor and Holdings under SECTION 16 shall survive such termination. -10- SECTION 28 AGREEMENTS RELATIVE TO A BANKRUPTCY PETITION. If, while any Subordinated Debt is outstanding, a petition under chapter 11 of the Bankruptcy Code shall be filed by or against Debtor, Holdings shall not accept a plan under chapter 11 of the Bankruptcy Code if the class in which Foothill's claim is placed (i) is an impaired class under such plan, and (ii) has not accepted such plan. Holdings shall have the right, for 90 days after the confirmation of a plan under chapter 11 of the Bankruptcy Code to purchase all of the Stock and other securities of Borrower received by Foothill pursuant to such plan for total consideration, in cash, equal to (a) the difference between (i) the dollar amount of the Obligations, MINUS (ii) the cash received by Foothill pursuant to such plan; PLUS (b) interest on such difference (at the rate then applicable to Advances under the Loan Agreement). [Remainder of page left intentionally blank.] -11- IN WITNESS WHEREOF, the parties hereto have duly executed this Agreement as of the date first above written. FOOTHILL CAPITAL CORPORATION, a California Corporation By: ------------------------------- Name: ------------------------------- Title ------------------------------- NATIONAL MEDIA CORPORATION, a Delaware corporation By: ------------------------------- Name: ------------------------------- Title: ------------------------------- S-1 DEBTOR ACKNOWLEDGEMENT Debtor has received a copy of, and has read, the foregoing Subordination Agreement. Debtor agrees to be bound by such agreement, and not to take any action that would breach or violate the terms thereof. Debtor consents to the execution, delivery, and performance of such agreement by Foothill and Holdings, and agrees that Debtor's obligations to Foothill and Holdings are not diminished by such agreement. Debtor acknowledges that it has no rights under the foregoing agreement and is not a third party beneficiary of such agreement. Dated as of the date first set forth above: QUANTUM NORTH AMERICA, INC. a Delaware corporation By: ------------------------------- Name: ------------------------------- Title: ------------------------------- S-2 EX-10.12 13 EXHIBIT 10.12 STOCK PLEDGE AGREEMENT THIS STOCK PLEDGE AGREEMENT (this "Agreement"), dated as of December _, 1998, is entered into between NATIONAL MEDIA CORPORATION, a Delaware corporation ("Pledgor"), and FOOTHILL CAPITAL CORPORATION, a California corporation ("Secured Party"), with reference to the following: WHEREAS, Pledgor beneficially owns the specified number of shares identified as Pledged Shares in the Persons identified as Issuers on SCHEDULE A attached hereto (or any addendum thereto); WHEREAS, Borrower and Secured Party are parties to that certain Loan and Security Agreement (the "Loan Agreement"), of even date herewith, pursuant to which Secured Party has agreed to make certain financial accommodations to Borrower; WHEREAS, to induce Secured Party to make the financial accommodations provided to Borrower pursuant to the Loan Agreement, Pledgor desires to pledge, grant, transfer, and assign to Secured Party a security interest in the Collateral (as hereinafter defined) to secure the Secured Obligations (as hereinafter defined), as provided herein. NOW, THEREFORE, in consideration of the mutual promises, covenants, representations, and warranties set forth herein and for other good and valuable consideration, the parties hereto agree as follows: 1. DEFINITIONS AND CONSTRUCTION. Definitions.All initially capitalized terms used herein and not otherwise defined herein shall have the meaning ascribed thereto in the Loan Agreement. As used in this Agreement: "AGREEMENT" shall mean this Stock Pledge Agreement. "BORROWER" shall mean Quantum North America, a Delaware corporation. "CHIEF EXECUTIVE OFFICE" shall mean where Pledgor is deemed located pursuant to ss.9103(3)(d) of the Code. "COLLATERAL" shall mean the Pledged Shares, the Future Rights, and the Proceeds, collectively. "EARTHLINK STOCK" shall have the meaning ascribed thereto in the Security Agreement. "FUTURE RIGHTS" shall mean: (a) all shares of stock (other than Pledged Shares) of the Issuers, and all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase, shares of stock of the Issuers; (b) to the extent of Pledgor's interest therein, all shares of, all securities convertible or exchangeable into, and all warrants, options, or other rights to purchase shares of stock of any Person in which Pledgor, after the date of this Agreement, acquires a direct equity interest, irrespective of whether such Person is or becomes a Subsidiary of Pledgor; and (c) the certificates or instruments representing such additional shares, convertible or exchangeable securities, warrants, and other rights and all dividends, cash, options, warrants, rights, instruments, and other property or proceeds from time to time received, receivable, or otherwise distributed in respect of or in exchange for any or all of such shares. "HOLDER" and "HOLDERS" shall have the meanings ascribed thereto in SECTION 3 of this Agreement. "ISSUERS" shall mean each of the Persons identified as an Issuer on SCHEDULE A attached hereto (or any addendum thereto), and any successors thereto, whether by merger or otherwise. "LIEN" shall mean any lien, mortgage, pledge, assignment (including any assignment of rights to receive payments of money), security interest, charge, or encumbrance of any kind (including any conditional sale or other title retention agreement, any lease in the nature thereof, or any agreement to give any security interest). "LOAN AGREEMENT" shall have the meaning ascribed thereto in the recitals to this Agreement. "PERMITTED LIENS" shall have the meaning ascribed to it in the Security Agreement. "PLEDGED SHARES" shall mean all of the shares identified as Pledged Shares on SCHEDULE A attached hereto (or any addendum thereto). "PLEDGOR" shall have the meaning ascribed thereto in the preamble to this Agreement. "PROCEEDS" shall mean all proceeds (including proceeds of proceeds) of the Pledged Shares and Future Rights including all: (a) rights, benefits, distributions, premiums, profits, dividends, interest, cash, instruments, documents of title, accounts, contract rights, inventory, equipment, general intangibles, deposit accounts, chattel paper, and other property from time to time received, receivable, or otherwise distributed in respect of or in exchange for, or as a replacement of or a substitution for, any of the Pledged Shares, Future Rights, or proceeds thereof (including any cash, stock, or other securities or instruments issued after any recapitalization, readjustment, reclassification, merger or consolidation with respect to the Issuers and any claims against financial intermediaries under ss.8313(2) of the Code or otherwise); (b) "proceeds," as such term is used in ss.9306 of the Code; (c) proceeds of any insurance, indemnity, warranty, or guarantY (including guaranties of delivery) payable from time to time with respect to any of the Pledged Shares, Future Rights, or proceeds thereof; (d) payments (in any form whatsoever) made or due and payable to Pledgor from time to time in connection with any requisition, confiscation, condemnation, seizure or forfeiture of all or any part of the Pledged Shares, Future Rights, or proceeds thereof; and (e) other amounts from time 2 to time paid or payable under or in connection with any of the Pledged Shares, Future Rights, or proceeds thereof. "SECURED OBLIGATIONS" shall mean all Obligations owing by Borrower to Secured Party of any kind or description arising out of or outstanding under, advanced or issued pursuant to, or evidenced by the Loan Agreement, the other Loan Documents, or this Agreement, irrespective of whether for the payment of money, whether direct or indirect, absolute or contingent, due or to become due, voluntary or involuntary, whether now existing or hereafter arising, and including all interest (including interest that accrues after the filing of a case under the Bankruptcy Code) and any and all costs, fees (including attorneys fees), and expenses which Borrower is required to pay pursuant to any of the foregoing, by law, or otherwise. "SECURED PARTY" shall have the meaning ascribed thereto in the preamble to this Agreement, together with its successors or assigns. "SECURITIES ACT" shall have the meaning ascribed thereto in SECTION 9(C) of this Agreement. (a) CONSTRUCTION. (i) Unless the context of this Agreement clearly requires otherwise, references to the plural include the singular and to the singular include the plural, the part includes the whole, 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 other similar terms in this Agreement refer to this Agreement as a whole and not exclusively to any particular provision of this Agreement. Article, section, subsection, exhibit, and schedule references are to this Agreement unless otherwise specified. All of the exhibits or schedules attached to this Agreement shall be deemed incorporated herein by reference. Any reference to any of the following documents includes any and all alterations, amendments, restatements, extensions, modifications, renewals, or supplements thereto or thereof, as applicable: this Agreement, the Loan Agreement, or any of the other Loan Documents. (ii) Neither this Agreement nor any uncertainty or ambiguity herein shall be construed or resolved against Secured Party or Pledgor, whether under any rule of construction or otherwise. On the contrary, this Agreement has been reviewed by both of the parties and their respective counsel 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 the parties hereto. 3 (iii) In the event of any direct conflict between the express terms and provisions of this Agreement and of the Loan Agreement, the terms and provisions of the Loan Agreement shall control. "SECURITY AGREEMENT" means that certain Security Agreement, dated as of the date hereof, between Pledgor and Secured Party. 2. PLEDGE. (a) As security for the prompt payment and performance of the Secured Obligations in full by Borrower when due, whether at stated maturity, by acceleration or otherwise (including amounts that would become due but for the operation of the provisions of the Bankruptcy Code), Pledgor hereby pledges, grants, transfers, and assigns to Secured Party a security interest in all of Pledgor's right, title, and interest in and to the Collateral. (b) If any Person whose shares of stock are pledged by Pledgor pursuant hereto shall at any time have earnings and profits which, because of such pledge, will result in taxable income to Pledgor pursuant to IRC Section 952, then Secured Party, upon written notice of the foregoing, shall (i) release its liens in the shares of stock of such Person to the extent necessary to avoid the recognition of income by Pledgor pursuant to IRC Section 952, and (ii) deliver to Pledgor the pledged certificates representing the number of shares of stock in which Secured Party has released its lien; PROVIDED, HOWEVER, Secured Party shall have no obligation to deliver such shares unless and until Pledgor shall have delivered, or caused to be delivered to Secured Party, certificates in such denominations as are necessary (if any) for Secured Party to deliver such certificates while retaining certificates representing the number of shares of stock in which Secured Party has retained its liens. (c) If any wholly owned Subsidiary of Pledgor shall at any time be merged into any other wholly owned Subsidiary of Pledgor, or shall be dissolved, then, in either case, upon delivery to Secured Party of evidence, reasonably acceptable to Secured Party, of such merger or dissolution, Secured Party shall deliver to Pledgor the pledged certificates representing the pledged shares of such wholly owned Subsidiary. 3. DELIVERY AND REGISTRATION OF COLLATERAL. (a) All certificates or instruments representing or evidencing the Collateral shall be promptly delivered by Pledgor to Secured Party or Secured Party's designee pursuant hereto at a location designated by Secured Party and shall be held by or on behalf of Secured Party pursuant hereto, and shall be in suitable form for transfer by delivery, or shall be accompanied by duly executed instruments of transfer or assignment in blank, all in form and substance satisfactory to Secured Party; PROVIDED, HOWEVER, that the Earthlink Stock need not be delivered by Pledgor to Secured Party so long as the Earthlink Stock is subject to a Permitted Lien and is in the possession of the creditor having such Permitted Lien. (b) Upon the occurrence and during the continuance of an Event of Default, Secured Party shall have the right, at any time in its discretion and without notice to Pledgor, to transfer to or to register on the books of the Issuers (or of any other Person 4 maintaining records with respect to the Collateral) in the name of Secured Party or any of its nominees any or all of the Collateral. In addition, Secured Party shall have the right at any time to exchange certificates or instruments representing or evidencing Collateral for certificates or instruments of smaller or larger denominations. (c) If, at any time and from time to time, any Collateral (including any certificate or instrument representing or evidencing any Collateral) is in the possession of a Person other than Secured Party or Pledgor (a "Holder"), then Pledgor shall immediately, at Secured Party's option, either cause such Collateral to be delivered into Secured Party's possession, or execute and deliver to such Holder a written notification/instruction, and take all other steps necessary to perfect the security interest of Secured Party in such Collateral, including obtaining from such Holder a written acknowledgement that such Holder holds such Collateral for Secured Party, all pursuant to ss.ss.9115 of the Code or other applicable law governing the perfectIon of Secured Party's security interest in the Collateral in the possession of such Holder. Each such notification/instruction and acknowledgement shall be in form and substance satisfactory to Secured Party. (d) Any and all Collateral (including dividends, interest, and other cash distributions) at any time received or held by Pledgor shall be so received or held in trust for Secured Party, shall be segregated from other funds and property of Pledgor and shall be forthwith delivered to Secured Party in the same form as so received or held, with any necessary endorsements; PROVIDED that cash dividends or distributions received by Pledgor, if and to the extent they are not prohibited by the Loan Agreement, may be retained by Pledgor in accordance with SECTION 4 and used in the ordinary course of Pledgor's business; (e) If at any time and from time to time any Collateral consists of an uncertificated security or a security in book entry form, then Pledgor shall immediately cause such Collateral to be registered or entered, as the case may be, in the name of Secured Party, or otherwise cause Secured Party's security interest thereon to be perfected in accordance with applicable law. 4. VOTING RIGHTS AND DIVIDENDS. (a) So long as no Event of Default shall have occurred and be continuing, Pledgor shall be entitled to exercise any and all voting and other consensual rights pertaining to the Collateral or any part thereof for any purpose not inconsistent with the terms of the Loan Documents and shall be entitled to receive and retain any cash dividends or distributions paid in respect of the Collateral. (b) Upon the occurrence and during the continuance of an Event of Default, all rights of Pledgor to receive and retain cash dividends or distributions that it would otherwise be entitled to exercise or receive and retain pursuant to SECTION 4(A) shall cease, and all such rights shall thereupon become vested in Secured Party, who shall thereupon have the sole right to receive and retain such cash dividends and distributions. Pledgor shall execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies and other instruments as Secured Party may reasonably request for the purpose of enabling Secured Party 5 to receive the dividends and distributions that it is entitled to receive and retain pursuant to the preceding sentence. (c) Upon the occurrence and during the continuance of an Event of Default in respect of which Secured Party has accelerated the Obligations, all rights of Pledgor to exercise the voting and other consensual rights pursuant to SECTION 4(A) shall cease, and all such rights shall thereupon become vested in Secured Party, who shall thereupon have the sole right to exercise such voting or other consensual rights. Pledgor shall execute and deliver (or cause to be executed and delivered) to Secured Party all such proxies and other instruments as Secured Party may reasonably request for the purpose of enabling Secured Party to exercise the voting and other rights which it is entitled to exercise pursuant to the preceding sentence. 5. REPRESENTATIONS AND WARRANTIES. Pledgor represents, warrants, and covenants, in each case, to the best of its knowledge, information, and belief, as follows: (a) Pledgor has taken all steps it deems necessary or appropriate to be informed on a continuing basis of changes or potential changes affecting the Collateral (including rights of conversion and exchange, rights to subscribe, payment of dividends, reorganizations or recapitalization, tender offers and voting rights), and Pledgor agrees that Secured Party shall have no responsibility or liability for informing Pledgor of any such changes or potential changes or for taking any action or omitting to take any action with respect thereto; (b) All information herein or hereafter supplied to Secured Party by or on behalf of Pledgor in writing with respect to the Collateral is, or in the case of information hereafter supplied will be, accurate and complete in all material respects; (c) Pledgor is and will be the sole legal and beneficial owner of the Collateral (including the Pledged Shares and all other Collateral acquired by Pledgor after the date hereof) free and clear of any adverse claim, Lien, or other right, title, or interest of any Person other than Permitted Liens and Liens in favor of Secured Party; (d) This Agreement, and the delivery to Secured Party of the Pledged Shares representing Collateral (or the delivery to all Holders of the Pledged Shares representing Collateral of the notification/instruction referred to in SECTION 3 of this Agreement), creates a valid, perfected, and first priority security interest in one hundred percent (100%) of the Pledged Shares in favor of Secured Party securing payment of the Secured Obligations, and all actions necessary to achieve such perfection have been duly taken; (e) SCHEDULE A to this Agreement is true and correct and complete in all material respects; without limiting the generality of the foregoing: (i) all the Pledged Shares are in certificated form, and, except to the extent registered in the name of Secured Party or its nominee pursuant to the provisions of this Agreement, are registered in the name of Pledgor; and (ii) the Pledged Shares as to each of the Issuers constitute at least the percentage of all the fully diluted issued and outstanding shares of stock of such Issuer as set forth in SCHEDULE A to this Agreement; (f) There are no presently existing Future Rights or Proceeds owned by Pledgor, except as set forth in SCHEDULE C hereto; 6 (g) The Pledged Shares have been duly authorized and validly issued and are fully paid and nonassessable; and (h) Neither the pledge of the Collateral pursuant to this Agreement nor the extensions of credit represented by the Secured Obligations violates Regulation T, U or X of the Board of Governors of the Federal Reserve System. 6. FURTHER ASSURANCES. (a) Pledgor agrees that from time to time, at the expense of Pledgor, Pledgor will promptly execute and deliver all further instruments and documents, and take all further action that may be necessary or reasonably desirable, or that Secured Party may request, in order to perfect and protect any security interest granted or purported to be granted hereby or to enable Secured Party to exercise and enforce its rights and remedies hereunder with respect to any Collateral. Without limiting the generality of the foregoing, Pledgor will: (i) at the request of Secured Party, mark conspicuously each of its records pertaining to the Collateral with a legend, in form and substance reasonably satisfactory to Secured Party, indicating that such Collateral is subject to the security interest granted hereby; (ii) execute and file such financing or continuation statements, or amendments thereto, and such other instruments or notices, as may be necessary or reasonably desirable, or as Secured Party may request, in order to perfect and preserve the security interests granted or purported to be granted hereby; (iii) allow inspection of the Collateral by Secured Party or Persons designated by Secured Party; and (iv) appear in and defend any action or proceeding that may affect Pledgor's title to or Secured Party's security interest in the Collateral. (b) Pledgor hereby authorizes Secured Party to file one or more financing or continuation statements, and amendments thereto, relative to all or any part of the Collateral without the signature of Pledgor where permitted by law. A carbon, photographic, or other reproduction of this Agreement or any financing statement covering the Collateral or any part thereof shall be sufficient as a financing statement where permitted by law. (c) Pledgor will promptly furnish to Secured Party, upon the request of Secured Party: (i) a certificate executed by an authorized officer of Pledgor, and dated as of the date of delivery to Secured Party, itemizing in such detail as Secured Party may request, the Collateral which, as of the date of such certificate, has been delivered to Secured Party by Pledgor pursuant to the provisions of this Agreement; and (ii) such statements and schedules further identifying and describing the Collateral and such other reports in connection with the Collateral as Secured Party may request. 7. COVENANTS OF PLEDGOR. Pledgor shall: (a) Perform each and every covenant in the Loan Documents applicable to Pledgor; (b) At all times keep at least one complete set of its records concerning substantially all of the Collateral at its Chief Executive Office as set forth in SCHEDULE B hereto, and not change the location of its Chief Executive Office or such records without giving Secured Party at least thirty (30) days prior written notice thereof; 7 (c) To the extent it may lawfully do so, use its best efforts to prevent the Issuers from issuing Future Rights or Proceeds, except for cash dividends and other distributions, if any, that are not prohibited by the terms of the Loan Agreement to be paid by any Issuer to Pledgor; and (d) Upon receipt by Pledgor of any material notice, report, or other communication from any of the Issuers or any Holder relating to all or any part of the Collateral, deliver such notice, report or other communication to Secured Party as soon as possible, but in no event later than five (5) days following the receipt thereof by Pledgor. 8. SECURED PARTY AS PLEDGOR'S ATTORNEY-IN-FACT. (a) Pledgor hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with full authority in the place and stead of Pledgor and in the name of Pledgor, Secured Party or otherwise, from time to time at Secured Party's discretion, to take any action and to execute any instrument that Secured Party may reasonably deem necessary or advisable to accomplish the purposes of this Agreement, including: (i) upon the occurrence and during the continuance of an Event of Default, to receive, endorse, and collect all instruments made payable to Pledgor representing any dividend, interest payment or other distribution in respect of the Collateral or any part thereof to the extent permitted hereunder and to give full discharge for the same and to execute and file governmental notifications and reporting forms; (ii) to issue any notifications/instructions Secured Party deems necessary pursuant to SECTION 3 of this Agreement; or (iii) to arrange for the transfer of the Collateral on the books of any of the Issuers or any other Person to the name of Secured Party or to the name of Secured Party's nominee. (b) In addition to the designation of Secured Party as Pledgor's attorney-in-fact in SUBSECTION (A), Pledgor hereby irrevocably appoints Secured Party as Pledgor's agent and attorney-in-fact to make, execute and deliver any and all documents and writings which may be necessary or appropriate for approval of, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or any of the Issuers engage in business, in order to transfer or to more effectively transfer any of the Pledged Shares or otherwise enforce Secured Party's rights hereunder. 9. REMEDIES UPON DEFAULT. Upon the occurrence and during the continuance of an Event of Default: (a) Secured Party may exercise in respect of the Collateral, in addition to other rights and remedies provided for herein, under the Loan Agreement, or otherwise available to it, all the rights and remedies of a secured party on default under the Code (irrespective of whether the Code applies to the affected items of Collateral), and Secured Party may also, in accordance with the Security Agreement and as otherwise specified below, sell the Collateral or any part thereof in one or more parcels at public or private sale, at any exchange, broker's board or at any of Secured Party's offices or elsewhere, for cash, on credit or for future delivery, at such time or times and at such price or prices and upon such other terms as Secured Party may deem commercially reasonable, irrespective of the impact of any such sales on the market price of the Collateral. To the maximum extent permitted by applicable law, Secured Party may be the purchaser of any or all of the Collateral at any such sale and shall be entitled, 8 for the purpose of bidding and making settlement or payment of the purchase price for all or any portion of the Collateral sold at any such public sale, to use and apply all or any part of the Secured Obligations as a credit on account of the purchase price of any Collateral payable at such sale. Each purchaser at any such sale shall hold the property sold absolutely free from any claim or right on the part of Pledgor, and Pledgor hereby waives (to the extent permitted by law) all rights of redemption, stay, or appraisal that it now has or may at any time in the future have under any rule of law or statute now existing or hereafter enacted. Secured Party shall not be obligated to make any sale of Collateral regardless of notice of sale having been given. Secured Party may adjourn any public or private sale from time to time by announcement at the time and place fixed therefor, and such sale may, without further notice, be made at the time and place to which it was so adjourned. To the maximum extent permitted by law, Pledgor hereby waives any claims against Secured Party arising because the price at which any Collateral may have been sold at such a private sale was less than the price that might have been obtained at a public sale, even if Secured Party accepts the first offer received and does not offer such Collateral to more than one offeree. (b) Pledgor hereby agrees that any sale or other disposition of the Collateral conducted in conformity with reasonable commercial practices of banks, insurance companies, or other financial institutions in the City of Los Angeles, California in disposing of property similar to the Collateral shall be deemed to be commercially reasonable. (c) Pledgor hereby acknowledges that the sale by Secured Party of any Collateral pursuant to the terms hereof in compliance with the Securities Act of 1933 as now in effect or as hereafter amended, or any similar statute hereafter adopted with similar purpose or effect (the "Securities Act"), as well as applicable "Blue Sky" or other state securities laws may require strict limitations as to the manner in which Secured Party or any subsequent transferee of the Collateral may dispose thereof. Pledgor acknowledges and agrees that in order to protect Secured Party's interest it may be necessary to sell the Collateral at a price less than the maximum price attainable if a sale were delayed or were made in another manner, such as a public offering under the Securities Act. Pledgor has no objection to sale in such a manner and agrees that Secured Party shall have no obligation to obtain the maximum possible price for the Collateral. Without limiting the generality of the foregoing, Pledgor agrees that, upon the occurrence and during the continuation of an Event of Default, Secured Party may, subject to applicable law, from time to time attempt to sell all or any part of the Collateral by a private placement, restricting the bidders and prospective purchasers to those who will represent and agree that they are purchasing for investment only and not for distribution. In so doing, Secured Party may solicit offers to buy the Collateral or any part thereof for cash, from a limited number of investors deemed by Secured Party, in its reasonable judgment, to be institutional investors or other responsible parties who might be interested in purchasing the Collateral. If Secured Party shall solicit such offers, then the acceptance by Secured Party of one of the offers shall be deemed to be a commercially reasonable method of disposition of the Collateral. (d) If Secured Party shall determine to exercise its right to sell all or any portion of the Collateral pursuant to this Section, Pledgor agrees that, upon request of Secured Party, Pledgor will, at its own expense: 9 (i) use its best efforts to execute and deliver, and cause the Issuers and the directors and officers thereof to execute and deliver, all such instruments and documents, and to do or cause to be done all such other acts and things, as may be necessary or, in the opinion of Secured Party, advisable to register such Collateral under the provisions of the Securities Act, and to cause the registration statement relating thereto to become effective and to remain effective for such period as prospectuses are required by law to be furnished, and to make all amendments and supplements thereto and to the related prospectuses which, in the opinion of Secured Party, are necessary or advisable, all in conformity with the requirements of the Securities Act and the rules and regulations of the Securities and Exchange Commission applicable thereto; (ii) use its best efforts to qualify the Collateral under the state securities laws or "Blue Sky" laws and to obtain all necessary governmental approvals for the sale of the Collateral, as requested by Secured Party; (iii) cause the Issuers to make available to their respective security holders, as soon as practicable, an earnings statement which will satisfy the provisions of Section 11(a) of the Securities Act; (iv) execute and deliver, or cause the officers and directors of the Issuers to execute and deliver, to any person, entity or governmental authority as Secured Party may choose, any and all documents and writings which, in Secured Party's reasonable judgment, may be necessary or appropriate for approval, or be required by, any regulatory authority located in any city, county, state or country where Pledgor or the Issuers engage in business, in order to transfer or to more effectively transfer the Pledged Shares or otherwise enforce Secured Party's rights hereunder; and (v) do or cause to be done all such other acts and things as may be necessary to make such sale of the Collateral or any part thereof valid and binding and in compliance with applicable law. Pledgor acknowledges that there is no adequate remedy at law for failure by it to comply with the provisions of this Section and that such failure would not be adequately compensable in damages, and therefore agrees that its agreements contained in this Section may be specifically enforced. 10 (e) PLEDGOR EXPRESSLY WAIVES TO THE MAXIMUM EXTENT PERMITTED BY LAW: (i) ANY CONSTITUTIONAL OR OTHER RIGHT TO A JUDICIAL HEARING PRIOR TO THE TIME SECURED PARTY DISPOSES OF ALL OR ANY PART OF THE COLLATERAL AS PROVIDED IN THIS SECTION; (ii) ALL RIGHTS OF REDEMPTION, STAY, OR APPRAISAL THAT IT NOW HAS OR MAY AT ANY TIME IN THE FUTURE HAVE UNDER ANY RULE OF LAW OR STATUTE NOW EXISTING OR HEREAFTER ENACTED; AND (iii) EXCEPT AS SET FORTH IN SUBSECTION (A) OF THIS SECTION, ANY REQUIREMENT OF NOTICE, DEMAND, OR ADVERTISEMENT FOR SALE. 10. APPLICATION OF PROCEEDS. Upon the occurrence and during the continuance of an Event of Default, any cash held by Secured Party as Collateral and all cash proceeds received by Secured Party in respect of any sale of, collection from, or other realization upon all or any part of the Collateral pursuant to the exercise by Secured Party of its remedies as a secured creditor as provided in SECTION 9 shall be applied from time to time by Secured Party as provided in the Loan Agreement. 11. DUTIES OF SECURED PARTY. The powers conferred on Secured Party hereunder are solely to protect its interests in the Collateral and shall not impose on it any duty to exercise such powers. Except as provided in Section 9207 of the Code, Secured Party shall have no duty with respect to the Collateral or any responsibility for taking any necessary steps to preserve rights against any Persons with respect to any Collateral. 12. CHOICE OF LAW AND VENUE. THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT, AND THE RIGHTS OF THE PARTIES HERETO 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 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 SECURED PARTY, IN ANY OTHER COURT IN WHICH SECURED PARTY SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF PLEDGOR AND SECURED PARTY 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 12. 13. AMENDMENTS; ETC. No amendment or waiver of any provision of this Agreement nor consent to any departure by Pledgor herefrom shall in any event be effective unless the same shall be in writing and signed by Secured Party, and then such waiver or consent shall be effective only in the specific instance and for the specific purpose for which given. No failure on the part of Secured Party to exercise, and no delay in exercising any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured Obligations, shall operate as a waiver thereof; nor shall any single or partial exercise of any right under this Agreement, any other Loan Document, or otherwise with respect to any of the Secured 11 Obligations preclude any other or further exercise thereof or the exercise of any other right. The remedies provided for in this Agreement or otherwise with respect to any of the Secured Obligations are cumulative and not exclusive of any remedies provided by law. 14. NOTICES. Unless otherwise specifically provided herein, any notice or other communication herein required or permitted to be given shall be in writing and shall be delivered in the manner set forth in the Loan Agreement. 15. CONTINUING SECURITY INTEREST. This Agreement shall create a continuing security interest in the Collateral and shall: (i) remain in full force and effect until the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement; (ii) be binding upon Pledgor and its successors and assigns; and (iii) inure to the benefit of Secured Party and its successors, transferees, and assigns. Upon the indefeasible payment in full of the Secured Obligations, including the cash collateralization, expiration, or cancellation of all Secured Obligations, if any, consisting of letters of credit, and the full and final termination of any commitment to extend any financial accommodations under the Loan Agreement, the security interests granted herein shall automatically terminate and all rights to the Collateral shall revert to Pledgor. Upon any such termination, Secured Party will, at Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor shall reasonably request to evidence such termination. Such documents shall be prepared by Pledgor and shall be in form and substance reasonably satisfactory to Secured Party. 16. SECURITY INTEREST ABSOLUTE. To the maximum extent permitted by law, all rights of Secured Party, all security interests hereunder, and all obligations of Pledgor hereunder, shall be absolute and unconditional irrespective of: (a) any lack of validity or enforceability of any of the Secured Obligations or any other agreement or instrument relating thereto, including any of the Loan Documents; (b) any change in the time, manner, or place of payment of, or in any other term of, all or any of the Secured Obligations, or any other amendment or waiver of or any consent to any departure from any of the Loan Documents, or any other agreement or instrument relating thereto; (c) any exchange, release, or non-perfection of any other collateral, or any release or amendment or waiver of or consent to departure from any guaranty for all or any of the Secured Obligations; or (d) any other circumstances that might otherwise constitute a defense available to, or a discharge of, Pledgor. To the maximum extent permitted by law, Pledgor hereby waives any right to require Secured Party to: (A) proceed against or exhaust any security held from Pledgor; or (B) pursue any other remedy in Secured Party's power whatsoever. 12 17. HEADINGS. Section and subsection headings in this Agreement are included herein for convenience of reference only and shall not constitute a part of this Agreement or be given any substantive effect. 18. SEVERABILITY. In case any provision in or obligation under this Agreement shall be invalid, illegal or unenforceable in any jurisdiction, the validity, legality and enforceability of the remaining provisions or obligations, or of such provision or obligation in any other jurisdiction, shall not in any way be affected or impaired thereby. 19. COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may be executed in one or more counterparts, each of which shall be deemed an original and all of which together shall constitute one and the same Agreement. Delivery of an executed counterpart of this Agreement by telefacsimile shall be equally as 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 20. WAIVER OF MARSHALING. Each of Pledgor and Secured Party acknowledges and agrees that in exercising any rights under or with respect to the Collateral: (i) Secured Party is under no obligation to marshal any Collateral; (ii) may, in its absolute discretion, realize upon the Collateral in any order and in any manner it so elects; and (iii) may, in its absolute discretion, apply the proceeds of any or all of the Collateral to the Secured Obligations in any order and in any manner it so elects. Pledgor and Secured Party waive any right to require the marshaling of any of the Collateral. 21. WAIVER OF JURY TRIAL. PLEDGOR AND SECURED PARTY HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR ANY OF THE TRANSACTIONS CONTEMPLATED HEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. PLEDGOR AND SECURED PARTY REPRESENT THAT EACH 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. 22. WAIVERS. (a) To the maximum extent permitted by law, Pledgor hereby waives: (i) notice of acceptance hereof; (ii) notice of any loans or other financial accommodations made or extended under the Loan Agreement, or the creation or existence of any Obligations; (iii) notice of the amount of the Obligations, subject, however, to Pledgor's right to make inquiry of Secured Party to ascertain the amount of the Obligations at any reasonable time; (iv) notice of 13 any adverse change in the financial condition of Borrower or of any other fact that might increase Pledgor's risk hereunder; (v) notice of presentment for payment, demand, protest, and notice thereof as to any instrument among the Loan Documents; (vi) notice of any unmatured Event of Default or Event of Default under the Loan Agreement; and (vii) all other notices (except if such notice is specifically required to be given to Pledgor under this Agreement) and demands to which Pledgor might otherwise be entitled. (b) To the fullest extent permitted by applicable law, Pledgor waives the right by statute or otherwise to require Secured Party to institute suit against Borrower or to exhaust any rights and remedies which Secured Party has or may have against Borrower. Pledgor further waives any defense arising by reason of any disability or other defense (other than the defense that the Secured Obligations shall have been fully and finally indefeasibly paid) of Borrower or by reason of the cessation from any cause (other than that the Secured Obligations shall have been fully and finally indefeasibly paid) whatsoever of the liability of Borrower in respect thereof. (c) To the maximum extent permitted by law, Pledgor hereby waives: (i) any rights to assert against Secured Party any defense (legal or equitable), set-off, counterclaim, or claim which Pledgor may now or at any time hereafter have against Borrower or any other party liable to Secured Party on account of or with respect to the Secured Obligations; (ii) any defense, set-off, counterclaim, or claim, of any kind or nature, arising directly or indirectly from the present or future sufficiency, validity, or enforceability of the Secured Obligations; (iii) any defense arising by reason of any claim or defense based upon an election of remedies by Secured Party including, to the extent applicable, the provisions of ss.ss. 580d and 726 of the California Code of Civil ProceduRe, or any similar law of California or any other jurisdiction; (iv) the benefit of any statute of limitations affecting Pledgor's liability hereunder or the enforcement thereof. (d) To the maximum extent permitted by law, Pledgor hereby waives any right of subrogation Pledgor has or may have as against Borrower with respect to the Secured Obligations. In addition, Pledgor hereby waives any right to proceed against Borrower, now or hereafter, for contribution, indemnity, reimbursement, or any other suretyship rights and claims (irrespective of whether direct or indirect, liquidated or contingent), with respect to the Secured Obligations. Pledgor also hereby waives any right to proceed or to seek recourse against or with respect to any property or asset of Borrower. Pledgor hereby agrees that, in light of the waivers contained in this Section, Pledgor shall not be deemed to be a "creditor" (as that term is defined in the Bankruptcy Code or otherwise) of Borrower, whether for purposes of the application of Sections 547 or 550 of the United States Bankruptcy Code or otherwise. (e) If any of the Secured Obligations at any time are secured by a mortgage or deed of trust upon real property, Secured Party may elect, in its sole discretion, upon the occurrence or during the continuance of an Event of Default, to foreclose such mortgage or deed of trust judicially or nonjudicially in any manner permitted by law, before or after enforcing this Agreement, without diminishing or affecting the liability of Pledgor hereunder. Pledgor understands that (a) by virtue of the operation of California's antideficiency law applicable to nonjudicial foreclosures, an election by Secured Party nonjudicially to foreclose such a mortgage or deed of trust probably would have the effect of impairing or destroying rights of subrogation, 14 reimbursement, contribution, or indemnity of Pledgor against Borrower or guarantors or sureties, and (b) absent the waiver given by Pledgor herein, such an election might estop Secured Party from enforcing this Agreement against Pledgor. Understanding the foregoing, and understanding that Pledgor is hereby relinquishing a defense to the enforceability of this Agreement, Pledgor hereby waives any right to assert against Secured Party any defense to the enforcement of this Agreement, whether denominated "estoppel" or otherwise, based on or arising from an election by Secured Party nonjudicially to foreclose any such mortgage or deed of trust. Pledgor understands that the effect of the foregoing waiver may be that Pledgor may have liability hereunder for amounts with respect to which Pledgor may be left without rights of subrogation, reimbursement, contribution, or indemnity against Borrower or guarantors or sureties. Pledgor also agrees that the "fair market value" provisions of Section 580a of the California Code of Civil Procedure shall have no applicability with respect to the determination of Pledgor's liability under this Agreement. 23. WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, PLEDGOR HEREBY WAIVES, TO THE MAXIMUM EXTENT SUCH WAIVER IS PERMITTED BY LAW, ANY AND ALL DEFENSES ARISING DIRECTLY OR INDIRECTLY UNDER ANY ONE OR MORE OF CALIFORNIA CIVIL CODE SS.SS. 2808, 2809, 2810, 2815, 2819, 2820, 2821, 2838, 2839, 2845, 2848, 2849, AND 2850, TO THE EXTENT APPLICABLE, CALIFORNIA CODE OF CIVIL PROCEDURE SS.SS. 580A, 580B, 580C, 580D, AND 726, AND, TO THE EXTENT APPLICABLE, CHAPTER 2 OF TITLE 14 OF THE CALIFORNIA CIVIL CODE. (a) WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER PROVISION SET FORTH IN THIS AGREEMENT, PLEDGOR HEREBY WAIVES ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF REMEDIES BY SECURED PARTY, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH AS A NONJUDICIAL FORECLOSURE WITH RESPECT TO SECURITY FOR A SECURED OBLIGATION, HAS DESTROYED PLEDGOR'S RIGHTS OF SUBROGATION AND REIMBURSEMENT AGAINST THE PRINCIPAL BY THE OPERATION OF SECTION 580D OF THE CODE OF CIVIL PROCEDURE OR OTHERWISE. 24. SUBORDINATION. If at any time, or from time to time, any Subsidiary of Pledgor, other than Borrower, shall enter into financing arrangements, then Secured Party shall subordinate, on terms and conditions reasonably satisfactory to Secured Party, its Liens on the Stock of such Subsidiary to the Liens of the lender providing such financing. [Remainder of page intentionally left blank] 15 IN WITNESS WHEREOF, Pledgor and Secured Party have caused this Agreement to be duly executed and delivered by their officers thereunto duly authorized as of the date first written above. NATIONAL MEDIA CORPORATION, a Delaware corporation By Title: FOOTHILL CAPITAL CORPORATION, a California corporation By ---------------------------------------- Title: -------------------------------------- S-1 SCHEDULE A TO STOCK PLEDGE AGREEMENT Pledgor: NATIONAL MEDIA CORPORATION PLEDGED SHARES
Former Name, if Pledgor's Number of Certificate any in Which Percentage Jurisdiction Of Issuer Shares Class Number(s) Certificate Issued Ownership Incorporation - ------ --------- ------- ----------- ------------------ ----------- ----------------
SCHEDULE B TO STOCK PLEDGE AGREEMENT Pledgor: NATIONAL MEDIA CORPORATION, a Delaware corporation Address of Chief Executive Office: 15821 Ventura Boulevard, 5th Floor Encino, California 91436 SCHEDULE C TO STOCK PLEDGE AGREEMENT Existing Future Rights and Proceeds: [None.] EX-27 14 EXHIBIT 27
5 US 9-MOS MAR-31-1999 DEC-31-1998 1 6,467 5,700 43,799 (6,936) 15,087 77,191 20,861 (11,609) 121,252 63,414 0 0 1 307 50,705 121,252 252,978 252,978 0 234,126 54,437 0 3,030 (38,615) 335 (38,950) 0 4,876 0 (34,074) (1.36) (1.36)
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