SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
Quarterly Report Under Section 13 or 15(d) of
The Securities and Exchange Act of 1934
For the quarter ended . . . . . . . . . . . . . . . . . December 31, 2001
Commission file number. . . . . . . . . . . . . . . . . . . . . . . . . .0-9347
ALANCO TECHNOLOGIES, INC.
------------------------
(Exact name of registrant as specified in its charter)
(Formerly reporting as Alanco Environmental Resources Corporation)
Arizona 86-0220694
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
15900 North 78th Street, Suite 101, Scottsdale, Arizona 85260
-------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(408) 607-1010
(Registrant's telephone number, including area code)
Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities and Exchange Act of 1934
during the preceding 12 months and (2) has been subject to such filing
requirements for the past 90 days.
YES XX NO
---- ----
As of February 12, 2002 there were 10,212,600 shares of common stock
outstanding.
ALANCO TECHNOLOGIES, INC.
INDEX
Page Number
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets
December 31, 2001 and June 30, 2001 .............3
Consolidated Statements of Operations
For the three months ended December 31,
2001 and 2000.................................4
Consolidated Statements of Operations
For the six months ended December 31,
2001 and 2000.................................5
Consolidated Statements of Cash Flows
For the six months ended December 31,
2001 and 2000..................................6
Notes to Consolidated Financial Statements ........7
Note A - Basis of Presentation
Note B - Inventories
Note C - Loss per Share
Note D - Sale of Common Shares
Note E - Acquisition and Business Development
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations ...........8
PART II. OTHER INFORMATION
Item 6. Exhibits ............................................10
Signature ...........................................10
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31 AND JUNE 30, 2001
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ASSETS
Dec 31, 2001 June 30, 2001
-------------- --------------
(Unaudited)
CURRENT ASSETS
Cash $ 748,000 $ 81,000
Accounts receivable, net 1,267,600 1,209,400
Subscriptions receivable 50,000 563,500
Notes receivable, net 783,700 677,500
Inventories 1,362,500 1,218,500
Prepaid expenses 69,300 35,000
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Total current assets 4,281,100 3,784,900
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PROPERTY, PLANT AND EQUIPMENT, NET 371,800 496,000
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OTHER ASSETS
Intangible assets, net 1,582,800 1,420,400
Notes Receivable, net 450,000 966,100
Investment at cost 2,475,200 2,475,200
Net assets held for sale 593,600 603,300
Other assets 32,600 35,500
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Total other assets 5,134,200 5,500,500
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TOTAL ASSETS $ 9,787,100 $ 9,781,400
============== ===============
CURRENT LIABILITIES
Accounts payable & accruals $ 1,553,200 $ 1,010,600
Bank line 1,273,900 885,600
Notes payable, current -- 248,600
Deferred gain, pollution control products 589,700 589,700
-------------- ---------------
Total Current Liabilities 3,416,800 2,734,500
LONG TERM LIABILITIES
Deferred gain, pollution control products 378,000 378,000
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TOTAL LIABILITIES 3,794,800 3,112,500
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SHAREHOLDERS' EQUITY
Preferred Stock:
Class A, cumulative convertible
preferred stock; 5,000,000 shares
authorized, of which none are -- --
issued and outstanding at 12/31/01.
Class B, cumulative preferred stock:
2,000,000 authorized and none outstanding -- --
Common Stock, no par value, 100,000,000 shares
authorized 9,691,600 and 8,720,300
shares issued, respectively 58,122,900 57,653,000
Treasury Stock -- (40,000)
Accumulated deficit (52,130,600) (50,944,100)
-------------- ---------------
Total shareholders' equity 5,992,300 6,668,900
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TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 9,787,100 $ 9,781,400
============== ===============
</table>
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE THREE MONTHS ENDED DECEMBER 31,
2001 2000
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NET SALES $ 1,475,400 $ 2,562,700
Cost of goods sold 938,800 1,559,500
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GROSS MARGIN 536,600 1,003,200
Selling, general and administrative 1,341,100 1,797,400
-------------- ---------------
OPERATING LOSS (804,500) (794,200)
Other income (expense), net (12,900) 23,000
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LOSS - CONTINUING OPERATIONS (817,400) (771,200)
Preferred stock dividend -- (56,500)
-------------- ---------------
LOSS - CONTINUING OPERATIONS ATTRIBUTABLE
TO COMMON SHAREHOLDERS (817,400) (827,700)
-------------- ---------------
Operating income (loss) - disc. operations 12,000 (30,500)
Gain - sale of pollution control products -- 252,000
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INCOME - DISCONTINUED OPERATIONS 12,000 221,500
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $ (805,400) $ (606,200)
============== ===============
EARNINGS (LOSS) PER SHARE-BASIC AND DILUTED
- Continuing Operations $ (0.09) $ (0.12)
============== ===============
- Discontinued Operations $ 0.00 $ 0.03
============== ===============
- Net Loss $ (0.09) $ (0.09)
============== ===============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,738,733 6,777,900
============== ===============
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31,
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2001 2000
-------------- --------------
NET SALES $ 3,614,000 $ 5,309,100
Cost of goods sold 2,186,200 3,135,300
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GROSS MARGIN 1,427,800 2,173,800
Selling, general and administrative 2,614,700 3,264,700
-------------- --------------
OPERATING LOSS (1,186,900) (1,090,900)
Other income (expense), net (10,300) 15,200
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LOSS - CONTINUING OPERATIONS (1,197,200) (1,075,700)
Preferred stock dividend -- (56,500)
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LOSS - CONTINUING OPERATIONS ATTRIBUTABLE
TO COMMON SHAREHOLDERS (1,197,200) (1,132,200)
Operating income (loss)-disc. operations 10,600 6,500
Gain - sale of pollution control products -- 252,000
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INCOME - DISCONTINUED OPERATIONS 10,600 258,500
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NET LOSS ATTRIBUTABLE TO COMMON STOCKHOLDERS $(1,186,600) $ (873,700)
============== ==============
EARNINGS (LOSS) PER SHARE - BASIC AND DILUTED
- Continuing Operations $ (0.14) $ (0.17)
============== ==============
- Discontinued Operations $ 0.00 $ 0.04
============== ==============
- Net Loss $ (0.14) $ (0.13)
============== ==============
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 8,738,733 6,772,400
============== ==============
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (UNAUDITED)
FOR THE SIX MONTHS ENDED DECEMBER 31,
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2001 2000
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CASH FLOWS FROM OPERATING ACTIVITIES
Net loss from continuing operations $ (1,197,200) $ (1,075,700)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation and amortization 131,500 197,700
Stock issued for services 26,000 3,300
Other 2,900 --
(Increase) decrease in:
Accounts receivable 455,300 (966,400)
Inventory (28,800) (208,900)
Net assets of disposed operations 9,700 153,900
Prepaid expenses and other assets (34,300) (37,100)
Increase (decrease) in:
Accounts payable and accrued expenses 542,600 213,800
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Net cash used in continuing operations (92,300) (1,719,400)
Income from discontinued operations 10,600 258,500
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Net cash used in operating activities (81,700) (1,460,900)
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CASH FLOWS FROM INVESTING ACTIVITIES
Collection of notes receivable 358,900 1,587,300
Purchase of property, plant and equipment (122,200) (59,300)
Intangible Assets, related to acquisitions (162,700) (6,100)
Deferred Gain -- 967,700
Investments -- --
Purchase of treasury stock (24,000) (7,800)
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Net cash provided by investing activities 50,000 2,481,800
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CASH FLOWS FROM FINANCING ACTIVITIES
Advances from borrowings 1,215,000 --
Repayment on borrowings (1,075,300) (1,028,300)
Issuance of Stock 578,300 --
Proceeds from sale of preferred stock -- 96,500
Nasdaq listing fee (19,300) --
Dividends on preferred stock -- (56,500)
Proceeds from exercise of options -- 11,000
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Net cash provided by (used in) financing
activities 698,700 (977,300)
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NET INCREASE IN CASH $ 667,000 $ 43,600
CASH, beginning of period $ 81,000 $ 176,700
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CASH, end of period $ 748,000 $ 220,300
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SUPPLEMENTAL SCHEDULE OF CASH FLOW INFORMATION
Cash paid for interest $ 42,700 $ 32,100
============= =============
Stock issued for services $ 26,000 $ 3,300
============= =============
Computer equipment transferred from PP&E to
Inventory $ 115,200 $ --
============= =============
Note receivable repaid through surrender of
options $ 51,000 $ --
============= =============
ALANCO TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR SIX MONTHS ENDED DECEMBER 31, 2001
Note A - Basis of Presentation
The accompanying unaudited consolidated financial statements have been
prepared in accordance with Generally Accepted Accounting Principles for interim
financial information and in accordance with the instructions to Form 10-QSB.
Accordingly, certain information and footnote disclosures normally included in
financial statements prepared in accordance with Generally Accepted Accounting
Principles have been condensed or omitted. These interim consolidated financial
statements should be read in conjunction with the Company's June 30, 2001,
Annual Report on Form 10-KSB. In the opinion of management, the accompanying
consolidated financial statements include all adjustments consisting of normal
recurring accruals necessary to present fairly the financial position, results
of operations and statements of cash flows as of December 31, 2001, and for all
periods presented. The results of operations for the six months ending
December 31, 2001, are not necessarily indicative of the operating results to be
expected for an entire year.
All significant intercompany balances, transactions and stock holdings
have been eliminated from the accompanying interim financial statements.
Note B - Inventories
Inventories have been recorded at the lower of cost or market. The
composition of inventories as of December 31, 2001, and June 30, 2001, is listed
below:
December 31, 2001 June 30, 2001
Finished goods $ 860,300 $ 824,200
Work-in-process 114,300 109,500
Raw material 387,900 284,800
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$1,362,500 $1,218,500
=========== ===========
Note C - Loss per Share
Basic loss per share of common stock was computed by dividing net
loss by the weighted average number of shares outstanding of common stock.
Diluted earnings per share were computed based on the weighted average
number of shares of common stock and dilutive securities outstanding during the
period. Dilutive securities are options and warrants that are freely
exercisable into common stock at less than the prevailing market price.
Dilutive securities are not included in the weighted average number of shares
when inclusion would increase the earnings per share or decrease the loss per
share.
Note D - Sale of Common Shares
During December 2001 and January 2002, the company raised a
total of $925,000 through the sale, to accredited investors, of common stock
at a price of $.625 per share. As of December 31, 2001 the Company had raised
$600,000 and had incurred expenses related to the stock issuance of $21,700.
The purchasers of the restricted common shares were also issued 3 year
warrants to purchase shares of common stock. The Company issued, with
respect to the full fund raising through January, warrants to purchase
805,000 shares of the Company's common stock at a price of $1.00 per share.
Note E - Acquisition and Business Development
Continuing the Company's acquisition strategy, the Company announced in
December 2001, an agreement to acquire Technology Systems International, Inc.
("TSI"), a Scottsdale, Arizona based developer of proprietary, wireless RF
(radio frequency) identification, location and tracking technology utilized for
area security management and information systems primarily focusing on the
correctional market. The acquisition, which is anticipated to be effected by the
Company purchasing substantially all the assets of TSI, is conditional on final
structuring and shareholder approval of both companies. The basic structure of
the acquisition will consist of an initial payment of Alanco common stock at the
close with additional future stock payments based upon financial performance.
Alanco believes the addition of the TSI patented technology (named the
TSI PRISM (TM) System) significantly enhances the Company's proprietary
intellectual property and represents a strategic expansion of the Company's
information technology activities. TSI recently completed both a seven-year
development program, investing over $14 million in the patented technology, and
two successful pilot projects, one in Texas and one in California. Currently,
TSI is completing an installation of the system at a correctional facility in
Michigan.
In November 2001, the Company's Excel/Meridian Data, Inc., Dallas,
Texas based subsidiary announced the commercial availability of its new SecurNAS
7200 Network Attached Storage (NAS) filer. The SecurNAS 7200 is a fault
tolerant, 4U Rack Mount filer with a powerful, low overhead, Linux-based
operating system coupled with hardware RAID backplane and controller. It can be
installed and configured in less than 15 minutes and offers a very affordable
fault tolerant data storage solution, readily scalable from 30 GB to 1 TB with
cost-effective IDE hard drives.
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
Except for historical information, the statements contained herein are
forward-looking statements made pursuant to the safe harbor provisions of the
Private Securities Litigation Reform Act of 1995. All such forward-looking
statements are subject to risks and uncertainties that could cause actual
results to differ materially from those expressed or implied by those
statements. These risks and uncertainties include, but are not limited to, the
following factors: general economic and market conditions; reduced demand for
information technology equipment; competitive pricing and difficulty managing
product costs; development of new technologies which make the Company's products
obsolete; rapid industry changes; failure by the Company's suppliers to meet
quality or delivery requirements; the inability to attract, hire and retain key
personnel; failure of an acquired business to further the Company's strategies;
the difficulty of integrating an acquired business; undetected problems in the
Company's products; the failure of the Company's intellectual property to be
adequately protected; unforeseen litigation; the ability to maintain sufficient
liquidity in order to support operations; the ability to maintain satisfactory
relationships with lenders and to remain in compliance with financial loan
covenants and other requirements under current banking agreements; and the
ability to maintain satisfactory relationships with suppliers.
1. Results of Operations
In accordance with Generally Accepted Accounting Principles, the Company
has limited its reported consolidated revenues to revenues from its Computer
Data Storage segment, the only operation classified as a continuing operation.
To maintain comparability, certain balances from the Consolidated Statement of
Operations and Consolidated Statement of Cash Flows for the comparable period
of the prior year may have been restated.
(A) Three months ended 12/31/2001 versus 12/31/2000
Consolidated revenue for the quarter ended December 31, 2001 was
$1,475,400, compared to $2,562,700 for the comparable quarter of the previous
year, a decrease of $1,087,300 or 42.4%. The net loss attributable to common
stockholders for the quarter was $805,400, or $.09 per share, compared to a loss
of $606,200, or $.09 per share, for the same quarter of the prior year. The
reduction in revenues was attributed to recent unfavorable economic conditions
that have resulted in deferred and cancelled purchase orders. Alanco's
business in recent quarters. If the economic conditions in the United States
worsen, Alanco may experience a material adverse impact on its operating
results and business conditions.
The Company reported a net loss from continuing operations for the current
quarter of $817,400, or $.09 per share, compared to $827,700, or $.12 per share,
for the comparable quarter in the prior fiscal year. The comparable prior year
quarter reflected a $56,500 charge for dividends on preferred stock that were
converted to common stock during the final quarter of the fiscal year ended June
30, 2001. The net loss from continuing operations for the quarter ended December
31, 2001 was attributable primarily to reductions in revenues related to current
economic conditions, offset by reduced overhead expenses and investment related
to the implementation of the SanOne Storage Area Network (SAN) market
development initiative.
Operating results for the quarter reflected a gain from discontinued
operations of $12,000, or nil per share, compared to income from discontinued
operations of $221,500, or $.03 per share, for the comparable quarter in 2000.
The results from discontinued operations for the quarter ended December 31, 2000
included a gain on sale of pollution control products of $252,000.
Selling, general and administrative expenses for the current quarter
decreased to $1,341,100, compared to $1,797,400 incurred in the comparable
quarter of 2000. The decrease of $456,300, or 25.4%, was attributable primarily
to reduction in sales commissions, costs associated with the SanOne Storage Area
Network (SAN) market development initiative and general overhead.
(B) Six months ended 12/31/2001 versus 12/31/2000
Consolidated revenue for the six months ended December 31, 2001 was
$3,614,000, compared to $5,309,100 for the comparable period of the previous
year, a decrease of $1,695,100 or 31.9%. The net loss attributable to common
stockholders for the six-month period was $1,186,600, or $.14 per share,
compared to a loss of $873,700, or $.13 per share, for the same period of the
prior year. The reduction in revenues and increase in losses were attributed to
recent unfavorable economic conditions that have resulted in deferred and
cancelled purchase orders. Recent unfavorable economic conditions and reduced
capital spending have adversely affected Alanco's business in recent quarters.
If the economic conditions in the United States worsen, Alanco may experience
continued adverse impact on its operating results and business conditions.
The Company reported a net loss from continuing operations for the current
six months of $1,197,200, or $.13 per share, compared to $1,132,200, or $.17 per
share, for the comparable period in the prior fiscal year. The comparable period
for the prior fiscal year included a $56,500 charge for dividends on preferred
stock. The preferred stock was converted to common stock during the final
quarter of fiscal year ended June 30, 2001. The net loss from continuing
operations for the six-months ended December 31, 2001 was attributable primarily
to reductions in revenues related to current economic conditions, offset by
reduction in expenses, including sales commissions and investment related to the
implementation of the SanOne Storage Area Network (SAN) market development
initiative.
Income from discontinued operations for the six-month period reflects a gain
from discontinued operations of $10,600, or nil per share, compared to income
from discontinued operations of $258,500, or $.04 per share, for same period in
2000. The results from discontinued operations for the prior year period
included a gain on sale of pollution control products of $252,000.
Gross profit for the six-months ended December 31, 2001 amounted to
$1,427,800, or 39.5%, compared to $2,173,800, or 40.9%, for the comparable
six-month period a year earlier. The decrease in gross profit percentage
resulted from a change in product mix that the Company believes is temporary.
The decrease in gross profit dollars resulted from the reduction in sales
related to current economic conditions.
Selling, general and administrative expenses for the current six-month
period decreased to $2,614,700, compared to $3,264,700 incurred in the
comparable six-month period of 2000. The decrease of $650,000, or 19.9%, was
attributable primarily to reduction in sales commissions, market development
costs and general overhead costs.
A significant element of the Company's future growth plan will continue
to be strategic acquisitions. Company management believes that the present
technology slowdown has resulted in a unique opportunity for potential
acquisitions at attractive terms among the numerous private information
technologies companies in the under $25 million sales revenue range. The
Company's acquisition program focuses on two complementary objectives: (1) to
consolidate acquired company product lines and/or distribution channels with
current subsidiary company operations; and (2) to identify companies with
proprietary intellectual property complementary to that of existing
subsidiaries. The Company currently anticipates that the purchase price of any
additional acquisitions will be payable primarily in the form of shares of the
Company's Common Stock. While the Company has a number of acquisitions under
serious consideration,completion of acquisitions and successful post-acquisition
operation of the acquired business are subject to uncertainties and risks,
including among others those mentioned in the "safe harbor" statement at the
beginning of this Management's Discussion and Analysis.
2. Liquidity and Capital Resources
The Company's current assets at December 31, 2001 exceeded current
liabilities by $864,300, or a current ratio of 1.25 to 1, compared to a current
ratio of 1.38 to 1 at Fiscal Year End June 30, 2001. The decrease in current
ratio resulted primarily from the loss for the quarter.
The Company's cash position at December 31, 2001 had increased to
$748,000, compared to the $81,000 at June 30, 2001, due to cash collected
immediately prior to December 31, 2001 related to an equity offering that is
discussed below. Collection of notes receivable during the period amounted to
$358,900, compared to $1,587,300 for the previous year. The significant decrease
was due to significant collections of notes receivable in the prior year related
to the sale of pollution control assets.
Cash used in operating activities for the six-month period ended
December 31, 2001 was $81,700, a decrease of $1,379,200 when compared to cash
used in operating activities of $1,460,900 for the comparable period in the
prior year. The decrease in cash used in operating activities was due primarily
to decreases in receivables resulting from the collection during the period of
subscription receivables recorded at June 30, 2001, and increases in accounts
payable and accrued expenses.
During the six-month period the Company purchased approximately
$122,200 of additional equipment and transferred excess interoperability lab
equipment, with a net book value of approximately $115,000, to inventory.
Repayment on borrowing during the quarter amounted to $1,075,300, while advances
from borrowing amounted to $1,215,000. The Company recorded goodwill of $160,000
during the current period related to the acquisition of the assets and
technology of Microtest Inc.'s FileZerver network attached storage (NAS)
business.
The Company's bank line of credit agreement expired in December of 2001
and a new $1.25 million formula-based revolving bank line of credit agreement
(the "Agreement") was executed in January 2002. At December 31, 2001, the
Company had an outstanding balance of $1,175,600, which had been drawn under the
previous line of credit agreement and was transferred to the new line of credit.
The new line of credit formula is based upon accounts receivables and inventory
asset values and is used to finance acquisitions and working capital. The new
line of credit arrangement carries an interest rate of prime plus 2.0%;
contains loan covenants related to net worth and debt to equity; and
expires on June 30, 2002. While the Company believes that it will be able to
negotiate an extension of the Agreement prior to its June 30, 2002 expiration
date, there can be no assurance that an extension will be obtained on
satisfactory terms, or at all. If the Company is unable to obtain an extension,
the Company likely will need to raise additional funds through public or private
debt or equity financing. There can be no assurance that additional financing
will be available on terms acceptable to the Company, or at all. If adequate
funds are not available or are not available on acceptable terms, the Company's
business, operating results and financial condition could be materially
adversely affected. The Company believes the new bank Agreement, projected cash
flow from operations and existing cash resources will be sufficient to meet its
capital needs through fiscal year 2002.
During the period December 2001 and continuing into January 2002, the
Company raised a total of $925,000 by issuing common shares to accredited
investors at a price of $.625 per share. At December 31, 2001 the Company had
raised $600,000 through the capital raising activity with the balance of
$325,000 raised in January 2002. The purchasers of the restricted common shares
were also issued stock warrants giving the holders the right to purchase 805,000
shares at a price of $1.00 per share.
PART II. OTHER INFORMATION
Item 2. CHANGES IN SECURITIES
During the six-month period ended December 31, 2001, the company
issued 26,000 shares of common stock for consultant services rendered and 12,000
shares for settlement of accounts payable balances. In addition, the company
purchased 23,900 shares of common stock during the quarter at a price of
approximately $24,000. All shares purchased, as well as treasury shares held at
June 30, 2001, were cancelled prior to September 30, 2001. Also during the
period the company raised $578,300 net of $21,700 of expenses, through the
sale of common stock, to accredited investors, at a price of $.625 per share.
Item 6. EXHIBITS 10.9
Exhibit A - Bank Loan Agreement dated January 24, 2002
SIGNATURE
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 thereunder duly authorized.
ALANCO TECHNOLOGIES, INC.
(Registrant)
/s/ John A. Carlson
--------------------
John A. Carlson
Chief Financial Officer
Date: February 14, 2001
Comerica Amended and Restated Loan and Security Agreement
(Accounts and Inventory)
THIS AGREEMENT is entered into on January 24, 2002, between Comerica
Bank-California, a California banking corporation ("Bank") as secured party,
whose headquarters office is 333 West Santa Clara Street, San Jose, California,
95113 and Alanco Technologies, Inc. ("ATI"), an Arizona corporation ("Borrower
1"); Arraid, Inc., ("Al"), an Arizona corporation, ("Borrower 2");
Excel/Meridian Data, Inc. ("EMD"), an Arizona corporation ("Borrower 3");
Sanone, Inc. ("SOI"), an Arizona Corporation ("Borrower 4"); and Netzerver,
Inc., an Arizona corporation ("Borrower 5," and together with Borrower 1,
Borrower 2, Borrower 3, and Borrower 4, jointly and severally, individually and
collectively, "Borrower")
WHEREAS, Borrower 1, Borrower 2, Borrower 3, and Borrower 4, and Imperial Bank
previously entered into that certain Amended and Restated Credit Agreement,
dated December 27, 2000 (as amended, restated, modified, supplemented or revised
from time to time, the "Prior Agreement"); and
WHEREAS, Borrowers and Bank wish to amend and restate the terms and conditions
of the Prior Agreement in accordance with the terms and conditions of this
Agreement.
NOW, THEREFORE, in consideration of the mutual covenants and conditions hereof,
the parties agree as follows:
1.DEFINITIONS.
1.1 'Accounts' shall mean and includes all presently existing and hereafter
arising accounts, including without limitation all accounts receivable,
contract rights and other forms of right to payment for monetary
obligations or receivables for property sold or to be sold, leased,
licensed, assigned or otherwise disposed of, or for services rendered or to
be rendered (including without limitation all health-care-insurance
receivables) owing to Borrower, and any supporting obligations, credit
insurance, guaranties or security therefor, irrespective ofwhether earned
by performance.
1.2 'Agreement' shall mean and includes this Amended and Restated Loan and
Security Agreement (Accounts and Inventory), any concurrent or subsequent
rider to this Amended and Restated Loan and Security Agreement (Accounts
and Inventory) and any extensions, supplements, amendments or modifications
to this Loan and Security Agreement (Accounts and Inventory) and/or to any
such rider.
1.3 'Bank Expenses' shall mean and includes: all costs or expenses required to
be paid by Borrower under this Agreement which are paid or advanced by
Bank; taxes and insurance premiums of every nature and kind of Borrower
paid by Bank; filing, recording, publication and search fees, appraiser
fees, auditor fees and costs, and title insurance premiums paid or incurred
by Bank in connection with Bank's transactions with Borrower; costs and
expenses incurred by Bank in collecting the Accounts (with or without suit)
to correct any default or enforce any provision of this Agreement, or in
gaining possession of, maintaining, handling, preserving, storing,
shipping, selling, disposing of, preparing for sale and/or advertising to
sell the Collateral, whether or not a sale is consummated; costs and
expenses of suit incurred by Bank in enforcing or defending this Agreement
or any portion hereof, including, but not limited to, expenses incurred by
Bank in attempting to obtain relief from any stay, restraining order,
injunction or similar process which prohibits Bank from exercising any of
its rights or remedies; and reasonable attorneys' fees and expenses
incurred by Bank in advising, structuring, drafting, reviewing, amending,
terminating, enforcing, defending or concerning this Agreement, or any
portion hereof or any agreement related hereto, whether or not suit is
brought. Bank Expenses shall include Bank's in-house legal charges in the
amount of $1,000.00.
1.4 'Base Rate' shall mean that variable rate of interest so announced by Bank
at its headquarters office in San Jose, California as its "Base Rate' from
time to time and which serves as the basis upon which effective rates of
interest are calculated for those loans making reference thereto.
1.5 'Borrowers Books' shall mean and includes all of Borrower's books and
records including but not limited to minute books; ledgers; records
indicating, summarizing or evidencing Borrower's assets (including, without
limitation, the Accounts), liabilities, business operations or financial
condition, and all information relating thereto, computer programs,
computer disk or tape files; computer printouts; computer runs; and other
computer prepared information and equipment of any kind.
1.6 'Borrowing Base' shall mean the sum of: (1) eighty percent (80%) of the net
amount of Eligible Accounts after deducting therefrom all payments,
adjustments and credits applicable thereto; and (2) the amount, if any, of
the advances against Inventory agreed to be made pursuant to any Inventory
Rider, or other rider, amendment or modification to this Agreement, that
may now or hereafter be entered into by Bank and Borrower.
1.7 'Cash Flow' shall mean, for any applicable period of determination, the
NetIncome (after deduction for income taxes and other taxes of such Person,
or its subsidiaries, determined by reference to income or profits of such
Person, or its subsidiaries) for such period, plus, to the extent deducted
in computation of such Net Income, the amount of depreciation and
amortization expense and the amount of deferred tax liability during such
period, all as determined in accordance with GAAP.
1.8 'Cash Flow Coverage Ratio' shall mean the ratio, as of any applicable
period of determination, the numerator of which Is Net Income plus
depreciation plus amortization plus (or minus) the increase (or decrease)
in the deferred tax liability minus dividends and, to the extent that and
so long as Borrower is an entity that is not directly subject to Federal
income taxation with respect to which any earnings are attributable ratably
to each Person with an ownership interest in Borrower, minus any
distributions to each such Person in an amount necessary to pay each such
Person's income tax resulting from such ownership interest, at the greater
of actual draws or net income times the highest prevailing personal tax
rate, and the denominator of which is the current portion of long term debt
plus the current portion of capital lease payments for the same period of
determination.
1.9 'Collateral'shall mean and includes all personal property of Borrower,
including without limitation each and all of the following: the Accounts;
the Inventory; the General Intangibles; the Negotiable Collateral;
Borrower's Books; all Borrower's deposit accounts;all Borrower's investment
property (including without limitation securities and securities
entitlements); all goods, Instruments, documents, policies and certificates
of insurance, deposits, money or other personal property of Borrower in
which Bank receives a security interest and which now or later come into
the possession, custody or control of Bank, all Borrower's equipment and
fixtures; all additions, accessions, attachments, parts, replacements,
substitutions, renewals, interest, dividends, distributions or rights of
any kind for or with respect to any of the foregoing (including without
limitation any stock splits, stock rights, voting rights and preferential
rights); any supporting obligations for any of the foregoing; and the
products and proceeds of any of the foregoing including, but not limited
to, proceeds of insurance covering the Collateral, and any and all
Accounts, General Intangibles, Negotiable Collateral, Inventory, equipment,
money, deposit accounts, investment property, equipment, fixtures or other
tangible and intangible property of Borrower resulting from the sale or
other disposition of the Collateral and the proceeds thereof and any
supporting obligations or security therefor and any right to payment
thereunder, and including, without limitation, cash or other property which
were proceeds and are recovered by a bankruptcy trustee or otherwise as a
preferential transfer by Borrower. Notwithstanding anything to the contrary
contained herein, Collateral shall not include any waste or other materials
which have been or may be designated as toxic or hazardous by Bank,
1.10 'Credit' shall mean all Indebtedness, except that Indebtedness arising
pursuant to any other separate contract, instrument, note, or other
separate agreement which, by its terms, provides for a specified interest
rate and term
.
1.11 'Credit Limit' shall mean, for Credit 1, Seven Hundred and Fifty Thousand
Dollars ($750,000.00); for Credit 2, Three Hundred Thousand Dollars
($300,000.00); and for Credit 3, Two Hundred Thousand Dollars ($200,000).
1.12 'Current Assets' shall mean, in respect of a Person and as of any
applicable date of determination; all (a) unrestricted cash, marketable
securities, or certificates of deposit; (b) non-affiliated accounts
receivable, (c) United States government securities; (d) claims against the
United States government; and (e) inventories (held for sale in the
ordinary course of business) of such Person.
1.13'Current Liabilities' shall mean, in respect of a Person and as of any
applicable date of determination, (a) all liabilities of such Person that
should be classified as current in accordance with GAAP, including, without
limitation, any portion of the principal of the Indebtedness under this
Agreement classified as current, plus (b) to the extent not otherwise
included, all liabilities of Borrower to any of its affiliates (including
officers, directors, shareholders, subsidiaries and commonly held
companies) whether or not classified as current in accordance with GAAP.
1.14 "Daily Balance" shall mean the amount determined by taking the amount of
the Credit owed at the beginning of a given day, adding any new Credit
advanced or incurred on such date, and subtracting any payments or
collections which are deemed to be paid and are applied by Bank in
reduction of the Credit on that date under the provisions of this
Agreement.
1.15 'Debt' shall mean, as of any applicable date of determination, all items of
indebtedness, obligation or liability of a Person, whether matured or
unmatured, liquidated or unliquidated, direct or indirect, absolute or
contingent, joint or several, that should be classified as liabilities in
accordance with GAAP. In the case of Borrower, the term 'Debt' shall
include, without limitation, the Indebtedness.
1.16'Debt-to-worth Ratio' shall mean, in respect of a Person and as of any
applicable date of determination, the ratio of (a) the total Debt of such
Person at such time, to (b) the Tangible Effective Net Worth of such Person
at such time.
1.17'Eligible Accounts' shall mean and includes those Accounts of Borrower which
are due and payable within ninety (90) days, or less, from the date of
invoice, have been validly assigned to Bank and strictly comply with all of
Borrower's warranties and representations to Bank; but Eligible Accounts
shall not include the following: (a) Accounts with respect to which the
account debtor is an officer, employee, partner, joint venturer or agent of
Borrower; (b) Accounts with respect to which goods are placed on
consignment, guaranteed sale or other terms by reason of which the payment
by the account debtor may be conditional; (c) Accounts with respect to
which the account debtor is not a resident of the United States unless
insured by an insurance company acceptable to Banker covered by letters of
credit issued or confirmed by a bank acceptable to Bank. Bank, in its sole
and absolute discretion, may deem as eligible amounts due from major,
publicly owned foreign companies; (d) Accounts with respect to which the
account debtor is a subsidiary of, related to, affiliated or has common
shareholders, officers or directors with Borrower, (e) Accounts with
respect to which Borrower is or may become liable to the account debtor for
goods sold or services rendered by the account debtor to Borrower; (f)
Accounts not paid by an account debtor within ninety (90) days from the
date of the invoice; (g) Accounts with respect to which account debtors
dispute liability or make any claim, or have any defense, crossclaim,
counterclaim, or offset; (h) Accounts with respect to which any Insolvency
Proceeding is filed by or against the account debtor, or if an account
debtor becomes insolvent, falls or goes out of business; and (i) Accounts
owed by any single account debtor which exceed twenty percent (20%) of all
of the Eligible Accounts; and (j) Accounts with a particular account debtor
on which over twenty-five percent (25%) of the aggregate amount owing is
greater than ninety (90) days from the date of the Invoice.
1.18 "Event of Default" shall mean one or more of those events described in
Section 7 contained herein below.
1.19 'GAAP' shall mean, as of any applicable period, generally accepted
accounting principles in affect during such period.
1.20 'General Intangibles' shall mean and includes all of Borrower's present and
future general intangibles and other personal property (including without
limitation all payment intangibles, electronic chattel paper, contract
rights, rights arising under common law, statutes, or regulations, choses
or things in action, goodwill, patents, trade names, trademarks,
servicemarks, copyrights, blueprints, drawings, plans, diagrams,
schematics, purchase orders, customer lists, monies due or recoverable from
pension funds, route lists, rights to payment (including without
limitation, rights to payment evidenced by chattel paper, documents or
instruments) and other rights under any royalty or licensing agreements,
infringement claims, software (including without limitation any computer
program that is embedded in goods that consist solely of the medium in
which the program is embedded), information contained on computer disks or
tapes, literature, reports, catalogs, insurance premium rebates, tax
refunds, and tax refund claims), other than goods, Accounts, Inventory,
Negotiable Collateral, and Borrower's Books.
1.21 'Indebtedness' shall mean and includes any and all loans, advances,
overdrafts, debts, liabilities (including, without limitation, any and all
amounts charged to Borrower's loan account pursuant to any agreement
authorizing Bank to charge Borrower's loan account), obligations, lease
payments, guaranties, covenants and duties owing by Borrower to Bank of any
kind and description whether advanced pursuant to or evidenced by this
Agreement; by any note or other Instrument; or by any other agreement
between Bank and Borrower and whether or not for the payment of money,
whether direct or indirect, absolute or contingent, due or to become due
now existing or hereafter arising, including, without limitation, any
interest, fees, expenses, costs and other amounts owed to Bank that but for
the provisions of the United States Bankruptcy Code would have accrued
after the commencement of any Insolvency Proceeding, and including, without
limitation, any debt, liability, or obligations owing from Borrower to
others which Bank may have obtained by assignment, participation, purchase
or otherwise, and further including, without limitation, all interest not
paid when due, and all Bank Expenses which Borrower is required to pay or
reimburse by this Agreement, by law, or otherwise.
1.22 "Insolvency Proceeding" shall mean and includes any proceeding or case
commenced by or against Borrower, or any guarantor of Borrower's
Indebtedness, or any of Borrower's account debtors, under any provisions of
the Bankruptcy Code, as amended, or any other bankruptcy or insolvency law,
including, but not limited to assignments for the benefit of creditors,
formal or informal moratoriums, composition or extensions with some or all
creditors, any proceeding seeking a reorganization, arrangement or any
other relief under the Bankruptcy Code, as amended, or any other bankruptcy
or insolvency law.
1.23'Inventory' shall mean and includes all present and future inventory in
which Borrower has any interest, including, but not limited to, goods held
by Borrower 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 (including without limitation any computer program
embedded in any of the foregoing goods and any supporting information
provided in connection therewith that (i) is associated with the goods in
such a manner that the program customarily is considered part of the goods
or that (ii) by becoming the owner of the goods, a person acquires a right
to use the program in connection with the goods), together with any
advertising materials and packing and shipping materials, wherever located
and any documents of title representing any of the above, and any
equipment, fixtures or other property used in the storing, moving,
preserving, identifying, accounting for and shipping or preparing for the
shipping of inventory, and any and all other items hereafter acquired by
Borrower by way of substitution, replacement, return, repossession or
otherwise, and all additions and accessions thereto, and the resulting
product or mass, and any documents of title respecting any of the above.
1.24 "Maturity Date" shall mean June 30, 2002.
1.25 'Net Income' shall mean the net income (or loss) of a person for any period
of determination, determined in accordance with GAAP but excluding in any
event: a. any gains or losses on the sale or other disposition, not in the
ordinary course of business, of investments or fixed or capital assets, and
any taxes on the excluded gains and any tax deductions or credits on
account on any excluded losses; and b. in the case of Borrower, net
earnings of any Person in which Borrower has an ownership interest, unless
such net earnings shall have actually been received by Borrower in the form
of cash distributions.
1.26 'Negotiable Collateral' shall mean and include all of Borrower's present
and future letters of credit, advises of credit, letter-of-credit rights,
certificates of deposit, notes, drafts, money, documents (including without
limitation all negotiable documents), instruments (including without
limitation all promissory notes), tangible chattel paper or any other
similar property.
1.27 'New Capital' shall mean any funds generated from the sale of Borrower's
common or preferred stock subsequent to December 28, 2001 and added to the
Borrower's consolidated balance sheet, as equity, on a GAAP basis.
1.28 'Judicial Officer or Assignee' shall mean and includes any trustee,
receiver, controller, custodian, assignee for the benefit of creditors or
any other person or entity having powers or duties like or similar to the
powers and duties of trustee, receiver, controller, custodian or assignee
for the benefit of creditors.
1.29 'Person' or 'person' shall mean and includes any individual, corporation,
partnership, joint venture, firm, association, trust, unincorporated
association, joint stock company, government, municipality, political
subdivision or agency or other entity.
1.30 'Quick Assets' shall mean, as of any applicable date of determination,
unrestricted cash, certificates of deposit or marketable securities and net
accounts receivable arising from the sale of goods and services, and United
States government securities and/or claims against the United States
government of Borrower and its subsidiaries.
1.31 'Subordinated Debt' shall mean indebtedness of Borrower to third parties
which has been subordinated to the Indebtedness pursuant to a subordination
agreement in form and content satisfactory to Bank.
1.32 'Subordination Agreement' shall mean a subordination agreement in form
satisfactory to Bank.
1.33 'Tangible Effective Net Worth' shall mean, with respect to any Person and
as of any applicable date of determination, Tangible Net Worth plus
Subordinated Debt.
1.34 'Tangible Net Worth' shall mean, with respect to any Person and as of any
applicable date of determination, the excess of:
a. the net book value of all assets of such Person (excluding affiliate
receivables, patents, patent rights, trademarks, trade names, franchises,
copyrights, licenses, goodwill, and all other Intangible assets of such Person)
after all appropriate deductions in accordance with GAAP (including, without
limitation, reserves for doubtful receivables, obsolescence, depreciation and
amortization), over
b. all Debt of such Person at such time.
1.35 'Working Capital' shall mean, as of any applicable date of determination,
Current Assets less Current Liabilities.
Any and all terms used in the foregoing definitions and elsewhere in this
Agreement shall be construed and defined in accordance with the meaning and
definition of such terms under and pursuant to the California Uniform
Commercial Code (hereinafter referred to as the 'Uniform Commercial Code') as
amended, revised or replaced from time to time. Notwithstanding the foregoing,
the parties intend that the terms used herein which are defined in the Uniform
Commercial Code have at all times the broadest and most inclusive meanings
possible. Accordingly, if the Uniform Commercial Code shall in the future be
amended or held by a court to define any term used herein more broadly or
inclusively than the Uniform Commercial Code in effect on the date of this
Agreement, then such term, as used herein, shall be given such broadened
meaning. If the Uniform Commercial Code shall in the future be amended
or held by a court to define any term used herein more narrowly, or less
inclusively, than the Uniform Commercial Code in effect on the date of this
Agreement, such amendment or holding shall be disregarded in defining terms used
in this Agreement.
2. LOAN AND TERMS OF PAYMENT.
--------------------------
For value received, Borrower promises to pay to the order of Bank such amount,
as provided for below, together with interest, as provided for below.
2.1 Upon the request of Borrower, made at any time and from time to time during
the term hereof, and so long as no Event of Default has occurred, Bank
shall lend to Borrower 1 ("Credit 1") an amount equal to the Borrowing
Base; provided, however, that the Daily Balance shall not exceed the lesser
of either the Credit Limit or the Borrowing Base. If at any time for any
reason, the amount of Indebtedness owed by Borrower to Bank pursuant to
this Section 2.1 of this Agreement is greater than the aggregate amount
available to be drawn under this Section 2.1, Borrower shall immediately
pay to Bank, in cash, the amount of such excess.
2.2 Upon the request of Borrower, made at any time and from time to time during
the term hereof, and so long as no Event of Default has occurred, Bank
shall lend to Borrower 2, Borrower 3, and Borrower 5 ('Credit 2') an amount
equal to the Borrowing Base; provided, however, that the Daily Balance
shall not exceed the lesser of either the Credit Limit or the Borrowing
Base. If at any time for any reason, the amount of Indebtedness owed by
Borrower to Bank pursuant to this Section 2.2 of this Agreement is greater
than the aggregate amount available to be drawn under this Section 2.2,
Borrower shall immediately pay to Bank, in cash, the amount of such excess.
2.3 Upon the request of Borrower, made at any time and from time to time during
the term hereof, and so long as no Event of Default has occurred, Bank
shall lend to Borrower 4 ("Credit 3") an amount equal to the Borrowing
Base; provided, however, that the Daily Balance shall not exceed the lesser
of either the Credit Limit or the Borrowing Base. If at any time for any
reason, the amount of Indebtedness owed by Borrower to Bank pursuant to
this Section 2.3 of this Agreement is greater than the aggregate amount
available to be drawn under this Section 2.3, Borrower shall immediately
pay to Bank, in cash, the amount of such excess.
2.4 Except as hereinbelow provided, the Credits shall bear interest, on the
Daily Balance owing, at a fluctuating rate of interest equal to the Base
Rate plus two (2%) percentage points per annum.
All interest chargeable under this Agreement that is based upon a per annum
calculation shall be computed on the basis of a three hundred sixty (360) day
year for actual days elapsed. The Base Rate as of the date of this Agreement is
Four and Three Quarters (4.75%) per annum. In the event that the Base Rate
announced is, from time to time hereafter, changed, adjustment in the Base Rate
shall be made and based on the Base Rate in effect on the date of such change.
The Base Rate, as adjusted, shall apply to the Credit until the Base Rate is
adjusted again.
All interest payable by Borrower under the Credit shall be due and
payable on the first day of each calendar month during the term of this
Agreement. A late payment charge equal to five percent (5%) of each late payment
may be charged on any payment not received by Bank within ten (10) calendar days
after the payment due date, but acceptance of payment of this charge shall not
waive any Event of Default under this Agreement. Upon the occurrence of an Event
of Default hereunder, and without constituting a waiver of any such Event of
Default, then during the continuation thereof, at Bank's option, the Credit
shall bear interest, on the Daily Balance owing, at a rate equal to three
percent (3%) per year in excess of the rate applicable immediately prior to the
occurrence of the Event of Default, and such rate of interest shall fluctuate
thereafter from time to time at the same time and in the same amount as any
fluctuation in the rate of interest applicable immediately prior to any such
occurrence.
2.5 In addition to any other amounts due or to become due under this
Agreement concurrent with the execution hereof, Borrower shall pay to Bank the
following fees:
3.TERM.
----
3.1 This Agreement shall remain in full force and effect until June 30, 2002
(the 'Maturity Date'), or until terminated by notice by Borrower. Notice of
such termination by Borrower shall be effectuated by mailing of a
registered or certified letter not less than thirty (30) days prior to the
effective date of such termination, addressed to Bank at the address set
forth herein and the termination shall be effective as of the date so fixed
in such notice.
a. In connection with the termination of this Agreement at any time
prior to the Maturity Date, upon the effective date of termination of this
Agreement for any reason, Borrower shall pay to Bank (in addition to the then
outstanding principal, accrued interest and other charges owing under the terms
of this Agreement and any of the other Loan Documents) as liquidated damages for
the loss of the bargain and not as a penalty, an amount equal to (a) five
percent (5%) of the Credit Limit. If such repayment or termination occurs (1) at
any time on or after the first anniversary of this Agreement as a result of
Bank's decision not to consent to an increase to the Credit Limit to permit
Borrower to utilize any availability under the Borrowing Base in excess of the
Credit Limit, or (ii) on the Maturity Date, no prepayment charge shall be
payable.
b. Notwithstanding the foregoing, should Borrower be in default of
one or more of the provisions of this Agreement, Bank may terminate this
Agreement at any time without notice. Notwithstanding the foregoing, should
either Bank or Borrower become insolvent or unable to meet its debts as they
mature, or fall, suspend, or go out of business, the other party shall have the
right to terminate this Agreement at any time without notice. On the date of
termination all Indebtedness shall become immediately due and payable without
notice or demand; no notice of termination by Borrower shall be effective until
Borrower shall have paid all Indebtedness to Bank in full. Notwithstanding
termination, until all Indebtedness has been fully satisfied, Bank shall retain
its security interest in all existing Collateral and Collateral arising
thereafter, and Borrower shall continue to perform all of its obligations.
3.2 After termination and when Bank has received payment in full of Borrower's
Indebtedness to Bank, Bank shall reassign to Borrower all Collateral held
by Bank, and shall execute a termination of all security agreements and
security interests given by Borrower to Bank.
4.0 CREATION OF SECURITY INTEREST.
-------------------------------
4.1 Borrower hereby grants to Bank a continuing security interest in all
presently existing and hereafter arising Collateral in order to secure
prompt repayment of any and all Indebtedness owed by Borrower to Bank and
in order to secure prompt performance by Borrower of each and all of its
covenants and obligations under this Agreement and otherwise created.
Bank's security interest in the Collateral shall attach to all Collateral
without further act on the part of Bank or Borrower. In the event that any
Collateral, including proceeds, is evidenced by or consists of Negotiable
Collateral, Borrower, immediately upon the request of Bank, shall (a)
endorse or assign such Negotiable Collateral to Bank, (b) deliver actual
physical possession of such Negotiable Collateral to Bank, and (c) mark
conspicuously all of its records pertaining to such Negotiable Collateral
with a legend, in form and substance satisfactory to Bank (and in the case
of Negotiable Collateral consisting of tangible chattel paper, immediately
mark all such tangible chattel paper with a conspicuous legend in form and
substance satisfactory to Bank), indicating that the Negotiable Collateral
is subject to the security interest granted to Bank hereunder.
4.2 Bank's security interest in the Accounts shall attach to all Accounts
without further act on the part of Bank or Borrower. Upon request from
Bank, Borrower shall provide Bank with schedules describing all Accounts
created or acquired by Borrower (including without limitation agings
listing the names and addresses of, and amounts owing by date by account
debtors), and shall execute and deliver written assignments of all Accounts
to Bank all in a form acceptable to Bank; provided, however, Borrower's
failure to execute and deliver such schedules and/or assignments shall not
affect or limit Bank's security interest and other rights in and to the
Accounts. Together with each schedule, Borrower shall furnish Bank with
copies of Borrower's customers' invoices or the equivalent, and original
shipping or delivery receipts for all merchandise sold, and Borrower
warrants the genuineness thereof. Upon the occurrence of an Event of
Default, Bank or Bank's designee may notify customers or account debtors of
Bank's security interest in the Collateral and direct such customers or
account debtors to make payments directly to Bank, but unless and until
Bank does so or gives Borrower other written instructions, Borrower shall
collect all Accounts for Bank, receive in trust all payments thereon as
Bank's trustee, and, if so requested to do so from Bank, Borrower shall
immediately deliver said payments to Bank in their original form as
received from the account debtor and all letters of credit, advices of
credit, instruments, documents, chattel paper or any similar property
evidencing or constituting Collateral. Notwithstanding anything to the
contrary contained herein, if sales of Inventory are made for cash,
Borrower shall immediately deliver to Bank, in identical form, all such
cash, checks, or other forms of payment which Borrower receives. The
receipt of any check or other item of payment by Bank shall not be
considered a payment on account until such check or other item of payment
is honored when presented for payment, in which event, said check or other
item of payment shall be deemed to have been paid to Bank two (2) calendar
days after the date Bank actually receives such check or other item of
payment.
4.3 Bank's security interest in Inventory shall attach to all Inventory without
further act on the part of Bank or Borrower. Borrower will at Borrowers
expense pledge, assemble and deliver such Inventory to Bank or to a third
party as Bank's bailee; or hold the same in trust for Bank's account or
store the same in a warehouse in Bank's name; or deliver to Bank documents
of title representing said Inventory; or evidence of Bank's security
interest in some other manner acceptable to Bank. Until a default by
Borrower under this Agreement or any other Agreement between Borrower and
Bank, Borrower may, subject to the provisions hereof and consistent
herewith, sell the Inventory, but only in the ordinary course of Borrower's
business. A sale of Inventory in Borrower's ordinary course of business
does not include an exchange or a transfer in partial or total
satisfaction of a debt owing by Borrower.
4.4 Concurrently with Borrower's execution of this Agreement, and at any time
or times hereafter at the request of Bank, Borrower shall (a) execute and
deliver to Bank security agreements, mortgages, assignments, certificates
of title, affidavits, reports, notices, schedules of accounts, letters of
authority and all other documents that Bank may reasonably request, in form
satisfactory to Bank, to perfect and maintain perfected Bank's security
interest in the Collateral and in order to fully consummate all of the
transactions contemplated under this Agreement, (b) cooperate with Bank in
obtaining a control agreement in form and substance satisfactory to Bank
with respect to all deposit accounts, electronic chattel paper, investment
property, and letter-of-credit rights, and (c) in the event that any
Collateral is in the possession of a third party, Borrower shall join with
Bank in notifying such third party of Bank's security interest and
obtaining an acknowledgment from such third party that it is holding such
Collateral for the benefit of Bank. By authenticating or becoming bound by
this Agreement, Borrower authorizes the filing of initial financing
statement(s), and any amendment(s) covering the Collateral to perfect and
maintain perfected Bank's security interest in the Collateral. Upon the
occurrence of an Event of Default, Borrower hereby irrevocably makes,
constitutes and appoints Bank (and any of Bank's officers, employees or
agents designated by Bank) as Borrower's true and lawful attorney-in-fact
with power to sign the name of Borrower on any security agreement,
mortgage, assignment, certificate of title, affidavit, letter of authority,
notice of other similar documents which must be executed and/or filed in
order to perfect or continue perfected Bank's security interest in the
Collateral, and to take such actions in its own name or in Borrower's name
as Bank, in its sole discretion, deems necessary or appropriate to
establish exclusive possession or control (as defined in the Uniform
Commercial Code) over any Collateral of such nature that perfection of
Bank's security interest may be accomplished by possession or control.
4.5 Borrower shall make appropriate entries in Borrower's Books disclosing
Bank's security interest in the Accounts. Bank (through any of its
officers, employees or agents) shall have the right at any time or times
hereafter, provided that reasonable notice is provided, during Borrower's
usual business hours, or during the usual business hours of any third party
having control over the records of Borrower, to inspect and verify
Borrower's Books in order to verify the amount or condition of, or any
other matter, relating to, said Collateral and Borrower's financial
condition.
4.6 Effective only upon the occurrence of an Event of Default,
Borrower appoints Bank or any other person whom Bank may designate as
Borrowers attorney-in-fact, with power: to endorse Borrowers name on any
checks, notes, acceptances, money order, drafts or other forms of payment
or security that may come into Bank's possession; to sign Borrowers name on
any invoice or bill of lading relating to any Accounts, on drafts against
account debtors, on schedules and assignments of Accounts, on verifications
of Accounts and on notices to account debtors; to establish a lock box
arrangement and/or to notify the post office authorities to change the
address for delivery of Borrower's mail addressed to Borrower to an address
designated by Bank, 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; to send, whether in writing or by telephone, requests for
verification of Accounts; and to do all things necessary to carry out this
Agreement. Borrower ratifies and approves all acts of the attorney-in-fact.
Neither Bank nor its attorney-in-fact will be liable for any acts or
omissions or for any error of judgement or mistake of fact or law. This
power being coupled with an interest, is irrevocable so long as any
Accounts in which Bank has a security interest remain unpaid and until the
Indebtedness has been fully satisfied.
4.7 In order to protect or perfect any security interest which Bank is granted
hereinunder, Bank may, in its sole discretion, discharge any lien or
encumbrance or bond the same, pay any insurance, maintain guards,
warehousemen, or any personnel to protect the Collateral, pay any service
bureau, or obtain any records, and all costs for the same shall be added to
the indebtedness and shall be payable on demand.
4.8 Borrower agrees that Bank may provide information relating to this
agreement or relating to Borrower to Bank's parent, affiliates,
subsidiaries, and service providers.
5. CONDITIONS PRECEDENT.
--------------------
5.1 Conditions precedent to the making of the loans and the extension of the
financial accommodations hereunder, Borrower shall execute, or cause to be
executed, and deliver to Bank, in form and substance satisfactory to Bank
and its counsel, the following:
a. This Agreement and other documents, instruments and agreements
required by Bank;
b. Certified copies of all actions taken by Borrower, any grantor of a
security interest to Bank to secure the Indebtedness, and any guarantor of the
Indebtedness, authorizing the execution, delivery and performance of this
Agreement and any other documents, instruments or agreements entered into in
connection herewith, and authorizing specific officers to execute and deliver
any such documents, instruments and agreements;
c. Certificate of good standing showing that Borrower is in good standing
under the laws of the state of its incorporation or formation and certificates
indicating that Borrower is qualified to transact business and is in good
standing in any other state in which it conducts business;
d. UCC searches and financing statements, notices or other similar
documents which Bank may require and in such form as Bank may require, in order
to reflect, perfect or protect Bank's first priority security interest in the
Collateral and in order to fully consummate all of the transactions contemplated
under this Agreement;
e. Evidence that Borrower has obtained insurance and acceptable
endorsements;
6. WARRANTIES. REPRESENTATIONS AND COVENANTS.
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6.1 If so requested by Bank, Borrower shall, at such intervals designated by
Bank, during the term hereof execute and deliver a Report of Accounts
Receivable or similar report, in form customarily used by Bank. The
aggregate amount of the Borrowing Base at all times during the
effectiveness of this Agreement shall not be less than the advances made
hereunder. Bank shall have the right to recompute the Borrowing Base in
conformity with this Agreement.
6.2 If any warranty is breached as to any Account, or any Account is not paid
in full by an account debtor within ninety (90) days from the date of
invoice, or an account debtor disputes liability or makes any claim with
respect thereto, or a petition in bankruptcy or other application for
relief under the Bankruptcy Code or any other insolvency law is filed by or
against an account debtor, or an account debtor makes an assignment for the
benefit of creditors, becomes insolvent, fails or goes out of business,
then Bank may deem ineligible any and all Accounts owing by that account
debtor, and reduce the Borrowing Base by the amount thereof. Bank shall
retain its security interest in all Accounts, whether eligible or
ineligible, until all Indebtedness has been fully paid and satisfied.
Returns and allowances, if any, as between Borrower and its customers, will
be on the same basis and in accordance with the usual customary practices
of Borrower, as they exist at this time. Any merchandise which is returned
by an account debtor or otherwise recovered shall be set aside, marked with
Bank's name, and Bank shall retain a security interest therein. Borrower
shall promptly notify Bank of all disputes and claims and settle or adjust
them on terms approved by Bank. After default by Borrower hereunder, no
discount, credit or allowance shall be granted to any account debtor by
Borrower and no return of merchandise shall be accepted by Borrower without
Bank's consent. Bank may, after default by Borrower, settle or adjust
disputes and claims directly with account debtors for amounts and upon
terms which Bank considers advisable, and in such cases Bank will credit
Borrower's loan account with only the net amounts received by Bank in
payment of the Accounts, after deducting all Bank Expenses in connection
therewith.
6.3 Borrower warrants, represents, covenants and agrees that:
a. Borrower has good and marketable title to the Collateral. Bank has and
shall continue to have a first priority perfected security interest in and to
the Collateral. The Collateral shall at all times remain free and clear of all
liens, encumbrances and security Interests (except those in favor of Bank);
b. All Accounts are and will, at all times pertinent hereto, be bona fide
existing obligations created by the sale and delivery of merchandise or the
rendition of services to account debtors in the ordinary course of business,
free of liens, claims, encumbrances and security interests (except as held by
Bank and except as may be consented to, in writing, by Bank) and are
unconditionally owed to Borrower without defenses, disputes, offsets
counterclaims, rights of return or cancellation, and Borrower shall have
received no notice of actual or imminent bankruptcy or insolvency of any account
debtor at the time an Account due from such account debtor is assigned to Bank;
and
c. At the time each Account is assigned to Bank, all property giving rise
to such Account shall have been delivered to the account debtor or to the agent
for the account debtor for immediate shipment to, and unconditional acceptance
by, the account debtor. Borrower shall deliver to Bank, as Bank may from time to
time require, delivery receipts, customers purchase orders, shipping
instructions, bills of lading and any other evidence of shipping arrangements.
Absent such a request by Bank, copies of all such documentation shall be held by
Borrower as custodian for Bank.
6.4 At the time each eligible Account is assigned to Bank, all such Eligible
Accounts will be due and payable on terms set forth in Section 1.17, or on
such other terms approved in writing by Bank in advance of the creation of
such Accounts and which are expressly set forth on the face of all
invoices, copies of which shall be held by Borrower as custodian for Bank,
and no such Eligible Account will then be past due.
6.5 Borrower shall keep the Inventory only at the following locations: 15900
North 78 Street, Suite 101, Scottsdale, AZ 85260.
a. Borrower, immediately upon demand by Bank therefor, shall now and from
time to time hereafter, at such intervals as are reasonably requested by Bank,
deliver to Bank, designations of Inventory specifying Borrower's cost of
Inventory, the wholesale market value thereof and such other matters and
information relating to the Inventory as Bank may request;
b. All of the Inventory is and shall remain free from all purchase money or
other security interests, liens or encumbrances, except as held by Bank;
c. Borrower does now keep and hereafter at all times shall keep correct and
accurate records itemizing and describing the kind, type, quality and quantity
of the Inventory, its cost therefor and selling price thereof, and the daily
withdrawals therefrom and additions thereto, all of which records shall be
available upon demand to any of Bank's officers, agents and employees for
inspection and copying;
d. All Inventory, now and hereafter at all times, shall be of good and
merchantable quality free from material defects;
e. Inventory is not now and shall not at any time or times hereafter be
located or stored with a bailee, warehouseman or other third party without
Bank's prior written consent, and, in such event, Borrower will concurrently
therewith cause any such bailee, warehouseman or other third party to issue and
deliver to Bank, warehouse receipts in Bank's name evidencing the storage of
Inventory and/or an acknowledgment by such bailee of Bank's prior rights in the
Inventory, in each case in form and substance ,acceptable to Bank. In any event,
Borrower shall instruct any third party to hold all such Inventory for Bank's
account subject to Bank's security interests and its instructions; and
f. Bank shall have the right upon demand now and/or at all times hereafter,
during Borrower's usual business hours, after reasonable notice, to inspect and
examine the Inventory and to check and test the same as to quality, quantity,
value and condition and Borrower agrees to reimburse Bank for Bank's reasonable
costs and expenses in so doing.
g. Borrower shall raise New Capital in the amount of $500,000.
6.6 Borrower represents, warrants and covenants with Bank that Borrower will
not, without Bank's prior written consent:
a. Grant a security interest in or permit a lien, claim or encumbrance upon
any of the Collateral to any person, association, firm, corporation, entity or
governmental agency or instrumentality;
b. Permit any levy, attachment or restraint to be made affecting any of
Borrower's assets;
c. Permit any Judicial Officer or Assignee to be appointed or to take
possession of any or all of Borrower's assets;
d. Other than sales of Inventory in the ordinary course of Borrower's
business, to sell, lease, or otherwise dispose of, move, or transfer, whether by
sale or otherwise, any of Borrower's assets;
e. Change its name, the location of its sole place of business, chief
executive office or residence, business structure, corporate identity or
structure, form of organization or the state in which it has been formed or
organized; add any new fictitious names, liquidate, merge or consolidate with or
into any other business organization;
f. Move or relocate any Collateral except in the ordinary course of
business;
g. Acquire any other business organization;
h. Make any change in Borrower's financial structure or in any of its
business objectives, purposes or operations which would materially adversely
affect the ability of Borrower to repay Borrower's Indebtedness;
i. Incur any debts outside the ordinary course of Borrower's business
except renewals or extensions of existing debts and interest thereon;
j. Make loans, advances or extensions of credit to any Person, except in
the ordinary course of business;
k. Guarantee or otherwise, directly or indirectly, in any way be
or become responsible for obligations of any other Person, whether by agreement
to purchase the indebtedness of any other Person, agreement for the furnishing
of funds to any other Person through the furnishing of goods, supplies or
services, by way of stock purchase, capital contribution, advance or loan, for
the purpose of paying or discharging (or causing the payment or discharge of the
indebtedness of any other Person, or otherwise, except for the endorsement of
negotiable instruments by Borrower in the ordinary course of business for
deposit or collection;
1. Make any payment on account of any Subordinated Debt except
for regularly scheduled payments of interest and principal in accordance with
the provisions of any Subordination Agreement executed by Bank and the
subordinated debt holder, or amend any provision contained in any documentation
relating to any such Subordinated Debt without Bank's prior written consent;
m. (a) Sell, lease, transfer or otherwise dispose of properties
and assets having an aggregate book value of more than Fifty Thousand Dollars
($50,000.00) (whether in one transaction or in a series of transactions) except
as to the sale of Inventory in the ordinary course of business; (b) change its
name, consolidate with or merge into any other corporation, permit another
corporation to merge into it, acquire all or substantially all the properties or
assets of any other Person, enter into any reorganization or recapitalization or
reclassify its capital stock, or (c) enter into any sale-leaseback transaction;
n. Except for existing holdings as of the effective date of this
Agreement, purchase or hold beneficially any stock or other securities of, or
make any investment or acquire any securities or other interest whatsoever in,
any other Person, except for the common stock of the Subsidiaries owned by
Borrower on the date of this Agreement and except for certificates of deposit
with maturities of one year or less of United States commercial banks with
capital, surplus and undivided profits in excess of One Hundred Million Dollars
($100,000,000) and the securities or other direct obligations of the United
States Government maturing within one year from the date of acquisition thereof;
and
o. Allow any fact, condition or event to occur or exist with
respect to any employee pension or profit sharing plans established or
maintained by it which might constitute grounds for termination of any such plan
or for the court appointment of a trustee to administer any such plan.
6.7 Borrower is not a merchant whose sales for resale of goods for personal,
family or household purposes exceeded seventy-five percent (75%) in dollar
volume of its total sales of all goods during the twelve (12) months
preceding the filing by Bank of a financing statement describing the
Collateral. At no time hereafter shall Borrower's sales for resale goods
for personal, family or household purposes exceed seventy-five percent
(75%) in dollar volume of its total sales.
6.8 Borrower represents, warrants, covenants and agrees that:
a. Borrower's true and correct legal name is that set forth on the
signature page to this Agreement. Except as disclosed in writing to Bank on or
before the date of this Agreement, Borrower has not done business under any name
other than that set forth on the signature page to this Agreement;
b. If Borrower is an individual, the location (as determined pursuant to
the Uniform Commercial Code) of Borrower's principal residence is that set forth
following Borrower's name on the signature page to this Agreement;
c. If Borrower is a registered organization that is organized under the
laws of any one of the states comprising the United States (e.g. corporation,
limited partnership, registered limited liability partnership or limited
liability company), and is located (as determined pursuant to the Uniform
Commercial Code) in the state under the laws of which it was organized,
Borrower's form of organization and the state in which it has been organized are
those set forth immediately following Borrower's name on the signature page to
this Agreement;
d. If Borrower is a registered organization organized under the laws of the
United States, and Borrower is located in the state that United States law
designates as its location or, if United States law authorizes Borrower to
designate the state for its location, the state designated by Borrower, or if
neither of the foregoing are applicable, at the District of Columbia (in each
case as determined in accordance with the Uniform Commercial Code), Borrower's
form of organization and the state or district in which it is located are those
set forth immediately following Borrower's name on the signature page to this
Agreement;
e. If Borrower is a domestic organization that is not a registered
organization under the laws of the United States or any state thereof (e.g.
general partnership, joint venture, trust, estate or association), and Borrower
is located (as determined pursuant to the Uniform Commercial Code) at its sole
place of business or, if it has more than one place of business, at its chief
executive office, Borrower's form of organization and the address of that
location are those set forth on the signature page to this Agreement; and
f. If Borrower is a foreign individual or foreign organization or a branch
or agency of a bank that is not organized under the laws of the United States or
a state thereof, Borrower is located (as determined pursuant to the Uniform
Commercial Code) at the address set forth following Borrower's name on the
signature page to this Agreement.
6.9 If Borrower is a corporation, Borrower represents, warrants and covenants
as follows:
a. Borrower will not make any distribution or declare or pay any cash
dividend to any shareholder or on any of its capital stock, of any class,
whether now or hereafter outstanding, or purchase, acquire, repurchase, or
redeem or retire any such capital stock;
b. Borrower is and shall at all times hereafter be a corporation duly
organized and existing in good standing under the laws of the state of its
incorporation and qualified and licensed to do business in California or any
other state in which it conducts its business;
c. Borrower has the right and power and is duly authorized to enter into
this Agreement; and
d. The execution by Borrower of this Agreement shall not constitute a
breach of any provision contained in Borrower's articles of incorporation or
by-laws.
6.10 The execution of and performance by Borrower of all of the terms and
provisions contained in this Agreement shall not result in a breach of or
constitute an event of default under any agreement to which Borrower is now
or hereafter becomes a party.
6.11 Borrower shall promptly notify Bank in writing of its acquisition by
purchase, lease or otherwise of any after acquired property of the type
included in the Collateral, with the exception of purchases of Inventory in
the ordinary course of business.
6.12 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 have been paid, and shall hereafter be paid in full, before
delinquency. Borrower shall make due and timely payment or deposit of all
federal, state and local taxes, assessments or contributions; required of
it by law, and will execute and deliver to Bank, on demand, appropriate
certificates attesting to the payment or deposit thereof. Borrower will
make timely payment or deposit of all F.I.C.A. payments and withholding
taxes required of it by applicable laws, and will upon request furnish Bank
with proof satisfactory to it that Borrower has made such payments or
deposit. If Borrower fails to pay any such assessment, tax, contribution,
or make such deposit, or furnish the required proof, Bank may, in its sole
and absolute discretion and without notice to Borrower, (i) make payment of
the same or any part thereof, or (ii) set up such reserves in Borrowers
loan account as Bank deems necessary to satisfy the liability therefor, or
both. Bank may conclusively rely on the usual statements of the amount
owing or other official statements issued by the appropriate governmental
agency. Each amount so paid or deposited by Bank shall constitute a Bank
Expense and an additional advance to Borrower.
6.13 There are no actions or proceedings pending by or against Borrower or any
guarantor of Borrower before any court or administrative agency and
Borrower has no knowledge of any pending, threatened or imminent
litigation, governmental investigations or claims, complaints, actions or
prosecutions involving Borrower or any guarantor of Borrower, except as
heretofore specifically disclosed in writing to Bank. If any of the
foregoing arise during the term of the Agreement, Borrower shall
immediately notify Bank in writing.
6.14 Insurance.
a. Borrower, at its expense, shall keep and maintain its assets
insured against loss or damage by fire, theft, explosion, sprinklers and all
other hazards and risks ordinarily insured against by other owners who use such
properties in similar businesses for the full insurable value thereof. Borrower
shall also keep and maintain business interruption insurance and public
liability and property damage insurance relating to Borrower's ownership and use
of the Collateral and its other assets. All such policies of insurance shall be
in such form, with such companies, and in such amounts as may be satisfactory to
Bank. Borrower shall deliver to Bank certified copies of such policies of
insurance and evidence of the payments of all premiums therefor. All such
policies of insurance (except those of public liability and property damage)
shall contain an endorsement in a form satisfactory to Bank showing Bank as a
loss payee thereof, with a waiver of warranties satisfactory to Bank, and all
proceeds payable thereunder shall be payable to Bank and, upon receipt by Bank,
shall be applied on account of the Indebtedness owing to Bank. To secure the
payment of the Indebtedness, Borrower grants Bank a security interest in and to
all such policies of insurance (except those of public liability and property
damage) and the proceeds thereof, and Borrower shall direct all insurers under
such policies of insurance to pay all proceeds thereof directly to Bank.
b. Borrower hereby irrevocably appoints Bank (and any of Bank's officers,
employees or agents designated by Bank) as Borrower's attorney for the purpose
of making, selling and adjusting claims under such policies of insurance,
endorsing the name of Borrower on any check, draft, instrument or other item of
payment for the proceeds of such policies of insurance and for making all
determinations and decisions with respect to such policies of Insurance.
Borrower will not cancel any of such policies without Bank's prior written
consent. Each such insurer shall agree by endorsement upon the policy or
policies of insurance issued by it to Borrower as required above, or by
independent instruments furnished to Bank, that it will give Bank at least ten
(10) days written notice before any such policy or policies of insurance shall
be altered or canceled, and that no act or default of Borrower, or any other
person, shall affect the right of Bank to recover under such policy or policies
of insurance required above or to pay any premium in whole or in part relating
thereto. Bank, without waiving or releasing any Indebtedness or any Event of
Default, may, but shall have no obligation to do so, obtain and maintain such
policies of insurance and pay such premiums and take any other action with
respect to such policies which Bank deems advisable. All sums so disbursed by
Bank, as well as reasonable attorneys' fees incurred by Bank, whether in-house
or outside counsel is used, court costs, expenses and other charges
relating thereto, shall constitute Bank Expenses and are payable on demand.
6.15 All financial statements and information relating to Borrower which have
been or may hereafter be delivered by Borrower to Bank are true and correct
and have been prepared in accordance with GAAP consistently applied and
there has been no material adverse change in the financial condition of
Borrower since the submission of such financial information to Bank.
6.16 Financial Reporting.
a. Borrower at all times hereafter shall maintain a standard and modern
system of accounting in accordance with GAAP consistently applied with ledger
and account cards and/or computer tapes and computer disks, computer printouts
and computer records pertaining to the Collateral which contain information as
may from time to time be requested by Bank, not modify or change its method of
accounting or enter into, modify or terminate any agreement presently existing,
or at any time hereafter entered into with any third party accounting firm
and/or service bureau for the preparation and/or storage of Borrower's
accounting records without the written consent of Bank first obtained and
without said accounting firm and/or service bureau agreeing to provide
information regarding the Accounts and Inventory and Borrower's financial
condition to Bank; permit Bank and any of its employees, officers or agents,
upon demand, during Borrower's usual business hours, or the usual business hour
of third persons having control thereof, to have access to and examine all of
Borrower's Books relating to the Collateral, Borrower's Indebtedness to Bank,
Borrower's financial condition and the results of Borrower's operations and in
connection therewith, permit Bank or any of its agents, employees or officers to
copy and make extracts therefrom.
b. Borrower shall deliver to Bank within thirty (30) days after the end of
each month and forty-five (45) days after the end of each fiscal quarter, a
company prepared balance sheet and profit and loss statement covering Borrower's
operations and deliver to Bank within one hundred and twenty (120) days after
the end of each of Borrower's fiscal years an annual audited statement of the
financial condition of Borrower for each such fiscal year, including but not
limited to, a balance sheet, profit and loss statement, statement of cash flows,
and any other report requested by Bank relating to the Collateral and the
financial condition of Borrower.
c. In addition to the financial statements requested above, Borrower
agrees to provide Bank with the following schedules:
(1) Borrowing Base Certificate on a monthly basis, including Accounts
Receivable and Accounts Payable agings and listings, all due within 30
days of each month end.
(2) Compliance Certification on a monthly basis due within 30 days of each
month end and 45 days of each fiscal quarter end, signed by the CEO,
President, or Chief Financial Officer of Borrower stating that there
exists on the date of delivery to Bank no condition or event which
constitutes a breach or Event of Default under this Agreement.
(3) Copies of all filings with the SEC, including 10-K and 10-Q financial
reports.
6.17 Borrower shall maintain the following financial ratios and covenants on a
consolidated and non-consolidated basis, which shall be monitored on a
monthly basis, except as noted below:
a. Tangible Effective Net Worth in an amount not less than $3,800,000
through January 31, 2002 increasing to $4,300,000 thereafter;
b. a Debt-to-Worth Ratio of less than .90;
c. maintain on a consolidated basis net profit after taxes of at least
$1.00 on a quarterly basis.
All financial covenants shall be computed in accordance with GAAP consistently
applied except as otherwise specifically set forth in this Agreement. All monies
due from affiliates (including officers, directors and shareholders) shall be
excluded from Borrower's assets for all purposes hereunder.
6.18 Borrower shall promptly supply Bank (and cause any guarantor to supply
Bank) with such other information (including tax returns) concerning its
financial affairs (or that of any guarantor) as Bank may request from time
to time hereafter, and shall promptly notify Bank of any material adverse
change in Borrower's financial condition and of any condition or event
which constitutes a breach of or an event which constitutes an Event of
Default under this Agreement.
6.19 Borrower is now and shall be at all times hereafter solvent and able to pay
its debts (including trade debts) as they mature.
6.20 Borrower shall immediately and without demand reimburse Bank for all sums
expended by Bank in connection with any action brought by Bank to correct
any default or enforce any provision of this Agreement, including all Bank
Expenses; Borrower authorizes and approves all advances and payments by
Bank for items described in this Agreement as Bank Expenses.
6.21 Each warranty, representation and agreement contained in this Agreement
shall be automatically deemed repeated with each advance and shall be
conclusively presumed to have been relied on by Bank regardless of any
investigation made or information possessed by Bank. The warranties,
representations and agreements set forth herein shall be cumulative and in
addition to any and all other warranties, representations and agreements
which Borrower shall give, or cause to be given, to Bank, either now or
hereafter.
6.22 Borrower shall keep all of its principal bank accounts with Bank and shall
notify Bank immediately in writing of the existence of any other bank
account, deposit account, or any other account into which money can be
deposited.
6.23 Borrower shall furnish to Bank: (a) as soon as possible, but in no event
later than thirty (30) days after Borrower knows or has reason to know that
any reportable event with respect to any deferred compensation plan has
occurred, a statement of the chief financial officer of Borrower setting
forth the details concerning such reportable event and the action which
Borrower proposes to take with respect thereto, together with a copy of the
notice of such reportable event given to the Pension Benefit Guaranty
Corporation, if a copy of such notice is available to Borrower; (b)
promptly after the filing thereof with the United States Secretary of Labor
or the Pension Benefit Guaranty Corporation, copies of each annual report
with respect to each deferred compensation plan; (c) promptly after receipt
thereof, a copy of any notice Borrower may receive from the Pension Benefit
Guaranty Corporation or the Internal Revenue Service with respect to any
deferred compensation plan; provided, however, this subparagraph shall not
apply to notice of general application issued by the Pension Benefit
Guaranty Corporation or the Internal Revenue Service; and (d) when the same
is made available to participants in the deferred compensation plan, all
notices and other forms of information from time to time disseminated to
the participants by the administrator of the deferred compensation plan.
6.24 Borrower is now and shall at all times hereafter remain in compliance with
all federal, state and municipal laws, regulations and ordinances relating
to the handling, treatment and disposal of toxic substances, wastes and
hazardous material and shall maintain all necessary authorizations and
permits.
7. EVENTS OF DEFAULT.
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Any one or more of the following events shall constitute an Event of Default
by Borrower under this Agreement:
a. If Borrower fails or neglects to perform, keep or observe any term,
provision, condition, covenant, agreement, warranty or representation contained
in this Agreement, or any other present or future document, instrument or
agreement between Borrower and Bank;
b. If any representation, statement, report or certificate made or
delivered by Borrower, or any of its officers, employees or agents to Bank is
not true and correct;
c. If Borrower fails to pay when due and payable or declared due and
payable, all or any portion of Borrower's Indebtedness (whether of principal,
interest, taxes, reimbursement of Bank Expenses, or otherwise);
d. If there is a material impairment of the prospect of repayment of all or
any portion of Borrower's Indebtedness or a material impairment of the value or
priority of Bank's security interest in the Collateral;
e. If all or any of Borrower's assets are attached, seized, subject to a
writ or distress warrant, or are levied upon, or come into the possession of any
Judicial Officer or Assignee and the same are not released, discharged or bonded
against within ten (10) days thereafter,
f. If any Insolvency Proceeding is filed or commenced by or against
Borrower without being dismissed within ten (10) days thereafter;
g. If any proceeding is filed or commenced by or against Borrower for its
dissolution or liquidation;
h. 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;
i. If a notice of lien, levy or assessment is filed of record with respect
to any or all of Borrower's assets by the United States Government, or any
department, agency or instrumentality thereof, or by any state, county,
municipal or other government agency or if any taxes or debts owing at any time
hereafter to any one or more of such entities becomes a lien, whether inchoate
or otherwise, upon any or all of Borrower's assets and the same is not paid on
the payment date thereof;
j. If a judgment or other claim becomes a lien or encumbrance upon any or
all of Borrower's assets and the same is not satisfied, dismissed or bonded
against within ten (10) days thereafter;
k. If Borrower's records are prepared and kept by an outside computer
service bureau at the time this Agreement is entered into or during the term of
this Agreement such an agreement with an outside service bureau is entered into,
and at any time thereafter, without first obtaining the written consent of Bank,
Borrower terminates, modifies, amends or changes its contractual relationship
with said computer service bureau or said computer service bureau fails to
provide Bank with any requested information or financial data pertaining to
Bank's Collateral, Borrower's financial condition or the results of Borrower's
operations;
1. If Borrower permits a default in any material agreement to which
Borrower is a party with third parties so as to result in an acceleration of the
maturity of Borrowers indebtedness to others, whether under any indenture,
agreement or otherwise;
m. If Borrower makes any payment on account of indebtedness which has been
subordinated to Borrower's Indebtedness to Bank except as otherwise permitted
under the terms of this Agreement;
n. If any misrepresentation exists now or thereafter in any warranty or
representation made to Bank by any officer or director of Borrower, or if any
such warranty or representation is withdrawn by any officer or director;
o. If any party subordinating its claims to that of Bank's or any guarantor
of Borrower's indebtedness dies, terminates its subordination or guaranty,
violates the terms of the subordination or guaranty, becomes insolvent, or an
Insolvency Proceeding is commenced by or against any such subordinating party or
guarantor;
p. If Borrower is an individual and Borrower dies;
q. If any reportable event, which Bank determines constitutes grounds for
the termination of any deferred compensation plan by the Pension Benefit
Guaranty Corporation or for the appointment by the appropriate United States
District Court of a trustee to administer any such plan, shall have occurred and
be continuing thirty (30) days after written notice of such determination shall
have been given to Borrower by Bank, or any such Plan shall be terminated within
the meaning of Title IV of the Employment Retirement Income Security Act
("ERISA"), or a trustee shall be appointed by the appropriate United States
District Court to administer any such plan, or the Pension Benefit Guaranty
Corporation shall institute proceedings to terminate any plan and in case of any
event described in this Section 7, the aggregate amount of Borrower's liability
to the Pension Benefit Guaranty Corporation under Sections 4062, 4063 or 4064 of
ERISA shall exceed five percent (5%) of Borrower's Tangible Effective Net Worth.
Notwithstanding anything contained in Section 7 to the contrary, Bank shall
refrain from exercising its rights and remedies and Event of Default shall
thereafter not be deemed to have occurred by reason of the occurrence of any of
the events set forth in Sections 7.e, 7.f or 7.j of this Agreement if, within
ten (10) days from the date thereof, the same is released, discharged,
dismissed, bonded against or satisfied; provided, however, if the event is the
institution of Insolvency Proceedings against Borrower, Bank shall not be
obligated to make advances to Borrower during such cure period.
8. BANKS RIGHTS AND REMEDIES.
- ------------------------------
8.1 Upon the occurrence of an Event of Default by Borrower under this
Agreement, Bank 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 Borrower's Indebtedness, whether evidenced by this Agreement,
installment notes, demand notes or otherwise, immediately due and payable to
Bank;
b. Cease advancing money or extending credit to or for the benefit of
Borrower under this Agreement, or any other agreement between Borrower and Bank;
c. Terminate this Agreement as to any future liability or obligation of
Bank, but without affecting Bank's rights and security Interests in the
Collateral, and the Indebtedness of Borrower to Bank;
d. Without notice to or demand upon Borrower or any guarantor, make such
payments and do such acts as Bank considers necessary or reasonable to protect
its security interest in the Collateral. Borrower agrees to assemble the
Collateral if Bank so requires and to make the Collateral available to Bank as
Bank may designate. Borrower authorizes Bank to enter the premises where the
Collateral is located, take and maintain possession of the Collateral and the
premises (at no charge to Bank), or any part thereof, and to pay, purchase,
contest or compromise any encumbrance, charge or lien which in the opinion of
Bank appears to be prior or superior to its security interest and to pay all
expenses Incurred in connection therewith;
e. Without limiting Bank's rights under any security interest, Bank is
hereby granted a license or other right to use, without charge, Borrowers
labels, patents, copyrights, rights of use of any name, trade secrets, trade
names, trademarks and advertising matter, or any property or 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 agreement shall inure to Bank's benefit, and Bank shall have the night
and power to enter into sublicense agreements with respect to all such rights
with third parties on terms acceptable to Bank;
f. Ship, reclaim, recover, store, finish, maintain, repair, prepare for
sale, advertise for sales and sell (in the manner provided for herein) the
Inventory;
g. Sell or dispose 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 is
commercially reasonable in the opinion of Bank. It is not necessary that the
Collateral be present at any such sale. At any sale or other disposition of the
Collateral pursuant to this Section, Bank disclaims all warranties which would
otherwise be given under the Uniform Commercial Code, including without
limitation a disclaimer of any warranty relating to title, possession, quiet
enjoyment or the like, and Bank may communicate these disclaimers to a purchaser
at such disposition. This disclaimer of warranties will not render the sale
commercially unreasonable;
h. Bank shall give notice of the disposition of the Collateral as follows:
(1) Bank shall give Borrower and each holder of a security interest in
the Collateral who has filed with Bank 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 disposition other than a public sale
is to be made of the Collateral, 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's address appearing in this Agreement, at least ten (10)
calendar days before the date fixed for the sale, or at least ten
(10) calendar days before the date on or after which the private
sale or other disposition is to be made, unless the Collateral is
perishable or threatens to decline speedily in value. Notice to
persons other than Borrower claiming an interest in the Collateral
shall be sent to such addresses as have been furnished to Bank or as
otherwise determined in accordance with Section 9611 of the Uniform
Commercial Code; and
(3) If the sale is to be a public sale, Bank shall also give notice of
the time and place by publishing a notice one time at least ten (10)
calendar days before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held; and
(4) Bank may credit bid and purchase at any public sale.
i. Borrower shall pay all Bank Expenses incurred in connection with Bank's
enforcement and exercise of any of its rights and remedies as herein provided,
whether or not suit is commenced by Bank;
j. Any deficiency which 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 parries, to
Borrower by Bank, or, in Bank's discretion, to any party who Bank believes, in
good faith, is entitled to the excess;
k. Without constituting a retention of Collateral in satisfaction of an
obligation within the meaning of 9620 of the Uniform Commercial Code or an
action under California Code of Civil Procedure 726, apply any and all amounts
maintained by Borrower as deposit accounts (as that term is defined under 9102
of the Uniform Commercial Code) or other accounts that Borrower maintains with
Bank against the Indebtedness;
1. The proceeds of any sale or other disposition of Collateral authorized
by this Agreement shall be applied by Bank first upon all expenses authorized by
the Uniform Commercial Code and all reasonable attorney fees and legal expenses
incurred by Bank, whether in-house or outside counsel is used, the balance of
the proceeds of the sale or other disposition shall be applied in the payment of
the Indebtedness, first to interest, then to principal, then to remaining
Indebtedness and the surplus, if any, shall be paid over to Borrower or to such
other person(s) as may be entitled to it under applicable law. Borrower shall
remain liable for any deficiency, which it shall pay to Bank immediately upon
demand. Borrower agrees that Bank shall be under no obligation to accept any
noncash proceeds in connection with any sale or disposition of Collateral unless
failure to do so would be commercially unreasonable. If Bank agrees in its sole
discretion to accept noncash proceeds (unless the failure to so so would be
commercially unreasonable), Bank may ascribe any commercially reasonable value
to such proceeds. Without limiting the foregoing, Bank may apply any discount
factor in determining the present value of proceeds to be received in the future
or may elect to apply proceeds to be received in the future only as and when
such proceeds are actually received in cash by Bank; and
m. The following shall be the basis for any finder of fact's determination
of the value of any Collateral which is the subject matter of a disposition
giving rise to a calculation of any surplus or deficiency under Section 9615f
of the Uniform Commercial Code: (i) The Collateral which is the subject matter
of the disposition shall be valued in an 'as is' condition as of the date of the
disposition, without any assumption or expectation that such Collateral will be
repaired or improved in any manner; (ii) the valuation shall be based upon an
assumption that the transferee of such Collateral desires a resale of the
Collateral for cash promptly (but no later than 30 days) following the
disposition; (iii) all reasonable closing costs customarily borne by the seller
in commercial sales transactions relating to property similar to such Collateral
shall be deducted including, without limitation, brokerage commissions, tax
prorations, attorney's fees, whether in-house or outside counsel is used, and
marketing costs; (iv) the value of the Collateral which is the subject matter of
the disposition shall be further discounted to account for any estimated holding
costs associated with maintaining such Collateral pending sale (to the extent
not accounted for in (iii) above), and other maintenance, operational and
ownership expenses; and (v) any expert opinion testimony given or considered in
connection with a determination of the value of such Collateral must be given by
persons having at least 5 years experience in appraising property similar to the
Collateral and who have conducted and prepared a complete written appraisal of
such Collateral taking into consideration the factors set forth above. The
"value" of any such Collateral shall be a factor in determining the amount of
proceeds which would have been realized in a disposition to a transferee other
than a secured party, a person related to a secured party or a secondary obligor
under Section 9615(f) of the Uniform Commercial Code.
8.2 In addition to any and all other rights and remedies available to Bank
under or pursuant to this Agreement or any other documents, instrument or
agreement contemplated hereby, Borrower acknowledges and agrees that (i) at
any time following the occurrence and during the continuance of any Event
of Default, and/or (ii) termination of Bank's commitment or obligation to
make loans or advances or otherwise extent credit to or in favor of
Borrower hereinunder, together with any and all other Indebtedness of
Borrower to Bank remaining unpaid, and Borrower pledges to Bank and grants
to Bank a continuing first priority security interest in such cash
collateral so delivered to Bank.
8.3 Bank's rights and remedies under this Agreement and all other agreements
shall be cumulative. Bank shall have all other rights and remedies not
inconsistent herewith as provided by law or in equity. No exercise by Bank
of one right or remedy shall be deemed an election, and no waiver by Bank
of any default on Borrower's part shall be deemed a continuing waiver. No
delay by Bank shall constitute a waiver, election or acquiescence by Bank.
9. TAXES AND EXPENSES REGARDING BORROWER'S PROPERTY.
-------------------------------------------------
If Borrower fails to pay promptly when due to another person or entity, monies
which Borrower is required to pay by reason of any provision in this Agreement,
Bank may, but need not, pay the same and charge Borrower's loan account
therefor, and Borrower shall promptly reimburse Bank. All such sums shall become
additional indebtedness owing to Bank, shall bear interest at the rate
hereinabove provided, and shall be secured by all Collateral. Any payments made
by Bank shall not constitute (i) an agreement by it to make similar payments in
the future, or (ii) a waiver by Bank of any default under this Agreement. Bank
need not inquire as to, or contest the validity of, any such expense, tax,
security interest, encumbrance or lien and the receipt of the usual official
notice of the payment thereof shall be conclusive evidence that the same was
validly due and owing. Such payments shall constitute Bank Expenses and
additional advances to Borrower.
10. WAIVERS.
-------
10.1 Borrower agrees that checks and other instruments received by Bank in
payment or on account of Borrower's Indebtedness constitute only
conditional payment until such items are actually paid to Bank and Borrower
waives the right to direct the application of any and all payments at any
time or times hereafter received by Bank on account of Borrower's
Indebtedness and Borrower agrees that Bank shall have the continuing
exclusive right to apply and reapply such payments in any manner as Bank
may deem advisable, notwithstanding any entry by Bank upon its books.
10.2 Borrower waives demand, protest, notice of protest, notice of default or
dishonor, notice of payment and nonpayment, notice of any default,
nonpayment at maturity, release, compromise, settlement, extension or
renewal of any or all commercial paper, accounts, documents, instruments,
chattel paper, and guarantees at any time held by Bank on which Borrower
may in any way be liable.
10.3 Bank shall not in any way or manner be liable or responsible for (a) the
safekeeping of the Inventory; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the
value thereof, or (d) any act or default of any carrier, warehouseman,
bailee, forwarding agency or other person whomsoever. All risk of loss,
damage or destruction of Inventory shall be borne by Borrower.
10.4 Borrower waives the right and the right to assert a confidential
relationship, if any, it may have with any accountant, accounting firm
and/or service bureau or consultant in connection with any information
requested by Bank pursuant to or in accordance with this Agreement, and
agrees that a Bank may contact directly any such accountant, accounting
firm and/or service bureau or consultant in order to obtain such
information.
10.5 THE UNDERSIGNED AND THE BANK ACKNOWLEDGE THAT THE RIGHT TO TRIAL BY JURY IS
A CONSTITUTIONAL ONE, BUT THAT IT MAY BE WAIVED. EACH PARTY, AFTER
CONSULTING (OR HAVING HAD THE OPPORTUNITY TO CONSULT) WITH COUNSEL OF THEIR
CHOICE, KNOWINGLY AND VOLUNTARILY, AND FOR THEIR MUTUAL BENEFIT, WAIVES ANY
RIGHT TO TRIAL BY JURY IN THE EVENT OF LITIGATION REGARDING THE PERFORMANCE
OR ENFORCEMENT OF, OR IN ANY WAY RELATED TO, THIS AGREEMENT OR THE
INDEBTEDNESS.
10.6 In the event that Bank elects to waive any rights or remedies hereunder, or
compliance with any of the terms hereof, or delays or fails to pursue or
enforce any term, such waiver, delay or failure to pursue or enforce shall
only be effective with respect to that single act and shall not be
construed to affect any subsequent transactions or Bank's right to later
pursue such rights and remedies.
11. ONE CONTINUING LOAN TRANSACTION.
-------------------------------
All loans and advances heretofore, now or at any time or times
hereafter made by Bank to Borrower under this Agreement or any other
agreement between Bank and Borrower, shall constitute one loan secured
by Bank's security interests in the Collateral and by all other
security interests, liens, encumbrances heretofore, now or from time to
time hereafter granted by Borrower to Bank.
Notwithstanding the above, (i) to the extent that any portion of the
Indebtedness is a consumer loan, that portion shall not be secured by any deed
of trust or mortgage on or other security Interest in Borrower's principal
dwelling which is not a purchase money security interest as to that portion,
unless expressly provided to the contrary in another place, or (ii) if Borrower
(or any of them) has (have) given or give(s) Bank a deed of trust or mortgage
covering real property, that deed of trust or mortgage shall not secure the loan
and any other Indebtedness of Borrower (or any of them), unless expressly
provided to the contrary in another place.
12. NOTICES.
-------
Unless otherwise provided in this Agreement, all notices or demands by
either party on the other relating to this Agreement shall be in writing
and sent by regular United States mail, postage prepaid, property
addressed to Borrower or to Bank at the addresses stated in this Agreement,
or to such other addresses as Borrower or Bank may from time to time
specify to the other in writing. Requests to Borrower by Bank hereunder
may be made orally.
13. AUTHORIZATION TO DISBURSE.
-------------------------
Bank is hereby authorized to make loans and advances hereunder upon
telephonic or other instructions received from anyone purporting to be an
officer, employee, or representative of Borrower, or at the discretion of
Bank if said loans and advances are necessary to meet any Indebtedness of
Borrower to Bank. Bank shall have no duty to make inquiry or verify the
authority of any such party, and Borrower shall hold Bank harmless from
any damage, claims or liability by reason of Bank's honor of, or failure
to honor, any such instructions.
14. PAYMENTS.
--------
Borrower hereby authorizes Bank to deduct the full amount of any interest,
fees, costs, or Bank Expenses due under this Agreement and not paid or
collected when due in accordance with the terms and conditions hereof
from any account maintained by Borrower with Bank. Should there be
insufficient funds in any such account to pay all such sums when due, the
full amount of such deficiency shall be immediately due and payable by
Borrower; provided, however, that Bank shall not be obligated to advance
funds to cover any such payment.
15. DESTRUCTION OF BORROWER'S DOCUMENTS.
------------------------------------
Any documents, schedules, invoices or other papers delivered to Bank, may
be destroyed or otherwise disposed of by Bank six (6) months after they
are delivered to or received by Bank, unless Borrower requests, in writing,
the return of the said documents, schedules, invoices or other papers and
makes arrangements, at Borrower's expense, for their return.
16. CHOICE OF LAW.
--------------
The validity of this Agreement, its construction, interpretation and
enforcement, and the rights of the parties hereunder and concerning the
Collateral, shall be determined according to 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 in the Northern District of California or the
County of Santa Clara.
17. GENERAL PROVISIONS.
-------------------
17.1 This Agreement shall be binding and deemed effective when executed by
Borrower and accepted and executed by Bank at its headquarters office.
17.2 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 hereunder without
Bank's prior written consent and any prohibited assignment shall be
absolutely void. No consent to an assignment by Bank shall release Borrower
or any guarantor from their obligations to Bank. Bank may assign this
Agreement and its rights and duties hereunder. Bank reserves the right to
sell, assign, transfer, negotiate or grant participations in all or any
part of, or any interest in Bank's rights and benefits hereunder. In
connection therewith, Bank may disclose all documents and information which
Bank now or hereafter may have relating to Borrower or Borrower's business.
17.3 Paragraph headings and paragraph numbers have been set forth herein for
convenience only; unless the contrary is compelled by the context,
everything contained in each paragraph applies equally to this entire
Agreement. Unless the context of this Agreement clearly requires otherwise,
references to the plural include the singular, references to the singular
include the plural, and the term 'including' is not limiting. 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.
17.4 Neither this Agreement nor any uncertainty or ambiguity herein shall be
construed or resolved against Bank 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.
17.5 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.
17.6 This Agreement cannot be changed or terminated orally. This Agreement
contains the entire agreement of the parties hereto and supersedes all
prior agreements, understandings, representations, warranties and
negotiations, if any, related to the subject matter hereof, and none of the
parties shall be bound by anything not expressed in writing.
17.7 The parties intend and agree that their respective rights, duties, powers,
liabilities, obligations and discretions shall be performed, carded out,
discharged and exercised reasonably and in good faith.
17.8 In addition, if this Agreement is secured by a deed of trust or mortgage
covering real property, then the trustor or mortgagor shall not mortgage or
pledge the mortgaged premises as security for any other indebtedness or
obligations. This Agreement, together with all other indebtedness secured
by said deed of trust or mortgage, shall become due and payable
immediately, without notice, at the option of Bank, (a) if said trustor or
mortgagor shall mortgage or pledge the mortgaged premises for any other
indebtedness or obligations or shall convey, assign or transfer the
mortgaged premises by deed, installment sale contract or other instrument;
(b) if the title to the mortgaged premises shall become vested in any other
person or party in any manner whatsoever, or (c) if there is any
disposition (through one or more transactions) of legal or beneficial title
to a controlling interest of said trustor or mortgagor.
17.9 Each undersigned Borrower hereby agrees that it is jointly and severally,
directly, and primarily liable to Bank for payment and performance in full
of all duties, obligations and liabilities under this Agreement and each
other document, instrument and agreement entered into by Borrower with or
in favor of Bank in connection herewith, and that such liability is
independent of the duties, obligations and liabilities of any other
Borrower or any other guarantor of the Indebtedness, as applicable. Each
reference herein to Borrower shall mean each and every Borrower party
hereto, individually and collectively, jointly and severally.
17.10Counterparts; Entire Agreement. This Agreement may be executed by the
parties hereto in several counterparts, each of which shall be deemed to be
an original and all of which shall constitute together but one and the same
agreement. This Agreement, together with the other Loan Documents
constitute the entire understanding among the parties hereto with respect
to the subject matter hereof and supersedes any prior agreements, written
or oral, with respect thereto.
[Signature page follows.]
IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security
executed as of the date first hereinabove written.
Accepted and effective as of: _________________ at Bank's Headquarters Office
COMERICA BANK-CALIFORNIA, a California banking corporation
By: /s/ Clifford A. Payson
----------------------
Name: Clifford A. Payson
Title: Senior Vice President
BORROWERS:
'Borrower l'
Alanco Technologies, Inc., an Arizona Corporation
By: /s/ J.A. Carlson
------------------
John A. Carlson, CFO
'Borrower 2'
Arraid, Inc., an Arizona corporation
By: /s/ J. A. Carlson
-----------------
John A. Carlson, CFO
'Borrower 3'
Excel/Meridian Data, an Arizona corporation
By: /s/ J.A. Carlson
-----------------
John A. Carlson, CFO
'Borrower 4'
Sanone, Inc., an Arizona corporation
By: /s/ J.A. Carlson
----------------
John A. Carlson, CFO
'Borrower 5'
Netzerver, Inc., an Arizona corporation
By: /s/ J.A. Carlson
----------------
John A. Carlson, CFO
Address for Notices:
333 West Santa Clara Street San Jose, California, 95113
Address for Notices:
15900 North 78th Street Scottsdale, Az. 85260
SURETYSHIP RIDER
Borrowers: Alanco Technologies, Inc. ('Borrower 1'); Arraid, Inc., ('Borrower
2'); Excel/Meridian Data, Inc. ('Borrower 3'); Sanone, Inc. ('Borrower 4');
and Netzerver, Inc.,('Borrower 5').
Each of the undersigned Borrowers has entered into a certain Amended and
Restated Loan & Security Agreement (Accounts And Inventory) (hereinafter
referred to as the 'Agreement'),dated January 24, 2002, with Comerica
Bank-California, a California banking corporation ('Bank') as secured party.
This SURETYSHIP RIDER (hereinafter this `Rider'), dated January 24, 2002, is
hereby made a part of and incorporated into that Agreement. Unless otherwise
defined, all initially capitalized terms in this Rider shall be as defined in
the Agreement.
The parties to the Agreement hereby agree as follows:
Each Borrower agrees that it is jointly and severally, directly, and primarily
liable to Bank for payment in full of the Indebtedness and that such liability
is independent of the duties, obligations and liabilities of the other Borrower.
The Agreement and each other document, instrument and agreement entered into by
any one or more of the Borrowers in connection therewith (collectively,
hereinafter, the 'Loan Documents') are a primary and original obligation of each
Borrower, are not the creation of a surety relationship, and are an absolute,
unconditional, and continuing promise of payment and performance which shall
remain in full force and effect without respect to future changes in conditions,
including any change of law or any invalidity or irregularity with respect to
the Loan Documents. Each Borrower acknowledges that the obligations of such
Borrower undertaken herein might be construed to consist, at least in part, of
the guaranty of obligations of persons or entities other than such Borrower
(including any other Borrower party hereto) and, in full recognition of that
fact, each Borrower consents and agrees that Bank may, at any time and from time
to time, without notice or demand, whether before or after any actual or
purported termination, repudiation, or revocation of the Agreement and the other
Loan Documents by any one or more Borrowers, and without affecting the
enforceability or continuing effectiveness hereof as to each Borrower: (a)
supplement, restate, modify, amend, increase, decrease, extend, renew,
accelerate, or otherwise change the time for payment or the terms of the
Indebtedness or any part thereof, including any increase or decrease of the
rate(s) of interest thereon; (b) supplement restate, modify, amend, increase,
decrease or waive, or enter into or give any agreement, approval, or consent
with respect to, the Indebtedness or any part thereof, or any of the Loan
Documents or any additional security or guaranties, or any condition covenant,
default, remedy, right, representation or term thereof or thereunder; (c) accept
new or additional instruments, documents or agreements in exchange for or
relative to any of the Loan Documents or the Indebtedness or any part thereof;
(d) accept partial payments on the Indebtedness; (e) receive and hold additional
security or guaranties for the Indebtedness or any part thereof; (f) release,
reconvey, terminate, waive, abandon, fail to perfect, subordinate, exchange,
substitute, transfer, or enforce any security or guaranties, and apply any
security and direct the order or manner of sale thereof as Bank in its sole and
absolute discretion may determine; (g) release any Person from any personal
liability with respect to the Indebtedness or any part thereof; (h) settle,
release on terms satisfactory to Bank or by operation of applicable laws, or
otherwise liquidate or enforce any Indebtedness and any security therefor or
guaranty thereof in any manner, consent to the transfer of any security and bid
and purchase at any sale; or (i) consent to the merger, change, or any other
restructuring or termination of the corporate or partnership existence of any
Borrower or any other Person, and correspondingly restructure the Indebtedness,
and any such merger, change, restructuring, or termination shall not affect the
liability of any Borrower or the continuing effectiveness hereof, or the
enforceability hereof with respect to all or any part of the Indebtedness.
Upon the occurrence and during the continuance of any Event of Default, Bank may
enforce the Agreement and the other Loan Documents independently as to each
Borrower and independently of any other remedy or security Bank at any time may
have or hold in connection with the Indebtedness, and it shall not be necessary
for Bank to marshal assets in favor of any Borrower or any other Person or to
proceed upon or against or exhaust any security or remedy before proceeding to
enforce the Agreement and the other Loan Documents. Each Borrower expressly
waives any right to require Bank to marshal assets in favor of any Borrower or
any other Person or to proceed against any other Borrower or any Collateral
provided by any Person, and agrees that Bank may proceed against Borrowers or
any Collateral in such order as it shall determine in its sole and absolute
discretion.
Bank may file a separate action or actions against any Borrower,
whether action is brought or prosecuted with respect to any security or against
any other person, or whether any other person is joined in any such action or
actions. Each Borrower agrees that Bank and any Borrower and any affiliate of
any Borrower may deal with each other in connection with the Indebtedness or
otherwise, or alter any contracts or agreements now or hereafter existing
between any of them, in any manner whatsoever, all without in any way altering
or affecting the continuing efficacy of the Agreement or the other Loan
Documents.
Bank's rights under the Loan Documents shall be reinstated and revived, and the
enforceability of the Agreement and the other Loan Documents shall continue,
with respect to any amount at any time paid on account of the Indebtedness which
thereafter shall be required to be restored or returned by Bank, all as though
such amount had not been paid. The rights of Bank created or granted herein and
the enforceability of the Agreement and the other Loan Documents at all times
shall remain effective to cover the full amount of all the Indebtedness even
though the Indebtedness, including any part thereof or any other security or
guaranty therefor, may be or hereafter may become invalid or otherwise
unenforceable as against any Borrower and whether or not any other Borrower
shall have any personal liability with respect thereto.
To the maximum extent permitted by applicable law and to the extent that a
Borrower is deemed a guarantor, each Borrower expressly waives any and all
defenses now or hereafter arising or asserted by reason of (a) any disability or
other defense of any other Borrower with respect to the Indebtedness, (b) the
unenforceability or invalidity of any security or guaranty for the Indebtedness
or lack of perfection or continuing perfection or failure of priority of any
security for the Indebtedness, (c) the cessation for any cause whatsoever of the
liability of any other Borrower (other than by reason of the full payment and
performance of all Indebtedness), (d) any failure of the to marshal assets in
favor Bank of any Borrower or any other person, (e) any failure of Bank to give
notice of sale or other disposition of collateral to any Borrower or any other
Person or any defect in any notice that may be given in connection with any sale
or disposition of collateral, (f) any failure of Bank to comply with applicable
law in connection with the sale or other disposition of any collateral or other
security for any Obligation, including any failure of Bank to conduct a
commercially reasonable sale or other disposition of any collateral or other
security for any Obligation, (g) any act or omission of Bank or others that
directly or indirectly results in or aids the discharge or release of any
Borrower or the Indebtedness or any security or guaranty therefor by operation
of law or otherwise, (h) any law which provides that the obligation of a surety
or guarantor must neither be larger in amount nor in other respects more
burdensome than that of the principal or which reduces a surety's or guarantors
obligation in proportion to the principal obligation, (i) any failure of Bank to
file or enforce a claim in any bankruptcy or other proceeding with respect to
any Person, (j) the election by Bank of the application or non-application of
Section 1111(b)(2) of the United States Bankruptcy Code, (k) any extension of
credit or the grant of any lien under Section 364 of the United States
Bankruptcy Code, (l) any use of cash collateral under Section 363 of the United
States Bankruptcy Code, (m) any agreement or stipulation with respect to the
provision of adequate protection in any bankruptcy proceeding of any Person,
(n) the avoidance of any lien in favor of Bank for any reason, or (o) any
action taken by Bank that is authorized by theAgreement or any other provision
of any Loan Document. Until such time as all of the Indebtedness have been
fully, finally, and indefeasibly paid in full in cash: (i) each Borrower hereby
waives and postpones any right of subrogation it has or may have as against
any other Borrower respect to the Indebtedness; and (ii) in addition, each
borrower also hereby waives and postpones any right to proceed or to seek
recourse against or with respect to any property or asset of any other Borrower.
Each Borrower expressly waives all setoffs and counterclaims and all
presentments, demands for payment or performance, notices of nonpayment
or nonperformance, protests, notices of protest, notices of dishonor and all
other notices or demands of any kind or nature whatsoever with respect to the
Indebtedness, and all notices of acceptance of the Agreement or the other Loan
Documents or of the existence, creation or incurring of new or additional
Indebtedness.
In the event that all or any part of the Indebtedness at any time are secured by
any one or more deeds of trust or mortgages or other instruments creating or
granting liens on any interests in real property, each Borrower authorizes Bank,
upon the occurrence of and during the continuance of any Event of Default, at
its sole option, without notice or demand and without affecting the obligations
of any Borrower, the enforceability of the Agreement and the other Loan
Documents, or the validity or enforceability of any liens of Bank, to foreclose
any or all of such deeds of trust or mortgages or other instruments by judicial
or nonjudicial sale.
Without limiting the generality of any other waiver or other provision set
forth in this Rider, each Borrower waives all rights and defenses that such
Borrower may have because the Indebtedness are secured by real property.
This means, among other things:
Bank may collect from any Borrower without first foreclosing on any real
or personal property pledged as Collateral by any other Borrower to secure the
Indebtedness.
If Bank forecloses on any real property pledged as Collateral by
any Borrower.
a. the amount of the debt may be reduced only by the price for which that
Collateral is sold at the foreclosure sale, even if the collateral is worth more
than the sale price.
b. Bank may collect from any Borrower even if Bank, by foreclosing on the
real property pledged as Collateral, has destroyed any right that Borrower may
have to collect from any other Borrower.
This is an unconditional and irrevocable waiver of any rights and defenses each
Borrower may have because the Indebtedness are secured by Real Property. These
rights and defenses include, but are not limited to, any rights or defenses
based upon Section 580a, 580b, 580d, or 726 of the Code of Civil Procedure.
To the fullest extent permitted by applicable law, to the extent that a
Borrower is deemed a guarantor, each Borrower expressly waives any defenses to
the enforcement of the Agreement and the other Loan Documents or any rights of
Bank created or granted hereby or to the recovery by Bank against any Borrower
or any other Person liable therefor of any deficiency after a judicial or
nonjudicial foreclosure or sale, even though such a foreclosure or sale may
impair the subrogation rights of Borrowers and may preclude Borrowers from
obtaining reimbursement or contribution from other Borrowers. To the fullest
extent permitted by applicable law, each Borrower expressly waives any
suretyship defenses or benefits that it otherwise might or would have under
applicable law. WITHOUT LIMITING THE GENERALITY OF ANY OTHER WAIVER OR OTHER
PROVISION SET FORTH IN THIS RIDER, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE
LAW, EACH BORROWER WAIVES ALL RIGHTS AND DEFENSES ARISING OUT OF AN ELECTION OF
REMEDIES BY LENDER, EVEN THOUGH THAT ELECTION OF REMEDIES, SUCH AS A NONJUDICIAL
FORECLOSURE WITH RESPECT TO SECURITY FOR THE INDEBTEDNESS, HAS DESTROYED SUCH
BORROWER'S RIGHTS OF SUBROGATION AND REIMBURSEMENT AGAINST THE OTHER BORROWERS
BY THE OPERATION LAW, INCLUDING BUT NOT LIMITED TO SECTION 580d OF THE CODE OF
CIVIL PROCEDURE, OR OTHERWISE.
Each of the undersigned Borrowers warrants and agrees that each of the
waivers and consents set forth herein are made after consultation with
legal counsel and with full knowledge of their significance and consequences,
with the understanding that events giving rise to any defense or right waived
may diminish, destroy or otherwise adversely affect rights which Borrower
otherwise may have against any other Borrower, Bank or others, or against
Collateral. If any of the waivers or consents herein are determined to
be contrary to any applicable law or public policy, such waivers and consents
shall be effective to the maximum extent permitted by law.
IN WITNESS WHEREOF, the parties hereto have caused this Loan and Security
executed as of the date first hereinabove written.
Accepted and effective as of: _________________ at Bank's Headquarters Office
COMERICA BANK-CALIFORNIA, a California banking corporation
By: /s/ Clifford A. Payson
----------------------
Name: Clifford A. Payson
Title: Senior Vice President
BORROWERS:
'Borrower l'
Alanco Technologies, Inc., an Arizona Corporation
By: /s/ J.A. Carlson
------------------
John A. Carlson, CFO
'Borrower 2'
Arraid, Inc., an Arizona corporation
By: /s/ J. A. Carlson
-----------------
John A. Carlson, CFO
'Borrower 3'
Excel/Meridian Data, an Arizona corporation
By: /s/ J.A. Carlson
-----------------
John A. Carlson, CFO
'Borrower 4'
Sanone, Inc., an Arizona corporation
By: /s/ J.A. Carlson
----------------
John A. Carlson, CFO
'Borrower 5'
Netzerver, Inc., an Arizona corporation
By: /s/ J.A. Carlson
----------------
John A. Carlson, CFO
Address for Notices:
333 West Santa Clara Street San Jose, California, 95113
Address for Notices:
15900 North 78th Street Scottsdale, Az. 85260
INVENTORY RIDER REVOLVING ADVANCE
---------------------------------
Borrower(s): Alanco Technologies, Inc. ('Borrower l'); Arraid, Inc.,
('Borrower 2'); Excel/Meridian Data, Inc. ('Borrower 3'); Sanone, Inc.
('Borrower 4'); and Netzerver,Inc., ('Borrower 5').
Borrower has entered into a certain Amended and Restated Revolving Credit and
Security Agreement (Accounts and Inventory) (hereinafter referred to as
('Agreement') dated January 24, 2002 with Bank (Secured Party). This INVENTORY
RIDER (hereinafter referred to as this Rider) dated January 24, 2002 is hereby
made a part of and incorporated into that Agreement. Unless otherwise defined,
all initially capitalized terms in this Rider shall be as defined in the
Agreement
1. At the request of Borrower, made at any time and from time to time during
the term of the Agreement, and so long as no event of default under the
Agreement has occurred and Borrower is in full, faithful and timely
compliance with each and all of the covenants, conditions, warranties and
representations contained in the Agreement, this Rider and/or any other
agreement between Bank and Borrower, Bank agrees to lend Borrower to
borrower as follows:
a.) The advances against Eligible Inventory shall directly correlate
to the amount of new capital raised by Borrower as stated below.
b.) In the event that Borrower raises less than $500,000 in New Capital,
no advances against Eligible Inventory shall be made.
c.) For amounts of New Capital raised by Borrower in excess of $500,000,
Bank will lend the equivalent amount against Eligible Inventory, less
cumulative net operating losses, up to a maximum advance outstanding at
any one time of Two Hundred and Fifty Thousand Dollars ($250,000),
upon Borrower's concurrent execution and delivery to Bank of a
Designation of Inventory, or Certification of Borrowing Base, in form
customarily used by Bank.
All advances made and to be made pursuant to this Rider are solely and
exclusively to enable Borrower to acquire rights in and purchase new
Inventory, and Borrower represents and warrants that all advances by Bank
pursuant to this Rider will be used solely and exclusively for such
purpose; and since such advances will be used for the foregoing purposes,
Bank's security interest in Borrower's Inventory is and shall be at all
times a purchase money security interest as that term is described in
Section 9103 of the California Uniform Commercial Code.
2. Advances made by Bank to Borrower pursuant to this Rider shall be included
as part of the Indebtedness of Borrower to Bank as the term 'Indebtedness'
is defined in the Agreement; and at Bank's option, advances pursuant to this
Rider may be evidenced by promissory note(s), in form and on terms
satisfactory to Bank. All such advances shall bear interest at the rate and
be payable in the manner specified in said promissory note(s) in the event
Bank exercises the aforementioned option, and in the event Bank does not,
such advances shall bear interest at the rate and be payable in the manner
specified in the Agreement.
3. All of the terms, covenants, warranties, conditions, agreements and
representations of the Agreement are incorporated herein as though set forth
in their entirety and are hereby reaffirmed by Borrower and Bank as though
fully set forth herein.
Accepted and effective as of: ________________ at Bank's Headquarters Office
COMERICA BANK-CALIFORNIA, a California banking corporation
By: /s/ Clifford A. Payson
Name: Clifford A. Payson
Title: Senior Vice President
BORROWERS:
'Borrower l'
Alanco Technologies, Inc., an Arizona Corporation
By: /s/ J.A. Carlson
------------------
John A. Carlson, CFO
'Borrower 2'
Arraid, Inc., an Arizona corporation
By: /s/ J. A. Carlson
-----------------
John A. Carlson, CFO
'Borrower 3'
Excel/Meridian Data, an Arizona corporation
By: /s/ J.A. Carlson
-----------------
John A. Carlson, CFO
'Borrower 4'
Sanone, Inc., an Arizona corporation
By: /s/ J.A. Carlson
----------------
John A. Carlson, CFO
'Borrower 5'
Netzerver, Inc., an Arizona corporation
By: /s/ J.A. Carlson
----------------
John A. Carlson, CFO
Address for Notices:
333 West Santa Clara Street San Jose, California, 95113
Address for Notices:
15900 North 78th Street Scottsdale, Az. 85260