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LOAN AND SECURITY AGREEMENT
by and between
INCOMNET COMMUNICATIONS CORPORATION
and
FOOTHILL CAPITAL CORPORATION
Dated as of April 9, 1999
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TABLE OF CONTENTS
PAGE(S)
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2. DEFINITIONS AND CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . 1
2.1 DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
1.2 ACCOUNTING TERMS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.3 CODE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.4 CONSTRUCTION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
1.5 SCHEDULES AND EXHIBITS. . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2. LOAN AND TERMS OF PAYMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.1 REVOLVING ADVANCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
2.2 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.3 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.4 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.5 OVERADVANCES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
2.6 INTEREST RATES, PAYMENTS, AND CALCULATIONS. . . . . . . . . . . . . . . . . 16
2.7 COLLECTION OF ACCOUNTS. . . . . . . . . . . . . . . . . . . . . . . . . . . 17
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. . . . . . . . . . . . . . . 17
2.9 DESIGNATED ACCOUNT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS.. . . . . . . . . . 18
2.11 FEES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
3. CONDITIONS; TERM OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . 18
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE.. . . . . . . . . . . . . . . . 19
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. . . . . . . . . . . . . . . . . . . . 20
3.3 CONDITION SUBSEQUENT. . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
3.4 TERM; AUTOMATIC RENEWAL.. . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.5 EFFECT OF TERMINATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . 21
3.6 EARLY TERMINATION BY BORROWER.. . . . . . . . . . . . . . . . . . . . . . . 21
3.7 TERMINATION UPON EVENT OF DEFAULT.. . . . . . . . . . . . . . . . . . . . . 21
4. CREATION OF SECURITY INTEREST . . . . . . . . . . . . . . . . . . . . . . . . . 21
4.1 GRANT OF SECURITY INTEREST. . . . . . . . . . . . . . . . . . . . . . . . . 22
4.2 NEGOTIABLE COLLATERAL.. . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE COLLATERAL. . . 22
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED.. . . . . . . . . . . . . . . 22
4.5 POWER OF ATTORNEY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22
4.6 RIGHT TO INSPECT. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5. REPRESENTATIONS AND WARRANTIES. . . . . . . . . . . . . . . . . . . . . . . . . 23
5.1 NO ENCUMBRANCES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.2 ELIGIBLE ACCOUNTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.3 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.4 EQUIPMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23
5.5 LOCATION OF INVENTORY AND EQUIPMENT.. . . . . . . . . . . . . . . . . . . . 24
5.6 INVENTORY RECORDS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. . . . . . . . . . . . . . . . . . 24
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES. . . . . . . . . . . . . . 24
5.9 DUE AUTHORIZATION; NO CONFLICT. . . . . . . . . . . . . . . . . . . . . . . 24
5.10 LITIGATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.11 NO MATERIAL ADVERSE CHANGE.. . . . . . . . . . . . . . . . . . . . . . . . 25
5.12 SOLVENCY.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.13 EMPLOYEE BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25
5.14 ENVIRONMENTAL CONDITION. . . . . . . . . . . . . . . . . . . . . . . . . . 25
6. AFFIRMATIVE COVENANTS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
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6.1 ACCOUNTING SYSTEM.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.2 COLLATERAL REPORTING. . . . . . . . . . . . . . . . . . . . . . . . . . . . 26
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES.. . . . . . . . . . . . . . . . 26
6.4 TAX RETURNS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.5 CARRIER AND LEC PAYABLES. . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.6 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.7 INTENTIONALLY OMITTED.. . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.8 MAINTENANCE OF EQUIPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.9 TAXES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.10 INSURANCE. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28
6.11 NO SETOFFS OR COUNTERCLAIMS. . . . . . . . . . . . . . . . . . . . . . . . 29
6.12 LOCATION OF EQUIPMENT. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.13 COMPLIANCE WITH LAWS.. . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.14 EMPLOYEE BENEFITS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
6.15 LEASES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
6.16 YEAR 2000 COMPLIANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7. NEGATIVE COVENANTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30
7.1 INDEBTEDNESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.2 LIENS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES.. . . . . . . . . . . . . . . . . . . . 31
7.4 DISPOSAL OF ASSETS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.5 CHANGE NAME.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31
7.6 GUARANTEE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.7 NATURE OF BUSINESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.8 PREPAYMENTS AND AMENDMENTS. . . . . . . . . . . . . . . . . . . . . . . . . 32
7.9 CHANGE OF CONTROL.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.10 INTENTIONALLY OMITTED. . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.11 DISTRIBUTIONS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.12 ACCOUNTING METHODS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 32
7.13 INVESTMENTS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.14 TRANSACTIONS WITH AFFILIATES.. . . . . . . . . . . . . . . . . . . . . . . 33
7.15 SUSPENSION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.16 COMPENSATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.17 USE OF PROCEEDS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES.. . . . . . . . . . . . . . . . . . . . . . . . . . 33
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA . . . . . . . . . . . . . . . . . . 33
7.20 FINANCIAL COVENANT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
7.21 CONTRACTS WITH LOCAL EXCHANGE CARRIERS.. . . . . . . . . . . . . . . . . . 34
8. EVENTS OF DEFAULT.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 34
9. FOOTHILL'S RIGHTS AND REMEDIES. . . . . . . . . . . . . . . . . . . . . . . . . 36
9.1 RIGHTS AND REMEDIES.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
9.2 REMEDIES CUMULATIVE.. . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
10. TAXES AND EXPENSES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11. WAIVERS; INDEMNIFICATION . . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.1 DEMAND; PROTEST; ETC.. . . . . . . . . . . . . . . . . . . . . . . . . . . 38
11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. . . . . . . . . . . . . . . . . . . . 39
11.3 INDEMNIFICATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
12. NOTICES. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 39
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.. . . . . . . . . . . . . . . . . . 40
14. DESTRUCTION OF BORROWER'S DOCUMENTS. . . . . . . . . . . . . . . . . . . . . . 41
15. GENERAL PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.1 EFFECTIVENESS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
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15.2 SUCCESSORS AND ASSIGNS.. . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.3 SECTION HEADINGS.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.4 INTERPRETATION.. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 41
15.5 SEVERABILITY OF PROVISIONS.. . . . . . . . . . . . . . . . . . . . . . . . 42
15.6 AMENDMENTS IN WRITING. . . . . . . . . . . . . . . . . . . . . . . . . . . 42
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. . . . . . . . . . . . . . . . . . . 42
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS.. . . . . . . . . . . . . . . . . 42
15.9 INTEGRATION. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 43
SCHEDULES AND EXHIBITS
Schedule P-1 Permitted Liens
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 6.9 Taxes
Schedule 6.12 Location of Equipment
Schedule 7.1 Indebtedness
Schedule 7.20 Tangible Net Worth Covenant
Exhibit C-1 Form of Compliance Certificate
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LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (THIS "AGREEMENT"), is entered into as of
April 9, 1999, between FOOTHILL CAPITAL CORPORATION, a California corporation
("Foothill"), with a place of business located at 11111 Santa Monica Boulevard,
Suite 1500, Los Angeles, California 90025-3333 and INCOMNET COMMUNICATIONS
CORPORATION, a Delaware corporation ("Borrower"), with its chief executive
office located at 2801 Main Street, Irvine, California.
The parties agree as follows:
2. DEFINITIONS AND CONSTRUCTION.
2.1 DEFINITIONS. As used in this Agreement, the following terms
shall have the following definitions:
"ACCOUNT DEBTOR" means any Person who is or who may become
obligated under, with respect to, or on account of, an Account.
"ACCOUNTS" means all currently existing and hereafter arising
accounts (both billed and unbilled), contract rights, and all other forms of
obligations owing to Borrower arising out of the sale or lease of goods, the
sale or lease of General Intangibles relating to the provision of
telecommunication services or the rendition of services by Borrower,
irrespective of whether earned by performance, and any and all credit insurance,
guaranties, or security therefor.
"ADVANCES" has the meaning set forth in SECTION 2.1(a).
"AFFILIATE" means, as applied to any Person, any other Person
who directly or indirectly controls, is controlled by, is under common control
with or is a director or officer of such Person. For purposes of this
definition, "control" means the possession, directly or indirectly, of the power
to vote 5% or more of the securities having ordinary voting power for the
election of directors or the direct or indirect power to direct the management
and policies of a Person.
"AGREEMENT" has the meaning set forth in the preamble hereto.
"AUTHORIZED PERSON" means any officer or other employee of
Borrower.
"AVAILABILITY" means, as the date of determination, Borrower's
cash and cash equivalents, PLUS unused borrowing availability pursuant to
SECTION 2.1, LESS accounts payable that are past due beyond Borrower's
historical business practices.
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"AVERAGE UNUSED PORTION OF MAXIMUM AMOUNT" means, as of any
date of determination, the Maximum Amount, LESS the average Daily Balance of
Advances that were outstanding during the immediately preceding month. The
average Daily Balances of Advances shall be calculated by adding together all of
the Daily Balances for each day of the month and dividing that number by the
number of days in that month.
"BANKRUPTCY CODE" means the United States Bankruptcy Code (11
U.S.C. Section 101 ET SEQ.), as amended, and any successor statute.
"BENEFIT PLAN" means a "defined benefit plan" (as defined in
Section 3(35) of ERISA) for which Borrower, any Subsidiary of Borrower, or any
ERISA Affiliate has been an "employer" (as defined in Section 3(5) of ERISA)
within the past six years.
"BORROWER" has the meaning set forth in the preamble to this
Agreement.
"BORROWER'S BOOKS" means all of Borrower's books and records
including: ledgers; records indicating, summarizing, or evidencing Borrower's
properties or assets (including the Collateral) or liabilities; all information
relating to Borrower's business operations or financial condition; and all
computer programs, disk or tape files, printouts, runs, or other computer
prepared information.
"BORROWING BASE" has the meaning set forth in SECTION 2.1(a).
"BUSINESS DAY" means any day that is not a Saturday, Sunday,
or other day on which national banks are authorized or required to close.
"CARRIER" means MCI/Worldcom or any other provider of long
distance telephone service with whom Borrower does business from time to time.
"CARRIER AGREEMENT" means each contract or agreement in effect
between Borrower and a Carrier.
"CARRIER CONSENT AGREEMENT" means an agreement by a Carrier in
favor of Borrower, that is in form and substance satisfactory to Foothill, or
that may be assigned to Foothill and is in fact so assigned, and that is in full
force and effect, whereby the Carrier consents to the grant of a security
interest in favor of Foothill in the Carrier Agreement then in effect between
Borrower and the applicable Carrier.
"CARRIER RESERVE" means a reserve in an amount equal to one
week of accrued accounts payable to Carriers.
"CHANGE OF CONTROL" shall be deemed to have occurred at such
time as: (a) Parent ceases to own at least 100% of Borrower's outstanding
capital stock, or (b) a "person" or "group" (within the meaning of Sections
13(d) and 14(d)(2) of the Securities
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Exchange Act of 1934), other than John P. Casey or Ironwood or their Affiliates,
becomes the "beneficial owner" (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934), directly or indirectly, of more than 40% of the total
voting power of all classes of stock then outstanding of Parent entitled to vote
in the election of directors.
"CLOSING DATE" means the date of the making of the initial
Advance.
"CODE" means the California Uniform Commercial Code.
"COLLATERAL" means each of the following:
(a) the Accounts,
(b) Borrower's Books,
(c) the Equipment,
(d) the General Intangibles,
(e) the Inventory,
(f) the Investment Property,
(g) the Negotiable Collateral,
(h) any money, or other assets of Borrower that now or
hereafter come into the possession, custody, or control of Foothill, excluding
any proceeds of the sale of the stock of Rapid Cast, Inc. which is owned by
Borrower, and
(i) the proceeds and products, whether tangible or
intangible, of any of the foregoing, including proceeds of insurance covering
any or all of the Collateral, and any and all Accounts, Borrower's Books,
Equipment, General Intangibles, Inventory, Investment Property, Negotiable
Collateral, Real Property, money, deposit accounts, or other tangible or
intangible property resulting from the sale, exchange, collection, or other
disposition of any of the foregoing, or any portion thereof or interest therein,
and the proceeds thereof.
"COLLATERAL ACCESS AGREEMENT" means a landlord waiver,
mortgagee waiver, bailee letter, or acknowledgement agreement of any
warehouseman, processor, lessor, consignee, or other Person in possession of,
having a Lien upon, or having rights or interests in the Equipment or Inventory,
in each case, in form and substance satisfactory to Foothill.
"COLLECTIONS" means all cash, checks, notes, instruments, and
other items of payment (including, insurance proceeds, proceeds of cash sales,
rental proceeds, and tax refunds), but excluding all amounts received by
Borrower from the sale of shares of
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Borrower's capital stock or proceeds of subordinated Indebtedness that replaces
Indebtedness payable to Ironwood.
"COMMUNICATION ACT" means the Communications Act of 1934, as
amended, 49 U.S.C. Sec. 151 et seq.
"COMPLIANCE CERTIFICATE" means a certificate substantially in
the form of EXHIBIT C-1 and delivered by the chief accounting officer of
Borrower to Foothill.
"DAILY BALANCE" means, with respect to each day during the
term of this Agreement, the amount of an Obligation owed at the end of such day.
"DEEMS ITSELF INSECURE" means that the Person deems itself
insecure in accordance with the provisions of Section 1208 of the Code.
"DEFAULT" means an event, condition, or default that, with the
giving of notice, the passage of time, or both, would be an Event of Default.
"DESIGNATED ACCOUNT" means account number 4159354943 of
Borrower maintained with Borrower's Designated Account Bank, or such other
deposit account of Borrower (located within the United States) which has been
designated, in writing and from time to time, by Borrower to Foothill.
"DESIGNATED ACCOUNT BANK" means Wells Fargo Bank, National
Association, whose office is located at 2030 Main Street, Suite 900, Irvine,
California 92614, and whose ABA number is 12100248.
"DILUTION" means, in each case based upon the experience of
the immediately prior three months, the result of dividing the Dollar amount of
(a) bad debt write-downs, discounts, advertising, returns, promotions, credits,
or other dilutive items with respect to the Accounts, by (b) Borrower's
Collections (excluding extraordinary items) plus the Dollar amount of clause
(a).
"DILUTION RESERVE" means, as of any date of determination, an
amount sufficient to reduce Foothill's advance rate against Eligible Accounts by
one percentage point for each percentage point by which Dilution is in excess of
10%.
"DISBURSEMENT LETTER" means an instructional letter executed
and delivered by Borrower to Foothill regarding the extensions of credit to be
made on the Closing Date, the form and substance of which shall be satisfactory
to Foothill.
"DOLLARS OR $" means United States dollars.
"EARLY TERMINATION PREMIUM" has the meaning set forth in
SECTION 3.6.
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"ELIGIBLE ACCOUNTS" means those Accounts arising out of the
provision of telecommunication services performed or accepted, consumed or
utilized by an Account Debtor in the ordinary course of Borrower's business,
that strictly comply with each and all of the representations and warranties
respecting Eligible Accounts made by Borrower to Foothill in the Loan Documents,
and that are and at all times continue to be acceptable to Foothill in all
respects; PROVIDED, HOWEVER, that standards of eligibility may be fixed and
revised from time to time by Foothill in Foothill's reasonable credit judgment.
Eligible Accounts shall not include the following:
(b) Accounts that the Account Debtor has failed to pay
within 90 days of original invoice date or 60 days from due date.
(c) Accounts owed by an Account Debtor or its Affiliates
where 50% or more of all Accounts owed by that Account Debtor (or its
Affiliates) are deemed ineligible under clause (a) above;
(d) Accounts with respect to which the Account Debtor is an
employee, Affiliate, or agent of Borrower;
(e) Accounts with respect to which goods are placed on
consignment, guaranteed sale, sale or return, sale on approval, bill and hold,
or other terms by reason of which the payment by the Account Debtor may be
conditional;
(f) Accounts that are not payable in Dollars or with respect
to which the Account Debtor: (i) does not maintain its chief executive office in
the United States, or (ii) is not organized under the laws of the United States
or any State thereof, or (iii) is the government of any foreign country or
sovereign state, or of any state, province, municipality, or other political
subdivision thereof, or of any department, agency, public corporation, or other
instrumentality thereof, unless (y) the Account is supported by an irrevocable
letter of credit satisfactory to Foothill (as to form, substance, and issuer or
domestic confirming bank) that has been delivered to Foothill and is directly
drawable by Foothill, or (z) the Account is covered by credit insurance in form
and amount, and by an insurer, satisfactory to Foothill;
(g) Accounts with respect to which the Account Debtor is
either (i) the United States or any department, agency, or instrumentality of
the United States (exclusive, however, of Accounts with respect to which
Borrower has complied, to the satisfaction of Foothill, with the Assignment of
Claims Act, 31 U.S.C. Section 3727), or (ii) any State of the United States
(exclusive, however, of Accounts owed by any State that does not have a
statutory counterpart to the Assignment of Claims Act);
(h) Accounts with respect to which the Account Debtor is a
creditor of Borrower, has or has asserted a right of setoff, has disputed its
liability, or has made any claim with respect to the Account;
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(i) Accounts with respect to an Account Debtor whose total
obligations owing to Borrower exceed 10% of all Eligible Accounts (or in the
case of each of Pacific Bell Telephone or USBI 40% of Eligible Accounts, subject
to continued monitoring of the creditworthiness of such Account Debtors), to the
extent of the obligations owing by such Account Debtor in excess of such
percentage;
(j) Accounts with respect to which the Account Debtor is
subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;
(k) Accounts the collection of which Foothill, in its
reasonable credit judgment, believes to be doubtful by reason of the Account
Debtor's financial condition;
(l) Accounts with respect to which the goods giving rise to
such Account have not been shipped and billed to the Account Debtor, the
services giving rise to such Account have not been performed and accepted by the
Account Debtor, or the Account otherwise does not represent a final sale;
(m) Accounts with respect to which the Account Debtor is
located in the states of New Jersey, Minnesota, or West Virginia (or any other
state that requires a creditor to file a Business Activity Report or similar
document in order to bring suit or otherwise enforce its remedies against such
Account Debtor in the courts or through any judicial process of such state),
unless Borrower has qualified to do business in New Jersey, Minnesota, West
Virginia, or such other states, or has filed a Notice of Business Activities
Report with the applicable division of taxation, the department of revenue, or
with such other state offices, as appropriate, for the then-current year, or is
exempt from such filing requirement; and
(n) Accounts that represent progress payments or other
advance billings that are due prior to the completion of performance by Borrower
of the subject contract for goods or services.
"ELIGIBLE UNBILLED ACCOUNTS" means Accounts meeting the
criteria of Eligible Accounts except that such Accounts have not been billed by
Borrower or transmitted by Borrower to the third party biller, and such accounts
are (a) not more than 45 days of the date of their accrual or (b) Accounts
arising from Borrower's Suresaver Product.
"EQUIPMENT" means all of Borrower's present and hereafter
acquired machinery, machine tools, motors, equipment, furniture, furnishings,
fixtures, vehicles (including motor vehicles and trailers), tools, parts, goods
(other than consumer goods, farm products, or Inventory), wherever located,
including, (a) any interest of Borrower in any of the foregoing, and (b) all
attachments, accessories, accessions, replacements, substitutions, additions,
and improvements to any of the foregoing.
6
"ERISA" means the Employee Retirement Income Security Act of
1974, 29 U.S.C. Sections 1000 et seq., amendments thereto, successor statutes,
and regulations or guidance promulgated thereunder.
"ERISA AFFILIATE" means (a) any corporation subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(b), (b) any trade or business subject to ERISA
whose employees are treated as employed by the same employer as the employees of
Borrower under IRC Section 414(c), (c) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any organization subject to ERISA that is a
member of an affiliated service group of which Borrower is a member under IRC
Section 414(m), or (d) solely for purposes of Section 302 of ERISA and Section
412 of the IRC, any party subject to ERISA that is a party to an arrangement
with Borrower and whose employees are aggregated with the employees of Borrower
under IRC Section 414(o).
"ERISA EVENT" means (a) a Reportable Event with respect to any
Benefit Plan or Multiemployer Plan, (b) the withdrawal of Borrower, any of its
Subsidiaries or ERISA Affiliates from a Benefit Plan during a plan year in which
it was a "substantial employer" (as defined in Section 4001(a)(2) of ERISA),
(c) the providing of notice of intent to terminate a Benefit Plan in a distress
termination (as described in Section 4041(c) of ERISA), (d) the institution by
the PBGC of proceedings to terminate a Benefit Plan or Multiemployer Plan,
(e) any event or condition (i) that provides a basis under Section 4042(a)(1),
(2), or (3) of ERISA for the termination of, or the appointment of a trustee to
administer, any Benefit Plan or Multiemployer Plan, or (ii) that may result in
termination of a Multiemployer Plan pursuant to Section 4041A of ERISA, (f) the
partial or complete withdrawal within the meaning of Sections 4203 and 4205 of
ERISA, of Borrower, any of its Subsidiaries or ERISA Affiliates from a
Multiemployer Plan, or (g) providing any security to any Plan under Section
401(a)(29) of the IRC by Borrower or its Subsidiaries or any of their ERISA
Affiliates.
"EVENT OF DEFAULT" has the meaning set forth in SECTION 8.
"FCC" means the Federal Communications Commission or any
governmental body or agency succeeding to the functions thereof.
"FCC RULES" means Title 47 of the Code of Federal Regulations,
as amended, and FCC decisions issued pursuant to the adoption of such
regulations.
"FEIN" means Federal Employer Identification Number.
"FOOTHILL" has the meaning set forth in the preamble to this
Agreement.
"FOOTHILL ACCOUNT" has the meaning set forth in SECTION 2.7.
"FOOTHILL EXPENSES" means all: costs or expenses (including
taxes, and insurance premiums) required to be paid by Borrower under any of the
Loan Documents that
7
are paid or incurred by Foothill; fees or charges paid or incurred by Foothill
in connection with Foothill's transactions with Borrower, including, fees or
charges for photocopying, notarization, couriers and messengers,
telecommunication, public record searches (including tax lien, litigation, and
UCC searches and including searches with the patent and trademark office, the
copyright office, or the department of motor vehicles), filing, recording,
publication, appraisal (including periodic Collateral or appraisals), costs and
expenses incurred by Foothill in the disbursement of funds to Borrower (by wire
transfer or otherwise); charges paid or incurred by Foothill resulting from the
dishonor of checks; costs and expenses paid or incurred by Foothill to correct
any default or enforce any provision of the Loan Documents, or in gaining
possession of, maintaining, handling, preserving, storing, shipping, selling,
preparing for sale, or advertising to sell the Collateral or any portion
thereof, irrespective of whether a sale is consummated; costs and expenses paid
or incurred by Foothill in examining Borrower's Books; costs and expenses of
third party claims or any other suit paid or incurred by Foothill in enforcing
or defending the Loan Documents or in connection with the transactions
contemplated by the Loan Documents or Foothill's relationship with Borrower or
any guarantor; and Foothill's reasonable attorneys fees and expenses incurred
in advising, structuring, drafting, reviewing, administering, amending,
terminating, enforcing, defending, or concerning the Loan Documents (including
attorneys fees and expenses incurred in connection with a "workout," a
"restructuring," or an Insolvency Proceeding concerning Borrower or any
guarantor of the Obligations), irrespective of whether suit is brought.
"GAAP" means generally accepted accounting principles as in
effect from time to time in the United States, consistently applied.
"GENERAL INTANGIBLES" means all of Borrower's present and
future general intangibles and other personal property (including contract
rights, rights arising under common law, statutes, or regulations, choses or
things in action, goodwill, patents, trade names, trademarks, servicemarks,
copyrights, blueprints, drawings, purchase orders, customer lists, monies due or
recoverable from pension funds, route lists, rights to payment and other rights
under any royalty or licensing agreements, infringement claims, computer
programs, information contained on computer disks or tapes, literature, reports,
catalogs, deposit accounts, insurance premium rebates, tax refunds, and tax
refund claims), other than goods, Accounts, and Negotiable Collateral.
"GOVERNING DOCUMENTS" means the certificate or articles of
incorporation, by-laws, or other organizational or governing documents of any
Person.
"GOVERNMENTAL AUTHORITY" means any nation or government, any
state or other political subdivision thereof and any entity exercising
executive, legislative, judicial, regulatory or administrative functions of or
pertaining to government.
"HAZARDOUS MATERIALS" means (a) substances that are defined or
listed in, or otherwise classified pursuant to, any applicable laws or
regulations as "hazardous substances," "hazardous materials," "hazardous
wastes," "toxic substances," or any other formulation intended to define, list,
or classify substances by reason of deleterious properties
8
such as ignitability, corrosivity, reactivity, carcinogenicity, reproductive
toxicity, or "EP toxicity", (b) oil, petroleum, or petroleum derived
substances, natural gas, natural gas liquids, synthetic gas, drilling fluids,
produced waters, and other wastes associated with the exploration, development,
or production of crude oil, natural gas, or geothermal resources, (c) any
flammable substances or explosives or any radioactive materials, and (d)
asbestos in any form or electrical equipment that contains any oil or
dielectric fluid containing levels of polychlorinated biphenyls in excess of 50
parts per million.
"INDEBTEDNESS" means: (a) all obligations of Borrower for
borrowed money, (b) all obligations of Borrower evidenced by bonds, debentures,
notes, or other similar instruments and all reimbursement or other obligations
of Borrower in respect of letters of credit, bankers acceptances, interest rate
swaps, or other financial products, (c) all obligations of Borrower under
capital leases, (d) all obligations or liabilities of others secured by a Lien
on any property or asset of Borrower, irrespective of whether such obligation or
liability is assumed, and (e) any obligation of Borrower guaranteeing or
intended to guarantee (whether guaranteed, endorsed, co-made, discounted, or
sold with recourse to Borrower) any indebtedness, lease, dividend, letter of
credit, or other obligation of any other Person.
"INSOLVENCY PROCEEDING" means any proceeding commenced by or
against any Person under any provision of the Bankruptcy Code or under any other
bankruptcy or insolvency law, assignments for the benefit of creditors, formal
or informal moratoria, compositions, extensions generally with creditors, or
proceedings seeking reorganization, arrangement, or other similar relief.
"INTANGIBLE ASSETS" means, with respect to any Person, that
portion of the book value of all of such Person's assets that would be treated
as intangibles under GAAP.
"INTELLECTUAL PROPERTY SECURITY AGREEMENT" means that certain
Intellectual Property Security Agreement, of even date herewith, between
Borrower and Foothill.
"INTERCREDITOR AGREEMENT" means that certain Intercreditor and
Subordination Agreement, of even date herewith, between Foothill and Ironwood,
and acknowledged by Borrower.
"INVENTORY" means all present and future inventory in which
Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of Borrower's present and future
raw materials, work in process, finished goods, and packing and shipping
materials, wherever located.
"INVESTMENT PROPERTY" means all of Borrower's presently
existing and hereafter acquired or arising investment property (as that term is
defined in Section 9115 of the Code).
9
"IRONWOOD" means Ironwood Telecom LLC, a Colorado limited
liability company.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"LEC RESERVE" means a reserve for fees payable to local
exchange carriers and USBI equal to one month's fees, based upon a trailing
three month average.
"LIEN" means any interest in property securing an obligation
owed to, or a claim by, any Person other than the owner of the property, whether
such interest shall be based on the common law, statute, or contract, whether
such interest shall be recorded or perfected, and whether such interest shall be
contingent upon the occurrence of some future event or events or the existence
of some future circumstance or circumstances, including the lien or security
interest arising from a mortgage, deed of trust, encumbrance, pledge,
hypothecation, assignment, deposit arrangement, security agreement, adverse
claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Real
Property.
"LOAN ACCOUNT" has the meaning set forth in SECTION 2.10.
"LOAN DOCUMENTS" means this Agreement, the Disbursement
Letter, the Lockbox Agreements, the Intellectual Property Security Agreement,
the Intercreditor Agreement, any note or notes executed by Borrower and payable
to Foothill, and any other agreement entered into, now or in the future, in
connection with this Agreement.
"LOCKBOX ACCOUNT" shall mean a depositary account established
pursuant to one of the Lockbox Agreements.
"LOCKBOX AGREEMENTS" means those certain Lockbox Operating
Procedural Agreements and those certain Depository Account Agreements, in form
and substance satisfactory to Foothill, each of which is among Borrower,
Foothill, and one of the Lockbox Banks.
"LOCKBOX BANKS" means Wells Fargo Bank, National Association,
or such other banks as may be agreed to by Foothill and Borrower from time to
time.
"LOCKBOXES" has the meaning set forth in SECTION 2.7.
"MATERIAL ADVERSE CHANGE" means (a) a material adverse change
in the business, prospects, operations, results of operations, assets,
liabilities or condition (financial or otherwise) of Borrower or Parent, (b) the
material impairment of Borrower's ability to perform its obligations under the
Loan Documents to which it is a party or of Foothill to
10
enforce the Obligations or realize upon the Collateral, (c) a material
adverse effect on the value of the Collateral or the amount that Foothill
would be likely to receive (after giving consideration to delays in payment
and costs of enforcement) in the liquidation of such Collateral, or (d) a
material impairment of the priority of Foothill's Liens with respect to the
Collateral.
"MAXIMUM AMOUNT" means $12,500,000.
"MULTIEMPLOYER PLAN" means a "multiemployer plan" (as defined
in Section 4001(a)(3) of ERISA) to which Borrower, any of its Subsidiaries, or
any ERISA Affiliate has contributed, or was obligated to contribute, within the
past six years.
"NEGOTIABLE COLLATERAL" means all of Borrower's present and
future letters of credit, notes, drafts, instruments, Investment Property,
securities (including the shares of stock of Subsidiaries of Borrower),
documents, personal property leases (wherein Borrower is the lessor), and
chattel paper.
"OBLIGATIONS" means all loans, Advances, debts, principal,
interest (including any interest that, but for the provisions of the Bankruptcy
Code, would have accrued), contingent reimbursement obligations under any
outstanding Letters of Credit, premiums (including Early Termination Premiums),
liabilities (including all amounts charged to Borrower's Loan Account pursuant
hereto), obligations, fees, charges, costs, or Foothill Expenses (including any
fees or expenses that, but for the provisions of the Bankruptcy Code, would have
accrued), lease payments, guaranties, covenants, and duties owing by Borrower to
Foothill of any kind and description (whether pursuant to or evidenced by the
Loan Documents or pursuant to any other agreement between Foothill and Borrower,
and irrespective of whether for the payment of money), whether direct or
indirect, absolute or contingent, due or to become due, now existing or
hereafter arising, and including any debt, liability, or obligation owing from
Borrower to others that Foothill may have obtained by assignment or otherwise,
and further including all interest not paid when due and all Foothill Expenses
that Borrower is required to pay or reimburse by the Loan Documents, by law, or
otherwise.
"OVERADVANCE" has the meaning set forth in SECTION 2.5.
"PARENT" means Incomnet, Inc., a California corporation.
"PBGC" means the Pension Benefit Guaranty Corporation as
defined in Title IV of ERISA, or any successor thereto.
"PERMITTED LIENS" means (a) Liens held by Foothill, (b) Liens
for unpaid taxes that either (i) are not yet due and payable or (ii) are the
subject of Permitted Protests, (c) Liens set forth on SCHEDULE P-1, (d) the
interests of lessors under operating leases and purchase money security
interests and Liens of lessors under capital leases to the extent that the
acquisition or lease of the underlying asset is permitted under SECTION 7.21 and
so long as the Lien only attaches to the asset purchased or acquired and only
secures the purchase price of the
11
asset, (e) Liens arising by operation of law in favor of warehousemen,
landlords, carriers, mechanics, materialmen, laborers, or suppliers, incurred
in the ordinary course of business of Borrower and not in connection with the
borrowing of money, and which Liens either (i) are for sums not yet due and
payable, or (ii) are the subject of Permitted Protests, (f) Liens arising
from deposits made in connection with obtaining worker's compensation or
other unemployment insurance, (g) Liens or deposits to secure performance of
bids, tenders, or leases (to the extent permitted under this Agreement),
incurred in the ordinary course of business of Borrower and not in connection
with the borrowing of money, (h) Liens arising by reason of security for
surety or appeal bonds in the ordinary course of business of Borrower, (i)
Liens of or resulting from any judgment or award that would not cause a
Material Adverse Change and as to which the time for the appeal or petition
for rehearing of which has not yet expired, or in respect of which Borrower
is in good faith prosecuting an appeal or proceeding for a review, and in
respect of which a stay of execution pending such appeal or proceeding for
review has been secured, (j) Liens in favor of Ironwood that are subordinated
pursuant to the Intercreditor Agreement, (k) Liens in favor of a subordinated
lender or investor whose Indebtedness replaces all or a portion of the
Ironwood Indebtedness, provided that such subordinated lender or investor has
executed a subordination or intercreditor agreement which provides Foothill
with no fewer rights than as set forth in the Intercreditor Agreement, and
(l) with respect to any Real Property, easements, rights of way, zoning and
similar covenants and restrictions, and similar encumbrances that customarily
exist on properties of Persons engaged in similar activities and similarly
situated and that in any event do not materially interfere with the ordinary
conduct of the business of Borrower.
"PERMITTED PROTEST" means the right of Borrower to protest
any Lien (other than any such Lien that secures the Obligations), tax (other
than payroll taxes or taxes that are the subject of a United States federal
tax lien), or rental payment, provided that (a) a reserve with respect to
such obligation is established on the books of Borrower in an amount that is
reasonably satisfactory to Foothill, (b) any such protest is instituted and
diligently prosecuted by Borrower in good faith, and (c) Foothill is
satisfied that, while any such protest is pending, there will be no
impairment of the enforceability, validity, or priority of any of the Liens
of Foothill in and to the Collateral.
"PERSON" means and includes natural persons, corporations,
limited liability companies, limited partnerships, general partnerships,
limited liability partnerships, joint ventures, trusts, land trusts, business
trusts, or other organizations, irrespective of whether they are legal
entities, and governments and agencies and political subdivisions thereof.
"PLAN" means any employee benefit plan, program, or
arrangement maintained or contributed to by Borrower or with respect to which
it may incur liability.
"REAL PROPERTY" means any estates or interests in real
property now owned or hereafter acquired by Borrower, but excluding the
leasehold interest on the parking lot next door to the Borrower's office at
2801 Main Street, Irvine, California.
12
"REFERENCE RATE" means the variable rate of interest, per
annum, most recently announced by Wells Fargo Bank, National Association, or
any successor thereto, as its "base rate," irrespective of whether such
announced rate is the best rate available from such financial institution.
"RENEWAL DATE" has the meaning set forth in SECTION 3.4.
"REPORTABLE EVENT" means any of the events described in
Section 4043(c) of ERISA or the regulations thereunder other than a Reportable
Event as to which the provision of 30 days notice to the PBGC is waived under
applicable regulations.
"RETIREE HEALTH PLAN" means an "employee welfare benefit plan"
within the meaning of Section 3(1) of ERISA that provides benefits to
individuals after termination of their employment, other than as required by
Section 601 of ERISA.
"SECURITY AGREEMENT" means that certain Security Agreement, of
even date herewith, between Foothill and Parent, pursuant to which Parent has
pledged the outstanding capital stock of Borrower and granted certain other
security interests to Foothill.
"SOLVENT" means, with respect to any Person on a particular
date, that on such date (a) at fair valuations, all of the properties and assets
of such Person are greater than the sum of the debts, including contingent
liabilities, of such Person, (b) the present fair salable value of the
properties and assets of such Person is not less than the amount that will be
required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
properties and assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, and does not believe that it will,
incur debts beyond such Person's ability to pay as such debts mature, and
(e) such Person is not engaged in business or a transaction, and is not about to
engage in business or a transaction, for which such Person's properties and
assets would constitute unreasonably small capital after giving due
consideration to the prevailing practices in the industry in which such Person
is engaged. In computing the amount of contingent liabilities at any time, it
is intended that such liabilities will be computed at the amount that, in light
of all the facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual or matured liability.
"SUBSIDIARY" of a Person means a corporation, partnership,
limited liability company, or other entity in which that Person directly or
indirectly owns or controls the shares of stock or other ownership interests
having ordinary voting power to elect a majority of the board of directors (or
appoint other comparable managers) of such corporation, partnership, limited
liability company, or other entity.
"TANGIBLE NET WORTH" means, as of any date of determination,
the difference of (a) Parent's total stockholder's equity, PLUS $8,150,000
representing settlements payable until such amount is converted into equity,
PLUS the outstanding principal balance of
13
the Ironwood Indebtedness and any Indebtedness that replaces or refinances
the Ironwood Indebtedness, MINUS (b) the sum of: (i) all Intangible Assets
of Parent, (ii) all of Parent's prepaid expenses, and (iii) all amounts due
to Parent from Affiliates.
"USBI" means Billing Concepts, Inc., a Delaware corporation.
"VOIDABLE TRANSFER" has the meaning set forth in SECTION 15.8.
"YEAR 2000 COMPLIANT" means, with regard to any Person,
that all software in goods produced or sold by, or utilized by and material
to the business operations or financial condition of, such entity are able to
interpret and manipulate data on and involving all calendar dates correctly
and without causing any abnormal ending scenario, including in relation to
dates in and after the year 2000.
1.2 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein,
the term "financial statements" shall include the notes and schedules thereto.
Whenever the term "Borrower" is used in respect of a financial covenant or a
related definition, it shall be understood to mean Borrower on a consolidated
basis unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement that are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.4 CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the term "including" is not limiting, and the
term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. An Event of
Default shall "continue" or be "continuing" until such Event of Default has been
waived in writing by Foothill. Section, subsection, clause, schedule, and
exhibit references are to this Agreement unless otherwise specified. Any
reference in this Agreement or in the Loan Documents to this Agreement or any of
the Loan Documents shall include all alterations, amendments, changes,
extensions, modifications, renewals, replacements, substitutions, and
supplements, thereto and thereof, as applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES.
(a) Subject to the terms and conditions of this Agreement,
Foothill agrees to make advances ("Advances") to Borrower in an amount
outstanding not to exceed at
14
any one time the lesser of (i) the Maximum Amount, or (ii) the Borrowing
Base. For purposes of this Agreement, "Borrowing Base", as of any date of
determination, shall mean the result of:
(x) 80% of the value of Eligible Accounts, LESS the
amount, if any, of the Dilution Reserve, the Carrier Reserve and the
LEC Reserve; PLUS
(y) the lesser of (i) 50% of the value of Eligible
Unbilled Accounts, less customary reserves, if any, and (ii) 35% of
the amount of credit availability created by Eligible Accounts and
Eligible Unbilled Accounts combined, MINUS
(z) the aggregate amount of reserves, if any,
established by Foothill under SECTIONS 2.1(b), 6.15, AND 10.
Notwithstanding anything to the contrary herein,
outstanding Advances pursuant to this SECTION 2.1 shall be limited
to the lower of: (i) 75% of Borrower's trailing three months
Collections and (ii) 75% of Borrower's trailing three months net
revenues, all of which shall be satisfactory to Foothill in all
respects.
(b) Anything to the contrary in SECTION 2.1(a) above
notwithstanding, Foothill may create reserves against or reduce its advance
rates based upon Eligible Accounts if it determines that (i) that has occurred a
Material Adverse Change or (ii) there exist any excise tax obligations that are
past due and unpaid by Borrower.
(c) Amounts borrowed pursuant to this SECTION 2.1 may be
repaid and, subject to the terms and conditions of this Agreement, reborrowed at
any time during the term of this Agreement.
2.2 INTENTIONALLY OMITTED.
2.3 INTENTIONALLY OMITTED.
2.4 INTENTIONALLY OMITTED.
2.5 OVERADVANCES. If, at any time or for any reason, the amount
of Obligations owed by Borrower to Foothill pursuant to SECTION 2.1 is greater
than either the Dollar or percentage limitations set forth in SECTION 2.1 (an
"Overadvance"), Borrower immediately shall pay to Foothill, in cash, the amount
of such excess to be used by Foothill to repay Advances outstanding under
SECTION 2.1.
15
2.6 INTEREST RATES, PAYMENTS, AND CALCULATIONS.
(a) Interest Rate. Except as provided in clause (c) below,
(i) all Obligations shall bear interest on the Daily Balance at a per annum rate
of one percentage point above the Reference Rate.
(b) Intentionally Omitted.
(c) Default Rate. Commencing on the fifth day after
Foothill notifies Borrower that: (i) an Event of Default has occurred and
(ii) Foothill intends to impose a default rate of interest, all Obligations
shall bear interest on the Daily Balance at a per annum rate equal to four
percentage points above the Reference Rate unless the facts or circumstances
giving rise to the Event of Default no longer exist as of the last day of such
notice period. The provisions of this SECTION 2.6(c) are not intended to affect
any of Foothill's other rights and remedies under this Agreement.
(d) Minimum Interest. In no event shall the rate of
interest chargeable hereunder for any day be less than 7.00% per annum. To the
extent that interest accrued hereunder at the rate set forth herein would be
less than the foregoing minimum daily rate, the interest rate chargeable
hereunder for such day automatically shall be deemed increased to the minimum
rate.
(e) Payments. Interest payable hereunder shall be due and
payable, in arrears, on the first day of each month during the term hereof.
Borrower hereby authorizes Foothill, at its option, without prior notice to
Borrower, to charge such interest, all Foothill Expenses (as and when incurred),
the fees and charges provided for in SECTION 2.11 (as and when accrued or
incurred), and other payments due under any Loan Document to Borrower's Loan
Account, which amounts thereafter shall accrue interest at the rate then
applicable to Advances hereunder. Any interest not paid when due shall be
compounded and shall thereafter accrue interest at the rate then applicable to
Advances hereunder.
(f) Computation. The Reference Rate as of the date of this
Agreement is 7.75% per annum. In the event the Reference Rate is changed from
time to time hereafter, the applicable rate of interest hereunder automatically
and immediately shall be increased or decreased by an amount equal to such
change in the Reference Rate. All interest and fees chargeable under the Loan
Documents shall be computed on the basis of a 360 day year for the actual number
of days elapsed.
(g) Intent to Limit Charges to Maximum Lawful Rate. In no
event shall the interest rate or rates payable under this Agreement, plus any
other amounts paid in connection herewith, exceed the highest rate permissible
under any law that a court of competent jurisdiction shall, in a final
determination, deem applicable. Borrower and Foothill, in executing and
delivering this Agreement, intend legally to agree upon the rate or rates of
interest and manner of payment stated within it; PROVIDED, HOWEVER, that,
anything contained herein to the contrary notwithstanding, if said rate or rates
of interest or manner of payment exceeds the maximum allowable under applicable
law, then, IPSO FACTO as of the date of this
16
Agreement, Borrower is and shall be liable only for the payment of such
maximum as allowed by law, and payment received from Borrower in excess of
such legal maximum, whenever received, shall be applied to reduce the
principal balance of the Obligations to the extent of such excess.
2.7 COLLECTION OF ACCOUNTS. Borrower shall at all times
maintain lockboxes (the "Lockboxes") and, immediately after the Closing Date,
shall instruct all Account Debtors with respect to the Accounts, General
Intangibles, and Negotiable Collateral of Borrower to remit ALL Collections
in respect thereof to such Lockboxes. Borrower, Foothill, and the Lockbox
Banks shall enter into the Lockbox Agreements, which among other things shall
provide for the opening of a Lockbox Account for the deposit of Collections
at a Lockbox Bank. Borrower agrees that all Collections and other amounts
received by Borrower from any Account Debtor or any other source immediately
upon receipt shall be deposited into a Lockbox Account. No Lockbox Agreement
or arrangement contemplated thereby shall be modified by Borrower without the
prior written consent of Foothill. Upon the terms and subject to the
conditions set forth in the Lockbox Agreements, all amounts received in each
Lockbox Account shall be wired each Business Day into an account (the
"Foothill Account") maintained by Foothill at a depositary selected by
Foothill. If on any Business Day Foothill has received an amount from the
Lockbox Account into the Foothill Account that exceeds the amount of the
outstanding Obligations, then Foothill shall wire such excess to the
Designated Account on the next Business Day.
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The
receipt of any Collections by Foothill (whether from transfers to Foothill by
the Lockbox Banks pursuant to the Lockbox Agreements or otherwise)
immediately shall be applied provisionally to reduce the Obligations
outstanding under SECTION 2.1, but shall not be considered a payment on
account unless such Collection item is a wire transfer of immediately
available federal funds and is made to the Foothill Account or unless and
until such Collection item is honored when presented for payment. From and
after the Closing Date, Foothill shall be entitled to charge Borrower for two
Business Days of `clearance' or `float' at the rate set forth in SECTION
2.6(a)(i) or SECTION 2.6(c)(i), as applicable, on all Collections that are
received by Foothill (regardless of whether forwarded by the Lockbox Banks to
Foothill, whether provisionally applied to reduce the Obligations under
SECTION 2.1, or otherwise). This across-the-board two Business Day clearance
or float charge on all Collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Foothill's financing of
Borrower, and shall apply irrespective of the characterization of whether
receipts are owned by Borrower or Foothill, and whether or not there are any
outstanding Advances, the effect of such clearance or float charge being the
equivalent of charging two Business Days of interest on such Collections.
Should any Collection item not be honored when presented for payment, then
Borrower shall be deemed not to have made such payment, and interest shall be
recalculated accordingly. Anything to the contrary contained herein
notwithstanding, any Collection item shall be deemed received by Foothill
only if it is received into the Foothill Account on a Business Day on or
before 11:00 a.m. California time. If any Collection item is received into
the Foothill Account on a non-Business Day or after 11:00 a.m. California
time on a Business Day, it shall be deemed to have been received by Foothill
as of the opening of business on the immediately following Business Day.
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2.9 DESIGNATED ACCOUNT. Foothill is authorized to make the
Advances under this Agreement based upon telephonic or other instructions
received from anyone purporting to be an Authorized Person, or without
instructions if pursuant to SECTION 2.6(e). Borrower agrees to establish and
maintain the Designated Account with the Designated Account Bank for the
purpose of receiving the proceeds of the Advances requested by Borrower and
made by Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any Advance requested by Borrower and made by Foothill hereunder
shall be made to the Designated Account.
2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS.
Foothill shall maintain an account on its books in the name of Borrower (the
"Loan Account") on which Borrower will be charged with all Advances made by
Foothill to Borrower or for Borrower's account, including, accrued interest,
Foothill Expenses, and any other payment Obligations of Borrower. In
accordance with SECTION 2.8, the Loan Account will be credited with all
payments received by Foothill from Borrower or for Borrower's account,
including all amounts received in the Foothill Account from any Lockbox Bank.
Foothill shall render statements regarding the Loan Account to Borrower,
including principal, interest, fees, and including an itemization of all
charges and expenses constituting Foothill Expenses owing, and such
statements shall be conclusively presumed to be correct and accurate and
constitute an account stated between Borrower and Foothill unless, within 60
days after receipt thereof by Borrower, Borrower shall deliver to Foothill
written objection thereto describing the error or errors contained in any
such statements.
2.11 FEES. Borrower shall pay to Foothill the following fees:
(a) Closing Fee. On the Closing Date, a closing fee of
$62,500;
(b) Unused Line Fee. On the first day of each month
during the term of this Agreement, an unused line fee in an amount equal to
0.25% per annum times the Average Unused Portion of the Maximum Amount,
payable in arrears.
(c) Intentionally Omitted;
(d) Financial Examination, Documentation, and Appraisal
Fees. Foothill's customary fee of $750 per day per examiner, plus out-of-pocket
expenses for each financial analysis and examination (i.e., audits) of Borrower
performed by personnel employed by Foothill; and, the actual charges paid or
incurred by Foothill if it elects to employ the services of one or more third
Persons to perform such financial analyses and examinations (i.e., audits) of
Borrower or to appraise the Collateral; PROVIDED, HOWEVER, prior to the
occurrence of an Event of Default Foothill shall not require more than four
audits during any twelve month period; and
(e) Servicing Fee. On the first day of each month during
the term of this Agreement, and thereafter so long as any Obligations are
outstanding, a servicing fee in an amount equal to $2,500, payable in arrears.
3. CONDITIONS; TERM OF AGREEMENT.
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3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE. The
obligation of Foothill to make the initial Advance is subject to the
fulfillment, to the satisfaction of Foothill and its counsel, of each of the
following conditions on or before the Closing Date:
(a) the Closing Date shall occur on or before April 14,
1999;
(b) Foothill shall have received searches reflecting the
filing of its financing statements;
(c) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
i. the Lockbox Agreements;
ii. the Disbursement Letter;
iii. the Intercreditor Agreement;
iv. the Intellectual Property Security Agreement; and
v. the Security Agreement.
(d) Foothill shall have received a certificate from the
Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution, delivery, and performance of this
Agreement and the other Loan Documents to which Borrower is a party and
authorizing specific officers of Borrower to execute the same;
(e) Foothill shall have received copies of Borrower's
Governing Documents, as amended, modified, or supplemented to the Closing
Date, certified by the Secretary of Borrower;
(f) Foothill shall have received a certificate of status
with respect to Borrower, dated within 10 days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of Borrower, which certificate shall indicate that Borrower is in
good standing in such jurisdiction;
(g) Foothill shall have received certificates of status with
respect to Borrower, each dated within 15 days of the Closing Date, such
certificates to be issued by the appropriate officer of the jurisdictions in
which its failure to be duly qualified or licensed would constitute a Material
Adverse Change, which certificates shall indicate that Borrower is in good
standing in such jurisdictions;
(h) Foothill shall have received a certificate of insurance,
together with the endorsements thereto, as are required by SECTION 6.10, the
form and substance of which shall be satisfactory to Foothill and its counsel;
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(i) Borrower shall not have less than $3,000,000 of
Availability after giving effect to the Advances and fees made on the Closing
Date, and Borrower's accounts payable must be current;
(j) Foothill shall have received such Collateral Access
Agreements from lessors, warehousemen, bailees, and other third persons as
Foothill may require;
(k) Foothill shall have received an opinion of Borrower's
counsel in form and substance satisfactory to Foothill in its sole discretion;
(l) Foothill shall have received consents to assignment of
monies payable to Borrower by GTE Telephone Operating Companies, Pacific Bell
Telephone and USBI, the form and substance of which shall be satisfactory to
Foothill and its counsel;
(m) Foothill shall have received satisfactory evidence that
all tax returns required to be filed by Borrower have been timely filed and all
taxes upon Borrower or its properties, assets, income, and franchises (including
real property taxes and payroll taxes) have been paid prior to delinquency,
except such taxes that (i) are the subject of a Permitted Protest or (ii) have
been disclosed in SCHEDULE 6.9; and
(n) all other documents and legal matters in connection with
the transactions contemplated by this Agreement shall have been delivered,
executed, or recorded and shall be in form and substance satisfactory to
Foothill and its counsel.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES. The following shall be
conditions precedent to all Advances hereunder:
(a) the representations and warranties contained in this
Agreement and the other Loan Documents shall be true and correct in all material
respects on and as of the date of such extension of credit, as though made on
and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date);
(b) no Default or Event of Default shall have occurred and
be continuing on the date of such extension of credit, nor shall either result
from the making thereof; and
(c) no injunction, writ, restraining order, or other order
of any nature prohibiting, directly or indirectly, the extending of such credit
shall have been issued and remain in force by any governmental authority against
Borrower, Foothill, or any of their Affiliates.
3.3 CONDITION SUBSEQUENT. As a condition subsequent to initial
closing hereunder, Borrower shall perform or cause to be performed the following
(the failure by Borrower to so perform or cause to be performed constituting an
Event of Default):
(a) within 30 days of the Closing Date, deliver to Foothill
the certified copies of the policies of insurance, together with the
endorsements thereto, as are
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required by SECTION 6.10, the form and substance of which shall be
satisfactory to Foothill and its counsel.
3.4 TERM; AUTOMATIC RENEWAL. This Agreement shall become
effective upon the execution and delivery hereof by Borrower and Foothill and
shall continue in full force and effect for a term ending on the date (the
"Renewal Date") that is three years from the Closing Date and automatically
shall be renewed for successive one year periods thereafter, unless sooner
terminated pursuant to the terms hereof. Either party may terminate this
Agreement effective on the Renewal Date or on any anniversary of the Renewal
Date by giving the other party at least 90 days prior written notice. The
foregoing notwithstanding, Foothill shall have the right to terminate its
obligations under this Agreement immediately and without notice upon the
occurrence and during the continuation of an Event of Default.
3.5 EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations (including contingent reimbursement obligations of
Borrower with respect to any outstanding Letters of Credit) immediately shall
become due and payable without notice or demand. No termination of this
Agreement, however, shall relieve or discharge Borrower of Borrower's duties,
Obligations, or covenants hereunder, and Foothill's continuing security
interests in the Collateral shall remain in effect until all Obligations have
been fully and finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated. If Borrower has sent a notice of
termination pursuant to the provisions of SECTION 3.4, but fails to pay the
Obligations in full on the date set forth in said notice, then Foothill may, but
shall not be required to, renew this Agreement for an additional term of one
year.
3.6 EARLY TERMINATION BY BORROWER. The provisions of SECTION 3.4
that allow termination of this Agreement by Borrower only on the Renewal Date
and certain anniversaries thereof notwithstanding, Borrower has the option, at
any time upon 90 days prior written notice to Foothill, to terminate this
Agreement by paying to Foothill, in cash, the Obligations, in full, together
with a premium (the "Early Termination Premium") in an amount equal to (a) 3.00%
of the Maximum Amount if such termination occurs within one year of the Closing
Date, (b) 2.00% of the Maximum Amount if such termination occurs during the
second year after the Closing Date and (c) 1.00% of the Maximum Amount if such
termination occurs at any time after two years from the Closing Date, including
any renewal period.
3.7 TERMINATION UPON EVENT OF DEFAULT. If Foothill terminates
this Agreement upon the occurrence of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill's
lost profits as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium shall be presumed to be the
amount of damages sustained by Foothill as the result of the early termination
and Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this SECTION 3.7 shall
be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
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4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to
Foothill a continuing security interest in all currently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each of
its covenants and duties under the Loan Documents. Foothill's security
interests in the Collateral shall attach to all Collateral without further act
on the part of Foothill or Borrower. Anything contained in this Agreement or
any other Loan Document to the contrary notwithstanding, except for the sale of
Inventory to buyers in the ordinary course of business, Borrower has no
authority, express or implied, to dispose of any item or portion of the
Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower, immediately upon the request of Foothill, shall endorse and deliver
physical possession of such Negotiable Collateral to Foothill.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND NEGOTIABLE
COLLATERAL. At any time that an Event of Default has occurred and is
continuing, Foothill or Foothill's designee may (a) notify customers or Account
Debtors of Borrower that the Accounts, General Intangibles, or Negotiable
Collateral have been assigned to Foothill or that Foothill has a security
interest therein, and (b) collect the Accounts, General Intangibles, and
Negotiable Collateral directly and charge the collection costs and expenses to
the Loan Account. Borrower agrees that it will hold in trust for Foothill, as
Foothill's trustee, any Collections that it receives and immediately will
deliver said Collections to the Foothill Account in their original form as
received by Borrower.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time
upon the request of Foothill, Borrower shall execute and deliver to Foothill all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, control agreements, endorsements of
certificates of title, applications for title, affidavits, reports, notices,
schedules of accounts, letters of authority, and all other documents that
Foothill reasonably may request, in form satisfactory to Foothill, to perfect
and continue perfected Foothill's security interests in the Collateral, and in
order to fully consummate all of the transactions contemplated hereby and under
the other the Loan Documents.
4.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes,
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents designated by Foothill) as Borrower's true and lawful attorney, with
power to (a) if Borrower refuses to, or fails timely to execute and deliver any
of the documents described in SECTION 4.4, sign the name of Borrower on any of
the documents described in SECTION 4.4, (b) at any time that an Event of
Default has occurred and is continuing or Foothill deems itself insecure, sign
Borrower's name on any invoice or bill of lading relating to any Account,
drafts against Account Debtors, schedules and assignments of Accounts,
verifications of Accounts, and notices to Account Debtors, (c) send requests
for verification of Accounts, (d) endorse Borrower's name on any Collection
item that may come into Foothill's possession, (e) at any time that an Event of
Default has occurred and is continuing or Foothill deems itself insecure,
notify the post office authorities to change the address for delivery of
Borrower's mail to an address designated by Foothill, to receive and open all
mail addressed to Borrower, and to
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retain all mail relating to the Collateral and forward all other mail to
Borrower, (f) at any time that an Event of Default has occurred and is
continuing or Foothill deems itself insecure, make, settle, and adjust all
claims under Borrower's policies of insurance and make all determinations and
decisions with respect to such policies of insurance, and (g) at any time that
an Event of Default has occurred and is continuing or Foothill deems itself
insecure, settle and adjust disputes and claims respecting the Accounts
directly with Account Debtors, for amounts and upon terms that Foothill
determines to be reasonable, and Foothill may cause to be executed and
delivered any documents and releases that Foothill determines to be necessary.
The appointment of Foothill as Borrower's attorney, and each and every one of
Foothill's rights and powers, being coupled with an interest, is irrevocable
until all of the Obligations have been fully and finally repaid and performed
and Foothill's obligation to extend credit hereunder is terminated.
4.6 RIGHT TO INSPECT. Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter to
inspect Borrower's Books and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, quality, value,
condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement, Borrower
makes the following representations and warranties which shall be true, correct,
and complete in all material respects as of the date hereof, and shall be true,
correct, and complete in all respects as of the Closing Date, and at and as of
the date of the making of each Advance thereafter, as though made on and as of
the date of such Advance (except to the extent that such representations and
warranties relate solely to an earlier date) and such representations and
warranties shall survive the execution and delivery of this Agreement:
5.1 NO ENCUMBRANCES. Borrower has good and indefeasible title to
the Collateral, free and clear of Liens except for Permitted Liens.
5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts and Eligible
Unbilled Accounts are bona fide existing obligations created by the sale and
delivery of Inventory or the rendition of services to Account Debtors in the
ordinary course of Borrower's business, unconditionally owed to Borrower without
defenses, disputes, offsets, counterclaims, or rights of return or cancellation.
The services giving rise to such Eligible Accounts and Eligible Unbilled
Accounts have been completed for the Account Debtor, or to the Account Debtor's
agent. Borrower has not received notice of actual or imminent bankruptcy,
insolvency, or material impairment of the financial condition of any Account
Debtor regarding any Eligible Account.
5.3 INTENTIONALLY OMITTED.
5.4 EQUIPMENT. All of the Equipment is used or held for use in
Borrower's business and is fit for such purposes.
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5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and
Equipment are not stored with a bailee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on SCHEDULE 6.12 or otherwise permitted by SECTION 6.12.
5.6 INVENTORY RECORDS. Borrower keeps correct and accurate
records itemizing and describing the kind, type, quality, and quantity of the
Inventory, and Borrower's cost therefor.
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief executive
office of Borrower is located at the address indicated in the preamble to this
Agreement and Borrower's FEIN is 88-0241740.
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Borrower is duly organized and existing and in good
standing under the laws of the jurisdiction of its incorporation and qualified
and licensed to do business in, and in good standing in, any state where the
failure to be so licensed or qualified reasonably could be expected to cause a
Material Adverse Change.
(b) Borrower does not have any direct or indirect
Subsidiaries.
5.9 DUE AUTHORIZATION; NO CONFLICT.
(a) The execution, delivery, and performance by Borrower of
this Agreement and the Loan Documents to which it is a party have been duly
authorized by all necessary corporate action.
(b) The execution, delivery, and performance by Borrower of
this Agreement and the Loan Documents to which it is a party do not and will not
(i) violate any provision of federal, state, or local law or regulation
(including Regulations T, U, and X of the Federal Reserve Board) applicable to
Borrower, the Governing Documents of Borrower, or any order, judgment, or decree
of any court or other Governmental Authority binding on Borrower, (ii) conflict
with, result in a breach of, or constitute (with due notice or lapse of time or
both) a default under any material contractual obligation or material lease of
Borrower, (iii) result in or require the creation or imposition of any Lien of
any nature whatsoever upon any properties or assets of Borrower, other than
Permitted Liens, or (iv) require any approval of stockholders or any approval or
consent of any Person under any material contractual obligation of Borrower.
(c) Other than the filing of appropriate financing
statements, fixture filings, and mortgages, the execution, delivery, and
performance by Borrower of this Agreement and the Loan Documents to which
Borrower is a party do not and will not require any registration with, consent,
or approval of, or notice to, or other action with or by, any federal, state,
foreign, or other Governmental Authority or other Person.
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(d) This Agreement and the Loan Documents to which Borrower
is a party, and all other documents contemplated hereby and thereby, when
executed and delivered by Borrower will be the legally valid and binding
obligations of Borrower, enforceable against Borrower in accordance with their
respective terms, except as enforcement may be limited by equitable principles
or by bankruptcy, insolvency, reorganization, moratorium, or similar laws
relating to or limiting creditors' rights generally.
(e) The Liens granted by Borrower to Foothill in and to its
properties and assets pursuant to this Agreement and the other Loan Documents
are validly created, perfected, and first priority Liens, subject only to
Permitted Liens.
5.10 LITIGATION. There are no actions or proceedings pending by or
against Borrower before any court or administrative agency and Borrower does not
have knowledge or belief of any pending, threatened, or imminent litigation,
governmental investigations, or claims, complaints, actions, or prosecutions
involving Borrower or any guarantor of the Obligations, except for: (a) ongoing
collection matters in which Borrower is the plaintiff; (b) matters disclosed on
SCHEDULE 5.10; and (c) matters arising after the date hereof that, if decided
adversely to Borrower, would not cause a Material Adverse Change.
5.11 NO MATERIAL ADVERSE CHANGE. All financial statements relating
to Borrower that have been delivered by Borrower to Foothill have been prepared
in accordance with GAAP (except, in the case of unaudited financial statements,
for the lack of footnotes and being subject to year-end audit adjustments) and
fairly present Borrower's financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has not been
a Material Adverse Change with respect to Borrower since the date of the latest
financial statements submitted to Foothill on or before the Closing Date.
5.12 SOLVENCY. Borrower is Solvent. No transfer of property is
being made by Borrower and no obligation is being incurred by Borrower in
connection with the transactions contemplated by this Agreement or the other
Loan Documents with the intent to hinder, delay, or defraud either present or
future creditors of Borrower.
5.13 EMPLOYEE BENEFITS. None of Borrower, any of its Subsidiaries,
or any of their ERISA Affiliates maintains or contributes to any Benefit Plan,
other than those listed on SCHEDULE 5.13. Borrower, each of its Subsidiaries
and each ERISA Affiliate have satisfied the minimum funding standards of ERISA
and the IRC with respect to each Benefit Plan to which it is obligated to
contribute. No ERISA Event has occurred nor has any other event occurred that
may result in an ERISA Event that reasonably could be expected to result in a
Material Adverse Change. None of Borrower or its Subsidiaries, any ERISA
Affiliate, or any fiduciary of any Plan is subject to any direct or indirect
liability with respect to any Plan under any applicable law, treaty, rule,
regulation, or agreement. None of Borrower or its Subsidiaries or any ERISA
Affiliate is required to provide security to any Plan under Section 401(a)(29)
of the IRC.
5.14 ENVIRONMENTAL CONDITION. None of Borrower's properties or
assets has ever been used by Borrower or, to the best of Borrower's knowledge,
by previous owners or operators in the disposal of, or to produce, store,
handle, treat, release, or transport, any
25
Hazardous Materials. None of Borrower's properties or assets has ever been
designated or identified in any manner pursuant to any environmental protection
statute as a Hazardous Materials disposal site, or a candidate for closure
pursuant to any environmental protection statute. No Lien arising under any
environmental protection statute has attached to any revenues or to any real or
personal property owned or operated by Borrower. Borrower has not received a
summons, citation, notice, or directive from the Environmental Protection
Agency or any other federal or state governmental agency concerning any action
or omission by Borrower resulting in the releasing or disposing of Hazardous
Materials into the environment.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, Borrower
shall do all of the following:
6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system of
accounting that enables Borrower to produce financial statements in accordance
with GAAP, and maintain records pertaining to the Collateral in the form
available on the Closing Date and such records as from time to time may be
reasonably requested by Foothill within 30 days of such request.
6.2 COLLATERAL REPORTING. Provide Foothill with the following
documents at the following times in form satisfactory to Foothill: (a) promptly
after each business cycle, but not less than five times per month, a sales
journal, collection journal, and credit register since the last such schedule
and a calculation of the Borrowing Base as of such date, (b) on a monthly basis
and, in any event, by no later than the 20th day of each month during the term
of this Agreement, (1) a detailed calculation of the Borrowing Base, (2) a
detailed aging, by total, of the Accounts, together with a reconciliation to the
detailed calculation of the Borrowing Base previously provided to Foothill, and
(2) the status of accrued excise taxes, (c) on a monthly basis and, in any
event, by no later than the 20th day of each month during the term of this
Agreement, a summary aging, by vendor, of Borrower's accounts payable and any
book overdraft and unpaid taxes, (d) promptly after each business cycle, but not
less than five times each month, notice of all disputes or claims, (e) upon
request, copies of invoices in connection with the Accounts, customer
statements, credit memos, remittance advices and reports, deposit slips, in
connection with the Accounts and for Inventory and Equipment acquired by
Borrower, purchase orders and invoices, (f) upon request from Foothill, a
detailed list of Borrower's customers, (g) on a monthly basis, a calculation of
the Dilution for the prior month; (h) upon request, Borrower's electronic data
and (i) at any time that an Event of Default has occurred and is continuing,
such other reports as to the Collateral or the financial condition of Borrower
as Foothill may request from time to time. Monthly statements evidencing
telephonic services shall be mailed by Borrower to each Account Debtor and, at
Foothill's direction, the statements shall indicate on their face that the
Account has been assigned to Foothill and that all payments are to be made
directly to Foothill.
6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to
Foothill: (a) as soon as available, but in any event within 30 days after the
end of each month during each
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of Borrower's fiscal years (or 45 days after the end of each of Borrower's
fiscal quarters), a company prepared balance sheet, income statement, and
statement of cash flow covering Borrower's operations during such period; and
(b) as soon as available, but in any event within 90 days after the end of each
of Borrower's fiscal years, financial statements of Borrower for each such
fiscal year, audited by independent certified public accountants reasonably
acceptable to Foothill and certified, without any qualifications, by such
accountants to have been prepared in accordance with GAAP, together with a
certificate of such accountants addressed to Foothill stating that such
accountants do not have knowledge of the existence of any Default or Event of
Default. Such audited financial statements shall include a balance sheet,
profit and loss statement, and statement of cash flow and, if prepared, such
accountants' letter to management. If Borrower is a parent company of one or
more Subsidiaries or Affiliates, or is a Subsidiary or Affiliate of another
company, then, in addition to the financial statements referred to above,
Borrower agrees to deliver financial statements prepared on a consolidating
basis so as to present Borrower and each such related entity separately, and on
a consolidated basis.
Together with the above, Borrower also shall deliver to
Foothill Parent's Form 10-Q Quarterly Reports, Form 10-K Annual Reports, and
Form 8-K Current Reports, and any other filings made by Parent with the
Securities and Exchange Commission, if any, as soon as the same are filed, or
any other information that is provided by Parent to its public shareholders, and
any other report reasonably requested by Foothill relating to the financial
condition of Parent.
Each month, together with the financial statements provided
pursuant to SECTION 6.3(a), Borrower shall deliver to Foothill a Compliance
Certificate signed by its chief financial officer (as an officer of Borrower and
not in his or her individual capacity) to the effect that: (i) all financial
statements delivered or caused to be delivered to Foothill hereunder have been
prepared in accordance with GAAP (except, in the case of unaudited financial
statements, for the lack of footnotes and being subject to year-end audit
adjustments) and fairly present the financial condition of Borrower, (ii) the
representations and warranties of Borrower contained in this Agreement and the
other Loan Documents are true and correct in all material respects on and as of
the date of such certificate, as though made on and as of such date (except to
the extent that such representations and warranties relate solely to an earlier
date), (iii) for each month that also is the date on which a financial covenant
in SECTION 7.20 is to be tested, Borrower is in compliance at the end of such
period with the applicable financial covenants contained in SECTION 7.20 (and
demonstrating such compliance in reasonable detail), and (iv) on the date of
delivery of such certificate to Foothill there does not exist any condition or
event that constitutes a Default or Event of Default (or, in the case of clauses
(i), (ii), or (iii), to the extent of any non-compliance, describing such
non-compliance as to which he or she may have knowledge and what action Borrower
has taken, is taking, or proposes to take with respect thereto).
After an Event of Default has occurred and is continuing,
Borrower shall issue written instructions to its independent certified public
accountants authorizing them to communicate with Foothill and to release to
Foothill whatever financial information concerning Borrower that Foothill may
request.
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6.4 TAX RETURNS. Deliver to Foothill copies of Parent's future
federal income tax returns, and any amendments thereto, within 30 days of the
filing thereof with the Internal Revenue Service.
6.5 CARRIER AND LEC PAYABLES. At all times, keep its accounts
payable to Carriers, local exchange carriers and USBI current, in accordance
with their respective terms.
6.6 INTENTIONALLY OMITTED.
6.7 INTENTIONALLY OMITTED.
6.8 MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good
operating condition and repair (ordinary wear and tear excepted), and make all
necessary replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Other than those items
of Equipment that constitute fixtures on the Closing Date, Borrower shall not
permit any item of Equipment to become a fixture to real estate or an accession
to other property, and such Equipment shall at all times remain personal
property.
6.9 TAXES. Except for assessments and taxes set forth in
SCHEDULE 6.9, cause all assessments and taxes, whether real, personal, or
otherwise, due or payable by, or imposed, levied, or assessed against Borrower
or any of its property to be paid in full, before delinquency or before the
expiration of any extension period, except to the extent that the validity of
such assessment or tax shall be the subject of a Permitted Protest. Except for
assessments and taxes set forth in SCHEDULE 6.9, Borrower shall make due and
timely payment or deposit of all such federal, state, and local taxes,
assessments, or contributions required of it by law, and will execute and
deliver to Foothill, on demand, appropriate certificates attesting to the
payment thereof or deposit with respect thereto, except to the extent that the
validity of such assessment or tax shall be the subject of a Permitted Protest.
Except for assessments and taxes set forth in SCHEDULE 6.9, Borrower will make
timely payment or deposit of all tax payments and withholding taxes required of
it by applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability, and local, state, and federal income taxes, and will, upon request,
furnish Foothill with proof satisfactory to Foothill indicating that Borrower
has made such payments or deposits.
6.10 INSURANCE.
(a) At its expense, keep the Collateral insured against loss
or damage by fire, theft, explosion, sprinklers, and all other hazards and
risks, and in such amounts, as are ordinarily insured against by other owners in
similar businesses. Borrower also shall maintain business interruption, public
liability, product liability, and property damage insurance relating to
Borrower's ownership and use of the Collateral, as well as insurance against
larceny, embezzlement, and criminal misappropriation. Nothing herein shall
require the Borrower to maintain earthquake insurance.
(b) All such policies of insurance shall be in such form,
with such companies, and in such amounts as may be reasonably satisfactory to
Foothill. All insurance
28
required herein shall be written by companies which are authorized to do
insurance business in the State of California. All hazard insurance and such
other insurance as Foothill shall specify, shall contain a California Form
438BFU (NS) mortgagee endorsement, or an equivalent endorsement satisfactory to
Foothill, showing Foothill as first loss payee thereof, and shall contain a
waiver of warranties. Every policy of insurance referred to in this SECTION
6.10 shall contain an agreement by the insurer that it will not cancel such
policy except after 30 days prior written notice to Foothill and that any loss
payable thereunder shall be payable notwithstanding any act or negligence of
Borrower or Foothill which might, absent such agreement, result in a forfeiture
of all or a part of such insurance payment. Borrower shall deliver to Foothill
certified copies of such policies of insurance and evidence of the payment of
all premiums therefor.
(c) Original policies or certificates thereof satisfactory
to Foothill evidencing such insurance shall be delivered to Foothill at least
30 days prior to the expiration of the existing or preceding policies. Borrower
shall give Foothill prompt notice of any loss covered by such insurance, and
Foothill shall have the right to adjust any loss payable under any such
insurance policies without any liability to Borrower whatsoever in respect of
such adjustments. Any monies received as payment for any loss under any
insurance policy including the insurance policies mentioned above, shall be paid
over to Foothill to be applied at the option of Foothill either to the
prepayment of the Obligations without premium, in such order or manner as
Foothill may elect, or shall be disbursed to Borrower. Upon the occurrence of
an Event of Default, Foothill shall have the right to apply all prepaid premiums
to the payment of the Obligations in such order or form as Foothill shall
determine.
6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and
under the other Loan Documents by or on behalf of Borrower without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.
6.12 LOCATION OF EQUIPMENT. Keep the Equipment only at the
locations identified on SCHEDULE 6.12; PROVIDED, HOWEVER, that Borrower may
amend SCHEDULE 6.12 so long as such amendment occurs by written notice to
Foothill not less than 30 days prior to the date on which the Equipment is moved
to such new location, so long as such new location is within the continental
United States, and so long as, at the time of such written notification,
Borrower provides any financing statements necessary to perfect and continue
perfected Foothill's security interests in such assets and also provides to
Foothill a Collateral Access Agreement.
6.13 COMPLIANCE WITH LAWS. Comply with the requirements of all
applicable laws, rules, regulations, and orders of any governmental authority,
including the Communications Act, FCC rules and those relating to
telecommunications, the Fair Labor Standards Act and the Americans With
Disabilities Act, other than laws, rules, regulations, and orders the
non-compliance with which, individually or in the aggregate, would not have
and could not reasonably be expected to cause a Material Adverse Change.
6.14 EMPLOYEE BENEFITS.
29
(a) Deliver to Foothill: (i) promptly, and in any event
within 10 Business Days after Borrower or any of its Subsidiaries knows or has
reason to know that an ERISA Event has occurred that reasonably could be
expected to result in a Material Adverse Change, a written statement of the
chief financial officer of Borrower describing such ERISA Event and any action
that is being taking with respect thereto by Borrower, any such Subsidiary or
ERISA Affiliate, and any action taken or threatened by the IRS, Department of
Labor, or PBGC. Borrower or such Subsidiary, as applicable, shall be deemed to
know all facts known by the administrator of any Benefit Plan of which it is the
plan sponsor, (ii) promptly, and in any event within three Business Days after
the filing thereof with the IRS, a copy of each funding waiver request filed
with respect to any Benefit Plan and all communications received by Borrower,
any of its Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate
with respect to such request, and (iii) promptly, and in any event within three
Business Days after receipt by Borrower, any of its Subsidiaries or, to the
knowledge of Borrower, any ERISA Affiliate, of the PBGC's intention to terminate
a Benefit Plan or to have a trustee appointed to administer a Benefit Plan,
copies of each such notice.
(b) Cause to be delivered to Foothill, upon Foothill's
request, each of the following: (i) a copy of each Plan (or, where any such
plan is not in writing, complete description thereof) (and if applicable,
related trust agreements or other funding instruments) and all amendments
thereto, all written interpretations thereof and written descriptions thereof
that have been distributed to employees or former employees of Borrower or its
Subsidiaries; (ii) the most recent determination letter issued by the IRS with
respect to each Benefit Plan; (iii) for the three most recent plan years, annual
reports on Form 5500 Series required to be filed with any governmental agency
for each Benefit Plan; (iv) all actuarial reports prepared for the last three
plan years for each Benefit Plan; (v) a listing of all Multiemployer Plans, with
the aggregate amount of the most recent annual contributions required to be made
by Borrower or any ERISA Affiliate to each such plan and copies of the
collective bargaining agreements requiring such contributions; (vi) any
information that has been provided to Borrower or any ERISA Affiliate regarding
withdrawal liability under any Multiemployer Plan; and (vii) the aggregate
amount of the most recent annual payments made to former employees of Borrower
or its Subsidiaries under any Retiree Health Plan.
6.15 LEASES. Pay when due all rents and other amounts payable
under any leases to which Borrower is a party or by which Borrower's properties
and assets are bound, unless such payments are the subject of a Permitted
Protest. To the extent that Borrower fails timely to make payment of such rents
and other amounts payable when due under its leases, Foothill shall be entitled,
in its discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
6.16 YEAR 2000 COMPLIANCE. Except for Borrower's billing system,
which shall be year 2000 Compliant prior to October 1, 1999, Borrower shall be
year 2000 Compliant prior to July 31, 1999. In addition, prior to July 31,
1999, Borrower shall have received reasonable assurances from USBI and the local
exchange carriers that they shall be year 2000 Compliant not later than
September 30, 1999.
7. NEGATIVE COVENANTS.
30
Borrower covenants and agrees that, so long as any credit hereunder
shall be available and until full and final payment of the Obligations, Borrower
will not do any of the following:
7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(a) Indebtedness evidenced by this Agreement;
(b) Indebtedness set forth in SCHEDULE 7.1, including
Indebtedness to Ironwood;
(c) Indebtedness secured by Permitted Liens; and
(d) refinancings, renewals, or extensions of Indebtedness
permitted under clauses (b) and (c) of this SECTION 7.1 (and continuance or
renewal of any Permitted Liens associated therewith) so long as: (i) the net
cash proceeds of such refinancings, renewals, or extensions do not result in
an increase in the aggregate principal amount of the Indebtedness so
refinanced, renewed, or extended, (ii) such refinancings, renewals,
refundings, or extensions do not result in a shortening of the average
weighted maturity of the Indebtedness so refinanced, renewed, or extended,
and (iii) to the extent that Indebtedness that is refinanced was subordinated
in right of payment to the Obligations, then the subordination terms and
conditions of the refinancing Indebtedness must be at least as favorable to
Foothill as those applicable to the refinanced Indebtedness.
7.2 LIENS. Create, incur, assume, or permit to exist, directly or
indirectly, any Lien on or with respect to any of its property or assets, of any
kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
SECTION 7.1(d) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter into any
merger, consolidation, reorganization, or recapitalization, or reclassify its
capital stock, or liquidate, wind up, or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of transactions, all or
any substantial part of its property or assets.
7.4 DISPOSAL OF ASSETS. Sell, lease, assign, transfer, or
otherwise dispose of any of Borrower's properties or assets other than sales
of Inventory to buyers in the ordinary course of Borrower's business as
currently conducted.
7.5 CHANGE NAME. Change Borrower's name, FEIN, corporate
structure (within the meaning of Section 9402(7) of the Code), or identity, or
add any new fictitious name.
31
7.6 GUARANTEE. Guarantee or otherwise become in any way liable
with respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or
which are transmitted or turned over to Foothill.
7.7 NATURE OF BUSINESS. Make any change in the principal nature
of Borrower's business.
7.8 PREPAYMENTS AND AMENDMENTS.
(a) Except in connection with a refinancing permitted by
SECTION 7.1(d) or as provided in SECTION 7.8(c), prepay, redeem, retire,
defease, purchase, or otherwise acquire any Indebtedness owing to any third
Person, other than the Obligations in accordance with this Agreement,
(b) Directly or indirectly, amend, modify, alter, increase,
or change any of the terms or conditions of any agreement, instrument, document,
indenture, or other writing evidencing or concerning Indebtedness permitted
under SECTIONS 7.1(b), (c), OR (d), and
(c) Notwithstanding anything to the contrary contained
herein, Borrower may, on or after December 31, 2000, make the scheduled payment
of principal on its Indebtedness to Ironwood, in whole or in part, so long as:
(i) no Event of Default has occurred and is continuing and (ii) Borrower has not
less than $2,000,000 of Availability after giving effect to such payment.
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10 INTENTIONALLY OMITTED.
7.11 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or other property, other than capital stock) on, or purchase,
acquire, redeem, or retire any of Borrower's capital stock, of any class,
whether now or hereafter outstanding, PROVIDED, HOWEVER, (a) that so long as no
Event of Default has occurred and is continuing, Borrower may pay dividends to
Parent to pay its general and administrative expenses in the ordinary course of
business as historically conducted, and (b) that so long as: (i) no Event of
Default has occurred and is continuing and (ii) Borrower has not less than
$2,000,000 of Availability after giving effect to the dividend, Borrower may pay
dividends to Parent to allow it to (a) pay accrued dividends or their
functional equivalent on up to $20,000,000 of Parent's outstanding Preferred
Stock and (b) redeem up to $3,865,000 of its outstanding Preferred Stock.
7.12 ACCOUNTING METHODS. Modify or change its method of accounting
or enter into, modify, or terminate any agreement currently existing, or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of Borrower's accounting records without
said accounting firm or service bureau
32
agreeing to provide Foothill information regarding the Collateral or
Borrower's financial condition.
7.13 INVESTMENTS. Directly or indirectly make, acquire, or
incur any liabilities (including contingent obligations) for or in connection
with (a) the acquisition of the securities (whether debt or equity) of, or
other interests in, a Person, (b) loans, advances, capital contributions, or
transfers of property to a Person, or (c) the acquisition of all or
substantially all of the properties or assets of a Person.
7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly enter
into or permit to exist any material transaction with any Affiliate of
Borrower except for transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms, that are fully disclosed
to Foothill, and that are no less favorable to Borrower than would be
obtained in an arm's length transaction with a non-Affiliate.
7.15 SUSPENSION. Suspend or go out of a substantial portion of its
business.
7.16 COMPENSATION. Increase the annual fee or per-meeting fees
paid to directors during any year by more than 15% over the prior year.
7.17 USE OF PROCEEDS. Use (a) the proceeds of the Advances made
hereunder for any purpose other than (i) on the Closing Date to pay
transactional costs and expenses incurred in connection with this Agreement, and
(ii) thereafter, consistent with the terms and conditions hereof, for its lawful
and permitted corporate purposes.
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY AND
EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new location
without providing 30 days prior written notification thereof to Foothill and so
long as, at the time of such written notification, Borrower provides any
financing statements or fixture filings necessary to perfect and continue
perfected Foothill's security interests and also provides to Foothill a
Collateral Access Agreement with respect to such new location. The Inventory
and Equipment shall not at any time now or hereafter be stored with a bailee,
warehouseman, or similar party without Foothill's prior written consent.
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or
indirectly:
(a) engage, or permit any Subsidiary of Borrower to engage,
in any prohibited transaction which is reasonably likely to result in a civil
penalty or excise tax described in Sections 406 of ERISA or 4975 of the IRC for
which a statutory or class exemption is not available or a private exemption has
not been previously obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan any
accumulated funding deficiency (as defined in Sections 302 of ERISA and 412 of
the IRC), whether or not waived;
33
(c) fail, or permit any Subsidiary of Borrower to fail, to
pay timely required contributions or annual installments due with respect to any
waived funding deficiency to any Benefit Plan;
(d) terminate, or permit any Subsidiary of Borrower to
terminate, any Benefit Plan where such event would result in any liability of
Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of
ERISA;
(e) fail, or permit any Subsidiary of Borrower to fail, to
make any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of Borrower to fail, to
pay any required installment or any other payment required under Section 412 of
the IRC on or before the due date for such installment or other payment;
(g) amend, or permit any Subsidiary of Borrower to amend, a
Plan resulting in an increase in current liability for the plan year such that
either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate is
required to provide security to such Plan under Section 401(a)(29) of the IRC;
or
(h) withdraw, or permit any Subsidiary of Borrower to
withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely
to result in any liability of any such entity under Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $10,000.
7.20 FINANCIAL COVENANT. See SCHEDULE 7.20 for Tangible Net Worth
covenant.
7.21 CONTRACTS WITH LOCAL EXCHANGE CARRIERS. Enter into any new
contractual arrangements with local exchange carriers ("LECs") or other Persons,
or materially amend, modify, or extend existing contractual arrangements with
the LECs or USBI or other Persons, if the effect would be to: (a) prohibit
Foothill from having a Lien on the rights of Borrower thereunder, (b) prohibit
disclosure of the terms thereof to Foothill, or (c) grant a Lien to the LEC or
such other Person in the Collateral.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an event of
default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when declared
due and payable, any portion of the Obligations (whether of principal, interest
(including any interest which, but for the provisions of the Bankruptcy Code,
would have accrued on such amounts),
34
fees and charges due Foothill, reimbursement of Foothill Expenses, or other
amounts constituting Obligations);
8.2 If Borrower fails to perform, keep, or observe: (a) any
term, provision, condition, covenant, or agreement contained in SECTION 6.2,
SECTION 6.3 or SECTION 6.9 and such failure continues for a period of five
days after such failure, (b) any term, provision, condition, covenant, or
agreement contained in SECTION 6.4, SECTION 6.12 or SECTION 6.15 and such
failure continues for a period of 10 days after such failure, or (c) any
other term, provision, covenant, or agreement contained in this Agreement, in
any of the Loan Documents, or in any other present or future agreement
between Borrower and Foothill;
8.3 If there is a Material Adverse Change;
8.4 If any material portion of Borrower's properties or assets
is attached, seized, subjected to a writ or distress warrant, or is levied
upon, or comes into the possession of any third Person;
8.5 If an Insolvency Proceeding is commenced by Borrower;
8.6 If an Insolvency Proceeding is commenced against Borrower and
any of the following events occur: (a) Borrower consents to the institution of
the Insolvency Proceeding against it; (b) the petition commencing the Insolvency
Proceeding is not timely controverted; (c) the petition commencing the
Insolvency Proceeding is not dismissed within 90 calendar days of the date of
the filing thereof; PROVIDED, HOWEVER, that, during the pendency of such period,
Foothill shall be relieved of its obligation to extend credit hereunder; (d) an
interim trustee is appointed to take possession of all or a substantial portion
of the properties or assets of, or to operate all or any substantial portion of
the business of, Borrower; or (e) an order for relief shall have been issued or
entered therein;
8.7 If Borrower is enjoined, restrained, or in any way prevented
by court order from continuing to conduct all or any material part of its
business affairs;
8.8 If a notice of Lien, levy, or assessment in excess of $100,000
is filed of record with respect to any of Borrower's properties or assets by the
United States Government, or any department, agency, or instrumentality thereof,
or by any state, county, municipal, or governmental agency, or if any taxes or
debts, in excess of $100,000 in the aggregate, owing at any time hereafter to
any one or more of such entities becomes a Lien, whether choate or otherwise,
upon any of Borrower's properties or assets and the same is not paid on the
payment date thereof; PROVIDED, HOWEVER, that Foothill may reserve the amount of
such Lien;
8.9 If a judgment or other claim becomes a Lien or encumbrance
upon any material portion of Borrower's properties or assets;
8.10 If there is a default in any material agreement to which
Borrower is a party with one or more third Persons and such default (a) occurs
at the final maturity of the obligations thereunder, or (b) after all applicable
notifications have been made and all
35
applicable grace periods have run, results in a right by such third
Person(s), irrespective of whether exercised, to accelerate the maturity of
Borrower's obligations thereunder;
8.11 If Borrower makes any payment on account of Indebtedness that
has been contractually subordinated in right of payment to the payment of the
Obligations, except to the extent such payment is permitted by the terms of the
subordination provisions applicable to such Indebtedness;
8.12 If any material misstatement or misrepresentation exists now
or hereafter in any warranty, representation, statement, or report made to
Foothill by Borrower or any officer, employee, agent, or director of Borrower,
or if any such material warranty or representation is withdrawn.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this
Agreement, by any of the other Loan Documents, or otherwise, immediately due and
payable;
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, under any of the Loan Documents, or
under any other agreement between Borrower and Foothill;
(c) Terminate this Agreement and any of the other Loan
Documents as to any future liability or obligation of Foothill, but without
affecting Foothill's rights and security interests in the Collateral and without
affecting the Obligations;
(d) Settle or adjust disputes and claims directly with
Account Debtors for amounts and upon terms which Foothill considers advisable,
and in such cases, Foothill will credit Borrower's Loan Account with only the
net amounts received by Foothill in payment of such disputed Accounts after
deducting all Foothill Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory in trust
for Foothill, segregate all returned Inventory from all other property of
Borrower or in Borrower's possession and conspicuously label said returned
Inventory as the property of Foothill;
(f) Without notice to or demand upon Borrower or any
guarantor, make such payments and do such acts as Foothill considers necessary
or reasonable to protect its security interests in the Collateral. Borrower
agrees to assemble the Collateral if Foothill so requires, and to make the
Collateral available to Foothill as Foothill may designate. Borrower authorizes
Foothill to enter the premises where the Collateral is located, to take and
maintain possession of the Collateral, or any part of it, and to pay, purchase,
contest, or
36
compromise any encumbrance, charge, or Lien that in Foothill's determination
appears to conflict with its security interests and to pay all expenses
incurred in connection therewith. With respect to any of Borrower's owned or
leased premises, Borrower hereby grants Foothill a license to enter into
possession of such premises and to occupy the same, without charge, for up to
120 days in order to exercise any of Foothill's rights or remedies provided
herein, at law, in equity, or otherwise;
(g) Without notice to Borrower (such notice being expressly
waived), and without constituting a retention of any collateral in satisfaction
of an obligation (within the meaning of Section 9505 of the Code), set off and
apply to the Obligations any and all (i) balances and deposits of Borrower held
by Foothill (including any amounts received in the Lockbox Accounts), or (ii)
indebtedness at any time owing to or for the credit or the account of Borrower
held by Foothill;
(h) Hold, as cash collateral, any and all balances and
deposits of Borrower held by Foothill, and any amounts received in the Lockbox
Accounts, to secure the full and final repayment of all of the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale, and sell (in the manner provided for
herein) the Collateral. Foothill is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and advertising
matter, or any property of a similar nature, as it pertains to the Collateral,
in completing production of, advertising for sale, and selling any Collateral
and Borrower's rights under all licenses and all franchise agreements shall
inure to Foothill's benefit;
(j) Sell the Collateral at either a public or private sale,
or both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Foothill
determines is commercially reasonable. It is not necessary that the Collateral
be present at any such sale;
(k) Foothill shall give notice of the disposition of the
Collateral as follows:
(1) Foothill shall give Borrower and each holder of a
security interest in the Collateral who has filed with Foothill a written
request for notice, a notice in writing of the time and place of public sale,
or, if the sale is a private sale or some other disposition other than a public
sale is to be made of the Collateral, then the time on or after which the
private sale or other disposition is to be made;
(2) The notice shall be personally delivered or
mailed, postage prepaid, to Borrower as provided in SECTION 12, at least five
days before the date fixed for the sale, or at least five days before the date
on or after which the private sale or other disposition is to be made; no notice
needs to be given prior to the disposition of any portion of the Collateral that
is perishable or threatens to decline speedily in value or that is of a type
37
customarily sold on a recognized market. Notice to Persons other than Borrower
claiming an interest in the Collateral shall be sent to such addresses as they
have furnished to Foothill;
(3) If the sale is to be a public sale, Foothill also
shall give notice of the time and place by publishing a notice one time at least
five days before the date of the sale in a newspaper of general circulation in
the county in which the sale is to be held;
(l) Foothill may credit bid and purchase at any public sale;
and
(m) Any deficiency that exists after disposition of the
Collateral as provided above will be paid immediately by Borrower. Any excess
will be returned, without interest and subject to the rights of third Persons,
by Foothill to Borrower.
9.2 REMEDIES CUMULATIVE. Foothill's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Foothill shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by
Foothill of one right or remedy shall be deemed an election, and no waiver by
Foothill of any Event of Default shall be deemed a continuing waiver. No delay
by Foothill shall constitute a waiver, election, or acquiescence by it.
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes, assessments,
insurance premiums, or, in the case of leased properties or assets, rents or
other amounts payable under such leases) due to third Persons, or fails to make
any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Foothill
determines that such failure by Borrower could result in a Material Adverse
Change, in its discretion and without prior notice to Borrower, Foothill may do
any or all of the following: (a) make payment of the same or any part thereof;
(b) set up such reserves in Borrower's Loan Account as Foothill deems necessary
to protect Foothill from the exposure created by such failure; or (c) obtain and
maintain insurance policies of the type described in SECTION 6.10, and take any
action with respect to such policies as Foothill deems prudent. Any such
amounts paid by Foothill shall constitute Foothill Expenses. Any such payments
made by Foothill shall not constitute an agreement by Foothill to make similar
payments in the future or a waiver by Foothill of any Event of Default under
this Agreement. Foothill need not inquire as to, or contest the validity of,
any such expense, tax, or Lien unless it is the subject of a Permitted Protest,
and the receipt of the usual official notice for the payment thereof shall be
presumptive evidence that the same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest, notice
of protest, notice of default or dishonor, notice of payment and nonpayment,
nonpayment at maturity, release, compromise, settlement, extension, or renewal
of accounts, documents, instruments, chattel paper, and guarantees at any time
held by Foothill on which Borrower may in any way be liable.
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11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as Foothill
complies with its obligations, if any, under Section 9207 of the Code, Foothill
shall not in any way or manner be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any cause; (c) any diminution in the value
thereof; or (d) any act or default of any carrier, warehouseman, bailee,
forwarding agency, or other Person. All risk of loss, damage, or destruction of
the Collateral shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend,
and hold Foothill, each Participant, and each of their respective officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from
and against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all reasonable attorneys fees and disbursements
and other costs and expenses actually incurred in connection therewith (as
and when they are incurred and irrespective of whether suit is brought), at
any time asserted against, imposed upon, or incurred by any of them in
connection with or as a result of or related to the execution, delivery,
enforcement, performance, and administration of this Agreement and any other
Loan Documents or the transactions contemplated herein, and with respect to
any investigation, litigation, or proceeding related to this Agreement, any
other Loan Document, or the use of the proceeds of the credit provided
hereunder (irrespective of whether any Indemnified Person is a party
thereto), or any act, omission, event or circumstance in any manner related
thereto (all the foregoing, collectively, the "Indemnified Liabilities").
Borrower shall have no obligation to any Indemnified Person under this
SECTION 11.3 with respect to any Indemnified Liability that a court of
competent jurisdiction finally determines to have resulted from the gross
negligence or willful misconduct of such Indemnified Person. This provision
shall survive the termination of this Agreement and the repayment of the
Obligations.
12. NOTICES.
Unless otherwise provided in this Agreement, all notices or demands
by any party relating to this Agreement or any other Loan Document shall be in
writing and (except for financial statements and other informational documents
which may be sent by first-class mail, postage prepaid) shall be personally
delivered or sent by registered or certified mail (postage prepaid, return
receipt requested), overnight courier, or telefacsimile to Borrower or to
Foothill, as the case may be, at its address set forth below:
IF TO BORROWER: INCOMNET COMMUNICATIONS CORPORATION
2801 Main Street
Irvine, California 92614
Attn: George Blanco
Fax No. 949.244.7474
WITH COPIES TO: HELLER, EHRMAN, WHITE & MCAULIFFE
601 South Figueroa Street, 40th Floor
Los Angeles, California 90017
Attn: G. Thomas Stromberg, Esq.
Fax No. 213.614.1868
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IF TO FOOTHILL: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310.478.9788
WITH COPIES TO: BUCHALTER, NEMER, FIELDS & YOUNGER
601 South Figueroa Street, Suite 2400
Los Angeles, California 90017
Attn: Robert C. Colton, Esq.
Fax No. 213.896.0400
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
the other. All notices or demands sent in accordance with this SECTION 12,
other than notices by Foothill in connection with Sections 9504 or 9505 of the
Code, shall be deemed received on the earlier of the date of actual receipt or
three days after the deposit thereof in the mail. Borrower acknowledges and
agrees that notices sent by Foothill in connection with Sections 9504 or 9505 of
the Code shall be deemed sent when deposited in the mail or personally
delivered, or, where permitted by law, transmitted by telefacsimile or other
similar method set forth above.
13. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS (UNLESS
EXPRESSLY PROVIDED TO THE CONTRARY IN ANOTHER LOAN DOCUMENT), THE CONSTRUCTION,
INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS OF THE
PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER OR
THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED BY,
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF CALIFORNIA. THE
PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH THIS
AGREEMENT AND THE OTHER LOAN DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE
STATE AND FEDERAL COURTS LOCATED IN THE COUNTY OF LOS ANGELES, STATE OF
CALIFORNIA OR, AT THE SOLE OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH
FOOTHILL SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT
MATTER JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF BORROWER AND
FOOTHILL WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH
MAY HAVE TO ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO
THE EXTENT ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 13.
BORROWER AND FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN
DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT
CLAIMS,
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TORT CLAIMS, BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY
CLAIMS. EACH OF BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED THIS
WAIVER AND EACH KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A
COPY OF THIS AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE
COURT.
14. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers
delivered to Foothill may be destroyed or otherwise disposed of by Foothill
four months after they are delivered to or received by Foothill, unless
Borrower requests, in writing, the return of said documents, schedules, or
other papers and makes arrangements, at Borrower's expense, for their return.
15. GENERAL PROVISIONS.
15.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and Foothill.
15.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of the respective successors and assigns of each of the
parties; PROVIDED, HOWEVER, that Borrower may not assign this Agreement or
any rights or duties hereunder without Foothill's prior written consent and
any prohibited assignment shall be absolutely void. No consent to an
assignment by Foothill shall release Borrower from its Obligations. Foothill
may assign this Agreement and its rights and duties hereunder and no consent
or approval by Borrower is required in connection with any such assignment.
Foothill reserves the right to sell, assign, transfer, negotiate, or grant
participations in all or any part of, or any interest in Foothill's rights
and benefits hereunder. In connection with any such assignment or
participation, Foothill may disclose all documents and information which
Foothill now or hereafter may have relating to Borrower or Borrower's
business. To the extent that Foothill assigns its rights and obligations
hereunder to a third Person, Foothill thereafter shall be released from such
assigned obligations to Borrower and such assignment shall effect a novation
between Borrower and such third Person.
15.3 SECTION HEADINGS. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the
context, everything contained in each section applies equally to this entire
Agreement.
15.4 INTERPRETATION. Neither this Agreement nor any uncertainty
or ambiguity herein shall be construed or resolved against Foothill or
Borrower, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by all parties and shall be
construed and interpreted according to the ordinary meaning of the words used
so as to fairly accomplish the purposes and intentions of all parties hereto.
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15.5 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
15.6 AMENDMENTS IN WRITING. This Agreement can only be amended
by a writing signed by both Foothill and Borrower.
15.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may
be executed in any number of counterparts and by different parties on
separate counterparts, each of which, when executed and delivered, shall be
deemed to be an original, and all of which, when taken together, shall
constitute but one and the same Agreement. Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective
as delivery of an original executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile also
shall deliver an original executed counterpart of this Agreement but the
failure to deliver an original executed counterpart shall not affect the
validity, enforceability, and binding effect of this Agreement.
15.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the
incurrence or payment of the Obligations by Borrower or any guarantor of the
Obligations or the transfer by either or both of such parties to Foothill of
any property of either or both of such parties should for any reason
subsequently be declared to be void or voidable under any state or federal
law relating to creditors' rights, including provisions of the Bankruptcy
Code relating to fraudulent conveyances, preferences, and other voidable or
recoverable payments of money or transfers of property (collectively, a
"Voidable Transfer"), and if Foothill is required to repay or restore, in
whole or in part, any such Voidable Transfer, or elects to do so upon the
reasonable advice of its counsel, then, as to any such Voidable Transfer, or
the amount thereof that Foothill is required or elects to repay or restore,
and as to all reasonable costs, expenses, and attorneys fees of Foothill
related thereto, the liability of Borrower or such guarantor automatically
shall be revived, reinstated, and restored and shall exist as though such
Voidable Transfer had never been made.
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15.9 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to
the transactions contemplated hereby and shall not be contradicted or
qualified by any other agreement, oral or written, before the date hereof.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed in Los Angeles, California.
INCOMNET COMMUNICATIONS CORPORATION,
a Delaware corporation
By /s/ Denis Richard
--------------------------------------
Name: Denis Richard
Title: President
FOOTHILL CAPITAL CORPORATION,
a California corporation
By /s/ Rhonda Foreman
--------------------------------------
Name: Rhonda Foreman
----------------------------------
Title: Vice President
----------------------------------
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