UNITED STATES
SECURITIES AND EXCHANGE COMMISION
WASHINGTION, D.C. 20549
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended September 30, 1996
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT
For the transition period from to
Commission file number 1-14072
PEN INTERCONNECT, INC.
(Exact name of small business issuer as specified in its charter)
UTAH 87-0430260
(State or other jurisdiction
of incorporation or organization) (I.R.S. Employer Identification No)
2351 South 2300 West, Salt Lake City, UT 84119
(Address of Principal Executive Offices) (Zip Code)
(801) 973-6090
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act:
Common Stock, Par Value $0.01 Per Share
Common Stock Warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-
KSB or any amendment to this Form 10-KSB. X check
State issuer's revenues for its most recent fiscal year. $25,106,734
As of December 20, 1996, there were 3,033,407 shares of the Issuer's
commons stock, par value $0.01, issued and outstanding. The aggregate market
value of the Issuer's voting stock held by nonaffiliates of the Issuer was
approximately $7,219,500, computed at the closing quotations for the Issuer's
common stock of $2.38 as of December 20, 1996.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Annual Meeting of Shareholders to be
held February 19, 1997. Certain information therein is incorporated into Part
III hereof.
<PAGE>
FORM 10-KSB
PEN INTERCONNECT, INC.
Table of Contents
Page
PART I
1. Description of Business 3
2. Description of Property 8
3. Legal Proceedings 9
4. Submission of Matters to a Vote of Security Holders 9
PART II
5. Market for Common Equity and Related Stockholder Matters 9
6. Management's Discussion and Analysis or Plan of Operation 10
7. Financial Statements 13
8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 13
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 13
10. Executive Compensation 14
11. Security Ownership of Certain Beneficial Owners and Management 14
12. Certain Relationships and Related Transactions 14
13. Exhibits and Reports on Form 8-K 14
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
General
Pen Interconnect, Inc. (the "Company" or "Pen") develops and produces on a
turnkey basis custom cable interconnections for original equipment manufactures
("OEMs") in the computer, computer peripheral, telecommunications,
instrumentation and testing equipment industries (See "Business of Issuer"). The
Company was incorporated under the laws of the State of Utah on September 30,
1985. The Company maintains divisions located in Salt Lake City, Utah and
Tustin, California. During fiscal year 1996 the Company had a division located
in San Jose, California. The San Jose Division was sold by the Company on
November 12, 1996 (See "Business Development - Subsequent Event"). The executive
offices of the Company are located at 2351 South 2300 West, SLC, UT 84119.
Summary of fiscal year 1996 events
On November 17, 1995, the Company successfully completed an initial public
offering of 1,000,000 shares of its common stock and warrants to purchase
1,000,000 shares of common stock. The initial public offering price was $6.00
per share of common stock and $0.10 per warrant. Each warrant was immediately
exercisable and entitled the registered holder to purchase one share of common
stock at a price of $6.50. The warrants expire on November 17, 2000. The
outstanding warrants may be redeemed by the Company upon 30 days' written notice
at $0.05 per warrant, provided that the closing bid quotations of the common
stock have averaged at least $9.00 per share for a period of any 20 consecutive
trading days ending on the third day prior to the day on which the Company gives
notice.
In connection with the offering, the Company granted the underwriter the
right to purchase up to 100,000 shares of common stock and 100,000 warrants. The
underwriter was also granted an over-allotment option of 150,000 shares of
common stock and/or warrants to purchase an additional 150,000 shares of common
stock. In December 1995, the underwriter exercised its option and purchased the
150,000 warrants. The option to purchase the 150,000 shares of common stock has
expired.
3
<PAGE>
Effective January 1, 1996, the Company acquired the assets of Overland
Communication, Inc. dba MOTO-SAT ("Moto-Sat Division") by assuming that
company's debt and offering future stock distributions contingent upon
achievement of performance criteria. MOTO-SAT is a manufacturer of high-end
satellite television receiving systems for recreational vehicles. The
acquisition gave the Company a new product line, and allowed it to utilize its
manufacturing capacity to help Moto-Sat focus on sales and research &
development activities. (See Note B of Notes to Financial Statements)
On April 8, 1996, the Company entered into a three year financing agreement
with National Bank of Canada for a $6 million line of credit with the option to
extend the line on an as needed basis. This line of credit replaced the $3
million line of credit which had a two-and- three-quarters (2.75) percent
interest rate over prime. (See Note G of Notes to Financial Statements.)
Effective April 1, 1996, the Company acquired substantially all of the
assets and assumed certain liabilities and the operations of InCirT Technology
("InCirT Division"), a division of the Cerplex Group, Inc. for $5.3 million
comprised of $3.5 million in cash and 333,407 shares of common stock. The
Company also agreed to deliver to Cerplex .09261 shares of its common stock for
every dollar of past due over 90 days accounts receivable of InCirT collected by
the Company during the first 180 days after the date of the acquisition closing
up to a maximum of 55,568 shares of common stock. (See Note B of Notes to
Financial Statements)
Subsequent event
On November 12, 1996, the Company sold all of the net assets used by it in
the operations of its San Jose Division to Touche Electronics, Inc., ("Touche")
a subsidiary of TMCI Electronics, Inc.("TMCI"). The sale was effective as of
November 1, 1996.
The sales price for the net assets of the San Jose Division was $3,300,000,
consisting of $2,000,000 in cash, $900,000 in promissory notes, and 53,669
shares of TMCI common stock with an agreed upon guaranteed value of $400,000. In
addition, the Company has the right to receive $700,000 in contingent earn outs
for a potential total sales price of $4,000,000. Pen originally purchased the
San Jose Division in March 1995 for approximately $2,200,000. As part of the
transaction, Touche and TMCI also assumed certain liabilities associated with
the operations of the Division. (See Note P of Notes to Financial Statements).
(b) BUSINESS OF ISSUER
Products
The Company develops, produces and acts as a sub-contract manufacturer for
total interconnect solutions on a turn key basis. The types of products produced
by the Company include custom cables, harness, ribbons, specialty cable, surface
mount technology and construction & testing of printed circuit boards,
interconnections for OEMs in the computer, computer peripheral,
telecommunications, medical, instrumentation and testing equipment industries.
The Company's products connect electronic equipment, such as computers, to
various external devices (such as video screens, printers, external disk drives,
modems, telephone jacks, peripheral interfaces and networks) and connect devices
within the equipment (such as power supplies, computer hard drives and PC
cards).
4
<PAGE>
Most of the Company's sales consist of custom cable interconnections
developed in close collaboration with its customers. The Company's customers
include OEMs of computers including mainframes, desktops, portables, laptops,
notebooks, pens, and palmtops as well as OEMs of computer peripheral equipment
such as modems, memory cards, LAN adapters, cellular phones, faxes and printers.
Other customers include OEMs of telecommunications, medical, instrumentation and
testing equipment. The Company's InCirT Division is engaged in the Electronic
Manufacturing Services Industry (EMSI) and provides sophisticated ISO 9002-
certified assembly and testing services for complex printed circuit boards and
subsystems through advanced surface mount technology (SMT) manufacturing as well
as traditional through-hole assembly. These products are used primarily in the
computer instrumentation, testing equipment and medical equipment.
Many OEMs in the industries that the Company serves increasingly rely upon
outsourcing of their manufacturing. Outsourcing allows OEMs to take advantage of
the expertise and capital investments of contract manufacturers, enabling
companies to concentrate on their core activities. Using its in-house technical
capabilities and multiple molding machines, the Company assists its OEM
customers by quickly developing and prototyping customized interconnection
assemblies in conjunction with the customers' design staffs, and then
efficiently producing the customized interconnections in time frames and
specialized quantities to meet its customers' needs in rapidly changing markets.
With its U.S. domestic facilities and in-house technical capabilities, the
Company concentrates on higher margin products, which require customization,
rapid production turnaround and constant, real-time client communication. The
Company also has entered into an agreement with lower cost foreign manufacturers
in order to competitively service the customers' needs for lower margin, high
volume standardized products.
Until 1993 the Company manufactured standard cabling interconnections for a
small number of OEMs in the mainframe computer industry. The Company has
experienced increases in sales since 1993 as a result of its participation in
the growth of portable computers and related peripherals by developing and
producing cabling interconnections using the emerging industry-wide standards
for the personal computer, or "PC" card. The PC card is a credit card size
device containing a large amount of electronic solid state circuitry which is
used extensively with portable computers. In the early 1990s, the Company
assisted in the development of the cabling interconnections associated with the
standards that have been established by the Personal Computer Memory Card
International Association ("PCMCIA"). Throughout the year the majority of the
computer and computer peripheral manufacturers have introduced multiple products
using the PCMCIA architecture.
Distribution of Products
The Company markets its products through in-house salesmen and sales
representatives to OEMs in the computer, medical and instrumentation markets
throughout the continental U.S. and Canada and into some selective foreign
countries.
5
<PAGE>
New Products
The Moto-Sat Division has developed a satellite receiving system for use on
recreational vehicles, buses, boats, yachts, and similar vehicles with a
mid-level price range to enhance its sales of its high-end satellite receiving
systems. The Moto-Sat Division anticipates the future release of an in-motion
satellite receiving system for all types of vehicles.
Competition
The Company competes directly with numerous other cable manufacturers in
its custom standard cable assembly business. Many of these manufacturers tend to
be relatively small and fragmented. The Company also competes with computer,
cabling and connector manufacturers that produce custom cable assemblies for
their own use, thereby reducing potential sales to such manufacturers and to
third parties by the Company. The PCMCIA cable assembly industry is dominated by
approximately 15 companies, including connector manufacturers, with revenues
ranging from $5 million to $100 million annually. The InCirT division competes
directly with several Electronic Manufacturing Services Industry (EMSI)
companies.
Across all product lines, computer, cabling and connector manufacturers are
generally substantially larger and have greater resources than the Company.
High technology companies often use outside contract manufacturers to
produce components or assemblies more inexpensively and more efficiently than
they could themselves. Contract manufacturers typically produce a relatively
large volume of such products and can more readily amortize the requisite
capital equipment and personnel costs. The Company competes against other
contract manufacturers on the basis of product quality, technical support, and
rapid design, engineering and delivery of prototype connections. Successful
competition requires rapid response and quick solutions to customer requests for
highly customized work.
Several of the Company's contract manufacturing competitors seek to develop
price advantages by assembling cabling overseas in countries with lower labor
costs. As new cable interconnection products become standardized and produced in
large quantities, these overseas producers can generally offer lower prices than
the Company. The Company has now started to focus its marketing efforts on this
part of the market and has developed a strategic manufacturing alliance with a
company in China to sell its products competitively and still control the
quality of its products. Historically, the Company believed that the quality of
cable assemblies manufactured overseas had not generally been equivalent to
products manufactured domestically. Moreover, by originally focusing its efforts
on the development and production of customized cable assemblies, the Company
developed the ability to service the critical need for immediate responses to
client demands which has to date avoided the relatively long turnaround time of
overseas manufacture for custom cable assemblies.
6
<PAGE>
Product Components
The Company generally purchases cable, connectors, and electronic
components from a large number of unaffiliated U.S. and foreign companies that
manufacture the products that meet the specifications of the OEM customers.
Certain components are custom designed and purchased from a specific supplier.
Most of the other components utilized by the Company are available from a number
of manufacturers and the Company's decisions with respect to suppliers are based
on availability of the necessary component, the reliability of the supplier in
meeting its commitments, and pricing.
Customers
Sales by the Company have historically been concentrated with several large
customers. However, only one customer exceeded 10% of the overall Company sales
for fiscal year ended 1996 (three in 1995). This customer's sales were 16% and
23% for the fiscal years ended September 30, 1996 and 1995 respectively. The
Company continues to have significant sales from its major customers; however,
due to recent acquisitions and the resulting increased customer base these
customers constitute less than 10% of the total sales of the Company, even
though there has been no decrease in the dollar volume of sales from this
customer.
Employees
As of September 30, 1996, the Company employed approximately 360 full and
part-time employees. Seven employees were executive personnel, 22 were technical
and engineering personnel, 14 were in marketing and sales, 299 were in
manufacturing, and 18 were administrative, accounting, information systems, and
clerical personnel. The Company reduced its manpower in its cable operations
through attrition and automated efficiency by approximately 28% by the end of
fiscal year 1996 compared to fiscal year 1995.
Regulatory Matters
Computer cables must satisfy electrical magnetic interference (EMI)
standards which are imposed by the Federal Communications Commission. The
Company relies on the manufacturer of its cable for compliance with these
requirements.
7
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
FACILITIES
The Company maintains manufacturing and administrative facilities in Salt
Lake City, Utah under a lease which expires September 30, 1998 and provides for
$147,060 in annual rental payments. The building contains 40,500 square feet of
space, of which 3,000 square feet are utilized for sales and administration and
37,500 square feet are dedicated to manufacturing, material control, quality
control and the machine shop for prototype development.
The InCirT division's manufacturing and administration facility is located
in Tustin, California, under a sublease (former parent company holds lease)
which expires December 31, 2001. The annual rental is approximately $126,700 per
year. The premises consists of approximately 120,300 sq. feet of which InCirT
subleases approximately 24,500 sq. feet of which 2,000 sq. ft. are utilized for
sales and administration and 22,500 sq.ft. are dedicated to manufacturing and
engineering.
The Moto-sat division's sales and engineering facilities are located in
Salt Lake City, Utah, under a lease which expires November 2000. The premises
contains approximately 7,000 square feet of space all of which is utilized for
sales, research, development, production and administration. The annual rental
is approximately $30,000.
The San Jose division's manufacturing and administration facilities are
located in San Jose, California, under a lease which expired June 30, 1996 and
was subsequently rented on a month to month basis at approximately $16,500 per
month. The premises contain 26,000 square feet of space, of which 3,000 square
feet are utilized for sales and administration; and 23,000 square feet are
dedicated to manufacturing and engineering.
In May 1996, the Company entered into a lease to relocate the San Jose
Division under a lease which expires December 2002. The premises contains
approximately 49,560 square feet of which the Company leases approximately
35,400 square feet to be used for sales, production and administration. The
annual rental is approximately $344,000. The Division was to relocate in January
1997. This Division was subsequently sold and management intends to either
sublease the facility or assign its interest in the lease.
8
<PAGE>
ITEM 3. LEGAL PROCEEDINGS
No proceedings are pending against the Company or any of its properties
which, if determined adversely to the Company, would have a material adverse
effect on the Company's financial condition or results of operations
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND
RELATED STOCKHOLDERS MATTERS
The common stock and warrants of the Company are listed on the National
Association of Securities Dealers, Inc., Automated Quotation system ("Nasdaq"),
under the symbol "PENC" for the stock and "PENCW" for the warrants. The common
stock and warrants were first publicly traded on November 17, 1995.
The following table sets forth the range of high and low bids for the
common stock of the Company during the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
------------- -------- -------
<S> <C> <C>
December 31, 1995 $ 6.50 $ 5.25
March 31, 1996 6.13 5.13
June 30, 1996 7.63 4.50
September 30, 1996 6.25 2.75
</TABLE>
On December 20, 1996, the closing quotation for the common stock on NASDAQ
was $2.38 per share. As of December 20, 1996, there were 3,033,407 shares of
common stock issued and outstanding, held by approximately 650 shareholders of
record, including several holders who are nominees for an undetermined number of
beneficial owners.
9
<PAGE>
The following table sets forth the range of high and low bids for the
warrants of the Company during the periods indicated.
<TABLE>
<CAPTION>
Quarter Ended High Bid Low Bid
------------- -------- -------
<S> <C> <C>
December 31, 1995 $ 2.13 $ 1.00
March 31, 1996 2.19 1.00
June 30, 1996 2.75 0.94
September 30, 1996 1.94 0.63
</TABLE>
On December 20, 1996, the closing quotation for the warrants on NASDAQ was
$ 0.64 per warrant. As of December 20, 1996, there were 1,150,000 warrants
issued and outstanding.
The trading volume of the common stock and warrants of the Company is
limited, creating significant changes in the trading price of the common stock
as a result of relatively minor changes in the supply and demand. Consequently,
potential investors should be aware that the price of the common stock and
warrants in the trading market can change dramatically over short periods as a
result of factors unrelated to the earnings and business activities of the
Company.
The Company has not paid any dividends, with respect to common stock and
does not anticipate paying any dividends in the near future. The Company's
credit facility with National Bank of Canada prohibits the payment of dividends
without the consent of the bank.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
The following discussion and analysis provides certain information which
the Company's management believes is relevant to an assessment and understanding
of the Company's results of operations and financial condition for the fiscal
years ended September 30, 1996 and 1995. This discussion and analysis should be
read in conjunction with the Company's financial statements and related
footnotes.
10
<PAGE>
Results of Operations
The acquisition of the net assets of InCirT Technology (InCirT), which was
effective as of April 1, 1996 has been accounted for as a purchase. The
statement of operations data for the year ended September 30, 1996 includes the
results of operations of InCirT for the period from April 1, 1996.
The acquisition of the net assets of MOTO-SAT in 1996, which was effective
as of January 1, 1996 has been accounted for as a purchase. The statement of
operations data for the year ended September 30, 1996 includes the results of
operations of MOTO-SAT for the period from January 1, 1996.
The acquisition of the net assets of QIS in San Jose, California (San Jose
Division) on March 24, 1995 has been accounted for as a purchase. The statements
of operations data for the years ended September 30, 1996 and 1995 include the
results of operations of QIS from March 24, 1995.
Net sales. Net sales for the Company increased approximately 67% for the year
ended September 30, 1996 ("1996") as compared to the year ended September 30,
1995 ("1995"). The significant increase is principally the result of the
inclusion of the recent acquisitions of the InCirT Division (April '96), San
Jose Division (March '95) and the MOTO-SAT Division (January '96). There have
been no material increases in the prices of any of the Company's products
between the two periods, but due to competitive pressure and the emergence of
far east competitors the Company has reduced its prices to its large volume
customers. The Company anticipates that prices will remain subject to
competitive pressures in the foreseeable future which may prohibit a significant
price increase.
Cost of sales. Cost of sales as a percentage of net sales has increased to
approximately 90% in 1996 as compared to 79% in 1995. This increase in costs
resulted primarily from the following factors: 1) the recording of a series of
unusual one-time production expenses; 2) the Salt Lake City Division has
increased its per hour wages due to an increased demand for skilled workers and
a very low unemployment rate in the area; the Salt Lake Division because of the
low unemployment and availability of manpower had to hire low skilled and
untrained employees, which increased training costs, created inefficiency in
production and created additional costs in reworking defective products. In
addition, the low unemployment rate caused an increase in entry level wages as
well as the trained employees wages in an effort to keep skilled labor. 3) the
InCirT Division has experienced a temporary shift in its product mix resulting
in an increase in low margin orders from several customers; 4) the Company also
adjusted its WIP inventory at year end to reflect inventory obsolescence and
required adjustments in material rework and 5) the San Jose Division has seen a
sharp decease in its standard cable and harness orders due to a softening in the
market. However, as the decrease was thought to be temporary the Division did
not reduce its indirect support personnel in anticipation of a market rebound.
This decision has effected the quarter and year-to-date margins in 1996.
11
<PAGE>
The unusual production expenses are estimated by management to be
approximately $395,000 and consist of labor inefficiencies, inventory costs,
excessive material rework costs, severance, finders fees, reorganization costs,
etc. The Company continues to take steps to improve its gross profit margin by
reorganizing its production facilities improving training and also is currently
implementing a new manufacturing software package to allow for more timely
information to management. In addition the Company has responded to the changing
market by reducing the labor force, reducing operating costs, reducing general
and administrative costs and has made efforts to transfer more high labor
products to its strategic contract manufacturer in China.
Operating expenses. Operating expenses in total as a percent of net sales have
remained relatively constant at about 12% for both years presented. However, on
a dollar for dollar basis the Company has proactively increased its sales and
marketing expenses to support the ever changing customer base resulting from the
recent acquisitions and to support its efforts to expand into a total
interconnect market place, due to the additional costs in absorbing its recent
acquisitions and in being a first year public company. The Company experienced
increases in audit fees, consulting, legal fees, insurance, travel and other
operating expenses. These increased costs did not allow any significant cost
saving in the current year in its general and administrative expenses as
previously anticipated.
Other income and expenses. Other income and expenses have increased as a percent
of net sales from 2.0% in 1995 to 2.2% in 1996. This percentage increase is
primarily due to increases in reserves for bad debt, warranty, and vacation.
These increases were partly offset by savings in interest expense as a percent
of net sales due to an improved interest rate from an average of 3.25% over
prime in 1995 to 0.5% over prime since April of 1996. In addition, 1995 interest
expense included interest expenses associated with the bridge loan used to fund
the QIS acquisition which was repaid in November 1995 with some of the proceeds
received from the initial public offering.
Net earnings (loss) and earnings (loss) per share. The Company recorded a loss
of $709,010 ($0.26 per share) for 1996, compared to net earnings of $617,618
($0.36 per share) for 1995. The reasons for the loss in the current year are as
listed above. In addition the per share earnings are further reduced because the
Company has issued an additional 1,333,407 shares since September 1995 in
connection with its initial public offering and the recent InCirT acquisition,
resulting in additional weighted shares outstanding.
Liquidity and Capital Resources
The Company has historically financed its operations through operating cash
flow and lines of credit. However, on November 17, 1995, the Company completed
an initial public offering (IPO) which produced net proceeds of approximately
$4.7 million . This offering significantly increased the cash and equity
balances. It also allowed the Company to retire the $1,600,000 debt associated
with the San Jose Division acquisition, and to purchase additional inventory and
equipment to support the increased production levels.
Working capital increased from $126,710 at September 30, 1995 to $3,189,817
at September 30, 1996. The increase is principally due to the acquisitions and
the net proceeds received from the initial public offering.
12
<PAGE>
The current ratio has increased from 1.0 at September 1995 to 1.4 at
September 30, 1996. This significant improvement is primarily the result of the
IPO and the acquisitions.
Management believes that additional working capital may be required to meet
its future operating costs, for business expansion opportunities and to
adequately support its China strategic manufacturing alliance in addition to its
existing cash balances, borrowings available under the line of credit, and cash
generated from operations. However, there can be no assurance that such
additional financing, if required, would be available on favorable terms.
Inflation and Seasonality
The Company does not believe that it is significantly impacted by
inflation. Historically, the industry sales tend to decline in January,
February, July and August when activity in the personal computer industry as a
whole is reduced. During the fourth quarter, the Company experienced a sharp
downturn in the semi conductor capital equipment market, slow down in purchases
and rescheduled orders in the telecommunication industry. These fourth quarter
changes have significantly effected the Company's sales and resulted in a loss
for both the fourth quarter of 1996 and a loss for 1996.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data are included beginning at
page 19. See page 18 for the index to the financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9. DIRECTORS, EXCECUTIVE OFFICERS, PROMOTERS AND CONTROL
PERSONS; COMPLIANCE WITH
SECTION 16(a) OF THE EXCHANGE ACT
The information required is set forth under the captions "Election of
Directors, Directors and Excecutive Officer; Compliance with Section 16(a) of
the Securities Exchange Act of 1934" in the Company's definitive Proxy Statement
to be filed pursuant to Regulation 14A and is incorporated herein by reference.
13
<PAGE>
ITEM 10. EXECUTIVE COMPENSATION
The information required is set forth under the caption "Compensation of
Executive Officers" in the Company's definitive Proxy Statement to be filed
pursuant to Regulation 14A and is incorporated herein by reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The information required is set forth under the caption "Security Ownership
of Certain Beneficial Owners and Management" in the Company's definitive Proxy
Statement to be filed pursuant to Regulation 14A and is incorporated herein by
reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required is set forth under the caption "Election of
Directors - Certain Relationships and Related Transactions" in the Company's
definitive Proxy Statement to be filed pursuant to Regulation 14A and is
incorporated herein by reference.
ITEM 13. EXHIBITS AND REPORTS OF FORM 8-K
No reports on form 8-K were filed by the Company during the three months ended
September 30, 1996.
14
<PAGE>
INDEX OF EXHIBITS
Exhibit No. Description
1 Form of Underwriter's Warrant Agreement including Form of Underwriter's
Warrant. See Registration Statement filed on Form SB-2, SEC File No.
33-96444
2 Plan of acquisition, reorganization, arrangement, liquidation, or
succession: Not applicable.
3 Articles of incorporation and By-laws. See Registration Statement filed on
Form SB-2, SEC File No. 33-96444
10.1 Asset Purchase Agreement for the purchase of InCirT Technology from the
Cerplex Group, Inc. See Exhibit to report on Form 10-QSB dated June 30,
1996.
10.2 Employment Agreement between James S. Pendleton and the Company. See
Exhibit to report on Form 10-QSB dated June 30, 1996.
10.3 Employment Agreement between Wayne R. Wright and the Company. See Exhibit
to report on Form 10-QSB dated June 30, 1996.
10.4 Employment Agreement between Robert D. Deforest Sr. and the Company. See
Exhibit to report on Form 10-QSB dated June 30, 1996.
10.5 Employment Agreement between Lewis Carl Rasmussen and the Company. See
Exhibit to report on Form 10-QSB dated June 30, 1996.
10.6 Employment Agreement between Alan L. Weaver and the Company. See Exhibit to
report on Form 10-QSB dated June 30, 1996.
10.7 Loan and Security Agreement dated February 29, 1996 between National Bank
of Canada and the Company. This filing page 47
10.8 Form of Warrant Agreement to be entered into between Registrant and
American Stock Transfer & Trust Company. See Registration Statement filed
on Form SB- 2, SEC File No. 33-96444
10.9 Asset Purchase Agreement dated March 22, 1995 between Registrant,
Insulectro, Quality Interconnect Systems, Quintec Interconnect Systems,
Quintec Industries and QIS Electronics. See Registration Statement filed on
Form SB-2, SEC File No. 33-96444
10.10Real Estate Lease dated June 2, 1993 between Registrant and The Equitable
Life Insurance Society. See Registration Statement filed on Form SB-2, SEC
File No. 33-96444
15
<PAGE>
10.11Form of 1995 Stock Option Plan. See Registration Statement filed on Form
SB-2, SEC File No. 33-96444
11 Statement re: computation of per share earnings. This filing page 78
27. Financial Data Schedule.
16
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
PEN INTERCONNECT, INC.
By: /s/ James S. Pendleton
James S. Pendleton,
CEO and Director
By: /s/ Wayne R. Wright
Wayne R. Wright,
CFO, Principal Accounting
Officer and Director
By: /s/ Alan Weaver
Alan Weaver,
President
By: /s/ Steven Fryer
Steven Fryer,
Director
By: /s/ C. Reed Brown
C. Reed Brown
Director
17
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
PEN INTERCONNECT, INC.
Report of Independent Certified Public Accountants 19
Financial Statements
Balance Sheets as of September 30, 1996 and 1995 20
Statements of Operations for the Years Ended
September 30, 1996 and 1995 22
Statement of Stockholders' Equity for the Years Ended
September 30, 1996 and 1995 23
Statements of Cash Flows for the Years Ended
September 30, 1996 and 1995 24
Notes to Financial Statements 28
18
<PAGE>
REPORT OF INDEPENDENT
CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Pen Interconnect, Inc.
We have audited the accompanying balance sheets of Pen Interconnect, Inc. (a
Utah Corporation), as of September 30, 1996 and 1995, and the related statements
of operations, stockholders' equity, and cash flows for the years then ended.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Pen Interconnect, Inc., as of
September 30, 1996 and 1995 and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
/s/ Grant Thornton LLP
Salt Lake City, Utah
November 22, 1996
19
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS
September 30,
ASSETS
<TABLE>
<CAPTION>
1996 1995
---------------- ----------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 169,445 $ 376,488
Receivables (Notes C and G)
Trade accounts, less allowance for doubtful
accounts of $273,852 in 1996 and $12,500
in 1995 4,259,298 2,192,368
Current maturities of notes receivable
(Notes D and M)
Related party - 13,894
Other 37,494 13,433
Income tax refund receivable (Note J) 228,241 -
Inventories (Notes E and G) 6,198,392 3,362,394
Prepaid expenses 386,494 135,789
Deferred tax asset (Note J) 525,800 33,000
------------- -------------
Total current assets 11,805,164 6,127,366
PROPERTY AND EQUIPMENT, AT COST
(Notes G,H and I)
Production equipment 3,010,575 1,825,867
Furniture and fixtures 717,821 419,144
Transportation equipment 49,373 36,008
Leasehold improvements 354,150 340,429
----------- --------------
4,131,919 2,621,448
Less accumulated depreciation 1,065,205 815,614
----------- ------------
3,066,714 1,805,834
OTHER ASSETS
Notes receivable, less current maturities (Notes D and M)
Related party - 33,417
Other 19,630 39,905
Deferred offering costs (Note O) - 294,158
Goodwill 1,589,313 -
Other 176,097 50,143
------------ -------------
1,785,040 417,623
----------- ------------
$16,656,918 $8,350,823
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
20
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS - CONTINUED
September 30,
LIABILITIES AND STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
1996 1995
---------------- ----------
CURRENT LIABILITIES
<S> <C> <C>
Notes payable (Notes F and O) $ - $ 1,600,000
Line of credit (Note G) 4,969,864 2,082,897
Current maturities of long-term obligations
(Note H) 19,265 199,200
Current maturities of capital leases (Note I) 59,878 54,556
Accounts payable 2,954,601 1,443,395
Accrued liabilities 611,739 332,608
Income taxes payable (Note J) - 288,000
------------------ ------------
Total current liabilities 8,615,347 6,000,656
LONG-TERM OBLIGATIONS, less current
maturities (Note H) 96,758 151,000
CAPITAL LEASE OBLIGATIONS, less current
maturities (Note I) 150,382 208,594
DEFERRED INCOME TAXES (Note J) 225,800 194,000
------------ -----------
Total liabilities 9,088,287 6,554,250
COMMITMENTS AND CONTINGENCIES (Notes I
and L) - -
STOCKHOLDERS' EQUITY (Notes B,G,K,N, and O)
Preferred stock, $0.01 par value, authorized
5,000,000 shares, none issued - -
Common stock, $0.01 par value, authorized
50,000,000 shares, issued and outstanding
3,033,407 shares in 1996 and 1,700,000 shares
in 1995 30,334 17,000
Additional paid-in capital 7,431,669 963,935
Retained earnings 106,628 815,638
------------ -----------
Total stockholders' equity 7,568,631 1,796,573
----------- -----------
$16,656,918 $8,350,823
=========== ==========
</TABLE>
The accompanying notes are an integral part of these statements.
21
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF OPERATIONS
Year ended September 30,
<TABLE>
<CAPTION>
1996 1995
------------------ ----------
<S> <C> <C>
Net sales (Note C) $ 25,106,734 $ 15,021,839
Cost of sales 22,582,187 11,842,864
-------------- ------------
Gross profit 2,524,547 3,178,975
Operating expenses
Sales and marketing 1,156,657 795,017
General and administrative 1,663,684 925,179
Depreciation and amortization 304,848 148,277
---------------- --------------
Total operating expenses 3,125,189 1,868,473
--------------- -------------
Operating income (loss) (600,642) 1,310,502
Other income (expense)
Interest expense (513,956) (332,787)
Other income (expense) (Note M) (35,026) 30,903
------------------- --------------
Total other income (expense) (548,982) (301,884)
---------------- -------------
Earnings (loss) before
income taxes (1,149,624) 1,008,618
Income taxes (benefit) (Note J) (440,614) 391,000
------------------ --------------
NET EARNINGS (LOSS) $ (709,010) $ 617,618
================== =============
Earnings (loss) per common share - Primary $ (0.26) $ 0.36
=================== ===============
- Fully dilutive $ (0.26) $ 0.36
=================== ===============
Weighted average common
shares outstanding - Primary 2,700,028 1,700,000
=============== ===========
- Fully dilutive 2,720,866 1,700,000
=============== ===========
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
Pen Interconnect, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended September 30, 1996 and 1995
<TABLE>
<CAPTION>
Common stock Additional
Number paid-in Retained
of shares Amount capital earnings Total
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1994 1,200,000 $ 12,000 $ 718,935 $ 198,020 $ 928,955
Common stock sold for cash
(Note O) 500,000 5,000 245,000 - 250,000
Net - - - 617,618 617,618
------------------------------------------------------------------------------
Balance at September 30, 1995 1,700,000 17,000 963,935 815,638 1,796,573
Common stock sold in IPO
(Note O ) 1,000,000 10,000 4,671,068 - 4,681,068
Common stock issued in acquisition
(Note B) 333,407 3,334 1,796,666 - 1,800,000
Net loss - - - (709,010) (709,010)
--------------------------------------------------------------------------------
Balance at September 30, 1996 3,033,407 $ 30,334 $ 7,431,669 $ 106,628 $7,568,631
========================================= ========= ==========
</TABLE>
The accompanying notes are an integral part of this statement.
23
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS
Year ended September 30,
<TABLE>
<CAPTION>
1996 1995
------------------ ----------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
<S> <C> <C>
Net earnings (loss) $ (709,010) $ 617,618
Adjustments to reconcile net earnings (loss)to net
cash used in operating activities
Depreciation and amortization 304,849 148,277
Bad debts 23,551 14,322
Deferred income taxes (176,900) 78,000
Gain on sale of property and equipment - (19,000)
Changes in assets and liabilities
Trade accounts receivable 1,362,345 (564,753)
Inventories 781,724 (772,200)
Prepaid expenses (239,471) (32,932)
Other assets (95,530) 28,204
Deferred offering costs 294,158 (294,158)
Accounts payable (2,308,412) 114,995
Accrued liabilities 199,016 194,170
Income taxes (800,341) 282,000
----------------- -------------
Total adjustments (655,011) (823,075)
--------------- --------------
Net cash used in operating activities (1,364,021) (205,457)
---------------- -------------
Cash flows from investing activities
Purchase of property and equipment (760,817) (593,846)
Acquisition of businesses (3,500,000) (2,107,457)
Proceeds from sale of property and
equipment - 35,000
Issuance of notes receivable (76,362) -
Collections on notes receivable 119,887 38,456
---------------- -------------
Net cash used in investing
activities (4,217,292) (2,627,847)
---------------- ------------
</TABLE>
(Continued)
24
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended September 30,
<TABLE>
<CAPTION>
1996 1995
------------------- -----------
Cash flows from financing activities
<S> <C> <C>
Proceeds from notes payable - 1,925,488
Principal payments on notes payable (1,600,000) (167,577)
Proceeds from line of credit 19,701,401 17,204,792
Principal payments on line of credit (16,814,434) (16,112,431)
Principal payments on long-term obligations (593,765) -
Proceeds from sale of common stock 4,681,068 250,000
---------------- --------------
Net cash provided by
financing activities 5,374,270 3,100,272
--------------- -------------
Net increase (decrease) in cash
and cash equivalents (207,043) 266,968
Cash and cash equivalents at beginning of year 376,488 109,520
---------------- ---------------
Cash and cash equivalents at end of year $ 169,445 $ 376,488
=============== ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 492,170 $ 234,440
Income taxes 428,538 25,000
</TABLE>
Noncash investing and financing activities
During the year ended September 30, 1995 capital lease obligations of
$148,049 were incurred when the Company entered into leases for equipment.
(Continued)
25
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended September 30,
Acquisition of businesses
Effective April 1, 1996, the Company acquired substantially all assets and
assumed certain liabilities and the operations of InCirT Technology, a division
of the Cerplex Group, Inc. for $3.5 million in cash and 333,407 shares of stock
(Note B). Assets aquired and liabilities assumed in conjunction with this
acquisition were as follows:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable (net) $ 3,307,387
Inventories 3,311,416
Prepaid expenses 5,436
Property and equipment 705,899
Other assets 30,424
Accounts payable (3,563,436)
Accrued liabilities (33,906)
-----------------
Net assets acquired 3,763,220
Excess purchase price over net assets acquired allocated
to goodwill 1,536,780
Purchase price 5,300,000
Less stock issued 1,800,000
-------------
Total cash paid $ 3,500,000
============
</TABLE>
Effective January 1, 1996, the Company acquired selected net assets of Overland
Communications (MOTO-SAT) (Note B). Assets acquired and liabilities assumed in
conjunction with this acquisition were as follows:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable (net) $ 145,439
Inventories 306,306
Prepaid and other assets 5,798
Furniture and equipment 43,755
Accounts payable (256,182)
Accrued liabilities (46,209)
Long term obligations (306,698)
------------
Net liabilities assumed $ (107,791)
============
</TABLE>
Excess purchase price over net assets acquired resulted in recognition of
goodwill
(Continued)
26
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended September 30,
On March 24, 1995, the Company acquired substantially all assets and assumed
certain liabilities of Quintec Interconnect Systems for approximately $2.1
million (Note B). Assets acquired and liabilities assumed in conjunction with
this acquisition were as follows:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable $ 705,010
Inventories 1,209,983
Prepaid expenses 6,400
Deposits 5,300
Property and equipment 294,645
Notes payable (32,322)
Accounts payable (636,951)
-----------
Net assets acquired 1,552,065
Excess purchase price over net assets acquired allocated
to inventory, property and equipment 555,392
Total cash paid $ 2,107,457
=============
</TABLE>
The accompanying notes are an integral part of these statements.
27
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A summary of the significant accounting policies applied in the preparation of
the accompanying financial statements follows.
1. Business activity
Pen Interconnect, Inc. (the Company) was incorporated on September 30,
1985, in the State of Utah. The Company develops and produces, on a turnkey
basis, interconnections solutions for original equipment manufacturers
("OEMs") in the computer, computer peripheral and other computer related
industries, such as the telecommunications, instrumentation and testing
equipment industries. The Company's products connect electronic equipment,
such as computers, to various external devices (such as video screens,
printers, external disk drives, modems, telephone jacks, peripheral
interfaces and networks) and connect devices within the equipment (such as
power supplies, computer hard drives and PC cards). Most of the Company's
sales consist of custom cable interconnections developed in close
collaboration with its customers. The Company's customers include OEMs of
computers including mainframes, desktops, portables, laptops, notebooks,
pens and palmtops, as well as, OEMs of computer peripheral equipment such
as modems, memory cards, LAN adapters, cellular phones, faxes and printers.
Other customers include OEMs of telecommunications, instrumentation and
testing equipment.
The InCirT Division is engaged in the electronic manufacturing services
industry (EMSI), and provides sophisticated ISO 9002-certified assembly and
testing services for complex printed circuit boards and subsystems. In
addition, the Company's MOTO-SAT Division is a manufacturer of satellite
receiving systems for recreational vehicles.
2. Inventories
Inventories consist primarily of cable, components, and boards and are
valued at the lower of cost or market (first-in, first-out basis). Costs
include materials, labor, and overhead.
(Continued)
28
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
3. Property and equipment
Property and equipment are recorded at cost. Expenditures for additions and
major improvements are capitalized. Expenditures for repairs and
maintenance and minor improvements are charged to expense as incurred. When
property or equipment is retired or otherwise disposed of, the related cost
and accumulated depreciation are removed from the accounts. Gains or losses
from retirements and disposals are recorded as other income or expense.
Property and equipment are depreciated over their estimated useful lives.
Leasehold improvements and assets financed under capital leases are
amortized over their estimated useful lives or the lease term, whichever is
shorter. Depreciation and amortization are calculated using straight-line
and accelerated methods over the following estimated useful lives:
Years
Production equipment 5-10
Furniture and fixtures 7
Transportation equipment 5-10
Leasehold improvements 7-10
4. Goodwill.
The Company capitalized as goodwill, the excess acquisition costs over the
fair value of net assets acquired, in connection with business
acquisitions, which costs are being amortized on a straight-line method
over 15 years. The carrying value of goodwill will be reviewed periodically
based on the undiscounted cash flows of the entities aquired over the
remaining amortization period. Should this review indicate that goodwill is
impaired, the Company's carrying value of the goodwill will be reduced by
the estimated shortfall of undiscounted cash flows.
5. Income taxes
The Company utilizes the liability method of accounting for income taxes as
set forth in Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes". Under the liability method, deferred taxes
are determined
(Continued)
29
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
5. Income taxes - Continued
based on the difference between the financial statement and tax bases of
assets and liabilities and are measured using enacted tax rates that will
be in effect when the differences are expected to reverse. An allowance
against deferred tax assets is recorded when it is more likely than not
that such tax benefits will not be realized.
6. Revenue recognition
Revenue is recognized upon shipment of products.
7. Cash and cash equivalents
For financial statement purposes, the Company considers all highly liquid
investments with an original maturity of three months or less when
purchased to be cash equivalents.
8. Warranties
The Company's standard warranty is one year on parts and labor. Warranty
costs are accrued and expensed when revenue is recognized based upon the
Company's experience with such costs. Returns have been insignificant to
date.
9. Research and development
All research expenditures are charged against operations as incurred and
are not significant to the financial statements taken as a whole.
10. Earnings (loss) per share
Earnings or loss per common and common equivalent share is computed by
dividing net earnings (loss) by the weighted average common shares
outstanding during each year, including common equivalent shares (if
(Continued)
30
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
10. Earnings (loss) per share - Continued
dilutive). Common equivalent shares include stock options and warrants.
Common stock issued at prices below the offering price of the initial
public offering (Note O) have been included in the calculation as if they
were outstanding for all periods presented. All per share amounts have been
retroactively restated to reflect the one-for-five reverse stock split,
effective March 1995.
11. Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets, liabilities,
revenues and expenses during the reporting period. Estimates also affect
the disclosure of contingent assets and liabilities at the date of the
financial statements. Actual results could differ from these estimates.
Such estimates of significant accounting sensitivity are allowance for
doubtful acccounts.
12. Accounting standards not yet adopted
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123, Accounting for Stock Based
Compensation (SFAS 123). The Company is required to adopt the provisions of
this statement for years beginning after December 15, 1995. This statement
encourages, but does not require, all entities to adopt a fair value based
method of accounting for employee stock options or similar equity
instruments. However, it also allows an entity to continue to measure
compensation cost for those plans using the intrinsic-value method of
accounting prescribed by Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees (APB 25). Entities electing to
remain with the accounting in APB 25 must make pro forma disclosures of net
income and earnings per share as if the fair value based method of
accounting defined in this statement had been applied. It is currently
anticipated that the Company will continue to measure compensation costs in
accordance with APB 25 and provide the disclosures required by SFAS 123.
(Continued)
31
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE B - ACQUISITIONS
InCirT Technology
Effective April 1, 1996, the Company entered into an agreement to acquire
substantially all assets and assumed certain liabilities and the operations
of InCirT Technology, a division of the Cerplex Group, Inc. for $5.3
million comprised of $3.5 million in cash and 333,407 shares of common
stock. The cash portion of the purchase price consisted of $2.5 million in
additional borrowing and $1 million in public offering funds. In addition,
the Company will deliver to Cerplex .09261 shares of its common stock for
every dollar of past due over 90 days accounts receivable of ICT collected
by the Company during the first 180 days after the date of the acquisition
closing up to a maximum of 55,568 shares of common stock. This transaction
was accounted for using the purchase method of accounting and the excess
purchase price over fair value of net tangible assets acquired of
$1,536,780 is being amortized over 15 years. The results of operations of
the acquired business have been included in the financial statements since
the effective date of acquisition.
MOTO-SAT
Effective January 1, 1996 the Company acquired the assets of Overland
Communication, Inc. dba MOTO-SAT by assuming that company's net debt of
$107,791 and offering future stock distributions contingent upon
achievement of performance milestones. MOTO-SAT is a manufacturer of
satellite receiver systems for recreational vehicles. This transaction was
accounted for using the purchase method of accounting; accordingly the
purchased assets and liabilities have been recorded at their fair value at
the date of acquisition. The excess purchase price over fair value of net
liabilities assumed of $107,791 is being amortized over 15 years. The
results of operations of the acquired business have been included in the
financial statements since the effective date of acquisition.
(Continued)
32
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE B - ACQUISITIONS - CONTINUED
Quintec Interconnect Systems
Effective March 24, 1995, the Company acquired substantially all assets and
assumed certain liabilities and the operations of Quintec Interconnect
Systems (QIS) for $2,107,457 including acquisition costs for $107,457. This
transaction was accounted for using the purchase method of accounting;
accordingly the purchased assets and liabilities have been recorded at
their estimated fair value at the date of acquisition. The results of
operations of the acquired business have been included in the financial
statements since the date of acquisition.
Pro forma results of operations
Assuming all of the acquisitions described above had occured at the
beginning of each period presented below, the Company's unaudited pro forma
condensed results of operations, exclusive of nonrecurring charges, would
have been approximately as follows:
(amounts in thousands,
except share data)
Year ended September 30,
1996 1995
Net sales $ 32,917 $ 31,917
Operating income (loss) (447) 3,321
Net earnings (loss) (708) 1,547
Earnings (loss) per share (0.18) 0.76
The unaudited pro forma condensed results of operations are not necessarily
indicative of the actual results that would have been achieved had the
aforementioned acquisitions taken place at the dates set forth above and
are not necessarily indicative of future results.
33
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE C - MAJOR CUSTOMERS AND CREDIT CONCENTRATION
Financial instruments, which potentially subject the Company to credit
risk, consist primarily of trade accounts receivable. The Company sells to
customers in the computer, computer peripheral, telecommunications,
instrumentation and testing equipment industries located throughout the
United States. Sales have historically been concentrated with several large
original equipment manufacturers (OEMs) on a turnkey basis. To reduce
credit risk the Company performs ongoing credit evaluations of its
customers' financial condition and generally does not require collateral.
The majority of its trade receivables are unsecured. Allowances are
maintained for potential credit losses. The resulting losses have been
insignificant to date and have been within management's expectations.
Revenue from shipments in fiscal 1996 and 1995 to the largest customers
(representing over 10% of sales) are as follows:
1996 1995
---- ----
Customer A 16% 23%
Customer B n/a 19%
Customer C n/a 12%
At September 30, 1996, the Company had accounts receivable due from the
largest OEM representing about 7% of receivables as well as a select number
of other OEMs. Remaining trade accounts receivable at September 30, 1996,
were due from a variety of other customers under normal credit terms.
34
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE D - NOTES RECEIVABLE
Notes receivable consist of the following:
<TABLE>
<CAPTION>
1996 1995
--------------- ----------
<S> <C> <C>
10% note receivable from a company, due
in monthly payments of $1,500 includ-
ing interest, collateralized by inventory,
accounts receivable, machinery, and
equipment $37,630 $44,028
10%note receivable from a company, due in monthly payments of $
1,297 including interest, collateralized by inventory, accounts
receivable, machinery, and
equipment 13,612 -
12% notes receivable from two companies,
due in monthly payments aggregating
$1,000 including interest 5,882 9,310
10% note receivable from an officer/stock-
holder due in monthly payments of
$1,500 including interest - 47,311
-------------- ---------
57,124 100,649
Less current maturities 37,494 27,327
------------- -------------
$ 19,630 $ 73,322
============= ============
NOTE E - INVENTORIES
Inventories consist of the following:
1996 1995
--------------- ----------
Raw materials $ 3,780,800 $ 1,788,640
Work-in-process 1,830,891 1,395,241
Finished goods 586,701 178,513
------------ -------------
$6,198,392 $3,362,394
========== ==========
</TABLE>
35
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE F - NOTES PAYABLE
During March 1995, certain investors, in connection with a private
placement (Note Q), loaned the Company $1,600,000. The loans are unsecured
and bear interest at the rate of 8% per annum. These notes and related
interest were paid in full upon successful completion of the public
offering in November, 1995.
NOTE G - CREDIT FACILITY
On April 8, 1996, the Company completed a new 3 year financing agreement
with a bank for a $6 million revolving line of credit with interest at
one-half (.5) percent over the prime rate. The line of credit is
collateralized by accounts receivable, inventory, property and equipment.
This agreement requires that the Company maintain certain financial ratios
and meet specified minimum levels of total assets, earnings and
restrictions on the payments of dividends. Because the Company did not
comply with certain of these requirements, the bank exercised its right to
increase the interest rate to 2.5% over prime (10.75 % at September 30,
1996) until such time as these requirements are met. This new line of
credit replaced the previous $3,000,000 revolving line of credit. The
Company has borrowed $4,969,864 under the new line of credit at September
30, 1996 (the Company still has $1,030,136 available under the line). As a
result of the Company's failure to meet these requirements the Company was
in default under the loan agreement. The lender has waived these defaults
as of September 30, 1996.
During 1995 and part of 1996, the Company had a credit facility with a
financing company which consisted of a line of credit and a long-term note.
At September 30, 1995, the Company had a $3,000,000 revolving line of
credit with interest at a base rate plus 3.25% (12.00% at September 1995),
payable monthly. The Company had borrowed $2,082,897 under the line of
credit at September 30, 1995. Advances on the line of credit were limited
to 80% of qualified accounts receivable and 35% of eligible inventory. The
line of credit, which was collateralized by accounts receivable,
inventories, property and equipment, was paid in full during 1996.
36
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE H - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1996 1995
-------------- ---------
<S> <C> <C>
Note to an individual with interest imputed
at 10% per annum, payable in monthly
payments of $2,500. $ 116,023 $ -
Prime plus 3.25% (12% at September 30, 1995), note to a financial
institution payable, in 35 monthly installments of $5,000 with a
balloon payment of $125,000 due on August 1, 1997, plus interest,
collateralized by substantially all of the Company's property and
equipment and substantially all personal
assets of the Company's president - 350,200
------------- --------
116,023 350,200
Less current maturities 19,265 199,200
-------- --------
$ 96,758 $151,000
======== ========
</TABLE>
(Continued)
37
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE H - LONG-TERM OBLIGATIONS - CONTINUED
Maturities of long-term obligations are as follows:
Year ending
September 30,
1997 $ 19,265
1998 21,282
1999 23,511
2000 25,973
2001 25,992
thereafter -
------------
$116,023
NOTE I - LEASES
1. Operating leases
The Company conducts a portion of its operations in leased facilities under
noncancelable operating leases expiring through 2001. In addition, the
Company leases equipment under noncancelable operating leases expiring
through 1999. The minimum future rental commitments under operating leases
are as follows:
<TABLE>
<CAPTION>
Year ending
September 30, Facilities Equipment Total
<S> <C> <C> <C>
1997 $617,634 $327,197 $944,831
1998 659,622 186,200 845,822
1999 522,030 170,883 692,913
2000 510,124 - 510,124
2001 138,144 - 138,144
Thereafter - - -
------------- ----------- ------------
$2,447,554 $684,280 $3,131,834
========== ======== ==========
</TABLE>
Rental expense for all operating leases is $ 402,873 and $ 155,989 for the
years ended September 30, 1996 and 1995, respectively.
(Continued)
38
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE I - LEASES - CONTINUED
2. Capital leases
Maturities of capital lease obligations are as follows:
Year ending
September 30,
1997 $ 80,136
1998 80,136
1999 67,457
2000 20,272
Thereafter -
Total minimum lease payments 248,001
Less amount representing interest 37,741
Present value of net minimum lease
payments 210,260
Less current portion 59,878
$150,382
Included in property and equipment is $307,657 of equipment under capital
leases at September 30, 1996. The related accumulated amortization is
$59,165.
NOTE J - INCOME TAXES (BENEFIT)
Components of income taxes (benefit) are as follows:
1996 1995
------------- --------
Current
Federal $ (226,000) $ 263,000
State (37,714) 50,000
------------- --------
(263,714) 313,000
------------ -------
Deferred
Federal (152,100) 66,000
State (24,800) 12,000
------------- --------
(176,900) 78,000
-------------- --------
Income taxes (benefit) $ (440,614) $391,000
============ ========
(Continued)
39
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE J - INCOME TAXES (BENEFIT) - CONTINUED
Reconciliation of income taxes (benefit) computed at the federal statutory
rate and the income tax expense are as follows:
<TABLE>
<CAPTION>
1996 1995
------------- --------
<S> <C> <C>
Federal income taxes at statutory rate $ (402,370) $ 343,000
State income taxes, net of federal benefit (38,244) 41,000
Nondeductible expenses - 7,000
--------------- ---------
$ (440,614) $ 391,000
=========== =========
Deferred tax assets and liabilities consist of the following:
1996 1995
------------- ----------
Deferred tax assets (liabilities)
Accumulated depreciation $(225,800) $(194,000)
Net operating loss 284,100 -
Reserve for inventory obsolescence 92,100 11,000
Allowance for doubtful accounts 108,900 5,000
Reserve for warranties 14,200 9,000
Reserve for vacation 26,500 8,000
----------- -----------
Net deferred tax asset (liability) $ 300,000 $ (161,000)
========= ===========
</TABLE>
NOTE K - EMPLOYEE STOCK OWNERSHIP PLAN
During 1986, the Company established a noncontributory Employee Stock
Ownership Plan (the ESOP) for all employees who have completed one year of
service with the Company. Contributions to the ESOP, which are determined
by the Company's Board of Directors, are not to exceed 25% of the
compensation of the plan's participants. No contributions have been made to
the ESOP since 1989. The ESOP owns 63,771 shares of common stock of the
Company which are held in a trust, the trustees of which are also directors
of the Company. Distributions of account balances to participants of the
ESOP are only made upon the death, disability, or termination of employment
of the participant.
40
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE L - COMMITMENTS AND CONTINGENCIES
1. Employment agreements
The Company has entered into agreements with five key officers which
provide for annual salaries and incentive bonuses. Incentive bonuses are
calculated as a percentage of gross profits and/or sales.
Annual salaries under these employment agreements are as follows:
Year ending
September 30,
1997 $ 550,600
1998 550,600
1999 550,600
2000 550,600
2001 137,650
Thereafter -
---------------
$2,340,050
2. Litigation
From time to time the Company is engaged in various lawsuits or disputes as
plaintiff or defendant arising in the normal course of business. In the
opinion of management, based upon advice of counsel, the ultimate outcome
of these matters will not have a material impact on the Company's financial
position or results of operations.
NOTE M - RELATED PARTY TRANSACTIONS
During 1989, the Company loaned to its Chairman and Chief Executive Officer
$370,335. The note bears interest at 10%. The balance of the loan was zero
and $47,311 as of September 30, 1996 and 1995, respectively. Interest
income received was $ 5,006 and $7,846 for the years ended September 30,
1996 and 1995, respectively.
During the year ended September 30, 1995, the Company guaranteed personal
indebtedness of its Chairman and CEO in the maximum amount outstanding at
any one time of $180,000. This indebtedness was paid in full during fiscal
year 1996 and the guarantee removed.
41
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE N - STOCK OPTION PLAN
During March 1995 the Company adopted the Pen Interconnect 1995 Stock
Option Plan (the Option Plan). The Option Plan provides for the granting of
both Incentive Stock Options (ISOs) or Non-Qualified Options (NQOs) to
purchase not more than 270,000 shares of common stock. ISOs are granted at
not less than market value on the date of grant whereas NQOs may be granted
at not less than 85% of market value on date of grant. Options may be
granted under the Option Plan to all officers, directors, and employees of
the Company. In addition, NQOs may be granted to other parties who perform
services for the Company. During October 1995, the Board of Directors
authorized the granting of options to acquire 255,000 shares of stock at
$6.00 per share. The options vest at 20% per year beginning one year from
the date of the grant. No options are currently exercisable.
NOTE O - STOCK TRANSACTIONS
1. Stock split
During March 1995, the Board of Directors and shareholders approved an
increase in the authorized number of shares from 6,000,000 to 50,000,000.
Also in March 1995, the Company effected a one-for-five reverse stock
split. All per share and weighted average share amounts have been restated
to reflect the reverse stock split.
2. Stock issued
In October 1994, the Company sold 500,000 shares of common stock at a price
of $0.50 per share including 47,000 shares to an officer.
(Continued)
42
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE O - STOCK TRANSACTIONS - CONTINUED
3. Preferred stock
The Company is authorized to issue 5,000,000 shares of $0.01 par value
preferred stock. The Board of Directors is authorized to provide for the
issuance of the preferred stock in one or more series and to fix the
designations, powers, preferences, and rights of any such series. No shares
have been designated or issued.
4. Private placement
In March 1995, the Company completed a private placement of 32 Units (the
Bridge Units). Each Bridge Unit consists of an unsecured promissory note in
the principal amount of $50,000 (total of $1,600,000) (Note F), bearing
interest at an annual rate of 8%, and warrants to acquire 50,000 shares of
common stock at $6.50 per share (the Bridge Warrants), expiring in five
years. The notes and related interest were paid in full upon successful
completion of the offering in November, 1995. The terms of the Bridge
Warrants included in the Bridge Units are identical to and were
automatically converted into a number of similar warrants offered in the
initial public offering.
5. Initial public offering
On November 17, 1995, the Company successfully completed an initial public
offering of 1,000,000 shares of common stock and 1,000,000 redeemable
common stock purchase warrants for $6,100,000 ($6.00 per share and $.10 per
warrant) less underwriting commissions and other expenses of $1,418,932.
Each warrant was immediately exercisable and entitled the registered holder
to purchase one share of common stock at a price of $6.50 and expires on
November 17, 2000. The outstanding warrants may be redeemed by the Company
upon 30 days' written notice at $0.05 per warrant, provided that the
closing bid quotations of the common stock have averaged at least $9.00 per
share for a period of any 20 trading days ending on the third day prior to
the day on which the Company gives notice.
(Continued)
43
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
5. Initial public offering - Continued
In connection with the offering, the Company granted the underwriters the
right to purchase up to 100,000 shares of common stock and 100,000
warrants. The underwriter was also granted an over-allotment option of
150,000 shares of common stock and/or warrants to purchase an additional
150,000 shares of common stock. In December 1995, the underwriters
exercised the option on the 150,000 warrants. The option to purchase the
150,000 shares of common stock has expired. The Company has granted
registration rights to certain stockholders of the Company and has agreed
to bear the cost associated therewith within certain limits.
NOTE P - SUBSEQUENT EVENT
Sale of Division
Effective November 1, 1996, the Company sold all of the net assets totaling
approximately $650,000 used by it in the operations of its San Jose
Division to Touche Electronics, Inc., a subsidiary of TMCI Electronics,
Inc. The Company will recognize a gain after tax of approximately $450,000
on this transaction.
The sales price was $3,300,000; consisting of $2,000,000 in cash, $900,000
in promissory notes, and 53,669 shares of TMCI common stock with an agreed
upon guaranteed value of $400,000. In addition, the Company has the right
to receive $700,000 in contingent earn outs for a potential total sale
price of $4,000,000. The Company originally purchased the Division in March
1995 for approximately $2,200,000. As part of the transaction, Touche and
TMCI also assumed certain liabilities associated with the operations of the
Division.
The $900,000 in promissory notes are comprised of two promissory notes in
the amounts of $400,000 and $500,000, respectively. The $400,000 promissory
note bears interest at one-half of one percent above the prime rate and is
to be fully amortized and paid monthly over a 24 month period. The $500,000
promissory note bears interest at the rate of one-half of one percent above
the prime rate, is amortized over a 48 month period and is payable monthly
with the entire balance coming due on October 31, 1999.
(Continued)
44
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE P - SUBSEQUENT EVENT - CONTINUED
The Company also has the right to receive up to $700,000 of contingent earn
outs. These contingent earn outs are described as follows:
1. Accounts Receivable Over 120 Days. The Company is entitled to receive
.13417 shares of TMCI common stock for every $1 of past due over 120 days
accounts receivable of the Division as of October 31, 1996 collected within
180 days of the closing date, up to a maximum of 13,417 shares of stock or
$100,000.
2. Division Earnings. The Company has the right to receive up to 80,503
shares of TMCI common shares or cash equivalent at the option of TMCI
contingent upon the earnings of the Division. To the extent the earnings of
the Division, determined before interest, income taxes and corporate
overhead allocations, exceed $800,000 in any one year, the Company shall be
entitled to receive such excess on a dollar for dollar basis in the form of
TMCI common shares valued at $7.4532 per share until the Company has
received up to $600,000 in the aggregate worth of TMCI common stock or
80,503 shares or cash equivalent at the option of TMCI. The Company has the
right to earn these shares during the calendar years 1997 through 2000.
The net assets sold by the Company include all of the assets used by the
Division in its operations including, but not limited to, inventory,
accounts receivable, furniture, fixtures and equipment, customer lists,
intellectual property and the assumption of accounts payable and other
liabilities.
The sales price for the Division was determined on the basis of arms-length
negotiations between the Company, Touche and TMCI and was based in a large
part on the earnings and net assets of the Division. There was no material
relationship between the Company and TMCI prior to the acquisition however,
the registrant leased space and sold product to Touche in the normal course
of business.
(Continued)
45
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE P - SUBSEQUENT EVENT - CONTINUED
The following unaudited pro forma information shows the condensed operating
results for the years presented as though the Company's San Jose Division
had been sold at the beginning of the earliest period presented:
<TABLE>
<CAPTION>
(amounts in thousands,
except share data)
Year ended September 30 ,
------------------------
1996 1995
------- ----
<S> <C> <C>
Net sales $18,205 $11,702
Operating income (loss) (1,423) 507
Net earnings (loss) (1,003) 227
Earnings (loss) per share (0.37) 0.13
</TABLE>
The unaudited pro forma information is not necessarily indicative of the
actual results that would have occurred had the aforementioned sale taken
place at the beginning of the earliest period set forth above.
46
<PAGE>
EXHIBIT 10.7
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT made this 29th day of February, 1996 by
and between NATIONAL BANK OF CANADA, a Canadian chartered bank ("Lender"), with
an address at One Tabor Center, 1200 17th Street, Suite 2760, Denver, Colorado
80202, and PEN INTERCONNECT, INC., a Utah corporation, with an address at 2351
South 2300 West, Salt Lake City, Utah 84119 ("Borrower"),
WITNESSETH:
WHEREAS, the parties wish to provide for the terms and conditions upon
which Loans may be made, and Letters of Credit may be issued, for the account of
Borrower;
NOW, THEREFORE, in consideration of any Loans made and/or Letters of Credit
issued for the account of Borrower, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged by
Borrower, the parties agree as follows:
I . DEFINITIONS.
(a) "Account," "Account Debtor," "Chattel Paper," "Documents," "Equipment,"
"General Intangibles," "Goods," "Instruments" and "Inventory" shall have the
respective meanings assigned to such terms, as of the date of this Agreement, in
the Uniform Commercial Code as in effect from time to time in the State of
Colorado.
(b) "Affiliate" shall mean any Person directly or indirectly controlling,
controlled by or under common control with another Person.
(c) "Agreement" shall mean this Loan and Security Agreement, any exhibits
or schedules hereto, any concurrent or subsequent riders hereto and any
extensions, supplements, amendments or modifications hereto.
(d) "Blocked Account" shall have the meaning specified in paragraph 8(a)
hereof.
(e) "Collateral" shall mean all of the property of Borrower described in
paragraph 5 hereof, together with all other real or personal property of
Borrower now or hereafter pledged to Lender to secure repayment of any of the
Liabilities, including without limitation all Accounts, Inventory, General
Intangibles and Equipment of Borrower.
(f) "Collateral Report" shall have the meaning specified in paragraph 9(a)
hereof.
47
<PAGE>
(g) "Eligible Accounts" shall mean those Accounts of Borrower which are
unpaid less than ninety (90) days from invoice date, and which Lender in its
sole discretion determines to be eligible. Without limiting Lender's discretion,
unless otherwise agreed by Lender, the following Accounts of Borrower are not
Eligible Accounts: (i) all Accounts owing by a single Account Debtor, including
currently scheduled Accounts, if twenty-five percent (25%) or more of the
balance owing by such Account Debtor to Borrower is ineligible for any reason;
(ii) Accounts with respect to which the Account Debtor is an officer, director,
employee, Subsidiary or Affiliate of Borrower; (iii) Accounts with respect to
which the Account Debtor is the United States of America or any department,
agency or instrumentality thereof, unless Borrower assigns its right to payment
of such Accounts to Lender pursuant to, and in full compliance with, the
Assignment of Claims Act of 1940, as amended; (iv) Accounts with respect to
which the Account Debtor is not a resident of the continental United States
unless (A) the Account Debtor has supplied Borrower with an irrevocable letter
of credit, in form and substance satisfactory to Lender, issued by a United
States financial institution satisfactory to Lender, to cover the full amount of
such Account, and such letter of credit is assigned and delivered to Lender or
(B) such Accounts are insured by a policy of insurance satisfactory to Lender in
its sole discretion; (v) Accounts in dispute or with respect to which the
Account Debtor has asserted or may assert a counterclaim or has asserted or may
assert a right of setoff; (vi) Accounts with respect to which the prospect of
payment or performance by the Account Debtor is or will be impaired, as
determined by Lender in the exercise of its sole discretion; (vii) Accounts with
respect to which Lender does not have a first and valid fully perfected security
interest; (viii) Accounts with respect to which the Account Debtor is the
subject of bankruptcy or a similar insolvency proceeding or has made an
assignment for the benefit of creditors or whose assets have been conveyed to a
receiver or trustee; (ix) Accounts with respect to which the Account Debtor's
obligation to pay the Account is conditional upon the Account Debtor's approval
or is otherwise subject to any prepurchase obligation or return right, as with
sales made on a bill-and-hold, guaranteed sale, sale-and- retum, sale on
approval or consignment basis; (x) Accounts to the extent that the Account
Debtor's indebtedness to Borrower exceeds a credit limit determined by Lender in
Lender's discretion; (xi) Accounts with respect to which the Account Debtor is
located in New Jersey unless Borrower has received a certificate of authority to
do business and is in good standing in New Jersey or has filed a Notice of
Business Activities Report with the New Jersey Division of Taxation for the then
current year; (xii) Accounts which arise out of sales not made in the ordinary
course of Borrower's business; (xiii) Accounts with respect to which the Account
Debtor has returned to Borrower any portion of the Inventory the sale of which
gave rise to such Accounts; and (xiv) Accounts with respect to which any
document or agreement executed or delivered in connection therewith, or any
procedure used in connection with any such document or agreement, fails in any
material respect to comply with the requirements of applicable law.
48
<PAGE>
(h) "Eligible Inventory" shall mean Inventory of Borrower of raw materials
and finished goods which Lender in its sole discretion determines to be
eligible. Without limiting Lender's discretion, unless otherwise agreed by
Lender, the following Inventory of Borrower is not Eligible Inventory: (i)
Inventory which is in transit; (ii) Inventory which is not in good condition, or
not currently usable or currently saleable in the ordinary course of Borrower's
business; (iii) Inventory which is obsolete; (iv) Inventory which Lender
determines, in the exercise of its sole discretion, to be unacceptable due to
age, type, category and/or quantity; (v) Inventory with respect to which Lender
does not have a first and valid fully perfected security interest; (vi)
Inventory consisting of work-in-progess, packaging materials or supplies; (vii)
Inventory which is stored with or located on the premises of a bailee,
consignee, warehouseman, processor or other third party; and (viii) Inventory
which is not located at an address described forth on Exhibit A.
(i) "ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as amended.
0) "Event of Default" shall have the meaning specified in paragraph 13
hereof.
(k) "Increased Amount" shall have the meaning specified in paragraph 2(a)
hereof.
(1) "Indemnified Party" shall have the meaning specified in paragraph 15
hereof.
(m) "Initial Amount" shall have the meaning specified in paragraph 2(a)
hereof.
(n) "Letters of Credit" shall mean any Letter of Credit which shall now or
hereafter be issued by Lender at the request and for the account of Borrower
pursuant to the terms of this Agreement.
49
<PAGE>
(o) "Liabilities" shall mean any and all obligations, liabilities and
indebtedness of Borrower to Lender or to any Affiliate of Lender of any and
every kind and nature, howsoever created, arising or evidenced and howsoever
owned, held or acquired, whether now or hereafter existing, whether now due or
to become due, whether primary, secondary, direct, indirect, absolute,
contingent or otherwise (including without limitation obligations of
performance), whether several, joint or joint and several, and whether arising
or existing under written or oral agreement or by operation of law, including
without limitation all obligations for payment of the Loans and for payment of
the reimbursement obligations under paragraph 2(b) hereof with respect to the
Letters of Credit.
(P) "Loan" or "Loans" shall mean all advances made by Lender to Borrower
pursuant to paragraph 2(a) hereof.
(q) "Loan Availability" shall mean, at any time, (i) up to eighty-five
percent (85%) of the face amount (less maximum discounts, credits and allowances
which may be taken by or granted to Account Debtors in connection therewith)
then outstanding under existing Eligible Accounts at such time, less such
reserves as Lender in its sole discretion elects to establish, plus (ii) the
lesser of (A) One Million Dollars ($1,000,000.00) and (B) up to fifty percent
(50%) of the value of then existing Eligible Inventory, valued at the lower of
cost (determined on a first in, first out basis) or market, less such reserves
as Lender in its sole discretion elects to establish, minus (iii) the aggregate
undrawri face amount of the Letters of Credit.
(r) "Obligor" shall mean Borrower and each Person who is or shall become
primarily or secondarily liable for any of the Liabilities.
(s) "Other Agreements" shall mean all agreements, instruments and
documents, including without limitation guaranties, mortgages, trust deeds,
pledges, powers of attorney, consents, assignments, security agreements,
intercreditor agreements, financing statements and all other writings
heretofore, now or from time to time hereafter executed by or on behalf of
Borrower or any other Person and delivered to Lender or to any Affiliate of
Lender in connection with the Liabilities or the transactions contemplated
hereby.
(t) "Permitted Liens" shall mean (i) statutory liens of landlords,
carriers, warehousemen, mechanics, materialmen or suppliers incurred in the
ordinary course of business and securing amounts not yet due or declared to be
due by the claimant thereunder, (ii) liens or security interests in favor of
Lender and (iii) zoning restrictions and easements, licenses, covenants and
other restrictions affecting the use of real property that do not individually
or in the aggregate have a material adverse effect on Borrower's ability to use
such real property for its intended purpose in connection with Borrower's
business.
50
<PAGE>
(U) "Person" shall mean any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association, corporation,
institution, entity, party or foreign or United States government (whether
federal, state, county, city, municipal or otherwise), including without
limitation any instrumentality, division, agency, body or department thereof.
(v) "Plan" shall mean any employee benefit plan defined in Section 3(3) of
ERISA, including any multiemployer plan or any employee welfare benefit plan
which is maintained or has been maintained pursuant to a collective bargaining
agreement to which two or more unrelated employers contribute and in respect of
which Borrower is an "employer" as defined in Section 3(5) of ERISA.
(W) "Reference Rate" shall mean the rate of interest publicly announced
from time to time by National Bank of Canada at its principal office as its
prime lending rate. The Reference Rate is a reference rate and does not
necessarily represent the lowest or best rate actually charged to any customer.
Any change in the Reference Rate shall be effective as of the effective date
stated in the announcement by National Bank of Canada of such change.
(x) "Subsidiary" shall mean any corporation of which more than fifty
percent (50%) of the outstanding capital stock having ordinary voting power to
elect a majority of the board of directors of such corporation (irrespective of
whether at the time stock of any other class of such corporation shall have or
might have voting power by reason of the happening of any contingency) is at the
time, directly or indirectly, owned by Borrower or by any partnership or joint
venture of which more than fifty percent (50%) of the outstanding equity
interests are at the time, directly or indirectly, owned by Borrower.
51
<PAGE>
(y) "Termination Date" shall mean the earliest to occur of (i) April 30,
1999 (which date shall be automatically extended to April 30 of each succeeding
year thereafter unless within sixty (60) days prior to such date or extended
date either Borrower or Lender provides notice to the other that such date
should not be extended, which either Borrower or Lender may do in its sole and
absolute discretion), (ii) the date on which this Agreement is terminated
pursuant to paragraph 7(a) hereof, and (iii) the date the Liabilities are
accelerated pursuant to paragraph 14(a) hereof. Borrower acknowledges that
Lender has not agreed to extend the Termination Date beyond April 30, 1999 and
has no obligation to extend the Termination Date.
2. LOANS; LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this Agreement and the Other
Agreements, prior to the Termination Date and so long as no Event of Default has
occurred under this Agreement or the Other Agreements, Lender shall make Loans
to Borrower as Borrower shall from time to time request or as may be necessary
to pay any fees and charges payable to Lender pursuant to paragraph 3 hereof.
The aggregate unpaid principal of all Loans outstanding at any one time shall
not exceed the lesser of (i) Three Million Five Hundred Thousand Dollars
($3,500,000.00) ("Initial Amount") minus the aggregate undrawn face amount of
the Letters of Credit and (ii) Loan Availability at such time; provided that the
Initial Amount shall be increased, so long as no Event of Default has occurred
or will occur under this Agreement or the Other Agreements as a result of the
increase, to Six Million Dollars ($6,000,000.00) ("Increased Amount") minus the
aggregate undrawn face amount of the Letters of Credit effective ten (10) days
after Lender receives Borrower's written request for such increase and payment
of (A) a further facility fee of Fifteen Thousand Dollars ($15,000.00) and (B)
any retroactive unused facility fee described in paragraph 3(d) hereof. If at
any time the outstanding principal balance of the Loans exceeds Loan
Availability, Borrower shall immediately, and without the necessity of a demand
of Lender, pay to Lender such amount as may be necessary to eliminate such
excess.
(b) Subject to the terms and conditions of this Agreement and the Other
Agreements, prior to the Termination Date, Lender may, in its sole discretion,
at Borrower's request, cause Letters of Credit to be issued for the account of
Borrower; provided that the aggregate undrawn face amount of the Letters of
Credit shall not at any time exceed the lesser of (i) Three Hundred Thousand
Dollars ($300,000.00) and (ii) the amount by which Loan Availability at such
time exceeds the outstanding principal balance of the Loans at such time. If at
any time the outstanding principal balance of the Loans is zero and Loan
Availability is less than zero, Borrower shall provide cash collateral to Lender
in an amount equal to the amount by which Loan Availability is less than zero to
secure any Letters of Credit. No Letter of Credit shall have an expiration date
later than twelve (12) months from the date of issuance or the Termination Date.
Borrower shall reimburse Lender, immediately upon demand, in the amount of any
payments made by Lender to any Person with respect to the Letters of Credit, and
until Lender shall have been so reimbursed by Borrower such payments by Lender
shall be deemed to be Loans. In connection with the Letters of Credit, Borrower
hereby indemnities Lender for any payments made by Lender with respect to the
Letters of Credit and for any taxes, levies, deductions, charges and costs and
expenses incurred by Lender with respect to the Letters of Credit.
52
<PAGE>
3. FEES AND CHARGES.
(a) Borrower shall pay to Lender interest on the outstanding principal
balance of the Loans monthly in arrears beginning on April 1, 1996 and at
maturity, at the per annum rate of one-half percent (1/2%) plus the Reference
Rate. Following the occurrence of an Event of Default, Borrower shall pay to
Lender interest on the outstanding principal balance of the Loans at the per
annum rate of two and one-half percent (2-1/2%) plus the Reference Rate.
Interest shall be computed on the basis of a year of three hundred sixty (360)
days for the actual number of days elapsed.
(b) Borrower shall pay to Lender a Letter of Credit fee equal to two
percent (2%) per annum (computed on the basis of a year of three hundred sixty
(360) days for the actual number of days elapsed) of the average of the
aggregate undrawn face amount of the Letters of Credit during each calendar
month, payable monthly in arrears beginning on April 1, 1996; provided that,
following the occurrence of an Event of Default, the Letter of Credit fee shall
increase to four percent (4%) per annum. In addition, Borrower shall pay to
Lender all expenses incurred by Lender and all fees charged by Lender in
connection with the issuance, negotiation and payment of any Letter of Credit,
payable on the date incurred by Lender.
(c) Borrower shall pay to Lender an annual audit fee at a rate of Five
Hundred Dollars ($500.00) per auditor per day, plus travel and other
out-of-pocket expenses, which shall be payable by Borrower upon completion of
each audit.
(d) Borrower shall pay to Lender an unused facility fee equal to
one-quarter percent (I /4%) per annum (computed on the basis of a year of three
hundred sixty (3 60) days for the actual number of days elapsed) of the amount
by which the Initial Amount exceeds the sum of the average outstanding balance
of the Loans and the average undrawn face amount of the Letters of Credit during
each calendar month, payable monthly in arrears beginning on April 1, 1996;
provided that, if the Initial Amount has been increased to the Increased Amount
in accordance with paragraph 2(a) hereof, then the unused facility fee shall be
calculated based on the Increased Amount retroactively to January I of the year
in which the Initial Amount was increased. Notwithstanding the foregoing, so
long as no Event of Default occurs before May 1, 1997, the unused facility fee
shall not commence to accrue until May 1, 1997 and shall not be payable until
June 1, 1997. If an Event of Default occurs before May 1, 1997, the unused
facility fee shall accrue retroactively to the date of this Agreement, and any
such accrued fee shall be immediately due and payable.
53
<PAGE>
(e) Except as provided in paragraph 7 hereof, if Borrower terminates this
Agreement, Borrower shall pay to Lender a termination fee of (i) two percent
(2%) of the Increased Amount if the tennination is effective on or before April
30, 1998 and (ii) one percent (I%) of the Increased Amount if the termination is
effective after April 3 0, 1998. It is the intent of the parties that the rate
of interest and the other fees and charges to Borrower under this Agreement
shall be lawftil; therefore, if for any reason the interest or other fees and
charges payable under this Agreement are found by a court of competent
jurisdiction, in a final determination, to exceed the amount that Lender may
lawfully charge Borrower, then the obligation to pay interest and other charges
shall automatically be reduced to the maximum lawful amount and, if any amount
in excess of such lawful amount shall have been paid, then such amount shall be
reftmded to Borrower.
4. CONDITIONS OF ADVANCES AND LETTERS OF CREDIT. The making of any advance
and the issuance of any Letter of Credit provided for in this Agreement shall be
conditioned upon the following:
(a) Lender shall have received (i) with respect to a request for an
advance, by at least eleven-thirty o'clock a.m. (1 1:30 a.m.) Mountain time on
the day on which such advance is requested to be made hereunder,'a telephonic
request from an officer of Borrower (or any Person authorized by Borrower
pursuant to a written list provided to Lender) for an advance in a specific
amount and (ii) with respect to a request for the issuance of a Letter of
Credit, at least five (5) days prior to the date such Letter of Credit is
requested to be issued, an application for such Letter of Credit executed by an
officer of Borrower; in addition, Lender shall also have received all of the
schedules and reports required to have been delivered by Borrower pursuant to
paragraph 9 hereof,
(b) No Default shall have occurred and be continuing;
(c) All of the representations and warranties contained in this Agreement
and the Other Agreements shall be true and correct as if made on the date the
request for an advance or Letter of Credit is made; and
54
<PAGE>
(d) Lender shall have received, in form and substance satisfactory to
Lender, all certificates, orders, authorities, consents, affidavits, schedules,
instruments, security agreements, financing statements, mortgages and other
documents which are provided for hereunder or which Lender may at any time
request.
5. GRANT OF SECURITY INTEREST TO LENDER. As security for the payment or
other satisfaction of all Liabilities, Borrower hereby assigns to Lender and
grants to Lender a continuing security interest in the following property of
Borrower, whether now or hereafter owned, existing, acquired or arising and
wherever now or hereafter located: (a) all Accounts and all Goods whose sale,
lease or other disposition by Borrower has given rise to Accounts and have been
returned to or repossessed or stopped in transit by Borrower; (b) all Chattel
Paper, Instruments, Documents and General Intangibles (including without
limitation all patents, patent applications, trademarks, trademark applications,
tradenames, trade secrets, goodwill, copyrights, registrations, licenses,
franchises, customer lists, tax reftmd claims, claims against carriers and
shippers, guarantee claims, contracts rights, security interests, security
deposits and any rights to indemnification) and specifically including the
insurance policy with American Credit Indemnity; (c) all Inventory and other
Goods, including without limitation Equipment, vehicles and fixtures; (d) all
deposits and cash and any other property of Borrower now or hereafter in the
possession, custody or control of Lender or any agent or any Affiliate of Lender
or any participant with Lender in the Loans and/or Letters of Credit for any
purpose (whether for safekeeping, deposit, collection, custody, pledge,
transmission or otherwise); and
(e) all additions and accessions to, substitutions for, and replacements,
products and proceeds of the foregoing property, including without limitation
proceeds of all insurance policies insuring the foregoing property, and all of
Borrower's books and records relating to any of the foregoing and to Borrower's
business.
55
<PAGE>
6. PRESERVATION OF COLLATERAL AND PERFECTION OF SECURITY INTERESTS
THER]EIN. Borrower shall, at Lender's request, at any time and from time to
time, execute and deliver to Lender such financing statements, documents and
other agreements and instruments (and pay the cost of filing or recording the
same in all public offices deemed necessary or desirable by Lender) and do such
other acts and things as Lender may deem necessary or desirable in order to
establish and maintain a valid, attached and perfected security interest in the
Collateral in favor of Lender (free and clear of all other liens, claims and
rights of third parties whatsoever, whether voluntarily or involuntarily
created, except Permitted Liens) to secure payment of the Liabilities, and in
order to facilitate the collection of the Collateral. Borrower irrevocably
hereby makes, constitutes and appoints Lender (and all Persons designated by
Lender for that purpose) as Borrower's true and lawful attorney and
agent-in-fact to execute such financing statements, documents and other
agreements and instruments and do such other acts and things as may be necessary
to preserve and perfect Lender's security interest in the Collateral in the
event that (a) an Event of Default occurs under this Agreement or the Other
Agreements or (b) Borrower neglects or refuses to execute and deliver any
financing statements, documents or other agreements and instruments requested by
Borrower within three (3) business days after Lender's written request therefor.
Borrower further agrees that a carbon, photographic, photostatic or other
reproduction of this Agreement or of a financing statement shall be sufficient
as a financing statement.
7. CAPITAL ADEQUACY. If Lender shall reasonably determine that the
application or adoption of any law, rule, regulation, directive, interpretation,
treaty or guideline regarding capital adequacy, or any change therein or in the
interpretation or administration thereof, whether or not having the force of
law, increases the amount of capital required or expected to be maintained by
Lender or any Person controlling, directly or indirectly, Lender, and such
increase is based upon the existence of Lender's obligations hereunder and other
commitments of this type, then from time to time, within ten (1 0) days after
demand from Lender, Borrower at its option (a) shall terminate this Agreement,
in which case the termination fee described in paragraph 3(e) hereof shall not
be payable, or (b) shall pay to Lender such amount or amounts as will compensate
Lender or such controlling Person, as the case may be, for such increased
capital requirement. The determination of any amount to be paid by Borrower
under this paragraph 7 shall take into consideration the policies of Lender or
any Person controlling Lender with respect to capital adequacy and shall be
based upon any reasonable averaging, attribution and allocation methods selected
by Lender. A certificate of Lender setting forth the amount or amounts as shall
be necessary to compensate Lender as specified in this paragraph 7 shall be
delivered to Borrower and shall be conclusive in the absence of manifest error.
56
<PAGE>
8. COLLECTIONS.
(a) Borrower shall establish one or more accounts (each a "Blocked
Account") in Borrower's name with a financial institution acceptable to Lender,
into which Borrower will immediately deposit all payments received by Borrower
with respect to Accounts and other Collateral in the identical form in which
such payments were made, whether by cash or check. If Borrower, any Affiliate or
Subsidiary of Borrower, any shareholder, officer, director, employee or agent of
Borrower or any Affiliate or Subsidiary of Borrower or any other Person acting
for or in concert with Borrower shall receive any monies, checks, notes, drafts
or other payments relating to or as proceeds of Accounts or other Collateral,
Borrower and each such Person shall receive all such items in trust for, and as
the sole and exclusive property of, Lender and immediately upon receipt thereof
shall remit the same (or cause the same to be remitted) in kind to the Blocked
Account. The financial institution with which the Blocked Account is established
shall acknowledge and agree, in a manner satisfactory to Lender, that the
amounts on deposit in such Blocked Account are the sole and exclusive property
of Lender, that such financial institution has no right to setoff against the
Blocked Account and that such financial institution shall wire, or otherwise
transfer in innnediately available funds in a manner satisfactory to Lender,
funds deposited in the Blocked Account to Lender on a daily basis as such ftmds
are collected. Lender shall, two (2) business days after receipt by Lender of
immediately available ftmds in its account, apply the whole or any part of such
collections or proceeds against the Liabilities in such order as Lender shall
determine in its sole discretion. All payments deposited to such Blocked Account
or otherwise received by Lender, whether in respect of the Accounts or as
proceeds of other Collateral or otherwise, shall be applied on account of the
Liabilities in accordance with the terms of this Agreement. All checks, drafts,
instruments and other items of payment or proceeds of Collateral shall be
endorsed by Borrower to Lender, and, if that endorsement of any such item shall
not be made for any reason, Lender is hereby irrevocably authorized to endorse
the same on Borrower's behalf. For the purpose of this paragraph 8(a), Borrower
irrevocably hereby makes, constitutes and appoints Lender (and all Persons
designated by Lender for that purpose) as Borrower's true and lawful attorney
and agentin-fact (i) to endorse Borrower's name upon said items of payment
and/or proceeds of Collateral and upon any Chattel Paper, document, instrument,
invoice or similar document or agreement relating to any Account of Borrower or
goods pertaining thereto, (ii) to take control in any manner of any item of
payment or proceeds thereof and (iii) to have access to any lock box or postal
box into which any of Borrower's mail is deposited, and to open and process all
mail addressed to Borrower and deposited therein.
57
<PAGE>
(b) Lender may, at any time and from time to time after the occurrence of
an Event of Default, whether before or after notification to any Account Debtor
and whether before or after the maturity of any of the Liabilities, (i) enforce
collection of any of Borrower's Accounts or contract rights by suit or
otherwise, (ii) exercise all of Borrower's rights and remedies with respect to
proceedings brought to collect any Accounts, (iii) surrender, release or
exchange all or any part of any Accounts, or compromise or extend or renew for
any period (whether or not longer than the original period) any indebtedness
thereunder, (iv) sell or assign any Account of Borrower upon such terms, for
such amount and at such time or times as Lender deems advisable, (v) prepare,
file and sign Borrower's name on any proof of claim in bankruptcyor other
similar document against any Account Debtor and (vi) do all other acts and
things which are necessary, in Lender's sole discretion, to fulfill Borrower's
obligations under this Agreement and to allow Lender to collect the Accounts. In
addition to any other provision hereof, Lender may at any time, whether before
or after the occurrence of an Event of Default, at Borrower's expense, notify
any parties obligated on any of the Accounts to make payment directly to Lender
of any amounts due or to become due thereunder.
(c) Lender, in its sole discretion, without waiving or releasing any
obligation, liability or duty of Borrower under this Agreement or the Other
Agreements or any Event of Default, may at any time or times hereafter, but
shall not be obligated to, pay, acquire or accept an assignment of any security
interest, lien, encumbrance or claim asserted by an Person in, upon or against
the Collateral. All sums paid by Lender in respect thereof and all costs, fees
and expenses, including without limitation reasonable attorney fees, all court
costs and all other charges relating thereto incurred by Lender shall constitute
Loans, payable by Borrower to Lender on demand and, until paid, shall bear
interest at the highest rate then applicable to Loans hereunder.
(d) Immediately upon Borrower's receipt of any portion of the Collateral
evidenced by an agreement, Instrument or Document, including without limitation
any Chattel Paper, Borrower shall deliver the original thereof to Lender
together with an appropriate endorsement or other specific evidence of
assignment thereof to Lender (in form and substance acceptable to Lender). If an
endorsement or assigrunent of any such items shall not be made for any reason,
Lender is hereby irrevocably authorized, as Borrower's attorney and
agent-in-fact, to endorse or assign the same on Borrower's behalf.
58
<PAGE>
9. SCHEDULES AND REPORTS.
(a) Borrower shall deliver to Lender, on a weekly or more frequent basis if
requested by Lender, a collateral report ("Collateral Report") describing the
aging of the Accounts, all Eligible Accounts created or acquired by Borrower
subsequent to the inunediately preceding Collateral Report, information in
connection with any Account which has ceased to be an Eligible Account since the
most recent Collateral Report, and information on all amounts collected by
Borrower on Accounts subsequent to the immediately preceding Collateral Report.
The Collateral Reports shall also include a schedule of Inventory owned by
Borrower and in Borrower's possession valued at cost on a first in, first out
basis, information on all sales of or other reduction of and all additions to
Inventory, all returns of Inventory, all credits issued by Borrower and all
complaints and claims against Borrower in connection with Inventory subsequent
to the immediately preceding Collateral Report. The Collateral Reports shall
contain such additional information as Lender shall require. Borrower shall also
furnish copies of any other reports or information concerning the Accounts and
Inventory included, described or referred to in the Collateral Reports,
including without limitation, but only if specifically requested by Lender,
copies of all invoices prepared in connection with Accounts. Lender, through its
officers, employees or agents, shall have the right, at any time and from time
to time in Lender's name, in the name of a nominee of Lender or in Borrower's
name, to verify the validity, amount or any other matter relating to any of the
Accounts, by mail, telephone,telegraph or otherwise. Borrower shall reimburse
Lender, on demand, for all costs, fees and expenses incurred by Lender in this
regard.
(b) Without limiting the generality of the foregoing, Borrower shall
deliver to Lender, at lease once a month (or more frequently when requested by
Lender), a report with respect to Borrower's Accounts and Inventory reconciling
the information described in paragraph 9(a) hereof for such month.
(c) All schedules, certificates, reports, and assigm-nents and other items
delivered by Borrower to Lender hereunder shall be executed by an authorized
representative of Borrower and shall be in such form and contain such
information as Lender shall specify.
59
<PAGE>
10. TERMINATION. This Agreement shall be in effect until the Termination
Date. The security interests and liens created under this Agreement and the
Other Agreements shall survive such termination until the Letters of Credit have
been terminated and canceled and the payment of the other Liabilities has become
indefeasible. At such time as Borrower has repaid all of the Liabilities and
this Agreement has terminated, the parties shall deliver to each other a mutual
release, in form and substance satisfactory to Lender and Borrower, of all
obligations and liabilities of each party and its officers, directors,
employees, agents and Affiliates to the other party-
11. REPRESENTATIONS, WARRANTIES AND COVENANTS. Borrower hereby represents,
warrants and covenants that:
(a) The financial statements delivered or to be delivered by Borrower to
Lender at or prior to the date of this Agreement and at all times subsequent
thereto fairly present the financial condition of Borrower in accordance with
generally accepted accounting principles consistently applied, and there has
been no material adverse change in the financial condition, the operations or
any other status of Borrower since the date of the financial statements
delivered to Lender most recently prior to the date of this Agreement;
(b) The office where Borrower keeps its books, records and accounts (or
copies thereof) concerning the Collateral, Borrower's principal place of
business and all of Borrower's other places of business, locations of Collateral
and post office boxes are as set forth in Exhibit A; Borrower shall promptly
(but in no event less than ten (IO) days prior thereto) advise Lender in writing
of the proposed opening of any new place of business, the closing of any
existing place of business, any change in the location of Borrower's books,
records and accounts (or copies thereof) or the opening or closing of any post
office box of Borrower;
(c) The Collateral, including without limitation the Equipment (except any
part thereof which prior to the date of this Agreement Borrower shall have
advised Lender in writing consists of Collateral normally used in more than one
state) is and shall be kept, or in the case of vehicles based, only at the
addresses set forth on the first page of this Agreement and on Exhibit A;
(d) If any of the Collateral consists of Goods of a type normally used in
more than one state, whether or not actually so used, Borrower shall immediately
give written notice to Lender of any use of any such Goods in any state other
than a state in which Borrower has previously advised Lender such Goods shall be
used, and such Goods shall not, unless Lender shall otherwise consent in
writing, be used outside of the continental United States;
60
<PAGE>
(e) Each Account or item of Inventory which Borrower shall, expressly or by
implication, request Lender to classify as an Eligible Account or as Eligible
Inventory, respectively, shall, as of the time when such request is made,
conform in all respects to the requirements of such classification as set forth
in the respective definitions of "Eligible Account" and "Eligible Inventory" as
defined in paragraph I hereof and as otherwise established by Lender from time
to time, and Borrower shall promptly notify Lender in writing if any such
Eligible Account or Eligible Inventory shall subsequently become ineligible;
(o Borrower is and shall at all times be the lawful owner of its property
now purportedly owned or hereafter purportedly acquired by Borrower, free from
all liens, claims, security interests and encumbrances whatsoever, whether
voluntarily or involuntarily created and whether or not perfected, other than
the Permitted Liens and those described on Exhibit B;
(g) Borrower has the right and power and is duly authorized and empowered
to enter into, execute and deliver this Agreement and the Other Agreements and
to perform its obligations hereunder and thereunder; Borrower's execution,
delivery and performance of this Agreement and the Other Agreements does not and
shall not conflict with the provisions of any statute, regulation, ordinance or
rule of law, or any agreement, contract or other document which may now or
hereafter be binding on Borrower, and Borrower's execution, delivery and
performance of this Agreement and the Other Agreements shall not result in the
imposition of any lien or other encumbrance upon any of the Borrower's property
under any existing indenture, mortgage, deed of trust, loan or credit agreement
or other agreement or instrument by which Borrower or any of its property may be
bound or affected;
(h) There are no actions or proceedings which are pending or, to the best
of the knowledge of Borrower, threatened against Borrower which might result in
any material adverse change in its financial condition or materially adversely
affect Borrower's property, and Borrower shall, promptly upon becoming aware of
any such pending or threatened action or proceeding, give written notice thereof
to Lender;
(i) Borrower has obtained all licenses, authorizations, approvals, and
permits, the lack of which would have a material adverse effect on the operation
of its business, and Borrower is and shall remain in compliance in all material
respects with all applicable federal, state, local and foreign statutes, orders,
regulations, rules and ordinances, the failure to comply with which could
reasonably be expected to have a material adverse effect on its business,
property, assets, operations or condition, financial or otherwise;
61
<PAGE>
0) All written information now, heretofore or hereafter fumished by
Borrower to Lender is and shall be true and correct as of the date with respect
to which such information was or is @shed;
(k) Borrower is not conducting, permitting or suffering to be conducted,
nor shall it conduct, permit or suffer to be conducted, any activities or
transactions with any Affiliate of Borrower; provided that Borrower may enter
into transactions with Affiliates of Borrower in the ordinary course of business
pursuant to terms that are no less favorable to Borrower than the terms upon
which such transfers or transactions would have been made had they been made to
or with a Person who is not an Affiliate of Borrower and, in connection
therewith, may transfer cash or property to Affiliates of Borrower for fair
value;
(1) Borrower's name has always been Pen National, Inc. or Pen Interconnect,
Inc., and Borrower uses no tradenames or division names in the operation of its
business other than those described on Exhibit C; Borrower shall notify Lender
in writing within ten (IO) days of the change of its name or the use of any
tradenames or division names not previously disclosed to Lender in writing;
(m) With respect to Borrower's Equipment, (i) except for Permitted Liens
and those described on Exhibit B, Borrower has good and indefeasible and
merchantable title to and ownership of all Equipment, including without
limitation the Equipment described or listed on Exhibit D, (ii) Borrower shall
keep and maintain the Equipment in good operating condition and repair and shall
make all necessary replacements thereof and renewals thereto so that the value
and operating efficiency thereof shall at all times be preserved and maintained,
(iii) Borrower shall not permit any such items to become a fixture to real
estate or an accession to other personal property, and (iv) Borrower,
immediately on demand by Lender, shall deliver to Lender any and all evidence of
ownership of, including without limitation certificates of title and
applications of title to, any of the Equipment;
(n) This Agreement and the Other Agreements to which Borrower is a party
are the legal, valid and binding obligations of Borrower and are enforceable
against Borrower in accordance with their respective terms;
62
<PAGE>
(o) Borrower is solvent, is able to pay its debts as they become due and
has capital sufficient to carry on its business, now owns property having a
value both at fair valuation and at present fair saleable value greater than the
amount required to pay its debts, and will not be rendered insolvent by the
execution and delivery of this Agreement or the Other Agreements or by
completion of the transactions contemplated hereunder or thereunder;
(p) Borrower is not now obligated, nor shall it create, incur, assume or
become obligated (directly or indirectly) for any loans or other indebtedness
for borrowed money other than the Loans and the indebtedness described on
Exhibit E, except that Borrower (i) may borrow money from a Person other than
Lender on an unsecured and subordinated basis if a subordination agreement in
favor of Lender and in form and substance satisfactory to Lender isexecuted and
delivered to Lender relative thereto and (ii) may incur unsecured indebtedness
to trade creditors in the ordinary course of Borrower's business;
(q) Borrower does not own any margin securities, and none of the proceeds
of the Loans shall be used for the purpose of purchasing or carrying any margin
securities or for the purpose of reducing or retiring any indebtedness which was
originally incurred to purchase any margin securities or for any other purpose
not permitted by Regulation G or Regulation U of the Board of Governors of the
Federal Reserve System as in effect from time to time;
(r) Exhibit F sets forth the names of all of the Persons who hold, of
record or beneficially, ten percent (IO%) or more of the outstanding capital
stock of Borrower; Borrower has no Subsidiaries or divisions, nor is Borrower
engaged in any joint venture or partnership with any other Person, other than
those described on Exhibit G;
(s) Borrower is duly organized and in good standing in its state of
organization and is duly qualified and in good standing in all states where the
nature and extent of the business transacted by it or the ownership of its
assets makes such qualification necessary, except such states in which the
failure to qualify would not materially adversely affect the business, property
or results of operations of Borrower;
(t) Borrower is not in material default under any material contract, lease
or commitment to which it is a party or by which it is bound, nor does Borrower
know of any dispute regarding any contract, lease or commitment which is
material to the continued financial success of Borrower;
63
<PAGE>
(u) There are no controversies pending or threatened between Borrower and
any of its employees, other than employee grievances arising in the ordinary
course of business which are not, in the aggregate, material to the continued
financial success of Borrower, and Borrower is in compliance in all material
respects with all federal and state laws respecting employment and employment
terms, conditions and practices; and
(v) Borrower possesses, and shall continue to possess, adequate licenses,
patents, patent applications, copyrights, service marks, trademarks, trademark
applications, tradestyles and tradenames to continue to conduct its business as
heretofore conducted by it.
Borrower represents, warrants and covenants to Lender that all
representations, warranties and covenants of Borrower contained in this
Agreement (whether appearing in paragraph I I or 12 hereof or elsewhere) shall
be true at the time of Borrower's execution of this Agreement, shall survive the
execution, delivery and acceptance hereof by the parties hereto and the closing
of the transactions described herein or related hereto, shall remain true until
the repayment in full of all of the Liabilities and termination of this
Agreement, and shall be remade by Borrower at the time any advance is made or
any Letters of Credit are issued pursuant to this Agreement.
12. ADDITIONAL COVENANTS OF BORROWER. Until payment or satisfaction in full
of all Liabilities and the termination of this Agreement, unless Borrower
obtains Lender's prior written consent waiving or modifying any of Borrower's
covenants hereunder in any specific instance, Borrower covenants that:
(a) Borrower shall at all times keep accurate and complete books, records
and accounts with respect to all of Borrower's business activities, in
accordance with sound accounting practices and generally accepted accounting
principles consistently applied, and shall keep such books, records and
accounts, and any copies thereof, only at the addresses indicated for such
purpose on Exhibit A;
64
<PAGE>
(b) Borrower agrees to deliver to Lender the following financial
information, all of which shall be prepared in accordance with generally
accepted accounting principles consistently applied, (i) no later than
twenty-five (25) days after each calendar month, copies of internally prepared
financial statements, including without limitation balance sheets and statements
of income, retained earnings and cash flow of Borrower, certified by the chief
financial officer of Borrower, (ii) no later than ninety (90) days after the end
of each of Borrower's fiscal years, annual financial statements certified by
independent certified public accountants selected by Borrower and satisfactory
to Lender, which financial statements shall be accompanied by a letter from such
accountants acknowledging that they are aware that Lender is relying upon such
financial statements in connection with the exercise of its rights hereunder,
and (iii) such other financial information as Lender shall reasonably request,
in each case accompanied by a certificate of Borrower in the form attached as
Exhibit H;
(c) Borrower shall promptly advise Lender in writing of any material
adverse change in business, assets or condition, financial or otherwise, of
Borrower, the occurrence of any Event of Default hereunder or the occurrence of
any event which, if uncured, will become an Event of Default hereunder after
notice or lapse of time (or both);
(d) Lender, or any Persons designated by it, shall have the right, upon two
(2) business days notice in writing to Borrower prior to the occurrence of an
Event of Default and at any time upon and after the occurrence of an Event of
Default, to call at Borrower's places of business at any reasonable times, and,
without hindrance or delay, to inspect the Collateral and to inspect, audit,
check and make extracts from Borrower's books, records, journals, orders,
receipts and any correspondence and other data relating to Borrower's business,
the Collateral or any transactions between the parties hereto, and Lender shall
have the right to make such verification concerning Borrower's business as
Lender may consider reasonable under the circumstances; Borrower shall furnish
to Lender such information relevant to Lender's rights under this Agreement as
Lender shall at any time and from time to time request, so long as the
disclosure thereof does not violate rules and regulations of the Securities and
Exchange Commission; Borrower authorizes Lender to discuss the affairs, finances
and business of Borrower with any officers, employees or directors of Borrower,
any Affiliate or the officers, employees or directors of any Affiliate, and to
discuss the financial condition of Borrower with Borrower's independent
certified public accountants (any such discussions shall be without liability to
Lender or such accountants); Borrower shall pay to Lender all customary fees and
out-of-pocket expenses incurred by Lender in the exercise of its rights
hereunder, and all of such fees and expenses shall constitute Loans hereunder,
payable on demand and, until paid, shall bear interest at the highest rate then
applicable to Loans hereunder;
65
<PAGE>
(e) Borrower shall keep the Collateral properly housed, shall keep the
Collateral insured for the full insurable value thereof against loss or damage
by fire, theft, explosion, sprinklers, collision (in the case of motor vehicles)
and such other risks as are customarily insured against by Persons engaged in
businesses similar to that of Borrower and shall maintain such public liability
and third party property damage insurance as is customary for Persons engaged in
businesses similar to that of Borrower, in each case with such companies, in
such amounts, with such deductibles and under policies in such form as shall be
satisfactory to Lender; at the request of Lender, original (or certified) copies
of such policies of insurance shall be delivered to Lender, together with
evidence of payment of all premiums therefor; each such policy shall contain an
endorsement, in form and substance acceptable to Lender, showing loss under such
insurance policies payable to Lender; such endorsement, or an independent
instrument furnished to Lender, shall provide that the insurance company shall
give Lender at least thirty (30) days written notice before any such policy of
insurance is altered or canceled and that no act, whether willful or negligent,
or default of Borrower or any other Person shall affect the right of Lender to
recover under such policy of insurance in case of loss or damage; Borrower
hereby directs all insurers under such policies of insurance to pay all proceeds
payable thereunder directly to Lender, and all proceeds received by Lender may
be applied to the Liabilities in such order and manner as Lender shall
determine; Borrower irrevocably makes, constitutes and appoints Lender (and all
officers, employees or agents designated by Lender) as Borrower's true and
lawful attorney (and agent-in- fact) after the occurrence of an Event of Default
for the purpose of making, settling and adjusting claims under such policies of
insurance, endorsing the name of Borrower on any check, draft, instrument or
other item of payment for the proceeds of such policies of insurance and making
all determinations and decisions with respect to such policies of insurance;
provided that, if Borrower at any time shall fail to obtain or maintain any of
the policies of insurance required above or to pay any premium in whole or in
part relating thereto, then Lender, without waiving or releasing any obligation
or default by Borrower hereunder, may (but shall be under no obligation to)
obtain and maintain such policies of insurance and to pay such premiums and take
such other actions with respect thereto as Lender deems advisable; all sums
disbursed by Lender in connection with any such actions, including without
limitation court costs, expenses, other charges relating thereto and reasonable
attorney fees, shall constitute Loans hereunder and shall be payable on demand
by Borrower to Lender and, until paid, shall bear interest at the highest rate
then applicable to Loans hereunder;
66
<PAGE>
(f) Borrower shall not use its property, or any part thereof, in any
unlawful business or for any unlawful purpose or use or maintain any of its
property in any manner that does or could result in material damage to the
environment or a violation of any applicable environmental laws, rules or
regulations; shall keep its property in good condition, repair and order; shall
not permit its property, or any part thereof, to be levied upon under execution,
attachment, distraint or other legal process; shall not sell, lease, transfer or
otherwise dispose of any of its property except for the sale of Inventory in the
ordinary course of its business; and shall not secrete or abandon any of its
property, or remove or permit removal of any of its property from any of the
locations listed on Exhibit A or in any written notice to Lender pursuant to
paragraph 1 1 (b) hereof, except for the removal of Inventory sold in the
ordinary course of Borrower's business;
(g) All monies and other property obtained by Borrower from Lender pursuant
to this Agreement shall be used solely for the business purposes of Borrower;
(h) Borrower shall, at the request of Lender, indicate on its records
concerning the Collateral a notation, in form satisfactory to Lender, of the
security interest of Lender hereunder, and Borrower shall not maintain
duplicates or copies of such records at any address other than Borrower's
principal place of business set forth on the first page of this Agreement;
(i) Borrower shall file all required tax returns and pay all of its taxes
when due, including without limitation taxes imposed by federal, state or
municipal agencies, and shall cause any liens for taxes to be promptly released;
provided that Borrower shall have the right to contest the payment of such taxes
in good faith by appropriate proceedings so long as (i) the amount so contested
is shown on Borrower's financial statements, (ii) the contesting of any such
payment does not give rise to a lien for taxes, (iii) Borrower keeps on deposit
with Lender (such deposit to be held without interest) an amount of money which,
in the sole judgment of Lender, is sufficient to pay such taxes and any interest
or penalties that may accrue thereon, and (iv) if Borrower fails to prosecute
such contest with reasonable diligence, Lender may apply the money so deposited
in payment of such taxes; if Borrower fails to pay any such taxes and in the
absence of any such contest by Borrower, Lender may (but shall be under no
obligation to) advance and pay any sums required to pay any such taxes and/or to
secure the release of any lien therefor, and any sums so advanced by Lender
shall constitute Loans hereunder, shall be payable by Borrower to Lender on
demand, and, until paid, shall bear interest at the highest rate then applicable
to Loans hereunder;
67
<PAGE>
0) Borrower shall not assume, guarantee or endorse, or otherwise become
liable in connection with, the obligations of any Person, except by endorsement
of instruments for deposit or collection or similar transactions in the ordinary
course of business;
(k) Without the prior written consent of Lender, which consent shall not be
unreasonably withheld, Borrower shall not enter into any merger or
consolidation, or enter into any transaction outside the ordinary course of
Borrower's business, including without limitation any purchase, redemption or
retirement of any shares of any class of its capital stock, and any issuance of
any shares of, or warrants or other rights to receive or purchase any shares of,
any class of its capital stock;
(1) Borrower shall not declare or pay any dividend or other distribution
(whether in cash or in kind) on any class of its capital stock;
(m) Without the prior written consent of Lender, which consent shall not be
unreasonably withheld, Borrower shall not pay compensation in the form of
salaries or consulting fees to any of its officers in any fiscal year in excess
of one hundred twenty-five percent (125%) of the amount paid to such officers in
the immediately preceding fiscal year and shall not make any loans to its
officers, directors or employees;
(n) Borrower shall (i) keep in full force and effect any and all Plans
which may, from time to time, come into existence under ERISA, unless such Plans
can be terminated without liability to Borrower, (ii) make contributions to all
of the Plans in a timely manner and in a sufficient amount to comply with the
requirements of ERISA, (iii) comply with all material requirements of ERISA
which relate to Plans (including without limitation the minimum funding
standards of Section 302 of ERISA) and (iv) notify Lender immediately upon
receipt by Borrower of any notice of the institution of any proceeding or other
action which may result in the termination of any Plans;
(o) Without the prior written consent of Lender, which consent shall not be
unreasonably withheld, Borrower shall not invest in, purchase or otherwise
acquire, or contract to invest in, purchase or otherwise acquire, the
obligations or capital stock of any Person, other than direct obligations of the
United States;
68
<PAGE>
(p) Borrower shall not amend its organizational documents or change its
fiscal year;
(q) Borrower shall reimburse Lender for all costs and expenses, including
without limitation legal expenses and reasonable attorney fees, incurred by
Lender in connection with the documentation and consummation of this transaction
and any other transactions between Borrower and Lender, including without
limitation Uniform Commercial Code and other public record searches, lien
filings, Federal Express or similar express or messenger delivery, appraisal
costs, surveys, title insurance and envirorunental audit or review costs, or in
seeking to administer, collect, protect or enforce any rights in or to the
Collateral, to collect any Liabilities or to administer, participate, assign
and/or enforce any of Lender's rights under this Agreement and the Other
Agreements; all such costs, expenses and charges shall constitute Loans
hereunder, shall be payable by Borrower to Lender on demand, and, until paid,
shall bear interest at the highest rate then applicable to Loans hereunder;
(r) At no time on or before April 30, 1997 shall Borrower permit the
principal balance outstanding on the Loans to be less than One Million Five
Hundred Thousand Dollars ($1,500,000.00);
(s) The capital expenditures of Borrower shall not exceed (i) Seven Hundred
Fifty Thousand Dollars ($750,000.00) during each of the years ending September
30, 1996, September 30, 1997 and September 30, 1998 and (ii) such amount as is
agreed in writing by Lender and Borrower for fiscal years ending after September
30, 1998;
(t) The value of the total assets of Borrower (excluding the value of any
intangible assets and accounts receivable due from officers and directors of
Borrower) less the value of the total liabilities of Borrower shall be at least
(i) Seven Million Fifty Thousand Dollars ($7,050,000.00) as of September 30,
1996, (ii) Seven Million Six Hundred Fifty Thousand Dollars ($7,650,000.00) as
of September 30, 1997, (iii) Eight Million Two Hundred Fifty Thousand Dollars
($8,250,000.00) as of September 30, 1998 and (iv) as agreed in writing by Lender
and Borrower for fiscal years ending after September 30, 1998;
69
<PAGE>
(u) Earnings of Borrower after income taxes but before extraordinary items
and nonoperating gains shall be at least (i) Six Hundred Thousand Dollars
($600,000.00) for each of the years ending September 30, 1996, September 30,
1997 and September 30, 1998 and (ii) as agreed in writing by Lender and Borrower
for fiscal years ending after September 30, 1998; and
(v) The interest expense payable by Borrower to Lender and others shall not
exceed (i) four (4) times its earnings before interest, income taxes,
depreciation, amortization, extraordinary items and nonoperating gains for each
of the years ending September 30, 1996, September 30, 1997 and September 30,
1998 and (ii) such amount as is agreed in writing by Lender and Borrower for
fiscal years ending after September 30, 1998.
(w) At no time shall the ratio of the total liabilities of Borrower to the
net worth of Borrower, in each case calculated in accordance with generally
accepted accounting principles consistently applied, exceed three (3) to one
(1), with net worth being defined as (i) shareholders' equity (including capital
stock, additional paid-in capital and retained earnings) plus (ii) indebtedness
subordinated to the Liabilities in fon-n and substance satisfactory to Lender
minus (iii) intangible assets (including goodwill).
13. EVENT OF DEFAULT. The occurrence of any one or more of the following
events shall constitute an event of default ("Event of Default") by Borrower
hereunder:
(a) The failure of any Obligor to pay when due or declared due any of the
Liabilities;
(b) The failure of any Obligor to perform, keep or observe any of the
covenants, conditions, promises, agreements or obligations of such obligor under
this Agreement or the Other Agreements;
(c) The failure of any Obligor to perform, keep or observe any of the
covenants, conditions, promises, agreements or obligations of such Obligor under
any other agreement with any Person if such failure may have a material adverse
effect on such Obligor's business, property, assets, operations or condition,
financial or otherwise;
(d) The making or furnishing by any Obligor to Lender of any
representation, warranty, certificate, schedule, report or other communication
which is untrue or misleading in any material respect within or in connection
with this Agreement or the Other Agreements or in connection with any other
agreement between such Obligor and Lender;
(e) The making or any attempt to make any levy, seizure or attachment of
any of Borrower's property;
70
<PAGE>
(f) The commencement of any proceedings in bankruptcy by or against any
Obligor or for the liquidation or reorganization of any Obligor, or alleging
that such Obligor is insolvent or unable to pay its debts as they mature, or for
the readjustment or arrangement of anyObligor's debts, whether under the United
States Bankruptcy Code or under any other state or federal law now or hereafter
existing for the relief of debtors, or the commencement of any analogous
statutory or non-statutory proceedings involving any Obligor; provided that, if
such commencement of proceedings against such Obligor is involuntary and such
Obligor is contesting such proceedings in good faith, such action shall not
constitute an Event of Default unless such proceedings are not dismissed within
thirty (30) days after the commencement thereof,
(g) The appointment of a receiver or trustee for any Obligor, for any of
the Collateral or for any substantial part of any Obligor's assets or the
institution of any proceedings for the dissolution, or the full or partial
liquidation, of any Obligor which is a corporation or a partnership; provided
that, if such appointment or commencement of proceedings against such Obligor is
involuntary and such Obligor is contesting such proceedings in good faith, such
action shall not constitute an Event of Default unless such appointment is not
revoked or such proceedings are not dismissed within thirty (30) days after the
appointment or commencement thereof;
(h) The entry of any final judgment or order against any Obligor granting
equitable relief or awarding money damages in excess of Fifty Thousand Dollars
($50,000.00) which remains unsatisfied or undischarged and in effect for ninety
(90) days after such entry without a stay of enforcement or execution;
(i) The death of any Obligor who is a natural Person or the dissolution of
any Obligor which is a partnership or corporation;
0) The occurrence of a material change in the identity or composition of
the Persons who are directors or executive officers of Borrower;
(k) The occurrence of an event of default under, or the revocation or
termination of, any agreement, instrument or document executed and delivered by
any Person to Lender pursuant to which such Person has guaranteed to Lender the
payment of all or any of the Liabilities or has granted Lender a security
interest in or lien upon some or all of such Person's real and/or personal
property to secure the payment of all or any of the Liabilities;
71
<PAGE>
(1) The institution in any court of a criminal proceeding against any
Obligor, or the indictment of any Obligor for any crime; or
(m) Lender shall feel insecure for any reason whatsoever, including without
limitation fear of removal or waste of all or part of the Collateral.
14. REMEDIES UPON AN EVENT OF DEFAULT.
(a) Upon the occurrence of an Event of Default described in paragraph 13(f)
hereof, all Liabilities shall immediately and automatically become due and
payable, without notice of any kind. Upon the occurrence of any other Event of
Default, all Liabilities may, at the option of Lender, and without demand,
notice or legal process of any kind, be declared, and immediately shall become,
due and payable.
(b) Upon the occurrence of an Event of Default, Lender may exercise from
time to time any rights and remedies available to it under the Uniform
Commercial Code and any other applicable law in addition to, and not in lieu of,
any rights and remedies expressly granted in this Agreement or in any of the
Other Agreements, and all of Lender's rights and remedies shall be cumulative
and non-exclusive to the extent permitted by law. In particular, but not by way
of limitation of the foregoing, Lender may, without notice, demand or legal
process of any kind, take possession of any or all of the Collateral (in
addition to Collateral of which it already has possession), wherever it may be
found, and for that purpose may pursue the same wherever it may be found, and
may enter into any of Borrower's premises where any of the Collateral may be and
search for, take possession of, remove, keep and store any of the Collateral
until the same shall be sold or otherwise disposed of, and Lender shall have the
right to store the same at any of Borrower's premises without cost to Lender. At
Lender's request, Borrower shall at Borrower's expense assemble the Collateral
and make it available to Lender at one or more places to be designated by Lender
and reasonably convenient to Lender and Borrower. Borrower recognizes that if
Borrower fails to perform, observe or discharge any of the Liabilities under
this Agreement or the Other Agreements, no remedy at law will provide adequate
relief to Lender, and Borrower agrees that Lender shall be entitled to temporary
and permanent injunctive relief in any such case without the necessity of
proving actual damages. Any notification required by law of the intended
disposition of any Collateral shall be deemed reasonably and properly given if
given at least ten (1 0) calendar days before such disposition. Any proceeds of
any disposition by Lender of any Collateral may be applied by Lender to the
payment of expenses in connection with the Collateral, including without
limitation legal expenses and reasonable attorney fees, and any balance of such
proceeds may be applied by Lender toward the payment of such of the Liabilities,
and in such order of application, as Lender may from time to time elect,
including without limitation to provide cash collateral to secure the Letters of
Credit.
72
<PAGE>
15. INDEMNIFICATION. Borrower shall defend (with counsel satisfactory to
Lender), protect, indemnify and hold hannless Lender, each Affiliate of Lender
and each of their respective officers, directors, employees, attorneys and
agents (each an "Indemnified Party") from and against any and all liabilities,
obligations, losses, damages, penalties, actions, judgments, suits, claims,
costs, expenses and disbursements of any judgments, suits, claims, costs,
expenses and disbursements of any kind or nature (including without limitation
the disbursements and the reasonable fees of counsel for each Inderymified Party
in connection with any investigative, administrative or judicial proceeding,
whether or not the Indemnified Party shall be designated a party thereto), which
may be imposed on, incurred by, or asserted against any Indemnified Party
(whether direct, indirect or consequential and whether based on any federal,
state or local laws or regulations, including without limitation securities,
environmental and commercial laws and regulations, under common law or in
equity, or based on contract or otherwise) in any manner relating to or arising
out of this Agreement or the Other Agreements, or any act, event or transaction
related or attendant thereto, the making and the management of the Loans or any
Letters of Credit or the use or intended use of the proceeds of the Loans or any
Letters of Credit; provided that Borrower shall not have any obligation
hereunder to any Indemnified Party with respect to matters caused by or
resulting from the willful misconduct or gross negligence of such Indemnified
Party. To the extent that the undertaking to indemnify set forth in the
preceding sentence may be unenforceable because it is violative of any law or
public policy, Borrower shall satisfy such undertaking to the maximum extent
permitted by applicable law. Any liability, obligation, loss, damage, penalty,
cost or expense covered by this indemnify shall be paid to each Indemnified
Party on demand, and, failing prompt payment, shall, together with interest
thereon at the highest rate then applicable to Loans hereunder from the date
incurred by each Indemnified Party until paid by Borrower, be added to the
Liabilities and be secured by the Collateral. The provisions of this paragraph
15 shall survive the satisfaction and payment of the Liabilities and the
termination of this Agreement.
73
<PAGE>
16. NOTICE. All written notices and other written communications with
respect to this Agreement shall be sent by ordinary, certified or overnight
mail, by facsimile transmission or delivered in person, and in the case of
Lender shall be sent to it at One Tabor Center, 1200 17th Street, Suite 2760,
Denver, Colorado 80202, Attention: William N. Tsiouvaras, and in the case of
Borrower shall be sent to it at its principal place of business set forth on the
first page of this Agreement, Attention: Wayne R. Wright.
17. CHOICE OF GOVERNING LAW; CONSTRUCTION; FORUM SELECTION. This Agreement
and the Other Agreements are submitted by Borrower to Lender for Lender's
acceptance or rejection at Lender's principal place of business as an offer by
Borrower to borrow monies from Lender now and from time to time hereafter and
shall not be binding upon Lender or become effective until accepted by Lender in
writing at said place of business. If so accepted by Lender, this Agreement and
the Other Agreements shall be deemed to have been made at said place of
business. THIS AGREEMENT AND THE OTHER AGREEMENTS SHALL BE GOVERNED AND
CONTROLLED BY THE INTERNAL LAWS OF THE STATE OF COLORADO AS TO INTERPRETATION,
ENFORCEMENT, VALIDITY, CONSTRUCTION, EFFECT, AND IN ALL OTHER RESPECTS,
INCLUDING WITHOUT LIMITATION THE LEGALITY OF THE INTEREST RATE AND OTHER
CHARGES, BUT EXCLUDING PERFECTION OF THE SECURITY INTERESTS IN THE COLLATERAL,
WHICH SHALL BE GOVERNED AND CONTROLLED BY THE LAWS OF THE RELEVANT JURISDICTION.
If any provision of this Agreement shall be held to be prohibited by or invalid
under applicable law, such provision shall be ineffective only to the extent of
such prohibition or invalidity, without invalidating the remainder of such
provision or remaining provisions of this Agreement. To induce Lender to accept
this Agreement, Borrower irrevocably agrees that, subject to Lender's sole and
absolute election, ALL ACTIONS OR PROCEEDINGS IN ANY WAY, MANNER OR RESPECT
ARISING OUT OF OR FROM OR RELATED TO THIS AGREEMENT, THE OTHER AGREEMENTS OR THE
COLLATERAL SHALL BE LITIGATED IN COURTS HAVING SITUS WITHIN THE CITY AND COUNTY
OF DENVER, STATE OF COLORADO. BORROWER HEREBY CONSENTS AND SUBMITS TO THE
JURISDICTION OF ANY LOCAL, STATE OR FEDERAL COURTS LOCATED WITHIN SAID CITY AND
COUNTY AND STATE. BORROWER HEREBY WAIVES ANY RIGHT IT MAY HAVE TO TRANSFER OR
CHANGE THE VENUE OF ANY LITIGATION BROUGHT AGAINST BORROWER BY LENDER IN
ACCORDANCE WITH THIS PARAGRAPH 17.
74
<PAGE>
18. PARTICIPATION; ASSIGNMENT. Lender shall have the right to assign all or
any of its rights under this Agreement and the Other Agreements, and/or to offer
participation interests therein to any Person without the consent of Borrower.
In such event, Borrower shall execute such agreements, instruments and documents
as Lender shall request and as are customary in connection therewith, including
without limitation agreements, instruments and documents in favor of each
assignee and participant.
19. MODIFICATION AND BENEFIT OF AGREEMENT. This Agreement and the Other
Agreements may not be modified, altered or amended except by an agreement in
writing signed by Borrower and Lender. Borrower may not sell, assign or transfer
this Agreement or the Other Agreements or any portion thereof, including without
limitation Borrower's rights, titles, interest, remedies, powers or duties
hereunder or thereunder.
20. HEADINGS OF SUBDIVISIONS. The headings of subdivisions in this
Agreement are for convenience of reference only, and shall not govern the
interpretation of any provisions of this Agreement.
21. POWER OF ATTORNEY. Borrower acknowledges and agrees that its
appointment of Lender as its attorney and agent-in-fact for the purposes
specified in this Agreement is an appointment coupled with an interest and shall
be irrevocable until the Liabilities are paid in full and this Agreement is
terminated.
22. WAIVER OF JURY TRIAL; OTHER WAIVERS.
(a) BORROWER HEREBY WAIVES ALL RIGHTS TO TRIAL BY JURY IN ANY ACTION OR
PROCEEDING WHICH PERTAINS DIRECTLY OR INDIRECTLY TO THIS AGREEMENT, THE OTHER
AGREEMENTS, THE LIABILITIES, THE COLLATERAL, ANY ALLEGED TORTIOUS CONDUCT BY
BORROWER OR LENDER OR WHICH, IN ANY WAY, DIRECTLY OR INDIRECTLY, ARISES OUT OF
OR RELATES TO THE RELATIONSHIP BETWEEN BORROWER AND LENDER. IN NO EVENT SHALL
LENDER BE LIABLE FOR LOST PROFITS OR OTHER SPECIAL OR CONSEQUENTIAL DAMAGES.
(b) Borrower hereby waives demand, presentment, protest and notice of
nonpayment, and Borrower further waives the benefit of all valuation, appraisal
and exemption laws.
(c) BORROWER HEREBY WAIVES ALL RIGHTS TO NOTICE AND HEARING OF ANY KIND
PRIOR TO THE EXERCISE BY LENDER OF ITS RIGHTS TO REPOSSESS THE COLLATERAL OF
BORROWER WITHOUT JUDICIAL PROCESS OR TO REPLEVY, ATTACH OR LEVY UPON SUCH
COLLATERAL WITHOUT PRIOR NOTICE OR HEARING.
75
<PAGE>
(d) Lender's failure, at any time or times hereafter, to require strict
performance by Borrower of any provision of this Agreement or the Other
Agreements shall not waive, affect or diminish any right of Lender thereafter to
demand strict compliance and performance therewith. Any suspension or waiver by
Lender of an Event of Default under this Agreement or any default under the
Other Agreements shall not suspend, waive or affect any other Event of Default
under this Agreement or any other default under the Other Agreements, whether
the same is prior or subsequent thereto and whether of the same or a different
kind or character. No delay on the part of Lender in the exercise of any right
or remedy under this Agreement or the Other Agreements shall preclude other or
further exercise thereof or the exercise of any right or remedy. None of the
undertakings, agreements, warranties, covenants and representations of Borrower
contained in this Agreement or the Other Agreements and no Event of Default
under this Agreement or default under the Other Agreements shall be deemed to
have been suspended or waived by Lender unless such suspension or waiver is in
writing, signed by a duly authorized officer of Lender and directed to Borrower
specifying such suspension or waiver.
Signatures
IN WITNESS THEREOF, the parties hereto have duly executed this Agreement as
of the date first above written.
NATIONAL BANK OF CANADA
By /s/ William N. Tsiouvaras
Name William N. Tsiouvaras
Title Vice President
PEN INTERCONNECT, INC.
By: /s/ James S. Pendleton
Name: James S. Pendleton
Title: President
76
<PAGE>
Exhibits:
A - Business and Collateral Locations
B - Existing Liens
C - Tradenames and Division Names
D - Equipment
E - Existing Indebtedness
F - Shareholders
G - Subsidiaries and Divisions
H - Financial Statement Certificate
77
<PAGE>
EXHIBIT 11
PEN INTERCONNECT, INC.
Calculation of Earnings (Loss) Per Share
FOR FISCAL YEARS ENDED
SEPTEMBER 30, 1996 AND 1995
<TABLE>
<CAPTION>
Fully
Primary dilutive
Months Weighted Weighted
Common out- Average Average
1996 Shares Standing Shares Shares
-------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at October 1, 1995 1,700,000 12 20,400,000 20,400,000
Issued November 17, 1995 1,000,000 10.5 10,500,000 10,500,000
Issued May 15, 1996 333,407 4.5 1,500,332 1,500,332
------- ---------
Balance at Sept. 30, 1996 - Primary 3,033,407 32,400,332
========= ==========
Contingent Shares 55,568 4.5 250,056
-------
Balance at Sept. 30, 1996 - Fully dilutive 32,650,388
==========
Weighted average number of shares for twelve months 2,700,028 2,720,866
--------- ---------
Loss for fiscal year ended Sept. 30 $ (709,010) $ (709,010)
=========== ===========
Loss per share $ (0.26) $ (0.26)
======== ========
1995
Balance at October 1, 1994 1,200,000 12 14,400,000 14,400,000
Issued October 1994 500,000 12 6,000,000 6,000,000
------- --------- ---------
Balance at Sept. 30, 1995 - Primary 1,700,000 20,400,000 20,400,000
========= ========== ==========
Weighted average number of shares for twelve months 1,700,000 1,700,000
--------- ---------
Earnings for fiscal year ended Sept. 30 $ 617,618 $ 617,618
========= =========
Earnings per share $ 0.36 $ 0.36
====== ======
</TABLE>
78
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from Pen
Interconnect, Inc. September 30, 1996 financial statements and is qualified
in its entirety by reference to such financial statements.
</LEGEND>
<CIK> 0001000266
<NAME> Pen Interconnect, Inc.
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1996
<PERIOD-END> SEP-30-1996
<CASH> 169,445
<SECURITIES> 0
<RECEIVABLES> 4,533,150
<ALLOWANCES> (273,852)
<INVENTORY> 6,198,392
<CURRENT-ASSETS> 11,805,164
<PP&E> 4,313,919
<DEPRECIATION> (1,065,205)
<TOTAL-ASSETS> 16,656,918
<CURRENT-LIABILITIES> 8,615,347
<BONDS> 0
0
0
<COMMON> 30,334
<OTHER-SE> 7,537,697
<TOTAL-LIABILITY-AND-EQUITY> 16,656,918
<SALES> 25,106,734
<TOTAL-REVENUES> 25,106,735
<CGS> 22,582,187
<TOTAL-COSTS> 25,707,376
<OTHER-EXPENSES> 35,026
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 513,956
<INCOME-PRETAX> (1,149,624)
<INCOME-TAX> (440,614)
<INCOME-CONTINUING> (709,010)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (709,010)
<EPS-PRIMARY> (.26)
<EPS-DILUTED> (.26)
</TABLE>
