UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, 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, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
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 (I.R.S. Employer Identification No)
incorporation or organization)
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. $18,238,460
As of January 8, 1998, there were 4,147,863 shares of the Issuer's
common stock, par value $0.01, issued and outstanding. The aggregate market
value of the Issuer's voting stock held by non-affiliated of the Issuer was
approximately $8,868,000 computed at the closing quotation for the Issuer's
common stock of $2.91 as of January 8, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
Definitive Proxy Statement for the Annual Meeting of Shareholders to
be held March 18, 1998. Certain information therein is incorporated into Part
III hereof.
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FORM 10-KSB
PEN INTERCONNECT, INC.
Table of Contents
age
PART I
1. Description of Business 3
2. Description of Property 9
3. Legal Proceedings 10
4. Submission of Matters to a Vote of Security Holders 10
PART II
5. Market for Common Equity and Related Stockholder Matters 10
6. Management's Discussion and Analysis or Plan of Operation 12
7. Financial Statements 15
8. Changes in and Disagreements With Accountants on
Accounting and Financial Disclosure 15
PART III
9. Directors, Executive Officers, Promoters and Control Persons;
Compliance With Section 16(a) of the Exchange Act 15
10. Executive Compensation 15
11. Security Ownership of Certain Beneficial Owners and Management 16
12. Certain Relationships and Related Transactions 16
13. Exhibits and Reports on Form 8-K 16
Signatures 19
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
(a) BUSINESS DEVELOPMENT
General
Pen Interconnect, Inc. (the "Company" or "Pen") is a total
interconnection solution provider offering internal and external custom cable
and harness interconnections, mobile satellite equipment, EMSI (Electronic
Manufacturing Service Industry) manufacturing (circuit board assembly) and
custom design and manufacturing of battery chargers, power supplies and
Uninterruptible Power Supply UPS systems for original equipment manufactures
("OEMs") in the computer, computer peripheral, telecommunications,
instrumentation, medical 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,
and Orem, Utah and Tustin, California. During fiscal year 1996 and a portion of
fiscal year 1997 the Company operated a division located in San Jose, California
(the "San Jose Division"). The San Jose Division was sold by the Company on
November 12, 1996 (See Note P of Notes to Financial Statements). The executive
offices of the Company are located at 2351 South 2300 West, Salt Lake City, Utah
84119.
Summary of Current Year Events
Effective November 1, 1996, the Company sold substantially all of the
net assets used by the San Jose Division to Touche Electronics, Inc., ("Touche")
a subsidiary of TMCI Electronics, Inc.("TMCI").
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. The Company originally purchased the San Jose Division in March 1995,
for approximately $2,100,000. As part of the transaction, Touche and TMCI also
assumed certain liabilities associated with the operations of the Division. In
February 1997, TMCI filed a notice of demand for rescission of the purchase and
sale of the Division. The Company filed a counterclaim against TMCI in May 1997,
alleging that TMCI had defaulted in its obligations under the promissory notes.
The disputes were submitted to arbitration. In December 1997, the Company and
TMCI entered into a Settlement and Release Agreement (the "Settlement
Agreement"), releasing each other of any and all respective claims the parties
may have had against each other. The Settlement Agreement provided, in part,
that TMCI issue to the Company 137,390 shares of TMCI's common stock (the
"Settlement Stock"). The Settlement Stock is guaranteed to have a minimum value
of $7.4532 per share. In the event the Settlement Stock is sold at less than
such amount, TMCI is obligated to pay to the Company the difference between the
sales price and the guaranteed value. The conclusion of the disputes will allow
the Company and TMCI to continue their joint sales and marketing arrangements.
(See Notes B and O of Notes to Financial Statements)
From February 1997, through May 1997, the Company issued $1,000,000 in
promissory
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notes and received $1,000,000 in cash. These notes bear interest at the rate of
8% per annum and are payable in six months. In addition to the interest, the
note holders received a warrant to purchase one share of the Company's common
stock for $2.00 for each dollar of principal amount of the notes. These warrants
expire ten years from the date of issuance. At September 30, 1997, all the notes
plus accrued interest had been repaid except for $100,000 plus accrued interest
of $4,000 which was due and paid November 1997.
Effective April 1, 1997, the Company purchased substantially all of the
assets, and assumed certain liabilities of PowerSteam Technology, Inc., a custom
design and development company for battery chargers, power supplies and UPS
systems located in Orem, Utah. The Company issued 150,000 shares of common stock
(at a value of $1.50 per share) for the net assets. (See Note B of Notes to
Financial Statements).
On September 4, 1997, the Company entered into a new four year $6,300,000
financing agreement with a bank. This credit facility replaced the Company's
existing line of credit. The credit facility consists of 3 loans: 1) a
$5,000,000 revolving credit loan accruing interest at prime plus 1.75% per annum
; 2) a term loan of $800,000 accruing interest at a fixed rate of 10.16% per
annum; and 3) a term loan of $500,000 accruing interest at a fixed rate of
10.32% per annum. These loans are secured by substantially all of the assets of
the Company. (See Note H of Notes to Financial Statements)
(b) BUSINESS OF ISSUER
FORWARD-LOOKING STATEMENTS. This annual report contains certain forward-looking
statements within the meaning of section 27A of the Securities Act of 1933 as
amended, and section 21E of the Securities Exchange Act of 1934, as amended,
that involve risks and uncertainties. In addition, the Company may from time to
time make oral forward-looking statements. Actual results are uncertain and may
be impacted by the following factors. In particular, certain risks and
uncertainties that may impact the accuracy of the forward-looking statements
with respect to revenues, expenses and operating results include without
limitation, cycles of customer orders, general economic and competitive
conditions and changing consumer trends, technological advances and the number
and timing of new product introductions, shipments of products and components
from foreign suppliers, and the timing of operating and changes in the mix of
products ordered by customers. As a result, the actual results may differ
materially from those projected in the forward- looking statements.
Because of these and other factors that may affect the Company's operating
results, past financial performance should not be considered an indicator of
future performance, and investors should not use historical trends to anticipate
results or trends in future periods.
Products
Headquartered in Salt Lake City with divisions in Tustin California,
and Orem, Utah, the Company is a total interconnection solution provider,
offering internal and external custom cable and harness interconnections, custom
power supply and battery charger design, mobile satellite equipment and EMSI
(Electronic Manufacturing Service Industry) manufacturing for OEMs in the
computer, computer peripheral, telecommunication, instrumentation, medical 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).
A portion of the Company's sales consist of custom cable
interconnections developed in close
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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 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 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.
Distribution of Products
The Company markets its products to its customers through in-house
salesmen and sales representatives. The Companies customers are located
throughout the continental U.S. and Canada and certain foreign countries.
New Products
The acquisition of PowerSteam by the Company has enabled it to enter
the engineered products market, providing the Company with the ability to sell
its own products rather than to merely service and manufacture other company's
products. This means that the Company has the ability to better control its
margins and increase its profits. PowerStream designs custom power supplies,
battery chargers and UPS systems for OEMs and has been able to produce several
of those designs for sale to other companies. It is expected that a major share
of the Company's future business will come from this division and market.
The InCirT Division is adding additional services to its circuit board
assembly business by offering repair and return functions and also complete
system assembly at its plant in Tustin.
The Cable Division located in Salt Lake City, Utah is expanding its
capabilities to include cable harnessing and packaging. It is also increasing
its off-shore manufacturing capability through its strategic manufacturing
alliance with a company in China to handle its high volume customers.
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 and many exist in the Far East, which
historically have been lower costs. The Company also competes with computer,
cabling and connector manufacturers that produce custom cable
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assemblies for their own use, thereby reducing potential sales to such
manufacturers and to third parties by the Company. The InCirT Division competes
directly with several EMSI companies, some of which are very large. However, the
vast majority are smaller firms similar in size to InCirT, so it is important
that the Company meet its schedules with quality products and on time
deliveries.
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 using offshore companies 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 at competitively prices while controlling the quality
of its products.
Product Components
The Company generally purchases cable, connectors, and electronic
components from a large number of unaffiliated United States and foreign
distribution companies to 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 its 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. In the current fiscal year, sales were dominated by three large
customers. These three customers accounted for approximately 41% of the
Company's total revenue (15%, 14%, and 12% respectively). The loss of any one of
these large customers could significantly affect the future profitability of the
Company in the short term. This was evidenced in the fourth quarter when one of
these customers significantly decreased its orders, which resulted in a
reduction of revenues and an operating loss in the fourth quarter of 1997.
Patents
The Company acquired, through PowerStream, several patent applications.
The Company is currently investigating economical feasibility of these patent
applications, and have not, as of yet, determined to actively pursue these
applications.
Regulatory Matters
Computer cables and board assemblies must satisfy electrical magnetic
interference (EMI) standards which are imposed by the Federal Communications
Commission. The Company relies on the manufacturer of its cable and components
for compliance with these requirements. The
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Company is not aware of any development to suggest that the computer cables and
board assemblies do not comply with EMI standards.
Environmental Laws
The Company has not incurred, and does not presently anticipate
incurring, any material costs in complying with all federal and state
environmental laws.
Employees
As of September 30, 1997, the Company employed approximately 195 full
and part-time employees. Six employees were executive personnel, 16 were
technical and engineering personnel, 9 were in marketing and sales, 140 were in
manufacturing, and 24 were administrative, accounting, information systems, and
clerical personnel. The number of employees at September 30, 1997 represents
approximately a 46% reduction from September 30, 1996. This reduction was
primarily due to the sale of the San Jose Division. The Company has also reduced
the number of its employees through increased efficiency and as a result of
lower sales, a reduction in requirements.
Research and development
During fiscal year 1997, the Company incurred approximately $198,000 in
research and development costs for new product development. In addition the
Company incurred additional development costs to modify existing products,
create new products and make significant improvements to existing products.
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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 $160,000 in annual rental payments. The building contains 40,500
square feet of space, in 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. The annual rental is approximately $126,700 per
year. The premises consist of approximately 120,300 square feet of which InCirT
subleases approximately 24,500 square feet. Within this facility 2,000 square
feet are utilized for sales and administration and 22,500 square feet are
dedicated to manufacturing and engineering. InCirT occupies its space pursuant
to a sublease which has a expiration date of December 31, 2001 but which allows
the sublessor to terminate the sublease on six months prior written notice to
the Company. In September 1997, the Company received notice that its sublease
would be terminated effective March 31, 1998. The Company is seeking to relocate
this division to another facility.
The PowerSteam division's sales and engineering facilities are located
in Orem, Utah, under a lease which expires in February 1998, which management
intends to extend. The premises contains approximately 2,600 square feet of
space, all of which is utilized for sales, research, development, prototype
production and administration. The annual rental is approximately $18,000.
Management believes that the above properties and their contents are
adequately covered by insurance.
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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.
The Company was involved in a dispute regarding the sale of the San
Jose Division to TMCI. This dispute was resolved subsequent to year end and
resulted in a restructuring of the consideration payable by TMCI to the Company.
(See "Business Development-Summary of Current Year Events" and Note O of Notes
to Financial Statements)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On August 8, 1997, the Company filed an Information Statement with the
Securities and Exchange Commission in connection with shareholder approval by
written consent ratifying the actions of the Board of Directors in issuing
warrants to acquire 1,000,000 shares of Common Stock to certain lenders. (See
Note N to Notes of Financial Statements)
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 Automated Quotation system ("NASDAQ"), under
the symbol "PENC" for the common 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 since the Company's common stock and warrants began
active trading on the NASDAQ.
Common Stock Schedule
Fiscal Year 1997 Quarter Ended High Bid Low Bid
------------------------------ -------- -------
September 30, 1997 $2.50 $ 1.13
June 30, 1997 1.88 1.38
March 31, 1997 2.75 0.88
December 31, 1996 3.38 1.94
Fiscal Year 1996 Quarter Ended High Bid Low Bid
------------------------------ -------- -------
September 30, 1996 $6.25 $ 2.75
June 30, 1996 7.63 4.50
March 31, 1996 6.13 5.13
December 31, 1995 6.50 5.25
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On January 8, 1998, the closing quotation for the common stock on
NASDAQ was $ 2.91 per share. As of January 8, 1998, there were 4,147,863 shares
of common stock issued and outstanding, held by approximately 900 shareholders
of record, including several holders who are nominees for an undetermined number
of beneficial owners.
The following table sets forth the range of high and low bids for the
warrants of the Company during the periods indicated since the Company's
warrants began trading on the NASDAQ.
Warrants Schedule
Fiscal Year 1997 Quarter Ended High Bid Low Bid
------------------------------ -------- -------
September 30, 1997 $ 0.56 $ 0.22
June 30, 1997 0.69 0.38
March 31, 1997 0.81 0.44
December 31, 1996 1.00 0.44
Fiscal Year 1996 Quarter Ended High Bid Low Bid
------------------------------ -------- -------
September 30, 1996 $ 1.94 $ 0.63
June 30, 1996 2.75 0.94
March 31, 1996 2.19 1.00
December 31, 1995 2.13 1.00
On January 8, 1998, the closing quotation for the warrants on NASDAQ
was $0.61 per warrant. As of January 8, 1998, there were 4,040,000 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
and warrants 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 its common stock
and does not anticipate paying any dividends in the near future. The Company's
credit facility with its bank 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, 1997 and 1996. This
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discussion and analysis should be read in conjunction with the Company's
financial statements and related footnotes.
Results of Operations
The acquisition of the net assets of PowerStream Technology, Inc.
("PowerStream"), which was effective as of April 1, 1997 has been accounted for
as a purchase. The statement of operations data for the fiscal year ended
September 30, 1997 includes the results of operations of PowerStream since April
1, 1997.
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 fiscal years ended September 30, 1997 and
1996 include the results of operations of InCirT since April 1, 1996.
The acquisition of the net assets of Overland Communications, Inc.,
doing business as MOTOSAT ("MOTO-SAT") which was effective as of January 1, 1996
has been accounted for as a purchase. The statement of operations data for the
fiscal years ended September 30, 1997 and 1996 include the results of operations
of MOTO-SAT since January 1, 1996.
The San Jose Division was acquired on March 24, 1995 and was accounted
for as a purchase. The division was subsequently sold effective November 1,
1996. The statement of operations data for the fiscal years ended September 30,
1997 and 1996 includes the results of operations of the San Jose Division for
one month and twelve months, respectively.
Net sales. Net sales for the Company decreased approximately $6,900,000 (27%)
from $25,106,734 for fiscal year 1996 ("1996") to $18,238,460 for the fiscal
year ended September 30, 1997 ("1997"). The decrease is primarily the result of
the sale of the San Jose Division (sales in fiscal year 1996 of approximately
$6,900,000) and the loss of a major customer in the Cable Division in the fourth
quarter. This major customer represented approximately 12% of overall Company
sales in fiscal year 1997 and 16% in fiscal year 1996. Efforts were made to
retain this customer by reducing the sales price and transferring production to
an offshore facility. However, the Company was not able to achieve a
satisfactory margin with this customer who then placed its future orders with
another vendor. 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 from
approximately 90% in fiscal year 1996 to 99% in fiscal year 1997. This increase
in costs resulted primarily in the Cable Division as a result of the following
factors: 1) a reduced profit margin resulting from efforts to retain a major
customer by offering reduced prices through-out the third quarter; 2) excess
capacity (as sales had historically been higher) supported by some fixed costs
that could not be reduced in the short term 3) a continued low unemployment rate
in the Salt Lake City area requiring unusually high costs for unskilled and
partially skilled workers; 4) increases in reserves for obsolete and slow moving
inventory 5) the Company changed to a 4-day work week during the fourth quarter
in a effort to reduce some support costs and maintain its skilled workforce in
anticipation of a rebound in sales. In addition, other Company divisions
experienced decreased margins during the last two quarters of the fiscal year
1997 due to higher than anticipated material costs. These higher materials
costs, caused by a cash flow problem, in turn caused vendors to delay their
shipments and to charge higher prices.
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Operating expenses. Operating expenses increased by approximately $18,000 from
$3,125,189 in 1996 to $3,143,227 in 1997. This increase resulted from the
following areas: 1) an increase of $150,000 in amortization resulting from
acquisitions in the current and prior years; 2) an increase in the investment of
approximately $198,000 in research and development of new products for the
satellite and power supply/charger divisions. The Company anticipates initiating
sales of these new products in the upcoming year; 3) the abandonment of a
long-term building lease in San Jose which was not assumed by TMCI when they
purchased the San Jose Division from the Company. These increases in costs were
offset in part by cost reductions in sales and marketing ; and general and
administrative expenses. The Company continues to look for ways to streamline
its operations and reduce operating costs.
Other income and expenses. The Company experienced increased interest expense
costs during the year due to the need to obtain additional funds to replace the
expected payments from the promissory notes from the sale of the San Jose
division. This increase was more than offset by the gain on the sale of the San
Jose Division and other income and expense amounts.
Net loss and loss per share. The Company recorded a loss of $1,735,483 ($0.54
per share) for fiscal year 1997, compared to a loss of $709,010 ($0.26 per
share) for fiscal year 1996. This increased loss resulted primarily from
increased material costs required by vendors due to the Company's inability to
pay per terms, increases of obsolete and slow-moving inventory reserves,
expenditures of research and development for new products with future higher
margins, the loss due to the abandonment of a building lease associated with the
operations of the San Jose Division that was sold during the fiscal year.
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 to the
Company of approximately $4,700,000.
Working capital decreased to $1,065,778 on September 30, 1997 from
$3,189,817 on September 30, 1996. The decrease is principally due to early
cashflow issues incurred during the year. These issues were resolved subsequent
to year end as a result of the cash received from the issuance of the
subordinated debenture and the $500,000 term loan under the new credit facility.
On September 5, 1997, the Company obtained a new financing package with
a bank that is anticipated to significantly improve the Company's cashflow. This
agreement includes a line of credit secured by trade receivables and inventory
of up to $5,000,000. In addition the Company obtained a term loan for $800,000,
that is secured by the Company's property and equipment. Also the Company
obtained an additional term loan of $500,000 in the first quarter of fiscal year
1998.
Subsequent to year end the Company issued $1,100,000 in convertible
debentures. This resulted in net proceeds to the Company of approximately
$1,000,000 which improved the Company's cashflow.
Management believes that existing cash balances, borrowings available
under the line of credit, the subsequent cash from the convertible debentures
and the additional term loan together with cash generated from operations will
be adequate to meet the Company's anticipated cash requirements during the next
twelve months. However, in the event the Company experiences adverse operating
performance or above anticipated capital expenditure requirements, additional
financing may be required. There can be no assurance that such additional
financing, if required, would be available on favorable terms.
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Inflation and Seasonality
The Company does not believe that it is significantly impacted by
inflation. Historically, the industry sales tend to decline in December,
January, July and August when activity in the personal computer industry as a
whole is reduced.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data are included beginning
at page 18. See page 19 for the index to the financial statements.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
None.
PART III
ITEM 9. DIRECTORS, EXECUTIVE 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 Executive 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.
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.
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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
REPORTS ON FORM 8-K
No reports on Form 8-K were filed by the Company during the three months ended
September 30, 1997.
INDEX OF EXHIBITS
Exhibit No. Description
1 Form of Underwriter's Warrant Agreement including Form of
Underwriter's Warrant, incorporated by reference to the Company's
Registration Statement filed on Form SB-2, SEC File No. 33-96444.
3. Articles of incorporation and By-laws, incorporated by reference
to the Company's 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.
14
<PAGE>
INDEX OF EXHIBITS -CONTINUED
Exhibit No. Description
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. See Exhibit to Report on
Form 10-KSB dated September 30, 1996.
10.8 Form of Warrant Agreement 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.
10.10 Real 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.
10.11 Form of 1995 Stock Option Plan. See Registration Statement filed
on Form SB-2, SEC File No. 33-96444
10.12 Asset Purchase Agreement dated November 12, 1996 for the sale of
the San Jose Division between Touche Electronics, Inc. a
subsidiary of TMCI Electronics, Inc. and the Company. See Exhibit
to Report on Form 10-QSB dated December 31, 1996.
10.13 Loan and Security Agreement between FINOVA and the Company. This
filing page 51.
10.14 Employment Agreement between Stephen J. Fryer and the Company.
This filing page 43.
10.15 Employment Agreement between Daniele Reni and the Company. This
filing page 47.
10.16 Agreement and Plan of Reorganization through Acquisition dated
April 1, 1997 between PowerStream Technology, Inc. and the
Company. This filing page 51.
15
<PAGE>
INDEX OF EXHIBITS -CONTINUED
Exhibit No. Description
11 Statement re: computation of per share earnings. This filing page
62.
23.1. Consent of Grant Thornton LLP. This filing page 63.
27. Financial Data Schedule.
99. Information Statement. This filing page 64.
16
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) the Registrant has duly caused
this report to be signed on its behalf by the undersigned thereunto duly
authorized.
PEN INTERCONNECT, INC.
Date: January 13, 1998 By: /s/ James S. Pendleton
-----------------------
James S. Pendleton,
CEO and Director
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
Date: January 13, 1998 By: /s/ James S. Pendleton
-----------------------
James S. Pendleton,
CEO and Director
Date: January 13, 1998 By: /s/ Wayne R. Wright
--------------------
Wayne R. Wright,
CFO, Principal Accounting
Officer and Director
Date: January 13, 1998 By: /s/ James E. Harward
---------------------
James E. Harward
Director
Date: January 13, 1998 By: /s/ Stephen Fryer
Stephen Fryer,
Vice President, Director
Date: January 13, 1998 By: /s/ C. Reed Brown
------------------
C. Reed Brown
Director
17
<PAGE>
PEN INTERCONNECT, INC.
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants 19
Financial Statements
Balance Sheets as of September 30, 1997 and 1996 20
Statements of Operations for the Years Ended
September 30, 1997 and 1996 22
Statement of Stockholders' Equity for the Years Ended
September 30, 1997 and 1996 23
Statements of Cash Flows for the Years Ended
September 30, 1997 and 1996 24
Notes to Financial Statements 29
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, 1997 and 1996, 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, 1997 and 1996 and the results of its operations and its cash flows
for the years then ended, in conformity with generally accepted accounting
principles.
Grant Thornton LLP
Salt Lake City, Utah
December 12 , 1997
19
<PAGE>
Pen Interconnect, Inc.
BALANCE SHEETS
September 30,
ASSETS
<TABLE>
<CAPTION>
1997 1996
------------- --------------
CURRENT ASSETS
<S> <C> <C>
Cash and cash equivalents $ 272,148 $ 169,445
Receivables (Notes C and H)
Trade accounts, less allowance for doubtful
accounts of $137,058 in 1997 and $273,852
in 1996 2,093,056 4,259,298
Current maturities of notes receivable
(Notes D, B, and O) 357,006 37,494
Income taxes receivable - 228,241
Inventories (Notes E and H) 3,355,871 6,198,392
Investments (Note B) 400,000 -
Prepaid expenses and other current assets 289,991 386,494
Deferred income taxes (Note K) 141,324 525,800
Total current assets 6,909,396 11,805,164
PROPERTY AND EQUIPMENT, AT COST
(Notes H, I and J)
Production equipment 2,418,368 3,010,575
Furniture and fixtures 834,971 717,821
Transportation equipment 69,217 49,373
Leasehold improvements 368,137 354,150
----------- --------------
3,690,693 4,131,919
Less accumulated depreciation 1,303,063 1,065,205
----------- --------------
2,387,630 3,066,714
OTHER ASSETS
Notes receivable, less current maturities
(Notes B, D, and O) 607,524 19,630
Deferred income taxes (Note K ) 1,392,658 -
Goodwill and other intangibles (Note B) 2,287,146 1,589,313
Other 322,630 176,097
------------ --------------
4,609,958 1,785,040
----------- --------------
$13,906,984 $16,656,918
=========== ===========
</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>
1997 1996
------------- --------------
CURRENT LIABILITIES
<S> <C> <C>
Notes payable (Note F) $ 641,505 $ -
Bridge loan (Note G) 100,000 -
Line of credit (Note H) 2,237,690 4,969,864
Current maturities of long-term obligations
(Notes H and I) 263,255 19,265
Current maturities of capital leases (Note J) 66,464 59,878
Accounts payable 2,053,348 2,954,601
Accrued liabilities 481,356 611,739
-------------- ------------
Total current liabilities 5,843,618 8,615,347
LONG-TERM OBLIGATIONS, less current
maturities (Notes H and I) 681,722 96,758
CAPITAL LEASE OBLIGATIONS, less current
maturities (Note J) 70,889 150,382
DEFERRED INCOME TAXES (Note K) 165,755 225,800
------------ -----------
Total liabilities 6,761,984 9,088,287
COMMITMENTS AND CONTINGENCIES (Notes J, L,
and M) - -
STOCKHOLDERS' EQUITY (Notes B, H, L, 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
4,072,863 shares in 1997 and 3,033,407 shares
in 1996 40,729 30,334
Additional paid-in capital 8,733,126 7,431,669
Retained earnings (accumulated deficit) (1,628,855) 106,628
-------------- -----------
Total stockholders' equity 7,145,000 7,568,631
------------- -----------
$ 13,906,984 $ 16,656,918
============= ============
</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>
1997 1996
-------------- --------------
<S> <C> <C>
Net sales (Note C) $ 18,238,460 $ 25,106,734
Cost of sales 18,009,478 22,582,187
-------------- --------------
Gross profit 228,982 2,524,547
Operating expenses
Sales and marketing 918,172 1,156,657
Research and development 197,804 -
General and administrative 1,361,139 1,663,684
Abandoned lease fee (Note B) 211,226 -
Depreciation and amortization 454,886 304,848
--------------- --------------
Total operating expenses 3,143,227 3,125,189
--------------- -------------
Operating loss (2,914,245) (600,642)
Other income (expense)
Interest expense (612,143) (513,956)
Gain on sale of division (Note B ) 611,912 -
Other income (expense) net 69,393 (35,026)
----------------- ----------------
69,162 (548,982)
----------------- ----------------
Loss before income taxes (2,845,083) (1,149,624)
Income tax benefit (Note K) (1,109,600) (440,614)
------------------ ----------------
NET LOSS $ (1,735,483) $ (709,010)
================== ================
Loss per common share $ (0.54) $ (0.26)
================= ================
Weighted average common
shares outstanding 3,213,089 2,700,028
================= ===============
</TABLE>
The accompanying notes are an integral part of these statements.
22
<PAGE>
Pen Interconnect, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended September 30, 1997 and 1996
<TABLE>
<CAPTION>
Retained
Common stock Additional earnings
Number paid-in (accumulated
of shares Amount capital deficit) Total
-------------- ---------- ------------ ------------- ------------
<S> <C> <C> <C> <C> <C>
Balance at October 1, 1995 1,700,000 $ 17,000 $ 963,935 $ 815,638 $ 1,796,573
Common stock sold in IPO
(Note N) 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
Common stock issued in acquisition
(Note B ) 150,000 1,500 223,500 - 225,000
Contingent common stock issued
in acquisition (Note B) 55,568 556 82,796 - 83,352
Common stock issued in payment
of notes (Note N ) 88,888 889 103,111 - 104,000
Common stock issued upon exercise of
warrants (Note N ) 745,000 7,450 892,050 - 899,500
Net loss - - - (1,735,483) (1,735,483)
-------------- ---------- ------------ ------------- ------------
Balance at September 30, 1997 4,072,863 $ 40,729 $ 8,733,126 $(1,628,855) $7,145,000
============== ========== ============ ============= ============
</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>
1997 1996
--------------- ---------------
Increase (decrease) in cash and cash equivalents
Cash flows from operating activities
<S> <C> <C>
Net loss $ (1,735,483) $ (709,010)
Adjustments to reconcile net loss to net
cash used in operating activities
Depreciation and amortization 454,886 304,849
Bad debts (118,339) 23,551
Deferred income taxes (1,068,227) (176,900)
Gain on sale of division (611,912) -
Changes in assets and liabilities
Trade accounts receivable 1,624,593 1,362,345
Inventories 1,204,085 781,724
Prepaid expenses and other current assets 62,929 (239,471)
Other assets (240,362) (95,530)
Deferred offering costs - 294,158
Accounts payable (793,139) (2,308,412)
Accrued liabilities (722,971) 199,016
Income taxes 228,341 (800,341)
--------------- ---------------
Total adjustments 19,884 (655,011)
--------------- ---------------
Net cash used in operating activities (1,715,599)) (1,364,021)
--------------- --------------
Cash flows from investing activities
Purchase of property and equipment (243,097) (760,817)
Acquisition of businesses - (3,500,000)
Issuance of notes receivable (49,730) (76,362)
Collections on notes receivable 5,616 119,887
-------------- --------------
Net cash used in investing
activities (287,211) (4,217,292)
-------------- ------------
</TABLE>
(Continued)
24
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended September 30,
<TABLE>
<CAPTION>
1997 1996
--------------- ---------------
Cash flows from financing activities
<S> <C> <C>
Proceeds from notes payable 902,469 -
Principal payments on notes payable (248,244) (1,600,000)
Net change in line of credit (2,732,174) 2,886,967
Proceeds from long-term obligations 1,000,000 -
Principal payments on long-term obligations (128,390) (593,765)
Proceeds from sale of division 2,000,000 -
Proceeds from sale of common stock 1,311,852 4,681,068
---------------- ----------------
Net cash provided by
financing activities 2,105,513 5,374,270
--------------- -------------
Net increase (decrease) in cash
and cash equivalents 102,703 (207,043)
Cash and cash equivalents at beginning of year 169,445 376,488
---------------- ---------------
Cash and cash equivalents at end of year $ 272,148 $ 169,445
=============== ============
Supplemental disclosures of cash flow information
Cash paid during the year for
Interest $ 627,522 $ 492,170
Income taxes 800 428,538
</TABLE>
(Continued)
25
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended September 30,
Noncash investing and financing activities
Acquisition of businesses
PowerSteam Technology, Inc. Effective April 1, 1997, the Company acquired
substantially all of the assets and assumed certain liabilities of PowerStream
Technology, Inc., in exchange for 150,000 shares of the Company's common stock,
valued at $1.50 per share (Note B). Assets acquired and liabilities assumed in
conjunction with this acquisition were as follows:
<TABLE>
<CAPTION>
<S> <C>
Accounts receivable (net) $ 20,432
Inventories (net) 5,900
Prepaid expenses and other current assets 603
Furniture and equipment 53,325
Accounts payable (169,315)
Accrued liabilities (402,861)
Long-term obligations (32,198)
-------------
Liabilities assumed (net) (524,114)
Plus stock issued (150,000 shares @ $1.50 per share) 225,000
------------
Excess purchase price over net assets acquired allocated
to goodwill $ 749,114
============
</TABLE>
InCirT Technology Effective April 1, 1996, the Company acquired substantially
all of the assets, and assumed certain liabilities of InCirT Technology, a
division of the Cerplex Group, Inc. for $3.5 million in cash and 333,407 shares
of stock valued at $5.3988 per share (Note B). Assets acquired 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)
------------
Assets acquired (net) 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>
(Continued)
26
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended September 30,
Overland Communications (MOTO-SAT) Effective January 1, 1996, the Company
acquired selected net assets of Overland Communications (MOTO-SAT) (Note B). The
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 expenses and other current assets 5,798
Furniture and equipment 43,755
Accounts payable (256,182)
Accrued liabilities (46,209)
Long-term obligations (306,698)
------------
Liabilities assumed (net) $ (107,791)
============
</TABLE>
Excess purchase price over net liabilities assumed resulted
in recognition of goodwill of $107,791
Sale of division
On November 1, 1996, the Company sold substantially all of the assets and
liabilities of its San Jose Division (Note B). Assets and liabilities sold were
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Accounts receivable $ 680,420
Inventories 1,644,336
Prepaid expenses 34,177
Other assets 26,099
Property and equipment 638,373
Accounts payable (277,429)
Accrued liabilities (35,373)
Capital leases (22,515)
--------
Assets sold (net) 2,688,088
Less non cash consideration received
Notes $ 900,000
Stock 400,000
-------
1,300,000
Cash received $ 2,000,000
-----------
Gain on sale of division $ 611,912
============
</TABLE>
(Continued)
27
<PAGE>
Pen Interconnect, Inc.
STATEMENTS OF CASH FLOWS - CONTINUED
Year ended September 30,
Pro forma data. The following unaudited pro forma summary represents the results
of operations as if the disposition of the San Jose Division and the purchase of
the InCirt Division had occurred at the beginning of the periods presented, and
do not purport to be indicative of what would have occurred had the transactions
actually occurred on that date, or of results which may occur in the future. The
pro forma weighted shares is reported as if outstanding at the beginning of the
period.
Fiscal year ended September 30,
(amounts in thousands)
1997 1996
--------- ----------
Net sales $ 17,955 $ 25,313
Operating income (loss) (2,931) 726
Net loss (2,347) (830)
Loss per share (0.73) (0.31)
Weighted shares outstanding 3,213 2,700
The accompanying notes are an integral part of these statements.
28
<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 is a total interconnection
solution provider offering internal and external custom cable and harness
interconnections, mobile satellite equipment, EMSI manufacturing (circuit
board assembly) and custom design and manufacturing of battery chargers,
power supplies and UPS systems for original equipment manufacturers
("OEMs") in the computer, computer peripheral, telecommunications,
instrumentation, medical 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 to one another 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 and printed circuit boards. 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.
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)
29
<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 is reviewed periodically
based on the undiscounted cash flows of the entities acquired over the
remaining amortization period. Should this review indicate that goodwill
is impaired, the Company's carrying value of the goodwill is reduced by
the estimated shortfall of undiscounted cash flows.
5. Income taxes
The Company utilizes the liability method of accounting for income taxes.
Under the liability method, deferred income taxes and liabilities are
provided
(Continued)
30
<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 as measured by the currently enacted tax rates in
effect for the years in which these differences are expected to reverse.
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.
10. Loss per share
Loss per common and common equivalent share is computed based on the
weighted average number of common and dilutive common equivalent shares
outstanding. Outstanding common stock warrants and options were excluded
from the weighted average number of shares of common stock as they would
decrease loss per share.
(Continued)
31
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
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 accounts and reserves for obsolete inventory.
12. Stock Options
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
interpretations in accounting for its employee stock options rather than
adopting the alternative fair value accounting provided for under
Financial Accounting Standards Boards ("FASB") FASB Statement No. 123,
Accounting for Stock Based Compensation (SFAS 123).
13. Recently Issued Accounting Pronouncements Not Yet Adopted
Earnings per share
In February 1997, the FASB issued Statement of Financial Accounting
Standards No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 eliminates
the presentation of primary earnings per share (EPS) and requires the
presentation of basic EPS, which includes no common stock equivalents and
thus no dilution. The statement also eliminates the modified treasury
stock method of computing potential common shares. This statement is
effective for financial statements issued for periods ending after
December 15, 1997.
(Continued)
32
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
13. Recently Issued Accounting Pronouncements Not Yet Adopted-Continued
Capital structure
Also in February 1997, the FASB issued Statement of Financial Accounting
Standards No. 129 (SFAS 129), "Disclosure of Information about Capital
Structure." SFAS 129 consolidates in one statement disclosures about the
rights of outstanding securities and changes in the number of equity
securities during the period, disclosures about liquidation preferences
and preferred stock, and disclosures about redemption requirements of
certain redeemable stock. Disclosures were previously included in APB
Opinion 10, APB Opinion 15 and SFAS 47. The statement does not change the
required disclosures about capital structure for entities currently
subject to the requirements of APB Opinion 10 and 15 and SFAS 47. SFAS
129 is effective for financial statements for interim and annual periods
ending after December 15, 1997.
Comprehensive income
In September 1997, the FASB issued Statement of Financial Accounting
Standards No. 130 (SFAS 130), "Reporting Comprehensive Income." SFAS 130
requires entities presenting a complete set of financial statements to
include details of comprehensive income that arise in the reporting
period. Comprehensive income consists of net earnings or loss for the
current period and other comprehensive income, which consists of revenue,
expenses, gains, and losses, that bypass the statement of operations and
are reported directly in a separate component of equity. Other
comprehensive income includes, for example foreign currency items,
minimum pension liability adjustments, and unrealized gains and losses of
certain investment securities. SFAS 130 requires that components of
comprehensive income be reported in a financial statement that is
displayed with the same prominence as other financial statements. This
statement is effective for fiscal years beginning after December 15, 1997
and requires restatement of prior period financial statements presented
for comparative purposes.
Disclosure of segments
Also in September 1997, the FASB issued Statement of Financial Accounting
Standards No. 131 (SFAS 131), "Disclosures about Segments of the
Enterprise and Related Information." This statement requires an entity to
report
(Continued)
33
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES - CONTINUED
13. Recently Issued Accounting Pronouncements Not Yet Adopted-Continued
Disclosure of segments - Continued
financial and descriptive information about their reportable operating
segments. An operating segment is a component of an entity for which
financial information is developed and evaluated by the entity's chief
operating decision maker to assess performance and to make decisions
about resource allocation. Entities are required to report segment profit
or loss, certain specific revenue and expense items and segment assets
based on financial information used internally for evaluating performance
and allocating resources. This statement is effective for fiscal years
beginning after December 15, 1997 and requires restatement of prior
period financial statements presented for comparative purposes.
Management does not believe that the adoption of SFAS 128, SFAS 129, SFAS
130 and SFAS 131 will have a material effect on the Company's financial
statements.
34
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE B - ACQUISITIONS/DISPOSITIONS
PowerStream Technology
Effective April 1, 1997, the Company acquired substantially all of the
assets, and assumed certain liabilities and the operations, of
PowerStream Technology, Inc. ("PowerStream") by issuing 150,000 shares of
common stock valued at $1.50 per share. PowerStream is a research and
development company specializing in power recharging devices and power
supply products. In addition the Company entered into a 5 year Employment
Agreement with Danielli Reni, the President of PowerStream. The Company
believes that Mr. Reni is an expert in the area of power recharging
devices and power supply products. 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 and the excess purchase price over fair value of net tangible
assets acquired of $749,114 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.
InCirT Technology
Effective April 1, 1996, the Company acquired substantially all of the
assets, and assume 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
valued at $5.3988 per share. In addition, during fiscal year 1997 the
Company issued 55,568 shares of common stock to the Cerplex Group, Inc.
for collections 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. 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.
(Continued)
35
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE B - ACQUISITIONS/DISPOSALS - CONTINUED
MOTO-SAT
Effective January 1, 1996 the Company acquired selected net assets and
the operations of Overland Communication, Inc. dba MOTO-SAT by assuming
that company's net debt of $107,791 and offering additional stock
contingent upon achievement of performance milestones. As of fiscal year
end 1997 no additional shares were required to be issued. MOTO- SAT is a
manufacturer of satellite receiver systems for recreational vehicles and
boats. 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.
SALE OF SAN JOSE DIVISION
Effective November 1, 1996, the Company sold substantially all of the net
assets used by the San Jose Division ("Division") to Touche Electronics,
Inc. ("Touche"), a subsidiary of TMCI Electronics, Inc. ("TMCI"). The
sales price for the net assets of the 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 had the right to receive $700,000 in contingent
earnouts for a potential total sale price of $4,000,000. The Company
originally purchased the Division in March 1995 for approximately
$2,100,000. As part of the transaction, Touche and TMCI also assumed
certain liabilities associated with the operations of the Division.
InFebruary 1997, TMCI filed a notice of demand for rescission of the
purchase and sale of the Division. The Company filed a counterclaim
against TMCI in May, 1997, alleging that TMCI had defaulted in its
obligations under the promissory notes. The disputes were subsequently
submitted to arbitration in
(Continued)
36
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE B - ACQUISITIONS/DISPOSALS - CONTINUED
August, 1997. In December, 1997, the Company and TMCI entered into a
Settlement and Release Agreement (the "Settlement Agreement"), releasing
each other of any and all respective claims the parties may have had
against each other. The Settlement Agreement provided, in part, that TMCI
issue to the Company, 137,390 shares of TMCI's common stock (the
"Settlement Stock"). The Settlement Stock is guaranteed to have a minimum
value of $7.4532 per share. In the event the Settlement Stock is sold at
less than that amount, TMCI is obligated to pay to the Company the
difference between the sales price and the guaranteed value. The conclusion
of the disputes, will allow the Company and TMCI to continue their joint
sales and marketing arrangements.
In addition the Company entered into a long-term building lease agreement
several months prior to the sale of the San Jose Division with the
intention of relocating the operations. This lease was not sold as part of
the above sale and required a fee of $211,226 for abandonment of the lease.
Such fee was recognized during fiscal year 1997.
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, medical 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 1997 and 1996 to the largest customers
(representing over 10% of sales) are as follows:
1997 1996
---- ----
Customer A 15% 13%
Customer B 14% 5%
Customer C 12% 16%
At September 30, 1997, the Company had accounts receivable due from these
three largest OEMs representing about 50% of trade receivables
($1,123,810) of which less than $150,000 was over 90 days. Remaining
trade accounts receivable at September 30, 1997, were due from a variety
of other customers under normal credit terms.
37
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE D - NOTES RECEIVABLE
<TABLE>
<CAPTION>
1997 1996
----------- ----------
Notes receivable consist of the following:
<S> <C> <C>
10% note receivable from a company, due in monthly payments of $1,500
including interest, collateralized by inventory, accounts
receivable, machinery, and
equipment $35,775 $37,630
10% note receivable from a company, due in monthly payments of $ 1,297
including interest, collateralized by inventory, accounts
receivable, machinery, and
equipment 8,124 13,612
12% notes receivable from two companies,
due in monthly payments aggregating
$1,000 including interest 5,882 5,882
Note receivable from a company at prime plus .5% ( 9% at September 30,
1997), due in monthly payments of $10,417 including interest,
with a balloon payment on October 31, 1999, secured by security
agreement and the personal guaranty of the owner and principal
stockholder of the
company (See Notes B and O ) 500,000 -
Note receivable from a company at prime plus .5% ( 9% at September 30,
1997), due in monthly payments of $16,667 including interest,
secured by security agreement and the personal guaranty of the
owner and principal stockholder of the
company (See Note B and O ) 400,000 -
10% note receivable from an officer/stock-
holder due in monthly payments of
$1,500 including interest 14,749 -
------------- ------------
964,530 57,124
Less current maturities 357,006 37,494
------------- -------------
$ 607,524 $ 19,630
============= ============
</TABLE>
38
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE E - INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------------- --------------
<S> <C> <C>
Raw materials (net of allowance) $ 2,531,235 $ 3,780,800
Work-in-process 736,928 1,830,891
Finished goods 87,708 586,701
------------ -------------
$3,355,871 $6,198,392
========== ==========
</TABLE>
NOTE F - NOTES PAYABLE
Notes payable consist of trade payables to vendors converted to notes
totaling $641,505, payable in semi-monthly amounts of approximately
$147,000, with interest at 9.5% per annum, due on or before January 31,
1998.
NOTE G - BRIDGE LOAN
At September 30, 1997, the Company had one note payable to an individual
for $100,000 with interest at 8% per annum due, which was due and paid in
November 1997.
NOTE H - CREDIT FACILITY
On September 4, 1997, the Company completed a new 4 year financing
agreement with a bank for a $6,300,000. The agreement consists of a
$5,000,000 revolving credit line and two term loans for $800,000 ("Loan
A") and $500,000 ("Loan B") respectively. The revolving credit loan is at
prime plus 1.75% (10.25% at September 30, 1997) and is collateralized by
accounts receivable and inventory. Loan A is at a fixed rate of 10.16%
and is collateralized by machinery and equipment. Loan B is at a fixed
rate of 10.32% and is collateralized by other assets of the Company. Loan
B was funded subsequent to year end. This agreement requires that the
Company maintain certain financial ratios, meet specified minimum levels
of earnings and net worth; restricts employee advances, capital
expenditures, compensation, and additional indebtedness; and restricts
the payment of dividends. This new line of credit replaced the previous
$6,000,000
(Continued)
39
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE H - CREDIT FACILITY - CONTINUED
revolving line of credit. The Company has borrowed $2,237,690 under the
new line of credit at September 30, 1997 (the Company still has
$2,762,310 available under the line). The Company was in compliance with
the financial covenants as of September 30, 1997.
At September 30, 1996, the Company had a $6,000,000 revolving line of
credit with a bank with interest at 2.5% percent over the prime rate
(10.75% at September 30, 1996) payable monthly. The line of credit was
collateralized by accounts receivable, inventory, property and equipment.
This agreement required that the Company maintain certain financial
ratios and meet specified minimum levels of total assets, earnings and
restrictions on the payments of dividends. The Company had borrowed
$4,969,864 under the line of credit at September 30, 1996. This line of
credit, which was collateralized by accounts receivable, inventories,
property and equipment was paid in full during fiscal year 1997.
40
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE I - LONG-TERM OBLIGATIONS
Long-term obligations consist of the following:
<TABLE>
<CAPTION>
1997 1996
--------- ------------
<S> <C> <C>
Note to an individual with interest imputed
at 10% per annum, payable in monthly
payments of $2,500. $ 100,604 $ 116,023
10.16% note to a financial institution payable in 48 monthly
installments of $16,667 plus interest, maturing on August 1,
2001, collateralized by substantially all of the
Company's property and equipment 800,000 -
11.25% note to a financial institution payable in monthly
installments of $375, including interest, collateralized by
personal residence
of the president of the PowerSteam Division 31,653 -
Non interest bearing note
to a parts vendor, payable
in monthly installments of
$1,000, maturing on July 1, 1998, 12,720 -
---------- ------------
944,977 116,023
Less current maturities 263,255 19,265
--------- ---------
$ 681,722 $ 96,758
========= ========
</TABLE>
(Continued)
41
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE I - LONG-TERM OBLIGATIONS - CONTINUED
Maturities of long-term obligations are as follows:
Year ending
September 30,
1998 $ 263,255
1999 223,515
2000 225,976
2001 225,997
2002 6,234
thereafter -
------------
$944,977
NOTE J - 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 2000. The minimum future rental commitments under
operating leases are as follows:
<TABLE>
<CAPTION>
Year ending
September 30, Facilities Equipment Total
<S> <C> <C> <C> <C>
1998 $659,622 $196,232 $855,854
1999 522,030 180,143 702,173
2000 510,124 3,749 513,873
2001 138,144 - 138,144
Thereafter - - -
------------- ----------- ------------
$1,829,920 $380,124 $2,210,044
========== ======== ==========
</TABLE>
The leases generally provide that property taxes, insurance and
maintenance expenses are obligations of the Company. It is expected that
in the normal course of business, operating leases that expire will be
renewed or replaced by leases on other properties. Rental expense for all
operating leases was $ 570,486 and $ 402,873 for the years ended
September 30, 1997 and 1996, respectively.
(Continued)
42
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE J - LEASES - CONTINUED
2. Capital leases
Maturities of capital lease obligations are as follows:
Year ending
September 30,
1998 $ 78,115
1999 55,982
2000 20,125
Thereafter -
Total minimum lease payments 154,222
Less amount representing interest 16,869
Present value of net minimum lease
payments 137,353
Less current portion 66,464
$ 70,889
Included in property and equipment is $307,657 of equipment under capital
leases at September 30, 1997. The related accumulated amortization is
$88,128.
NOTE K - INCOME TAXES (BENEFIT)
Income tax expense (benefit) consists of the following:
1997 1996
------------- ------------
Current
Federal $ (36,067) $ (226,000)
State (5,306) (37,714)
------------ ----------
(41,373) (263,714)
----------- ---------
Deferred
Federal (931,233) (152,100)
State (136,994) (24,800)
-------------- ----------
(1,068,227) (176,900)
---------------- -----------
Income tax (benefit) $ (1,109,600) $(440,614)
============= ==========
(Continued)
43
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE K - INCOME TAXES (BENEFIT) - CONTINUED
Reconciliation of income taxes (benefit) computed at the federal
statutory rate of 34% is as follows:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Federal income taxes at statutory rate $ (967,300) $ (402,370)
State income taxes, net of federal tax benefit (142,300) (38,244)
------------ -------------
$ (1,109,600) $ (440,614)
============= =============
Deferred tax assets and liabilities consist of the following:
1997 1996
------------- -------------
Deferred tax assets (liabilities)
Accumulated depreciation $(165,755) $(225,800)
Net operating loss 1,392,658 284,100
Reserve for inventory obsolescence 71,576 92,100
Allowance for doubtful accounts 53,453 108,900
Reserve for warranties 10,182 14,200
Reserve for vacation 6,113 26,500
----------- -----------
Net deferred tax asset (liability) $ 1,368,227 $ 300,000
=========== ==========
</TABLE>
NOTE L - STOCK OPTION PLAN
The Company has a Stock Option Plan (the Plan). The Plan provides for the
granting of both Incentive Stock Options (ISOs) or Non-Qualified Options (NQOs)
to purchase 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 the date of the grant. Options may be granted under the 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.
The Company also issues warrants in conjunction with various transactions with
third parties.
(Continued)
44
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE L - STOCK OPTION PLAN- CONTINUED
The Company has adopted only the disclosure provisions of FASB No. 123,
"Accounting for Stock- Based Compensation" (FAS 123). It applies APB Opinion No.
25 "Accounting for Stock Issued to Employees," and related Interpretation in
accounting for its plans and does not recognize compensation expense for its
stock-based compensation plans other than for restricted stock. If the Company
had elected to recognize compensation expense based upon the fair value at the
grant date for awards under these plans consistent with the methodology
prescribed by FAS 123, the Company's net income and earnings per share would be
reduced to the pro forma amounts indicated below:
Fiscal Year Ended
September 30,
1997 1996
------------ ------------
Net Loss
As reported $(1,735,483) $ (709,010)
Pro forma (3,185,595) (2,224,315)
Loss per common share
As reported $ (0.54) $ (0.26)
Pro forma $ (0.99) (0.82)
The fair value of these options and warrants was estimated at the date of grant
using the Black-Scholes option-pricing model with the following weighted-average
assumptions for 1997 and 1996, respectively: expected volatility of 90.06 and
68.08 percent; risk-free interest rate of 6.33 and 6.35 percent; an expected
life equal to the actual life for both periods. The weighted-average fair value
of options and warrants granted was $0.83 for both 1997 and 1996.
The following is a summary of the activity relating to options and warrants
through September 30, 1997:
(Continued)
45
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE L - STOCK OPTION PLAN- CONTINUED
<TABLE>
<CAPTION>
Weighted
Warrants and Exercise average
Stock Options price exercise price
-------------- -------------- ---------------
<S> <C> <C> <C>
Outstanding at October 1, 1995 - - -
Granted 3,110,000 $ 6.00 - 6.50 $ 6.46
Canceled 5,000 6.00 6.00
Exercised - - -
------------
Outstanding at
September 30, 1996 3,105,000 6.00 - 6.50 6.46
Granted 3,498,000 1.38 - 3.00 1.87
Canceled 154,000 6.00 6.00
Exercised 550,000 1.75 - 2.00 1.88
------------
Outstanding at
September 30, 1997 5,899,000 1.38 - 6.50 4.18
============
Exercisable at
September 30, 1997 5,530,700 $1.38 - 6.50 $ 4.46
============
</TABLE>
The following table summarizes information concerning currently outstanding and
exercisable options and warrants:
Options and Warrants Outstanding
<TABLE>
<CAPTION>
Weighted-Average
Remaining
Range of Number Contractual Life Weighted-Average
Exercise Prices Outstanding (Years) Exercise Price
- - --------------- ----------- ------------------ --------------
<S> <C> <C> <C>
$1.38 960,500 8.2 $ 1.38
2.00 - 2.75 1,950,000 7.5 2.11
3.00 37,500 4.7 3.00
6.00 - 6.50 2,951,000 3.2 6.48
---------
5,899,000
</TABLE>
(Continued)
46
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE L - STOCK OPTION PLAN- CONTINUED
Options and Warrants Exercisable
<TABLE>
<CAPTION>
Weighted-Average
Remaining
Range of Number Contractual Life Weighted-Average
Exercise Prices Outstanding (Years) Exercise Price
- - --------------- ----------- ------------------ --------------
<S> <C> <C> <C>
$1.38 725,500 9.4 $ 1.38
2.00 - 2.75 1,935,000 7.6 2.11
3.00 - - -
6.00 - 6.50 2,870,200 3.2 6.50
---------
5,530,700
</TABLE>
NOTE M - COMMITMENTS AND CONTINGENCIES
1. Employment agreements
The Company has entered into agreements with seven key employees and
officers which provide for annual salaries and incentive bonuses.
Incentive bonuses are calculated as a percentage of gross profits and/or
sales of the Company.
Annual salaries under these employment agreements, in the aggregate, are
as follows:
Year ending
September 30,
1998 $ 704,600
1999 651,850
2000 578,000
2001 367,200
2002 37,400
Thereafter -
---------------
$2,339,050
(Continued)
47
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE M - COMMITMENTS AND CONTINGENCIES - CONTINUED
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 N - STOCK TRANSACTIONS
1. 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.
2. 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. 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 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 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.
(Continued)
48
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE N - STOCK TRANSACTIONS - CONTINUED
3. Stock issued in payment of notes
In August 1997, the Company issued 88,888 shares of common stock in
payment of notes payable in the amount of $104,000.
4. Stock issued for exercised warrants
In September 1997, the Company issued 745,000 shares of common stock
associated with the exercise of certain warrants.
NOTE O - SUBSEQUENT EVENTS
1. Issuance of Debentures
On October 22, 1997, the Board of Directors of the Company approved the
issuance of up to $1,500,000 of 3% convertible debentures (the
"Debentures") with a maximum term of 24 months. The Debentures will
mature, unless earlier converted by the holders, into shares of common
stock of the Company. The Company has agreed to file a registration
statement with the United States Securities and Exchange Commission with
respect to the Debentures.
The Debentures are convertible by the holders thereof into the number of
shares of common stock equal to the face amount of the Debentures being
converted divided by the lesser of (i) eighty percent (80%) of the
closing bid price of the Company's common stock as reported on the NASDAQ
Small Cap market on the day of conversion, or (ii) $2.75. The Debentures
may be converted in three equal installments beginning on the earlier of
(i) the 75th day of their issuance, and continuing through the 135th day
of their issuance, or (ii) the day following the effective date of the
Registration Statement, through the 60th day following the effective date
of the Registration Statement. The Company may cause the Debentures to be
converted into shares of common stock after the 110th day following the
effective date of the Registration Statement, if the common stock has
traded at or above $5.50 per share for twenty consecutive days.
2. Restructure of notes receivable
On November 1, 1996, the Company sold substantially all of the net assets
used by the San Jose Division (the "Division") to Touche Electronics,
Inc. ("Touche"), a subsidiary of TMCI Electronics, Inc., ("TMCI"). The
sales price for the net assets of the Division was $3,300,000, consisting
of $2,000,000 in cash, $900,000 in promissory notes and 53,669 shares of
TMCI's common stock, with an agreed upon guaranteed value of $400,000. In
addition, the Company had the right to receive $700,000 in contingent
earnouts for a potential (but not guaranteed) total sales price of
$4,000,000. The Company originally purchased the Division in March 1995,
for approximately $2,100,000. As part of the transaction, Touche and TMCI
also agreed to assume certain liabilities associated with the operations
of the Division.
In February 1997, TMCI filed a notice of demand for rescission of the
purchase and sale of the Division. The Company filed a counterclaim
against TMCI in May 1997, alleging that TMCI had defaulted in its
obligations under the promissory notes. The disputes were subsequently
submitted to arbitration in August 1997.
(continued)
49
<PAGE>
Pen Interconnect, Inc.
NOTES TO FINANCIAL STATEMENTS
NOTE O - SUBSEQUENT EVENTS - CONTINUED
2. Restructure of notes receivable - continued
In December 1997, the Company and TMCI entered into a Settlement and
Release Agreement (the "Settlement Agreement"), releasing each other of
any and all respective claims the parties may have had against each
other. The Settlement Agreement provided, in part, that TMCI issue to the
Company, 137,390 shares of TMCI's common stock to replace the $900,000 of
promissory notes and related accrued interest payable by TMCI to the
Company. The Settlement Stock is guaranteed to have a minimum value of
$7.4532 per share. In the event the Settlement Stock is sold by the
Company at less than that amount, TMCI is obligated to pay the Company
the difference between the sales price and the guaranteed value. The
conclusion of the disputes, will allow the Company and TMCI to continue
their joint sales and marketing arrangements.
3. Additional Loan from Credit Facility
On December 8, 1997, the Company obtained the second term loan in the
principal amount of $500,000, which bears interest at a fixed rate of
10.32% per annum (Note H). The loan is payable in 36 monthly installments
of $10,417, including interest, with payments to begin in September 1998.
50
<PAGE>
Exhibit 10.13
LOAN AND SECURITY AGREEMENT
PEN INTERCONNECT, INC.
Borrower
2351 South 2300 West
Salt Lake City, Utah 84119
Address
87-0430260
Borrower Fed ID Tax No.
$6,300,000
Credit Limit
September 4, 1997
CORPORATE FINANCE
file=cfla0597
Revised May 1997
51
<PAGE>
THIS LOAN AND SECURITY AGREEMENT (collectively with the Schedule to Loan
Agreement (the "Schedule") attached hereto, the "Agreement") dated the date set
forth on the cover page, is entered into by and between the borrower named on
the cover page (jointly and severally, the "Borrower"), whose address is set
forth on the cover page and FINOVA Capital Corporation ("FINOVA"), whose address
is 355 South Grand Avenue, Los Angeles, California 90071.
<PAGE>
1. DEFINITIONS.
1.1 Defined Terms. As used in this Agreement, the following terms have
the definitions set forth below:
"ADA" has the meaning set forth in Section 4.1(aa) hereof.
"Additional Sums" has the meaning set forth in Section 2.9(a) hereof.
"Affiliate" means any Person controlling, controlled by or under common
control with Borrower. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause direction of
the management and policies of any Person, whether through ownership of common
or preferred stock or other equity interests, by contract or otherwise. Without
limiting the generality of the foregoing, each of the following shall be an
Affiliate: any officer, director, employee or other agent of Borrower, any
shareholder, member or subsidiary of Borrower, and any other Person with whom or
which Borrower has common shareholders, officers or directors.
"Agreement" has the meaning set forth in the preamble.
"Applicable Usury Law" has the meaning set forth in Section 2.9(b)
hereof.
"Assignment of Life Insurance" has the meaning set forth in Section
4.1(u) hereof.
"Blocked Account" has the meaning set forth in Section 2.10(c) hereof.
"Business Day" means any day on which commercial banks in both Los
Angeles, California and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities
incurred for the acquisition of any fixed asset or improvement, replacement,
substitution or addition thereto which has a useful life of more than one year
and including, without limitation, those arising in connection with Capital
Leases.
"Capital Lease" means any lease of property by Borrower that, in
accordance with GAAP, should be capitalized for financial reporting purposes and
reflected as a liability on the balance sheet of Borrower.
"Closing Fee" has the meaning set forth in the Schedule.
"Closing Date" means the date of the initial advance made by FINOVA
pursuant to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in
the State of Arizona from time to time.
"Collateral" has the meaning set forth in Section 3.1 hereof.
"Collateral Monitoring Fee" has the meaning set forth in the Schedule.
"Current Assets" at any date means the amount at which the current
assets of Borrower would be shown on a balance sheet of Borrower as at such
date, prepared in accordance with GAAP, provided that amounts due from
Affiliates and investments in Affiliates shall be excluded therefrom.
"Current Liabilities" at any date means the amount at which the current
liabilities of Borrower would be shown on a balance sheet of Borrower as at such
date, prepared in accordance with GAAP.
"Deposit Accounts" has the meaning set forth in Section 9105 of the
Code.
"Dominion Account" has the meaning set forth in Section 2.10(c) hereof.
<PAGE>
"Earnings Before Interest, Taxes, Depreciation and Amortization" for
any fiscal period of Borrower means the net income of Borrower for such fiscal
period, plus interest expense, depreciation and amortization and provision for
income taxes for such fiscal period, and minus non-recurring miscellaneous
income and expenses, all calculated in accordance with GAAP.
"Eligible Inventory" means Inventory which FINOVA, in its Permitted
Discretion, deems Eligible Inventory, based on such considerations as FINOVA may
from time to time deem appropriate. Without limiting the generality of the
foregoing, no Inventory shall be Eligible Inventory unless, in FINOVA's
Permitted Discretion, such Inventory (i) consists of raw materials and finished
goods, in good, new and salable condition which are not obsolete or
unmerchantable, and are not comprised of work in process, packaging materials or
supplies; (ii) meets all standards imposed by any governmental agency or
authority; (iii) conforms in all respects to the warranties and representations
set forth herein; (iv) is at all times subject to FINOVA's duly perfected, first
priority security interest; and (v) is situated at Borrower's facility at Salt
Lake City, Utah or Borrower's facility at Tustin, California.
"Eligible Receivables" means Receivables arising in the ordinary course
of Borrower's business from the sale of goods or rendition of services, which
FINOVA, in its Permitted Discretion, shall deem eligible based on such
considerations as FINOVA may from time to time deem appropriate. Without
limiting the foregoing, a Receivable shall not be deemed to be an Eligible
Receivable if (i) the account debtor has failed to pay the Receivable within a
period of ninety (90) days after invoice date, to the extent of any amount
remaining unpaid after such period; (ii) the account debtor has failed to pay
more than 25% of all outstanding Receivables owed by it to Borrower within
ninety (90) days after invoice date; (iii) the account debtor is an Affiliate of
Borrower; (iv) the goods relating thereto are placed on consignment, guaranteed
sale, "bill and hold," "COD" or other terms pursuant to which payment by the
account debtor may be conditional; (v) the account debtor is not located in the
United States, unless the Receivable is supported by a letter of credit or other
form of guaranty or security, in each case in form and substance satisfactory to
FINOVA; (vi) the account debtor is the United States or any department, agency
or instrumentality thereof or any State, city or municipality of the United
States; (vii) Borrower is or may become liable to the account debtor for goods
sold or services rendered by the account debtor to Borrower; (viii) the account
debtor's total obligations to Borrower exceed 15% of all Eligible Receivables
(or, in the case of Triconex Corp., 30% of all Eligible Receivables), to the
extent of such excess; (ix) the account debtor disputes liability or makes any
claim with respect thereto (up to the amount of such liability or claim), or is
subject to any insolvency or bankruptcy proceeding, or becomes insolvent, fails
or goes out of a material portion of its business; (x) the amount thereof
consists of late charges or finance charges; (xi) the amount thereof consists of
a credit balance more than ninety (90) days past due; (xii) the face amount
thereof exceeds $25,000, unless accompanied by evidence of shipment of the goods
relating thereto satisfactory to FINOVA in its Permitted Discretion; (xiii) the
invoice constitutes a progress billing on a project not yet completed, except
that the final billing at such time as the matter has been completed and
delivered to the customer may be deemed an Eligible Receivable; or (xiv) the
amount thereof is not yet represented by an invoice or bill issued in the name
of the applicable account debtor.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any
<PAGE>
interest in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"ERISA" means the Employment Retirement Income Security Act of 1974,
as amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not
incorporated and whether or not foreign) which is or may hereafter become a
member of a group of which Borrower is a member and which is treated as a single
employer under ERISA Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section 7.1 of
this Agreement.
"Examination Fee" has the meaning set forth in the Schedule.
"Excess Availability" means, as of the date of determination thereof,
the amount by which the average daily total principal balance of the Revolving
Credit Loans facility which Borrower would be permitted to have outstanding over
the prior 30 days, based on the formulas and reserves set forth in the Schedule,
exceeds the sum of the Receivable Loans and the Inventory Loans (if any) then
actually outstanding, such excess then being reduced by an amount necessary to
provide for the payment of all accounts payable of Borrower which are more than
30 days past due date and all book overdrafts.
"Excess Cash Flow" means Operating Cash Flow/Permitted less each of the
following (to the extent permitted hereunder): Total Contractual Debt
Service.
"Facility Fee" has the meaning set forth in the Schedule.
"FINOVA Affiliate" has the meaning set forth in Section 9.22 hereof.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time as set forth in the opinions
and pronouncements of the Accounting Principles Board and the American Institute
of Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Boards which are applicable to the circumstances
as of the date of determination consistently applied, except that, for the
financial covenants set forth in this Agreement, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to Lender
prior to the date hereof.
"General Intangibles" means all general intangibles of Borrower,
whether now owned or hereafter created or acquired by Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, inventions, designs, drawings, blueprints,
Trademarks, Licenses and Patents, names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against FINOVA, rights to
purchase or sell real or personal property, rights as a licensor or licensee of
any kind, royalties, telephone numbers, proprietary information, purchase
orders, and all insurance policies and claims (including without limitation
credit, liability, property and other insurance) tax refunds and claims,
computer programs, discs, tapes and tape files, claims under guaranties,
security interests or other security held by or granted to Borrower to secure
payment of any of the Receivables by an account debtor, all rights to
indemnification and all other intangible property of every kind and nature
(other than Receivables).
<PAGE>
"Guarantor(s)" has the meaning set forth in the Schedule.
"Indebtedness" means all of Borrower's present and future obligations,
liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred, acquired, owing or arising, whether under
written or oral agreement, operation of law or otherwise, and includes, without
limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of
any Person secured by a lien, claim, encumbrance or security interest upon
property owned by Borrower, even though Borrower has not assumed or become
liable therefor, (iii) obligations and liabilities created or arising under any
lease (including Capital Leases) or conditional sales contract or other title
retention agreement with respect to property used or acquired by Borrower, even
though the rights and remedies of the lessor, seller or lender are limited to
repossession, (iv) all unfunded pension fund obligations and liabilities and (v)
deferred taxes.
"Initial Term" has the meaning set forth on the Schedule.
"Insurance Collateral" has the meaning set forth in Section 4.1(u)
hereof.
"Inventory" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease, all raw materials, work
in process, finished goods and materials and supplies of any kind, nature or
description which are or might be used or consumed in Borrower's business or
used in connection with the manufacture, packing, shipping, advertising, selling
or finishing of such goods, merchandise or other personal property, and all
documents of title or other documents representing them.
"Inventory Loans" has the meaning set forth in the Schedule.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Life Insurance Policy" has the meaning set forth in Section 4.1(u)
hereof.
"Loans" has the meaning set forth in Section 2.2 hereof.
"Loan Documents" means, collectively, this Agreement, any note or notes
executed by Borrower and payable to FINOVA, and any other present or future
agreement entered into in connection with this Agreement, together with all
alterations, amendments, changes, extensions, modifications, refinancings,
refundings, renewals, replacements, restatements, or supplements, of or to any
of the foregoing.
"Loan Party" means Borrower, each Guarantor, each Subordinating
Creditor and each other party (other than FINOVA) to any Loan Document.
"Loan Reserves" means, as of any date of determination, such amounts as
FINOVA may from time to time establish and revise in good faith reducing the
amount of Revolving Credit Loans and Letters of Credit which would otherwise be
available to Borrower under the lending formula(s) provided in the Schedule: (a)
to reflect events, conditions, contingencies or risks which, as determined by
FINOVA in good faith, do or may affect either (i) the Collateral or any other
property which is security for the Obligations or its value, (ii) the assets,
business or prospects of Borrower or any Guarantor or (iii) the security
interests and other rights of FINOVA in the Collateral (including the
enforceability, perfection and priority thereof) or (b) to reflect FINOVA's good
faith belief that any collateral report or financial information furnished by or
on behalf of Borrower or any Guarantor to FINOVA is or may have been incomplete,
inaccurate or misleading in any material
<PAGE>
respect or (c) in respect of any state of facts which FINOVA determines in good
faith constitutes an Event of Default or may, with notice or passage of time or
both, constitute an Event of Default."
"Loan Year" means each twelve month period commencing on the Closing
Date.
"Maximum Interest Rate" has the meaning set forth in Section 2.9(c)
hereof.
"Minimum Interest Charge" has the meaning set forth in the Schedule.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA
Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of
Borrower or any ERISA Affiliate.
"Net Worth" at any date means the Borrower's net worth as determined in
accordance with GAAP.
"Obligations" means all present and future loans, advances, debts,
liabilities, obligations, covenants, duties and indebtedness at any time owing
by Borrower to FINOVA, whether evidenced by this Agreement, any note or other
instrument or document, whether arising from an extension of credit, opening of
a letter of credit, banker's acceptance, loan, guaranty, indemnification or
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment and any participation by FINOVA in Borrower's debts owing
to others), absolute or contingent, due or to become due, including, without
limitation, all interest, charges, expenses, fees, attorney's fees, expert
witness fees, Examination Fee, letter of credit fees, Collateral Monitoring Fee,
Closing Fee, Facility Fee, Termination Fee, Minimum Interest Charge and any
other sums chargeable to Borrower hereunder or under any other agreement with
FINOVA.
"Operating Cash Flow/Actual" means, for any period, Borrower's net
income or loss (excluding the effect of any extraordinary gains or losses),
determined in accordance with GAAP, plus or minus each of the following items,
to the extent deducted from or added to the revenues of Borrower in the
calculation of net income or loss: (i) depreciation; (ii) amortization and other
non-cash charges; (iii) interest expense paid or accrued; (iv) total federal and
state income tax expense determined as the accrued liability of Borrower in
respect of such period, regardless of what portion of such expense has actually
been paid by Borrower during such period, and after deduction for each of (a)
federal and state income taxes, to the extent actually paid during such period;
(b) any non-cash income; and (c) all actual Capital Expenditures made during
such period and not financed.
"Operating Cash Flow/Permitted" means, for any period, Borrower's net
income or loss (excluding the effect of any extraordinary gains or losses),
determined in accordance with GAAP, plus or minus each of the following items,
to the extent deducted from or added to the revenues of Borrower in the
calculation of net income or loss: (i) depreciation; (ii) amortization and other
non-cash charges; (iii) interest expense paid or accrued; (iv) total federal and
state income tax expense determined as the accrued liability of Borrower in
respect of such period, regardless of what portion of such expense has actually
been paid by Borrower during such period; after deduction for each of (a)
federal and state income taxes, to the extent actually paid during such period;
(b) any non-cash income; and (c) all permitted Capital Expenditures (without
regard to any waiver given by FINOVA with respect to any limitation on such
Capital Expenditures) actually made during such period and not financed.
"Overadvance" has the meaning set forth in Section 2.3.
"Overline" has the meaning set forth in Section 2.3.
<PAGE>
"PBGC" means the Pension Benefit Guarantee Corporation.
"Permitted Discretion" means FINOVA's judgment exercised in good faith
based upon its consideration of any factor which FINOVA believes in good faith:
(i) will or could adversely affect the value of any Collateral, the
enforceability or priority of FINOVA's liens thereon or the amount which FINOVA
would be likely to receive (after giving consideration to delays in payment and
costs of enforcement) in the liquidation of such Collateral; (ii) suggests that
any collateral report or financial information delivered to FINOVA by any Person
on behalf of the Borrower is incomplete, inaccurate or misleading in any
material respect; (iii) materially increases the likelihood of a bankruptcy,
reorganization or other insolvency proceeding involving the Borrower, any Loan
Party or any of the Collateral, or (iv) creates or reasonably could be expected
to create an Event of Default. In exercising such judgment, FINOVA may consider
such factors already included in or tested by the definition of Eligible
Receivables or Eligible Inventory, as well as any of the following: (i) the
financial and business climate of the Borrower's industry and general
macroeconomic conditions, (ii) changes in collection history and dilution with
respect to the Receivables, (iii) changes in demand for, and pricing of,
Inventory, (iv) changes in any concentration of risk with respect to Receivables
and/or Inventory, and (v) any other factors that change the credit risk of
lending to the Borrower on the security of the Receivables and Inventory. The
burden of establishing lack of good faith hereunder shall be on the Borrower.
"Permitted Encumbrance" means each of the liens, mortgages and other
security interests set forth on the Schedule.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, government, or any agency or political division thereof, or
any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for
employees of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
"Prepared Financials" means the balance sheets of Borrower as of the
date set forth in the Schedule in the section entitled 'Reporting Requirements'
, and as of each subsequent date on which audited balance sheets are delivered
to FINOVA from time to time hereunder, and the related statements of operations,
changes in stockholder's equity and changes in cash flow for the periods ended
on such dates.
"Prime Rate" has the meaning set forth in the Schedule.
"Prohibited Transaction" means any transaction described in Section 406
of ERISA which is not exempt by reason of Section 408 of ERISA, and any
transaction described in Section 4975(c) of the IRC which is not exempt by
reason of Section 4975(c)(2) of the IRC.
"Receivable Loans" has the meaning set forth on the Schedule.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), proceeds of any letters of
credit naming Borrower as beneficiary, contract rights, chattel paper,
instruments, documents and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, whether secured or
unsecured, all merchandise returned to or repossessed by Borrower, and all
rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured party.
"Renewal Term" has the meaning set forth on the Schedule.
<PAGE>
"Reportable Event" means a reportable event described in Section 4043
of ERISA or the regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, or a cessation of operations described in Section 4068(f)
of ERISA.
"Revolving Credit Loans" has the meaning set forth in the Schedule.
"Revolving Credit Limit" has the meaning set forth in the Schedule.
"Revolving Interest Rate" has the meaning set forth in the Schedule.
"Schedule" has the meaning set forth in the preamble.
"Senior Contractual Debt Service" means, for any period, the sum of
payments made or required to be made by Borrower during such period for (i)
interest and scheduled principal payments due on any Term Loans (excluding
voluntary prepayment and payments made from Borrower's Excess Cash Flow, as
required pursuant to the Schedule), and (ii) interest only payments due on the
Revolving Credit Loans facility plus the Collateral Monitoring Fee, the Facility
Fee and the Unused Line Fee (if any).
"Start Date" has the meaning set forth in the Schedule.
"Subordinated Debt" means liabilities of Borrower the repayment of
which is subordinated, to the payment and performance of the Obligations,
pursuant to a subordination agreement acceptable to FINOVA in its sole
discretion.
"Subordinating Creditor" has the meaning set forth in the Schedule.
"Term Loans" has the meaning set forth in the Schedule.
"Termination Fee" has the meaning set forth in Section 9.2(d) hereof.
"Total Contractual Debt Service" means, for any period, the sum of
payments made (or, as to clause (i) of this sentence, required to be made) by
Borrower during such period for (i) Senior Contractual Debt Service, (ii)
interest and scheduled principal payments due on any and all other Indebtedness
of Borrower, including without limitation the Subordinated Debt.
"Total Facility" has the meaning set forth in Section 2.1 hereof.
"Trademarks, Copyrights, Licenses and Patents" means all of Borrower's
right, title and interest in and to, whether now owned or hereafter acquired:
(i) trademarks, trademark registrations, trade names, trade name registrations,
and trademark or trade name applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, (d) all rights corresponding thereto throughout the
world, and (e) the goodwill of the business operated by Borrower connected with
and symbolized by any trademarks or trade names; (ii) copyrights, copyright
registrations and copyright applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, and (d) all rights corresponding thereto throughout the
world; (iii) license agreements, including without limitation such as are listed
on the Schedule attached hereto and made a part hereof, and the right to prepare
for sale, sell and advertise for sale any Inventory now or hereafter owned by
<PAGE>
Borrower and now or hereafter covered by such licenses; and (iv) patents and
patent applications, registered or pending, including without limitation such as
are listed on the Schedule attached hereto, together with all income, royalties,
shop rights, damages and payments thereto, the right to sue for infringements
thereof, and all rights thereto throughout the world and all reissues,
divisions, continuations, renewals, extensions and continuations- in-part
thereof.
"Unused Line Fee" has the meaning set forth in the Schedule.
1.2 Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with GAAP.
All other terms contained in this Agreement, unless otherwise indicated, shall
have the meanings provided by the Code, to the extent such terms are defined
therein.
2. LOANS; INTEREST RATE AND OTHER CHARGES.
2.1 Total Facility. Upon the terms and conditions set forth herein and
provided that no Event of Default or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall have
occurred and be continuing, FINOVA shall, upon Borrower's request, make advances
to Borrower from time to time in an aggregate outstanding principal amount not
to exceed the Total Facility amount (the "Total Facility") set forth on the
Schedule hereto, subject to deduction of reserves for accrued interest and such
other reserves as FINOVA deems proper from time to time, and less amounts FINOVA
may be obligated to pay in the future on behalf of Borrower. The Schedule is an
integral part of this Agreement and all references to "herein", "herewith" and
words of similar import shall for all purposes be deemed to include the
Schedule.
2.2 Loans. Advances under the Total Facility ("Loans" and individually,
a "Loan") shall be comprised of the amounts shown on the Schedule.
2.3 Overlines; Overadvances. If at any time or for any reason the
outstanding amount of advances (including all Letters of Credit) extended or
issued pursuant hereto exceeds any of the dollar limitations ("Overline") or
percentage limitations ("Overadvance") in the Schedule, then Borrower shall,
upon FINOVA's demand, immediately pay to FINOVA, in cash, the full amount of
such Overline or Overadvance which, at FINOVA's option, may be applied to reduce
the outstanding principal balance of the Loans and/or cash collateralize all or
any part of any outstanding Letters of Credit. Without limiting Borrower's
obligation to repay to FINOVA on demand the amount of any Overline or
Overadvance, Borrower agrees to pay FINOVA interest on the outstanding principal
amount of any Overline or Overadvance, on demand, at the rate set forth on the
Schedule and applicable to the Revolving Credit Loans.
2.4 Letters of Credit [Not applicable]
2.5 Loan Account. All advances made hereunder (including without
limitation all advances made by FINOVA under or in connection with any Letter of
Credit) shall be added to and deemed part of the Obligations when made. FINOVA
may from time to time charge all Obligations of Borrower to Borrower's loan
account with FINOVA.
2.6 Interest; Fees. Borrower shall pay FINOVA interest on the daily
outstanding balance of the Obligations at the per annum rate set forth on the
Schedule. Borrower shall also pay FINOVA the fees set forth on the Schedule.
2.7 Default Interest Rate. Upon the occurrence and during the
continuation of an Event of Default, Borrower shall pay FINOVA interest on the
daily outstanding balance of the Obligations and any L/C Fee at a rate per annum
which is two percent (2%) in excess of the rate which would otherwise be
applicable thereto pursuant to the Schedule.
2.8 Examination Fee. Borrower agrees to pay to FINOVA the Examination
Fee in the amount set forth on the Schedule in connection with each audit or
examination of Borrower performed by FINOVA prior to or after the date hereof.
Without limiting the generality of the foregoing, Borrower shall pay to FINOVA
an initial Examination Fee in an amount equal to the amount set forth on the
Schedule. Such initial Examination Fee shall be deemed fully earned at the time
of payment and due and payable upon the closing of this transaction, and
<PAGE>
shall be deducted from any good faith deposit paid by Borrower to FINOVA prior
to the date of this Agreement.
2.9 Excess Interest.
(a) The contracted for rate of interest of the loan contemplated
hereby, without limitation, shall consist of the following: (i) the interest
rate set forth on the Schedule, calculated and applied to the principal balance
of the Obligations in accordance with the provisions of this Agreement; (ii)
interest after an Event of Default, calculated and applied to the amount of the
Obligations in accordance with the provisions hereof; and (iii) all Additional
Sums (as herein defined), if any. Borrower agrees to pay an effective contracted
for rate of interest which is the sum of the above-referenced elements. The
Examination Fee, attorneys fees, expert witness fees, letter of credit fees,
collateral monitoring fees, closing fees, facility fees, Termination Fees,
Minimum Interest Charges, other charges, goods, things in action or any other
sums or things of value paid or payable by Borrower (collectively, the
"Additional Sums"), whether pursuant to this Agreement or any other documents or
instruments in any way pertaining to this lending transaction, or otherwise with
respect to this lending transaction, that under any applicable law may be deemed
to be interest with respect to this lending transaction, for the purpose of any
applicable law that may limit the maximum amount of interest to be charged with
respect to this lending transaction, shall be payable by Borrower as, and shall
be deemed to be, additional interest and for such purposes only, the agreed upon
and "contracted for rate of interest" of this lending transaction shall be
deemed to be increased by the rate of interest resulting from the inclusion of
the Additional Sums.
(b) It is the intent of the parties to comply with the usury laws of
the State of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed
that notwithstanding any provisions to the contrary in this Agreement, or in any
of the documents securing payment hereof or otherwise relating hereto, in no
event shall this Agreement or such documents require the payment or permit the
collection of interest in excess of the maximum contract rate permitted by the
Applicable Usury Law (the "Maximum Interest Rate"). In the event (a) any such
excess of interest otherwise would be contracted for, charged or received from
Borrower or otherwise in connection with the loan evidenced hereby, or (b) the
maturity of the Obligations is accelerated in whole or in part, or (c) all or
part of the Obligations shall be prepaid, so that under any of such
circumstances the amount of interest contracted for, shared or received in
connection with the loan evidenced hereby, would exceed the Maximum Interest
Rate, then in any such event (1) the provisions of this paragraph shall govern
and control, (2) neither Borrower nor any other Person now or hereafter liable
for the payment of the Obligations shall be obligated to pay the amount of such
interest to the extent that it is in excess of the Maximum Interest Rate, (3)
any such excess which may have been collected shall be either applied as a
credit against the then unpaid principal amount of the Obligations or refunded
to Borrower, at FINOVA's option, and (4) the effective rate of interest shall be
automatically reduced to the Maximum Interest Rate. It is further agreed,
without limiting the generality of the foregoing, that to the extent permitted
by the Applicable Usury Law; (x) all calculations of interest which are made for
the purpose of determining whether such rate would exceed the Maximum Interest
Rate shall be made by amortizing, prorating, allocating and spreading during the
period of the full stated term of the loan evidenced hereby, all interest at any
time contracted for, charged or received from Borrower or otherwise in
connection with such loan; and (y) in the event that the effective rate of
interest on the loan should at any time exceed the Maximum Interest Rate, such
excess interest that would otherwise have been collected had there been no
ceiling imposed by the Applicable Usury Law shall be paid to FINOVA from time to
time, if and when the effective interest rate on the loan otherwise falls below
the Maximum Interest Rate, to the extent that interest paid to the date of
calculation does not exceed the Maximum Interest Rate, until the entire amount
of interest which would otherwise have been collected had there been no ceiling
imposed by the Applicable Usury Law has been paid in full. Borrower further
agrees that should the Maximum Interest Rate be increased at any time hereafter
because of a change in the Applicable Usury Law, then to the extent not
prohibited by the Applicable Usury Law, such increases shall apply to all
indebtedness evidenced hereby regardless of when incurred; but, again to the
extent not prohibited by the Applicable Usury Law, should the Maximum Interest
Rate be decreased because of a change in the Applicable Usury Law, such
decreases shall not
<PAGE>
apply to the indebtedness evidenced hereby regardless of when incurred.
2.10 Principal Payments; Proceeds of Collateral.
(a) Principal Payments. Except where evidenced by notes or other
instruments issued or made by Borrower to FINOVA specifically containing payment
provisions which are in conflict with this Section 2.10 (in which event the
conflicting provisions of said notes or other instruments shall govern and
control), that portion of the Obligations consisting of principal payable on
account of Loans shall be payable by Borrower to FINOVA immediately upon the
earliest of (i) the receipt by FINOVA or Borrower of any proceeds of any of the
Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of
Default in consequence of which FINOVA elects to accelerate the maturity and
payment of such loans, or (iii) any termination of this Agreement pursuant to
Section 9.2 hereof; provided, however, that any Overadvance or Overline shall be
payable on demand pursuant to the provisions of Section 2.3 hereof.
(b) Collections. Until FINOVA notifies Borrower to the contrary,
Borrower may make collection of all Receivables for FINOVA and shall receive all
such payments or sums as trustee of FINOVA and immediately deliver all such
payments or sums to FINOVA in their original form, duly endorsed in blank or
cause the same to be deposited into a Blocked Account or Dominion Account.
FINOVA or its designee may, at any time, notify account debtors that the
Receivables have been assigned to FINOVA and of FINOVA's security interest
therein, and may collect the Receivables directly and charge the collection
costs and expenses to Borrower's loan account. Borrower agrees that, in
computing the charges under this Agreement, all items of payment shall be deemed
applied by FINOVA on account of the Obligations three (3) Business Days after
receipt by FINOVA of good funds which have been finally credited to FINOVA's
account, whether such funds are received directly from Borrower or from the
Blocked Account bank or the Dominion Account bank, pursuant to Section 2.10(c)
hereof, and this provision shall apply regardless of the amount of the
Obligations outstanding or whether any Obligations are outstanding; provided,
that if any such good funds are received after 12:00 p.m. noon (Los Angeles
time) on any Business Day or at any time on any day not constituting a Business
Day, such funds shall be deemed received on the immediately following Business
Day. FINOVA is not, however, required to credit Borrower's account for the
amount of any item of payment which is unsatisfactory to FINOVA in its Permitted
Discretion and FINOVA may charge Borrower's loan account for the amount of any
item of payment which is returned to FINOVA unpaid.
(c) Establishment of a Lockbox Account or Dominion Account. Unless
Borrower shall be otherwise directed by FINOVA in writing, Borrower shall cause
all proceeds of Collateral to be deposited into a lockbox account, or such other
"blocked account" as FINOVA may require (each, a "Blocked Account") pursuant to
an arrangement with such bank as may be selected by Borrower and be acceptable
to FINOVA which proceeds, unless otherwise provided herein, shall be applied in
payment of the Obligations in such order as FINOVA determines in its sole
discretion. Borrower shall issue to any such bank an irrevocable letter of
instruction directing said bank to transfer such funds so deposited to FINOVA,
either to any account maintained by FINOVA at said bank or by wire transfer to
appropriate account(s) of FINOVA. All funds deposited in a Blocked Account shall
immediately become the sole property of FINOVA and Borrower shall obtain the
agreement by such bank to waive any offset rights against the funds so
deposited. FINOVA assumes no responsibility for any Blocked Account arrangement,
including without limitation, any claim of accord and satisfaction or release
with respect to deposits accepted by any bank thereunder. Alternatively, FINOVA
may establish depository accounts in the name of FINOVA at a bank or banks for
the deposit of such funds (each, a "Dominion Account") and Borrower shall
deposit all proceeds of Receivables and all cash proceeds of any sale of
Inventory or, to the extent permitted herein, Equipment or cause same to be
deposited, in kind, in such Dominion Accounts of FINOVA in lieu of depositing
same to Blocked Accounts, and, unless otherwise provided herein, all such funds
shall be applied by FINOVA to the Obligations in such order as FINOVA determines
in its sole discretion.
(d) Payments Without Deductions. Borrower shall pay principal,
interest, and all other amounts payable hereunder, or under any other Loan
Document, without any deduction whatsoever, including, but not limited to, any
deduction for any setoff or counterclaim.
<PAGE>
(e) Collection Days Upon Repayment. In the event Borrower repays the
Obligations in full at any time hereafter, such payment in full shall be
credited (conditioned upon final collection) to Borrower's loan account three
(3) Business Days after FINOVA's receipt thereof.
(f) Monthly Accountings. FINOVA shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by FINOVA), unless Borrower
notifies FINOVA in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or admissions.
2.11 Application of Collateral. Except as otherwise provided herein,
FINOVA shall have the continuing and exclusive right to apply or reverse and
re-apply any and all payments to any portion of the Obligations in such order
and manner as FINOVA shall determine in its sole discretion. To the extent that
Borrower makes a payment or FINOVA receives any payment or proceeds of the
Collateral for Borrower's benefit which is subsequently invalidated, declared to
be fraudulent or preferential, set aside or required to be repaid to a trustee,
debtor in possession, receiver or any other party under any bankruptcy law,
common law or equitable cause, or otherwise, then, to such extent, the
Obligations or part thereof intended to be satisfied shall be revived and
continue as if such payment or proceeds had not been received by FINOVA.
2.12 Application of Payments. The amount of all payments or amounts
received by FINOVA with respect to the Loan shall be applied to the extent
applicable under this Agreement: (i) first, to accrued interest through the date
of such payment, including any Default Interest; (ii) then, to any late fees,
overdue risk assessments, Examination Fee and expenses, collection fees and
expenses and any other fees and expenses due to FINOVA hereunder; and (iii)
last, the remaining balance, if any, to the unpaid principal balance of the
Loan; provided however, while an Event of Default exists under this Agreement,
or under any other Loan Document, each payment hereunder shall be (x) held as
cash collateral to secure Obligations relating to any Letters of Credit or other
contingent obligations arising under the Loan Documents and/or (y) applied to
amounts owed to FINOVA by Borrower as FINOVA in its sole discretion may
determine. In calculating interest and applying payments as set forth above: (a)
interest shall be calculated and collected through the date a payment is
actually applied by FINOVA under the terms of this Agreement; (b) interest on
the outstanding balance shall be charged during any grace period permitted
hereunder; (c) at the end of each month, all accrued and unpaid interest and
other charges provided for hereunder shall be added to the principal balance of
the Loan; and (d) to the extent that Borrower makes a payment or FINOVA receives
any payment or proceeds of the Collateral for Borrower's benefit that is
subsequently invalidated, set aside or required to be repaid to any other
Person, then, to such extent, the Obligations intended to be satisfied shall be
revived and continue as if such payment or proceeds had not been received by
FINOVA and FINOVA may adjust the Loan balances as FINOVA, in its sole
discretion, deems appropriate under the circumstances.
2.13 Notification of Closing. Borrower shall provide FINOVA with at
least forty-eight (48) hours prior written notice of the Closing Date, to enable
FINOVA to arrange for the availability of funds. In the event the closing does
not take place on the date specified in Borrower's notice to FINOVA, other than
through the fault of FINOVA, Borrower agrees to reimburse FINOVA for FINOVA's
costs to maintain the necessary funds available for the closing, at the Term
Interest Rate with respect to the amount specified in the Schedule, and at the
Revolving Interest Rate with respect to an amount equal to the initial advance
under the Revolving Credit Loans facility which is to be made on the Closing
Date*, for the number of days which elapse between the date specified in
Borrower's notice and the date upon which the closing actually occurs (which
number of days shall not include the date specified in Borrower's notice, but
shall include the Closing Date).
*as set forth in the Schedule
3. SECURITY.
3.1 Security Interest in the Collateral. To secure the payment and
performance of the Obligations when due, Borrower hereby grants to FINOVA a
first priority security interest
<PAGE>
(subject only to Permitted Encumbrances) in all of Borrower's now owned or
hereafter acquired or arising Inventory, Equipment, Receivables, life insurance
policies and the proceeds thereof, Trademarks, Copyrights, Licenses and Patents,
Investment Property (as defined in Section 9-115 of the Code) and General
Intangibles, including, without limitation, all of Borrower's Deposit Accounts,
money, any and all property now or at any time hereafter in FINOVA's possession
(including claims and credit balances), and all proceeds (including proceeds of
any insurance policies, proceeds of proceeds and claims against third parties),
all products and all books and records and computer data related to any of the
foregoing (all of the foregoing, together with all other property in which
FINOVA may be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral").
3.2 Perfection and Protection of Security Interest. Borrower shall, at
its expense, take all actions requested by FINOVA at any time to perfect,
maintain, protect and enforce FINOVA's first priority security interest and
other rights in the Collateral and the priority thereof from time to time,
including, without limitation, (i) executing and filing financing or
continuation statements and amendments thereof and executing and delivering such
documents and titles in connection with motor vehicles as FINOVA shall require,
all in form and substance satisfactory to FINOVA, (ii) maintaining a perpetual
inventory and complete and accurate stock records, (iii) delivering to FINOVA
warehouse receipts covering any portion of the Collateral located in warehouses
and for which warehouse receipts are issued, and transferring Inventory to
warehouses designated by FINOVA, (iv) placing notations on Borrower's books of
account to disclose FINOVA's security interest therein and (v) delivering to
FINOVA all letters of credit on which Borrower is named beneficiary. FINOVA may
file, without Borrower's signature, one or more financing statements disclosing
FINOVA's security interest under this Agreement. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral is
at any time in the possession or control of any warehouseman, bailee or any of
Borrower's agents or processors, Borrower shall notify such Person of FINOVA's
security interest in such Collateral and, upon FINOVA's request, instruct them
to hold all such Collateral for FINOVA's account subject to FINOVA's
instructions. From time to time, Borrower shall, upon FINOVA's request, execute
and deliver confirmatory written instruments pledging the Collateral to FINOVA,
but Borrower's failure to do so shall not affect or limit FINOVA's security
interest or other rights in and to the Collateral. Until the Obligations have
been fully satisfied and FINOVA's obligation to make further advances hereunder
has terminated, FINOVA's security interest in the Collateral shall continue in
full force and effect.
3.3 Preservation of Collateral. FINOVA may, in its Permitted
Discretion, at any time discharge any lien or encumbrance on the Collateral or
bond the same, pay any insurance, maintain guards, pay any service bureau,
obtain any record or take any other action to preserve the Collateral and charge
the cost thereof to Borrower's loan account as an Obligation.
3.4 Insurance. Borrower will maintain and deliver evidence to FINOVA of
such insurance as is required by FINOVA, written by insurers, in amounts, and
with lender's loss payee, additional insured, and other endorsements,
satisfactory to FINOVA. All premiums with respect to such insurance shall be
paid by Borrower as and when due. Accurate and certified copies of the policies
shall be delivered by Borrower to FINOVA. If Borrower fails to comply with this
Section, FINOVA may (but shall not be required to) procure such insurance and
endorsements at Borrower's expense and charge the cost thereof to Borrower's
loan account as an Obligation.
3.5 Collateral Reporting; Inventory.
(a) Invoices. Borrower shall not re-date any invoice or sale from the
original date thereof or make sales on extended terms beyond those customary in
Borrower's industry, or otherwise extend or modify the term of any Receivable.
If Borrower becomes aware of any matter affecting any Receivable, including
information affecting the credit of the account debtor thereon, Borrower shall
promptly notify FINOVA in writing.
(b) Instruments. In the event any Receivable is or becomes evidenced by
a promissory note, trade acceptance or any other instrument for the payment of
money, Borrower shall
<PAGE>
immediately deliver such instrument to FINOVA appropriately endorsed to FINOVA
and, regardless of the form of any presentment, demand, notice of dishonor,
protest and notice of protest with respect thereto, Borrower shall remain liable
thereon until such instrument is paid in full.
(c) Physical Inventory. Borrower shall conduct a physical count of the
Inventory at such intervals as FINOVA requests and promptly supply FINOVA with a
copy of such accounts accompanied by a report of the value (calculated at the
lower of cost or market value on a first in, first out basis) of the Inventory
and such additional information with respect to the Inventory as FINOVA may
request from time to time.
(d) Returns. For so long as no Event of Default has occurred and is
continuing and subject to the provisions of Section 3.6(b), if any account
debtor returns any Inventory to Borrower in the ordinary course of its business,
Borrower shall promptly determine the reason for such return and promptly issue
a credit memorandum to the account debtor (sending a copy to FINOVA) in the
appropriate amount. In the event any attempted return occurs after the
occurrence of any Event of Default, Borrower shall (i) hold the returned
Inventory in trust for FINOVA, (ii) segregate all returned Inventory from all of
Borrower's other property, (iii) conspicuously label the returned Inventory as
FINOVA's property, and (iv) immediately notify FINOVA of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on FINOVA's request deliver such returned Inventory
to FINOVA.
(e) Borrower shall not consign any Inventory.
3.6 Receivables.
(a) Eligibility. (i) Borrower represents and warrants that each Receivable
covers and shall cover a bona fide sale or lease and delivery by it of goods or
the rendition by it of services in the ordinary course of its business, and
shall be for a liquidated amount and FINOVA's security interest shall not be
subject to any offset, deduction, counterclaim, rights of return or
cancellation, lien or other condition. If any representation or warranty herein
is breached as to any Receivable or any Receivable ceases to be an Eligible
Receivable for any reason other than payment thereof, then FINOVA may, in
addition to its other rights hereunder, designate any and all Receivables owing
by that account debtor as not Eligible Receivables; provided, that FINOVA shall
in any such event retain its security interest in all Receivables, whether or
not Eligible Receivables, until the Obligations have been fully satisfied and
FINOVA's obligation to provide loans hereunder has terminated.
(ii) FINOVA at any time shall be entitled to (i) establish and increase
or decrease reserves against Eligible Receivables and Eligible Inventory, (ii)
reduce the advance rates in the Schedule or restore such advance rates to any
level equal to or below the advance rates set forth in the Schedule or (iii)
impose additional restrictions (or eliminate the same) to the standards of
eligibility set forth in the definitions of "Eligible Receivables" and "Eligible
Inventory," in the exercise of its Permitted Discretion. FINOVA may but shall
not be required to rely on the schedules an/or reports delivered to FINOVA in
connection herewith in determining the then eligibility of Receivables and
Inventory. Reliance thereon by FINOVA from time to time shall not be deemed to
limit the right of FINOVA to revise advance rates or standards of eligibility as
provided above.
(b) Disputes. Borrower shall notify FINOVA promptly of all disputes or
claims and settle or adjust such disputes or claims at no expense to FINOVA, but
no discount, credit or allowance shall be granted to any account debtor and no
returns of merchandise shall be accepted by Borrower without FINOVA's consent,
except for discounts, credits and allowances made or given in the ordinary
course of Borrower's business. FINOVA may, at any time after the occurrence of
an Event of Default, settle or adjust disputes or claims directly with account
debtors for amounts and upon terms which FINOVA considers advisable in its
reasonable credit judgment and, in all cases, FINOVA shall credit Borrower's
loan account with only the net amounts received by FINOVA in payment of any
Receivables.
3.7 Equipment. Borrower shall keep and maintain the Equipment in good
operating condition and repair and make all necessary replacements thereto to
maintain and preserve the value and operating efficiency thereof at all times
consistent with Borrower's past practice,
<PAGE>
ordinary wear and tear excepted. Borrower shall not permit any item of Equipment
to become a fixture (other than a trade fixture) to real estate or an accession
to other property.
3.8 Other Liens; No Disposition of Collateral. Borrower represents,
warrants and covenants that except for FINOVA's security interest, Permitted
Encumbrances, and such other liens, claims and encumbrances as may be permitted
by FINOVA in its sole discretion from time to time in writing, (a) all
Collateral is and shall continue to be owned by it free and clear of all liens,
claims and encumbrances whatsoever and (b) Borrower shall not, without FINOVA's
prior written approval, sell, encumber or dispose of or permit the sale,
encumbrance or disposal of any Collateral or all or any substantial part of any
of its other assets (or any interest of Borrower therein), except for the sale
of Inventory in the ordinary course of Borrower's business. In the event FINOVA
gives any such prior written approval with respect to any such sale of
Collateral, the same may be conditioned on the sale price being equal to, or
greater than, an amount acceptable to FINOVA. The proceeds of any such sales of
Collateral shall be remitted to FINOVA pursuant to this Agreement for
application to the Obligations.
3.9 Collateral Security. The Obligations shall constitute one loan
secured by the Collateral. FINOVA may, in its sole discretion, (i) exchange,
enforce, waive or release any of the Collateral, (ii) apply Collateral and
direct the order or manner of sale thereof as it may determine, and (iii)
settle, compromise, collect or otherwise liquidate any Collateral in any manner
without affecting its right to take any other action with respect to any other
Collateral.
4. CONDITIONS OF CLOSING.
4.1 Initial Advance. The obligation of FINOVA to make the initial
advance hereunder or to issue or arrange for the issuance of the initial Letter
of Credit hereunder is subject to the fulfillment, to the satisfaction of FINOVA
and its counsel, of each of the following conditions on or prior to the date set
forth on the Schedule:
(a) Loan Documents. FINOVA shall have received each of the following
Loan Documents: (i) the Agreement fully and properly executed by Borrower; (ii)
promissory notes in such amounts and on such terms and conditions as FINOVA
shall specify, executed by Borrower; (iii) Guaranties executed by each of the
Guarantors and/or Validity and Support Agreements executed by the applicable
parties; (iv) such security agreements, intellectual property assignments,
pledge agreements, mortgages and deeds of trust as FINOVA may require with
respect to this Agreement and any Guaranties, executed by each of the parties
thereto and, if applicable, duly acknowledged for recording or filing in the
appropriate governmental offices; (v) Subordination Agreements in form and
substance acceptable to FINOVA, executed by each of the Subordinating Creditors,
together with copies of all instruments subject thereto showing a legend
indicating such subordination; (vi) such Blocked Account or Dominion Account
agreements as it shall determine; and (vii) such other documents, instruments
and agreements in connection herewith as FINOVA shall require, executed,
certified and/or acknowledged by such parties as FINOVA shall designate;
(b) Minimum Excess Availability. Borrower shall have Excess
Availability under the Revolving Credit Loans facility of not less than the
amount specified in the Schedule, after giving effect to the initial advance
hereunder and after giving effect to any applicable Loan Reserves against
borrowing availability under the Revolving Credit Loans.
(c) Terminations by Existing Lender. * shall have executed and
delivered UCC termination statements and other documentation evidencing the
termination of its liens and security interests in the assets of Borrower or a
subordination agreement in form and substance satisfactory to FINOVA in its sole
discretion;
*National Bank of Canada
(d) Charter Documents. FINOVA shall have received copies of Borrower's
By-laws and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
(e) Good Standing. FINOVA shall have received a certificate of
corporate status with respect to Borrower, dated within ten (10) days of the
Closing Date, by the Secretary of
<PAGE>
State of the state of incorporation of Borrower, which certificate shall
indicate that Borrower is in good standing in such state;
(f) Foreign Qualification. FINOVA shall have received certificates of
corporate status with respect to Borrower and each other Loan Party, each dated
within ten (10) days of the Closing Date, issued by the Secretary of State of
each state in which such party's failure to be duly qualified or licensed would
have a material adverse effect on its financial condition or assets, indicating
that such party is in good standing;
(g) Authorizing Resolutions and Incumbency. FINOVA shall have received
a certificate from the Secretary of Borrower attesting to (i) the adoption of
resolutions of Borrower's Board of Directors, and shareholders or members if
necessary, authorizing the borrowing of money from FINOVA and execution and
delivery of this Agreement and the other Loan Documents to which Borrower is a
party, and authorizing specific officers of Borrower to execute same, and (ii)
the authenticity of original specimen signatures of such officers;
(h) Insurance. FINOVA shall have received the insurance certificates
and certified copies of policies required by Section 3.4 hereof, in form and
substance satisfactory to FINOVA and its counsel, together with an additional
insured endorsement in favor of FINOVA with respect to all liability policies
and a lender's loss payable endorsement in favor of FINOVA with respect to all
casualty and business interruption policies, each in form and substance
acceptable to FINOVA and its counsel;
(i) Title Insurance. FINOVA shall have received binding commitments to
issue such title insurance with respect to Collateral or security for Guaranties
which is comprised of real property as it shall determine;
(j) Searches; Certificates of Title. FINOVA shall have received
searches reflecting the filing of its financing statements and fixture filings
in such jurisdictions as it shall determine, and shall have received
certificates of title with respect to the Collateral which shall have been duly
executed in a manner sufficient to perfect all of the security interests granted
to FINOVA;
(k) Landlord, Bailee and Mortgagee Waivers. FINOVA shall have received
landlord, bailee and/or mortgagee waivers from the lessors, bailees and/or
mortgagees of all locations where any Collateral is located;
(l) Fees. Borrower shall have paid all fees payable by it on the
Closing Date pursuant to this Agreement;
(m) Opinion of Counsel. FINOVA shall have received an opinion of
Borrower's counsel covering such matters as FINOVA shall determine in its sole
discretion;
(n) Officer Certificate. FINOVA shall have received a certificate of
the President and the Chief Financial Officer or similar official of Borrower,
attesting to the accuracy of each of the representations and warranties of
Borrower set forth in this Agreement and the fulfillment of all conditions
precedent to the initial advance hereunder;
(o) Solvency Certificate. If requested, FINOVA shall have received a
signed certificate of the Borrower's duly elected Chief Financial Officer
concerning the solvency and financial condition of Borrower, on FINOVA's
standard form;
(p) Blocked Account. The Blocked Account referred to in Section 2.10(c)
hereof shall have been established to the satisfaction of FINOVA in its sole
discretion;
(q) Environmental Assessment. If required by FINOVA, Borrower shall
have caused a Phase I Environmental Assessment to be conducted on the property
or properties owned or occupied by Borrower, all at Borrower's own expense and
the results of such assessment(s) shall have been in form and substance
satisfactory to FINOVA in its sole discretion. Such assessment(s) shall have
included, in FINOVA's discretion, core samplings, and shall have been conducted
by an environmental engineer acceptable to FINOVA;
(r) Environmental Certificate. FINOVA shall have received an Environmental
Certificate from Borrower, in form and substance satisfactory to FINOVA in its
discretion, with respect to all locations of Collateral;
<PAGE>
(s) Search and References. FINOVA shall have received and approved the
results of UCC, tax lien, litigation, judgment, and bankruptcy searches
regarding Borrower, and shall have received satisfactory customer, vendor and
credit reference checks on Borrower.
(t) [Intentionally Omitted]
(u) Life Insurance. FINOVA shall require that Borrower maintain a life
insurance policy on the life of the persons specified in the Schedule in an
amount specified in the Schedule (the "Life Insurance Policy"). The Life
Insurance Policy shall be collaterally assigned to FINOVA (pursuant to an
assignment in form satisfactory to FINOVA, hereinafter referred to as the
"Assignment of Life Insurance") and be accepted and acknowledged in writing by
the applicable insurer or its authorized representative. Borrower hereby grants
to FINOVA a security interest in the Life Insurance Policy, all replacements
thereof, any supplementary contract issued in connection therewith, and all
proceeds of the foregoing (including without limitation, the beneficiary's
interest therein, collectively referred to as the "Insurance Collateral") to
secure Borrower's payment and performance of all the Obligations. The insurer
under the Life Insurance Policy and the terms and conditions of the Life
Insurance Policy are subject to the approval of FINOVA. The original of the
policy evidencing the Life Insurance Policy, signed by an authorized insurance
company representative, shall be delivered to FINOVA * at the closing together
with a duly executed Collateral Assignment of Life Insurance which has been
accepted and acknowledged in writing by the applicable insurer or its authorized
representative. The Life Insurance Policy shall require the insurer to provide
FINOVA with thirty (30) days advance written notice of any cancellation and/or
any material change in coverage. Borrower warrants and represents that it is and
will be (throughout the entire term of the Loan) the owner and beneficiary of
the Life Insurance Policy. Notwithstanding anything herein to the contrary, upon
the maturity of the Life Insurance Policy or upon the death of the individual
insured, the proceeds of the Life Insurance Policy shall be paid directly to
FINOVA, shall (at the option of FINOVA) be treated as a prepayment and, if
treated as a prepayment, shall be applied in order against (a) all of Borrower's
Obligations, other than as set forth in the remaining subsections of this
paragraph, (b) all costs and expenses of FINOVA in connection with such
prepayment, (c) accrued interest, and (d) the unpaid principal balance of the
Loans in such manner as FINOVA shall elect. No prepayment premium or Termination
Fee shall be due and owing in connection with such prepayment. To the extent
that the proceeds of said Life Insurance Policy exceed the amount of Borrower's
Obligations, any such excess shall be paid by FINOVA directly to Borrower.
Notwithstanding anything to the contrary herein, the obligations, undertakings
and representations of Borrower under this Section 4.1(u) shall survive the
Closing Date and shall be a continuing obligation and agreement of Borrower
hereunder.
*within 60 days after the closing
(v) No Material Adverse Changes. Prior to the Closing Date, there shall
have occurred no material adverse change in the financial condition of Borrower,
or in the condition of the assets of Borrower. At the closing, Borrower shall
deliver to FINOVA an officer's certification confirming that Borrower is unaware
of the existence of any such material adverse change in Borrower's financial
condition.
(w) Material Agreements. FINOVA shall have received, reviewed and
approved all material agreements to which Borrower shall be a party.
(x) Projections. Borrower shall submit cash flow projections and pro
forma balance sheet with adjusting entries (i) showing that the proposed
financing will provide sufficient funds for the Borrower's projected working
capital needs, and (ii) showing: (1) that the Borrower will have reasonably
sufficient capital for the conduct of its business following the initial
funding, and (2) that the Borrower will not incur debts beyond its ability to
pay such debts as they mature.
(y) Opinions. To the extent any Person other than Borrower shall be
parties to the Loan Documents, FINOVA reserves the right to require satisfactory
opinions of counsel for each such Person concerning the proper organization of
such Person and the due authorization, execution, delivery, enforceability,
validity and binding effect of the Loan Documents to which such Person is a
party. Each such opinion of counsel shall confirm, to the satisfaction of
FINOVA, that the opinion is being delivered to FINOVA at the instruction of
<PAGE>
the party represented by such counsel, that FINOVA is entitled to rely on such
opinion and that for purposes of such reliance, FINOVA is deemed to be in
privity with the opining counsel.
(z) ADA Compliance. If necessary, as of the Closing Date, Borrower
shall be in compliance with the Americans with Disabilities Act of 1990 ("ADA"),
or, if any renovations of Borrower's facilities or modifications of Borrower's
employment practices shall be required to bring them into compliance with the
ADA, review and approval by FINOVA of Borrower's proposed plan to come into such
compliance. Borrower shall deliver representations and warranties to FINOVA
concerning Borrower's compliance with the ADA, and no evidence shall have come
to the attention of FINOVA indicating that Borrower is not in compliance with
the ADA (except to the extent that FINOVA has reviewed and approved Borrower's
plan to come into compliance).
(aa) Subordination and Intercreditor Agreements. FINOVA and each
Subordinating Creditor shall have entered into a Subordination Agreement, in
form and substance satisfactory to FINOVA.
(bb) [Intentionally Omitted]
(cc) [Intentionally Omitted]
(dd) [Intentionally Omitted.]
(ee) Asset Appraisal. Borrower shall have provided to FINOVA, at
Borrower's sole cost and expense, an asset appraisal of all Borrower's fixed
assets upon which FINOVA shall be granted a first priority lien and security
interest, which appraisal must be acceptable to FINOVA in all respects.
(ff) Transaction Costs. Borrower shall provide to FINOVA a complete,
itemized summary of all transaction costs paid or incurred by any Person in
connection with the making of the Loan and the consummation of the Acquisition,
which transaction costs shall not exceed the amount set forth in the Schedule,
as well as appropriate documentation evidencing such costs and the payment
thereof. All such information must be acceptable to FINOVA, in FINOVA's sole
discretion, exercised in good faith.
(gg) Schedule Conditions. Borrower shall have complied with all additional
conditions precedent as set forth in the Schedule attached hereto.
(hh) Other Matters. All other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered,
executed and recorded and shall be in form and substance satisfactory to FINOVA
and its counsel including, without limitation, each of the items listed on the
Closing Checklist attached as Exhibit 4.1 hereto.
4.2 Subsequent Advances. The obligation of FINOVA to make any advance
or issue or cause any Letter of Credit to be issued hereunder (including the
initial advance or Letter of Credit) shall be subject to the further conditions
precedent that, on and as of the date of such advance or Letter of Credit
issuance: (a) the representations and warranties of Borrower set forth in this
Agreement shall be accurate, before and after giving effect to such advance or
issuance and to the application of any proceeds thereof; (b) no Event of Default
and no event which, with notice or passage of time or both, would constitute an
Event of Default has occurred and is continuing, or would result from such
advance or issuance or from the application of any proceeds thereof; (c) no
material adverse change has occurred in the Borrower's business, operations,
financial condition, in the condition of the Collateral or other assets of
Borrower or in the prospect of repayment of the Obligations; and (d) FINOVA
shall have received such other approvals, opinions or documents as FINOVA shall
reasonably request.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
5.1 Due Organization. It is a corporation duly organized, validly
existing and in good standing under the laws of the State set forth on the
Schedule, is qualified and authorized to do business and is in good standing in
all states in which such qualification
<PAGE>
and good standing are necessary in order for it to conduct its business and own
its property, and has all requisite power and authority to conduct its business
as presently conducted, to own its property and to execute and deliver each of
the Loan Documents to which it is a party and perform all of its Obligations
thereunder, and has not taken any steps to wind-up, dissolve or otherwise
liquidate its assets;
5.2 Other Names. Borrower has not, during the preceding five (5) years,
been known by or used any other corporate or fictitious name except as set forth
on the Schedule, nor has Borrower been the surviving corporation of a merger or
consolidation or acquired all or substantially all of the assets of any Person
during such time;
5.3 Due Authorization. The execution, delivery and performance by
Borrower of the Loan Documents to which it is a party have been authorized by
all necessary corporate action and do not and shall not constitute a violation
of any applicable law or of Borrower's Articles or Certificate of Incorporation
or By-Laws or any other document, agreement or instrument to which Borrower is a
party or by which Borrower or its assets are bound;
5.4 Binding Obligation. Each of the Loan Documents to which Borrower is a
party is the legal, valid and binding obligation of Borrower enforceable against
Borrower in accordance with its terms;
5.5 Intangible Property. Borrower possesses adequate assets, licenses,
patents, patent applications, copyrights, trademarks, trademark applications and
trade names for the present and planned future conduct of its business without
any known conflict with the rights of others, and each is valid and has been
duly registered or filed with the appropriate governmental authorities; each of
Borrower's patents, patent applications, copyrights, trademarks and trademark
applications which have been registered or filed with any governmental authority
(including the U.S. Patent and Trademark Office and the Library of Congress) are
listed by name, date and filing number on the Schedule;
5.6 Capital. * Borrower has capital sufficient to conduct its business,
is able to pay its debts as they mature, and owns property having a fair salable
value greater than the amount required to pay all of its debts (including
contingent debts);
*Taking into account the Loans to be made hereunder,
5.7 Material Litigation. Borrower has no pending or overtly threatened
litigation, actions or proceedings which would materially and adversely affect
its business, assets, operations, prospects or condition, financial or
otherwise, or the Collateral or any of FINOVA's interests therein;
5.8 Title; Security Interests of FINOVA. Borrower has good,
indefeasible and merchantable title to the Collateral and, upon the execution
and delivery of the Loan Documents, the filing of UCC-1 Financing Statements,
delivery of the certificate(s) evidencing any pledged securities, the filing of
any collateral assignments or security agreements regarding Borrower,
Trademarks, Copyrights, Licenses and/or Patents, if any, with the appropriate
governmental offices and the recording of any mortgages or deeds of trust with
respect to real property, in each case in the appropriate offices, this
Agreement and such documents shall create valid and perfected first priority
liens in the Collateral, subject only to Permitted Encumbrances;
5.9 Restrictive Agreements; Labor Contracts. Borrower is not a party or
subject to any contract or subject to any charge, corporate restriction,
judgment, decree or order materially and adversely affecting its business,
assets, operations, prospects or condition, financial or otherwise, or which
restricts its right or ability to incur Indebtedness, and it is not party to any
labor dispute. In addition, no labor contract is scheduled to expire during the
Initial Term of this Agreement, except as disclosed to FINOVA in writing prior
to the date hereof;
5.10 Laws. Borrower is not in violation of any applicable statute,
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or its
business, assets, operations, prospects or condition, financial or otherwise;
<PAGE>
5.11 Consents. Borrower has obtained or caused to be obtained or issued
any required consent of a governmental agency or other Person in connection with
the financing contemplated hereby;
5.12 Defaults. Borrower is not in default with respect to any note,
indenture, loan agreement, mortgage, lease, deed or other agreement to which it
is a party or by which it or its assets are bound, nor has any event occurred
which, with the giving of notice or the lapse of time, or both, would cause such
a default;
5.13 Financial Condition. The Prepared Financials fairly present
Borrower's financial condition and results of operations and those of such other
Persons described therein as of the date thereof in accordance with GAAP; there
are no material omissions from the Prepared Financials or other facts or
circumstances not reflected in the Prepared Financials; and there has been no
material and adverse change in such financial condition or operations since the
date of the initial Prepared Financials delivered to FINOVA hereunder;
5.14 ERISA. None of Borrower, any ERISA Affiliate, or any Plan is or
has been in violation of any of the provisions of ERISA, any of the
qualification requirements of IRC Section 401(a) or any of the published
interpretations thereunder, nor has Borrower or any ERISA Affiliate received any
notice to such effect. No notice of intent to terminate a Plan has been filed
under Section 4041 of ERISA, nor has any Plan been terminated under ERISA. The
PBGC has not instituted proceedings to terminate, or appointed a trustee to
administer, a Plan. No lien upon the assets of Borrower has arisen with respect
to a Plan. No prohibited transaction or Reportable Event has occurred with
respect to a Plan. Neither Borrower nor any ERISA Affiliate has incurred any
withdrawal liability with respect to any Multiemployer Plan. Borrower and each
ERISA Affiliate have made all contributions required to be made by them to any
Plan or Multiemployer Plan when due. There is no accumulated funding deficiency
in any Plan, whether or not waived;
5.15 Taxes. Borrower has filed all tax returns and such other reports
as it is required by law to file and has paid or made adequate provision for the
payment on or prior to the date when due of all taxes, assessments and similar
charges that are due and payable;
5.16 Locations; Federal Tax ID No. Borrower's chief executive office
and the offices and locations where it keeps the Collateral (except for
Inventory in transit) are at the locations set forth on the Schedule, except to
the extent that such locations may have been changed after notice to FINOVA in
accordance with Section 6.4 hereof; Borrower's federal tax identification number
is as shown on the Schedule;
5.17 Business Relationships. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of Borrower, or with any material supplier, and there exists no present
condition or state of facts or circumstances which would materially and
adversely affect Borrower or prevent Borrower from conducting such business
after the consummation of the transactions contemplated by this Agreement in
substantially the same manner in which it has heretofore been conducted; and
5.18 Reaffirmations. Each request for a loan made by Borrower pursuant
to this Agreement shall constitute (i) an automatic representation and warranty
by Borrower to FINOVA that there does not then exist any Event of Default and
(ii) a reaffirmation as of the date of said request of all of the
representations and warranties of Borrower contained in this Agreement and the
other Loan Documents.
6. COVENANTS.
6.1 Affirmative Covenants. Borrower covenants that, so long as any
Obligation remains outstanding and this Agreement is in effect, it shall:
6.1.1 Taxes. File all tax returns and pay or make adequate provision for
the payment of all taxes, assessments and other charges on or prior to the date
when due;
6.1.2 Notice of Litigation. Promptly notify FINOVA in writing of any
litigation, suit or administrative proceeding which may materially and adversely
affect the
<PAGE>
Collateral or Borrower's business, assets, operations, prospects or condition,
financial or otherwise, whether or not the claim is covered by insurance;
6.1.3 ERISA. Notify FINOVA in writing (i) promptly upon the
occurrence of any event described in Paragraph 4043 of ERISA, other than a
termination, partial termination or merger of a Plan or a transfer of a Plan's
assets and (ii) prior to any termination, partial termination or merger of a
Plan or a transfer of a Plan's assets;
6.1.4 Change in Location. Notify FINOVA in writing forty-five (45)
days prior to any change in the location of Borrower's chief executive office or
the location of any Collateral, or Borrower's opening or closing of any other
place of business;
6.1.5 Corporate Existence. Maintain its corporate existence and its
qualification to do business and good standing in all states necessary for the
conduct of its business and the ownership of its property and maintain adequate
assets, licenses, patents, copyrights, trademarks and trade names for the
conduct of its business;
6.1.6 Labor Disputes. Promptly notify FINOVA in writing of any labor
dispute to which Borrower is or may become subject and the expiration of any
labor contract to which Borrower is a party or bound;
6.1.7 Violations of Law. Promptly notify FINOVA in writing of any
violation of any law, statute, regulation or ordinance of any governmental
entity, or of any agency thereof, applicable to Borrower which may materially
and adversely affect the Collateral or Borrower's business, assets, prospects,
operations or condition, financial or otherwise;
6.1.8 Defaults. Notify FINOVA in writing within five (5) Business
Days of Borrower's default under any note, indenture, loan agreement, mortgage,
lease or other agreement to which Borrower is a party or by which Borrower is
bound, or of any other default under any Indebtedness of Borrower;
6.1.9 Capital Expenditures. Promptly notify FINOVA in writing of
the making of any Capital Expenditure materially affecting Borrower's business,
assets, prospects, operations or condition, financial or otherwise, except to
the extent permitted in the Schedule;
6.1.10 Books and Records. Keep adequate records and books of
account with respect to its business activities in which proper entries are made
in accordance with GAAP, reflecting all of its financial transactions;
6.1.11 Leases; Warehouse Agreements. Provide FINOVA with (i) copies
of all agreements between Borrower and any landlord, warehouseman or bailee
which owns any premises at which any Collateral may, from time to time, be
located (whether for processing, storage or otherwise), and (ii) without
limiting the landlord, bailee and/or mortgagee waivers to be provided pursuant
to Section 4.1(j) hereof, additional landlord, bailee and/or mortgagee waivers
in form acceptable to FINOVA with respect to all locations where any Collateral
is hereafter located;
6.1.12 Additional Documents. At FINOVA's request, promptly execute
or cause to be executed and delivered to FINOVA any and all documents,
instruments or agreements deemed necessary by FINOVA to facilitate the
collection of the Obligations or the Collateral or otherwise to give effect to
or carry out the terms or intent of this Agreement or any of the other Loan
Documents. Without limiting the generality of the foregoing, if any of the
Receivables with a face value in excess of $1,000 arises out of a contract with
the United States of America or any department, agency, subdivision or
instrumentality thereof, Borrower shall promptly notify FINOVA of such fact in
writing and shall execute any instruments and take any other action required or
requested by FINOVA to comply with the provisions of the Federal Assignment of
Claims Act; and
6.1.13 Financial Covenants. Comply with the financial covenants set forth
on the Schedule.
6.2 Negative Covenants. Without FINOVA's prior written consent, which
consent FINOVA may withhold in its sole discretion, so long as any Obligation
remains outstanding and this
<PAGE>
Agreement is in effect, Borrower shall not:
6.2.1 Mergers. Merge or consolidate with or acquire any other
Person, or make any other material change in its capital structure or in its
business or operations which might adversely affect the repayment of the
Obligations;
6.2.2 Loans. Make advances, loans or extensions of credit to, or
invest in, any Person, except for loans or cash advances to employees which are
permitted in the Schedule;
6.2.3 Dividends. Declare or pay cash dividends upon any of its stock or
distribute any of its property or redeem, retire, purchase or acquire directly
or indirectly any of its stock;
6.2.4 Adverse Transactions. Enter into any transaction which materially and
adversely affects the Collateral or its ability to repay the Obligations in full
as and when due;
6.2.5 Indebtedness of Others. Guarantee or become directly or
contingently liable for the Indebtedness of any Person, except by endorsement of
instruments for deposit and except for the existing guarantees made by Borrower
prior to the date hereof, if any, which are set forth in the Schedule;
6.2.6 Repurchase. Make a sale to any customer on a bill-and-hold,
guaranteed sale, sale and return, sale on approval, consignment, or any other
repurchase or return basis;
6.2.7 Name. Use any corporate or fictitious name other than its
corporate name as set forth in its Articles or Certificate of Incorporation on
the date hereof or as set forth on the Schedule;
6.2.8 Prepayment. Prepay any Indebtedness other than trade payables and
other than the Obligations*;
*(except in the ordinary course of business); provided that no
prepayments may be made with respect to the Bridge Loans (as defined in the
Schedule), except as set forth in the Schedule, and no prepayments may be made
with respect to other Subordinated Debt except in accordance with the
subordination agreement to which FINOVA is a party
6.2.9 Capital Expenditure. Make or incur any Capital Expenditure if, after
giving effect thereto, the aggregate amount of all Capital Expenditures by
Borrower in any fiscal year would exceed the amount set forth on the Schedule;
6.2.10 Compensation. Pay total compensation, including salaries,
withdrawals, fees, bonuses, commissions, drawing accounts and other payments,
whether directly or indirectly, in money or otherwise, during any fiscal year to
all of Borrower's executives, officers and directors (or any relative thereof)
in an amount in excess of the amount set forth on the Schedule;
6.2.11 Indebtedness. Create, incur, assume or permit to exist any
Indebtedness (including Indebtedness in connection with Capital Leases) in
excess of the amount set forth on the Schedule, other than (i) the Obligations,
(ii) trade payables and other contractual obligations to suppliers and customers
incurred in the ordinary course of business, and (iii) other Indebtedness
existing on the date of this Agreement and reflected in the Prepared Financials
(except Indebtedness paid on the date of this Agreement from proceeds of the
initial advances hereunder), and (iv) Subordinated Debt;
6.2.12 Affiliate Transactions. Except as set forth below, sell,
transfer, distribute or pay any money or property to any Affiliate, or invest in
(by capital contribution or otherwise) or purchase or repurchase any stock or
Indebtedness, or any property, of any Affiliate, or become liable on any
guaranty of the indebtedness, dividends or other obligations of any Affiliate.
Notwithstanding the foregoing, Borrower may pay compensation permitted by
Section 6.23 to employees who are Affiliates and, if no Event of Default has
occurred, Borrower may (i) engage in transactions with Affiliates in the normal
course of business, in amounts and upon terms which are fully disclosed to
FINOVA and which
<PAGE>
are no less favorable to Borrower than would be obtainable in a comparable arm's
length transaction with a Person who is not an Affiliate, and (ii) make payments
to a Subordinating Creditor that is an Affiliate, subject to and only to the
extent expressly permitted in the Subordination Agreement between such
Subordinating Creditor and FINOVA;
6.2.13 Nature of Business. Enter into any new business or make any material
change in any of Borrower's business objectives, purposes or operations;
6.2.14 FINOVA's Name. Use the name of FINOVA in connection with any
of Borrower's business or activities, except in connection with internal
business matters or as required in dealings with governmental agencies and
financial institutions or with trade creditors of Borrower, solely for credit
reference purposes; or
6.2.15 Margin Security. Borrower will not (and has not in the past)
engaged principally, or as one of its important activities, in the business of
extending credit for the purpose of purchasing or carrying margin stock (within
the meaning of Regulation G or Regulation U issued by the Board of Governors of
the Federal Reserve System), and no proceeds of any Loan or other advance will
be used to purchase or carry any margin stock or to extend credit to others for
the purpose of purchasing or carrying any margin stock, or in any manner which
might cause such Loan or other advance or the application of such proceeds to
violate (or require any regulatory filing under) Regulation G, Regulation T,
Regulation U, Regulation X or any other regulation of the Board of Governors of
the Federal Reserve System, in each case as in effect on the date or dates of
such Loan or other advance and such use of proceeds. Further, no proceeds of any
Loan or other advance will be used to acquire any security of a class which is
registered pursuant to Section 12 of the Securities Exchange Act of 1934.
6.2.16 Real Property. Purchase or acquire any real property without
FINOVA's prior written consent, a condition of which consent shall include
delivery of appropriate environmental reports and analysis, in form and
substance satisfactory to FINOVA and its counsel.
7. DEFAULT AND REMEDIES.
7.1 Events of Default. Any one or more of the following events shall
constitute an Event of Default under this Agreement:
(a) Borrower fails to pay when due and payable any portion of the
Obligations at stated maturity, upon acceleration or otherwise;
(b) Borrower or any other Loan Party fails or neglects to perform,
keep, or observe any Obligation including, but not limited to, any term,
provision, condition, covenant or agreement contained in any Loan Document to
which Borrower or such other Loan Party is a party;
(c) Any material adverse change occurs in Borrower's business, assets,
operations, prospects or condition, financial or otherwise;
(d) The prospect of repayment of any portion of the Obligations or the
value or priority of FINOVA's security interest in the Collateral is materially
impaired;
(e) Any portion of Borrower's assets is seized, attached, subjected to
a writ or distress warrant, is levied upon or comes into the possession of any
judicial officer;
(f) Borrower shall generally not pay its debts as they become due or
shall enter into any agreement (whether written or oral), or offer to enter into
any agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation of
such creditors or their representatives in the supervision, management or
control of the business of Borrower;
(g) Any bankruptcy or other insolvency proceeding is commenced by
Borrower, or any such proceeding is commenced against Borrower and remains
undischarged or unstayed for forty-five (45) days;
(h) Any notice of lien, levy or assessment is filed of record with
respect to any of Borrower's assets;
<PAGE>
(i) Any judgments are entered against Borrower in an aggregate amount
exceeding $25,000 in any fiscal year*;
*unless the same is paid or fully bonded within ten days after the date
such judgment is entered
(j) Any default shall occur under (i) any material agreement between
Borrower and any third party including, without limitation, any default which
would result in a right by such third party to accelerate the maturity of any
Indebtedness of Borrower to such third party*, or (ii) any Subordinated Debt;
*in excess of $25,000
(k) Any representation or warranty made or deemed to be made by
Borrower, any Affiliate or any other Loan Party in any Loan Document or any
other statement, document or report made or delivered to FINOVA in connection
therewith shall prove to have been misleading in any material respect;
(l) Any Guarantor terminates or attempts to terminate its Guaranty or
any security therefor or becomes subject to any bankruptcy or other insolvency
proceeding;
(m) Any Prohibited Transaction or Reportable Event shall occur with
respect to a Plan which could have a material adverse effect on the financial
condition of Borrower; any lien upon the assets of Borrower in connection with
any Plan shall arise; Borrower or any of its ERISA Affiliates shall fail to make
full payment when due of all amounts which Borrower or any of its ERISA
Affiliates may be required to pay to any Plan or any Multiemployer Plan as one
or more contributions thereto; Borrower or any of its ERISA Affiliates creates
or permits the creation of any accumulated funding deficiency, whether or not
waived; or
(n) Any transfer of more than ten percent (10%) of the issued and
outstanding shares of common stock or other evidence of ownership of Borrower*.
*(other than as a result of the exercise of presently outstanding warrants)
NOTWITSTANDING ANYTHING TO THE CONTRARY HEREIN, FINOVA RESERVES THE RIGHT TO
CEASE MAKING ANY LOANS DURING ANY CURE PERIOD STATED ABOVE, AND THEREAFTER IF AN
EVENT OF DEFAULT HAS OCCURRED.
7.2 Remedies. Upon the occurrence of an Event of Default, FINOVA may,
at its option and in its sole discretion and in addition to all of its other
rights under the Loan Documents, cease making Loans, terminate this Agreement
and/or declare all of the Obligations to be immediately payable in full.
Borrower agrees that FINOVA shall also have all of its rights and remedies under
applicable law, including, without limitation, the default rights and remedies
of a secured party under the Code, and upon the occurrence of an Event of
Default Borrower hereby consents to the appointment of a receiver by FINOVA in
any action initiated by FINOVA pursuant to this Agreement and to the
jurisdiction and venue set forth in Section 9.25 hereof, and Borrower waives
notice and posting of a bond in connection therewith. Further, FINOVA may, at
any time, take possession of the Collateral and keep it on Borrower's premises,
at no cost to FINOVA, or remove any part of it to such other place(s) as FINOVA
may desire, or Borrower shall, upon FINOVA's demand, at Borrower's sole cost,
assemble the Collateral and make it available to FINOVA at a place reasonably
convenient to FINOVA. FINOVA may sell and deliver any Collateral at public or
private sales, for cash, upon credit or otherwise, at such prices and upon such
terms as FINOVA deems advisable, at FINOVA's discretion, and may, if FINOVA
deems it reasonable, postpone or adjourn any sale of the Collateral by an
announcement at the time and place of sale or of such postponed or adjourned
sale without giving a new notice of sale. Borrower agrees that FINOVA has no
obligation to preserve rights to the Collateral or marshall any Collateral for
the benefit of any Person. FINOVA is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, name, trade
secrets, trade names, trademarks and advertising matter, or any similar
property, in completing production, advertising or selling any Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
FINOVA's benefit. Any requirement of reasonable notice shall be met if such
notice is mailed postage prepaid to Borrower at its address set forth in the
heading to this Agreement at least five (5) days before sale or other
disposition. The proceeds of sale
<PAGE>
shall be applied, first, to all attorneys fees and other expenses of sale, and
second, to the Obligations in such order as FINOVA shall elect, in its sole
discretion. FINOVA shall return any excess to Borrower and Borrower shall remain
liable for any deficiency to the fullest extent permitted by law.
7.3 Standards for Determining Commercial Reasonableness. Borrower and
FINOVA agree that the following conduct by FINOVA with respect to any
disposition of Collateral shall conclusively be deemed commercially reasonable
(but other conduct by FINOVA, including, but not limited to, FINOVA's use in its
sole discretion of other or different times, places and manners of noticing and
conducting any disposition of Collateral shall not be deemed unreasonable): Any
public or private disposition: (i) as to which on no later than the * calendar
day prior thereto written notice thereof is mailed or personally delivered to
Borrower and, with respect to any public disposition, on no later than the fifth
calendar day prior thereto notice thereof describing in general non-specific
terms, the Collateral to be disposed of is published once in a newspaper of
general circulation in the county where the sale is to be conducted (provided
that no notice of any public or private disposition need be given to the
Borrower or published if the Collateral is perishable or threatens to decline
speedily in value or is of a type customarily sold on a recognized market); (ii)
which is conducted at any place designated by FINOVA, with or without the
Collateral being present; and (iii) which commences at any time between 8:00
a.m. and 5:00 p.m. Without limiting the generality of the foregoing, Borrower
expressly agrees that, with respect to any disposition of accounts, instruments
and general intangibles, it shall be commercially reasonable for FINOVA to
direct any prospective purchaser thereof to ascertain directly from Borrower any
and all information concerning the same, including, but not limited to, the
terms of payment, aging and delinquency, if any, the financial condition of any
obligor or account debtor thereon or guarantor thereof, and any collateral
therefor.
*tenth
8. EXPENSES AND INDEMNITIES
8.1 Expenses. Borrower covenants that, so long as any Obligation
remains outstanding and this Agreement remains in effect, it shall promptly
reimburse FINOVA for all * costs, fees and expenses incurred by FINOVA in
connection with the negotiation, preparation, execution, delivery,
administration and enforcement of each of the Loan Documents, including, but not
limited to, the attorneys' and paralegals' fees of in-house and outside counsel,
expert witness fees, lien, title search and insurance fees, appraisal fees, all
charges and expenses incurred in connection with any and all environmental
reports and environmental remediation activities, and all other costs, expenses,
taxes and filing or recording fees payable in connection with the transactions
contemplated by this Agreement, including without limitation all such costs,
fees and expenses as FINOVA shall incur or for which FINOVA shall become
obligated in connection with (i) any inspection or verification of the
Collateral, (ii) any proceeding relating to the Loan Documents or the
Collateral, (iii) actions taken with respect to the Collateral and FINOVA's
security interest therein, including, without limitation, the defense or
prosecution of any action involving FINOVA and Borrower or any third party, (iv)
enforcement of any of FINOVA's rights and remedies with respect to the
Obligations or Collateral and (v) consultation with FINOVA's attorneys and
participation in any workout, bankruptcy or other insolvency or other proceeding
involving any Loan Party or any Affiliate, whether or not suit is filed or the
issues are peculiar to federal bankruptcy or state insolvency laws. Borrower
shall also pay all FINOVA charges in connection with bank wire transfers,
forwarding of loan proceeds, deposits of checks and other items of payment,
returned checks, establishment and maintenance of lockboxes and other Blocked
Accounts, and all other bank and administrative matters, in accordance with
FINOVA's schedule of bank and administrative fees and charges in effect from
time to time.
*reasonable
8.2 Environmental Matters. The Environmental Certificate dated on or
about the date of this Agreement is incorporated herein for all purposes as if
fully stated in this Agreement.
9. MISCELLANEOUS.
<PAGE>
9.1 Examination of Records; Financial Reporting.
(a) Examinations. FINOVA shall at all reasonable times have full access
to and the right to examine, audit, make abstracts and copies from and inspect
Borrower's records, files, books of account and all other documents, instruments
and agreements relating to the Collateral and the right to check, test and
appraise the Collateral. Borrower shall deliver to FINOVA any instrument
necessary for FINOVA to obtain records from any service bureau maintaining
records for Borrower. All instruments and certificates prepared by Borrower
showing the value of any of the Collateral shall be accompanied, upon FINOVA's
request, by copies of related purchase orders and invoices. FINOVA may, at any
time after the occurrence of an Event of Default, remove from Borrower's
premises Borrower's books and records (or copies thereof) or require Borrower to
deliver such books and records or copies to FINOVA. FINOVA may, without expense
to FINOVA, use such of Borrower's personnel, supplies and premises as may be
reasonably necessary for maintaining or enforcing FINOVA's security interest.
(b) Reporting Requirements. Borrower shall furnish FINOVA, upon
request, such information and statements as FINOVA shall request from time to
time regarding Borrower's business affairs, financial condition and the results
of its operations. Without limiting the generality of the foregoing, Borrower
shall provide FINOVA with: (i) FINOVA's standard form collateral and loan
report, daily, and upon FINOVA's request, copies of sales journals, cash receipt
journals, and deposit slips; (ii) upon FINOVA's request, copies of sales
invoices, customer statements and credit memoranda issued, remittance advices
and reports; (iii) copies of shipping and delivery documents, upon request; (iv)
on or prior to the date set forth on the Schedule, monthly agings (aged from
invoice date) and reconciliations of Receivables (with listings of concentrated
accounts), payables reports, inventory reports, compliance certificates and
unaudited financial statements with respect to the prior month prepared on a
basis consistent with such statements prepared in prior months and otherwise in
accordance with GAAP; (v) audited annual consolidated and consolidating
financial statements, prepared in accordance with GAAP applied on a basis
consistent with the most recent Prepared Financials provided to FINOVA by
Borrower, including balance sheets, income and cash flow statements, accompanied
by the unqualified report thereon of independent certified public accountants
acceptable to FINOVA, as soon as available, and in any event, within ninety (90)
days after the end of each of Borrower's fiscal years; and (vi) such
certificates relating to the foregoing as FINOVA may request, including, without
limitation, a monthly certificate from the president and the chief financial
officer of Borrower showing Borrower's compliance with each of the financial
covenants set forth in this Agreement, and stating whether any Event of Default
has occurred or event which, with giving of notice or the passage of time, or
both, would constitute an Event of Default, and if so, the steps being taken to
prevent or cure such Event of Default. All reports or financial statements
submitted by Borrower shall be in reasonable detail and shall be certified by
the principal financial officer of Borrower as being complete and correct.
(c) Guarantor's Financial Statements and Tax Returns. Borrower shall
cause each of the Guarantors to deliver to FINOVA such Guarantor's annual
financial statement (in form acceptable to FINOVA) and a copy of such
Guarantor's federal income tax return with respect to the corresponding year, in
each case on the date when such tax return is due or, if earlier, on the date
when available.
9.2 Term; Termination.
(a) Term. The Initial Term of the Revolving Credit Loans facility and
the obligation of FINOVA to made advances with respect thereto in accordance
with this Agreement shall be as set forth on the Schedule, and the Revolving
Credit Loans facility and this Agreement shall be automatically renewed for one
or more Renewal Term(s) as set forth in the Schedule, unless earlier terminated
as provided herein.
(b) Prior Notice. Each party shall have the right to terminate this
Agreement effective at the end of the Initial Term or at the end of any Renewal
Term by giving the other party written notice not less than sixty (60) days
prior to the effective date of such termination, by registered or certified
mail.
(c) Payment in Full. Upon the effective date of termination, the
Obligations shall
<PAGE>
become immediately due and payable in full in cash.
(d) Early Termination; Termination Fee. In addition to the procedure
set forth in Section 9.2(b), Borrower may terminate this Agreement at any time
but only upon sixty (60) days' prior written notice and prepayment of the
Obligations. Upon any such early termination by Borrower or any termination of
this Agreement by FINOVA upon the occurrence of an Event of Default, then, and
in any such event, Borrower shall pay to FINOVA upon the effective date of such
termination a fee (the "Termination Fee") in an amount equal to the amount shown
on the Schedule.
9.3 Recourse to Security; Certain Waivers. All Obligations shall be
payable by Borrower as provided for herein and, in full, at the termination of
this Agreement; recourse to security shall not be required at any time. Borrower
waives presentment and protest of any instrument and notice thereof, notice of
default and, to the extent permitted by applicable law, all other notices to
which Borrower might otherwise be entitled.
9.4 No Waiver by FINOVA. Neither FINOVA's failure to exercise any
right, remedy or option under this Agreement, any supplement, the Loan Documents
or other agreement between FINOVA and Borrower nor any delay by FINOVA in
exercising the same shall operate as a waiver. No waiver by FINOVA shall be
effective unless in writing and then only to the extent stated. No waiver by
FINOVA shall affect its right to require strict performance of this Agreement.
FINOVA's rights and remedies shall be cumulative and not exclusive.
9.5 Binding on Successor and Assigns. All terms, conditions, promises,
covenants, provisions and warranties shall inure to the benefit of and bind
FINOVA's and Borrower's respective representatives, successors and assigns.
9.6 Severability. If any provision of this Agreement shall be
prohibited or invalid under applicable law, it shall be ineffective only to such
extent, without invalidating the remainder of this Agreement.
9.7 Amendments; Assignments. This Agreement may not be modified,
altered or amended, except by an agreement in writing signed by Borrower and
FINOVA. Borrower may not sell, assign or transfer any interest in this Agreement
or any other Loan Document, or any portion thereof, including, without
limitation, any of Borrower's rights, title, interests, remedies, powers and
duties hereunder or thereunder. Borrower hereby consents to FINOVA's
participation, sale, assignment, transfer or other disposition, at any time or
times hereafter, of this Agreement and any of the other Loan Documents, or of
any portion hereof or thereof, including, without limitation, FINOVA's rights,
title, interests, remedies, powers and duties hereunder or thereunder. In
connection therewith, FINOVA may disclose all documents and information which
FINOVA now or hereafter may have relating to Borrower or Borrower's business. To
the extent that FINOVA assigns its rights and obligations hereunder to a third
party, FINOVA shall thereafter be released from such assigned obligations to
Borrower and such assignment shall effect a novation between Borrower and such
third party.
9.8 Integration. This Agreement, together with the Schedule (which is a
part hereof) and the other Loan Documents, reflect the entire understanding of
the parties with respect to the transactions contemplated hereby.
9.9 Survival. All of the representations and warranties of Borrower
contained in this Agreement shall survive the execution, delivery and acceptance
of this Agreement by the parties. No termination of this Agreement or of any
guaranty of the Obligations shall affect or impair the powers, obligations,
duties, rights, representations, warranties or liabilities of the parties hereto
and all shall survive such termination.
9.10 Evidence of Obligations. Each Obligation may, in FINOVA's
discretion, be evidenced by notes or other instruments issued or made by
Borrower to FINOVA. If not so evidenced, such Obligation shall be evidenced
solely by entries upon FINOVA's books and records.
9.11 Loan Requests. Each oral or written request for a loan by any
Person who purports to be any employee, officer or authorized agent of Borrower
shall be made to FINOVA on or prior to 11:00 a.m., Pacific time, on the Business
Day on which the proceeds thereof are requested to be paid to Borrower and shall
be conclusively presumed to be made by a
<PAGE>
Person authorized by Borrower to do so and the crediting of a loan to Borrower's
operating account shall conclusively establish Borrower's obligation to repay
such loan. Unless and until Borrower otherwise directs FINOVA in writing, all
loans shall be wired to Borrower's operating account set forth on the Schedule.
9.12 Notices. Any notice required hereunder shall be in writing and
addressed to the Borrower and FINOVA at their addresses set forth at the
beginning of this Agreement. Notices hereunder shall be deemed received on the
earlier of receipt, whether by mail, personal delivery, facsimile, or otherwise,
or upon deposit in the United States mail, postage prepaid.
9.13 Brokerage Fees. Borrower represents and warrants to FINOVA that,
with respect to the financing transaction herein contemplated, no Person is
entitled to any brokerage fee or other commission and Borrower agrees to
indemnify and hold FINOVA harmless against any and all such claims.
9.14 Disclosure. No representation or warranty made by Borrower in this
Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to Borrower
or which reasonably should be known to Borrower which Borrower has not disclosed
to FINOVA in writing with respect to the transactions contemplated by this
Agreement which materially and adversely affects the business, assets,
operations, prospects or condition (financial or otherwise), of Borrower.
9.15 Publicity. FINOVA is hereby authorized to issue appropriate press
releases and to cause a tombstone to be published announcing the consummation of
this transaction and the aggregate amount thereof.
9.16 Captions. The Section titles contained in this Agreement are
without substantive meaning and are not part of this Agreement.
9.17 Injunctive Relief. Borrower recognizes that, in the event Borrower
fails to perform, observe or discharge any of its Obligations under this
Agreement, any remedy at law may prove to be inadequate relief to FINOVA.
Therefore, FINOVA, if it so requests, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
9.18 Counterparts; Facsimile Execution. This Agreement may be executed
in one or more counterparts, each of which taken together shall constitute one
and the same instrument, admissible into evidence. Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile shall also
deliver a manually executed counterpart of this Agreement, but the failure to
deliver a manually executed counterpart shall not affect the validity,
enforceability, and binding effect of this Agreement.
9.19 Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the drafting party
shall not be employed in the interpretation of this Agreement or any amendments
or exhibits hereto.
9.20 Time of Essence. Time is of the essence for the performance by
Borrower of the Obligations set forth in this Agreement.
9.21 Limitation of Actions. Borrower agrees that any claim or cause of
action by Borrower against FINOVA, or any of FINOVA's directors, officers,
employees, agents, accountants or attorneys, based upon, arising from, or
relating to this Agreement, or any other present or future agreement, or any
other transaction contemplated hereby or thereby or relating hereto or thereto,
or any other matter, cause or thing whatsoever, whether or not relating hereto
or thereto, occurred, done, omitted or suffered to be done by FINOVA, or by
FINOVA's directors, officers, employees, agents, accountants or attorneys,
whether sounding in contract or in tort or otherwise, shall be barred unless
asserted by Borrower by the commencement of an action or proceeding in a court
of competent jurisdiction by the filing
<PAGE>
of a complaint within one year after the first act, occurrence or omission upon
which such claim or cause of action, or any part thereof, is based and service
of a summons and complaint on an officer of FINOVA or any other Person
authorized to accept service of process on behalf of FINOVA, within 30 days
thereafter. Borrower agrees that such one-year period of time is a reasonable
and sufficient time for Borrower to investigate and act upon any such claim or
cause of action. The one-year period provided herein shall not be waived,
tolled, or extended except by a specific written agreement of FINOVA. This
provision shall survive any termination of this Loan Agreement or any other
agreement.
9.22 Liability. Neither FINOVA nor any FINOVA Affiliate shall be liable
for any indirect, special, incidental or consequential damages in connection
with any breach of contract, tort or other wrong relating to this Agreement or
the Obligations or the establishment, administration or collection thereof
(including without limitation damages for loss of profits, business
interruption, or the like), whether such damages are foreseeable or
unforeseeable, even if FINOVA has been advised of the possibility of such
damages. Neither FINOVA, nor any FINOVA Affiliate shall be liable for any
claims, demands, losses or damages, of any kind whatsoever, made, claimed,
incurred or suffered by the Borrower through the ordinary negligence of FINOVA,
or any FINOVA Affiliate. "FINOVA Affiliate" shall mean FINOVA's directors,
officers, employees, agents, attorneys or any other Person or entity affiliated
with or representing FINOVA.
9.23 Notice of Breach by FINOVA. Borrower agrees to give FINOVA written
notice of (i) any action or inaction by FINOVA or any attorney of FINOVA in
connection with any Loan Documents that may be actionable against FINOVA or any
attorney of FINOVA or (ii) any defense to the payment of the Obligations for any
reason, including, but not limited to, commission of a tort or violation of any
contractual duty or duty implied by law. Borrower agrees that unless such notice
is fully given as promptly as possible (and in any event within thirty (30)
days) after Borrower has knowledge, or with the exercise of reasonable diligence
should have had knowledge, of any such action, inaction or defense, Borrower
shall not assert, and Borrower shall be deemed to have waived, any claim or
defense arising therefrom.
9.24 Application of Insurance Proceeds. The net proceeds of any
casualty insurance insuring the Collateral, after deducting all costs and
expenses (including attorneys' fees) of collection, shall be applied, at
FINOVA's option, either toward replacing or restoring the Collateral, in a
manner and on terms satisfactory to FINOVA, or toward payment of the
Obligations. Any proceeds applied to the payment of Obligations shall be applied
in such manner as FINOVA may elect. In no event shall such application relieve
Borrower from payment in full of all installments of principal and interest
which thereafter become due in the order of maturity thereof.
9.25 Power of Attorney. Borrower appoints FINOVA and its designees as
Borrower's attorney, with the power to endorse Borrower's name on any checks,
notes, acceptances, money orders or other forms of payment or security that come
into FINOVA's possession; to sign Borrower's name on any invoice or bill of
lading relating to any Receivable, on drafts against customers, on assignments
of Receivables, on notices of assignment, financing statements and other public
records, on verifications of accounts and on notices to customers or account
debtors; to send requests for verification of Receivables to customers or
account debtors; after the occurrence of any Event of Default, to notify the
post office authorities to change the address for delivery of Borrower's mail to
an address designated by FINOVA and to open and dispose of all mail addressed to
Borrower; and to do all other things FINOVA deems necessary or desirable to
carry out the terms of this Agreement. Borrower hereby ratifies and approves all
acts of such attorney. Neither FINOVA nor any of its designees shall be liable
for any acts or omissions nor for any error of judgment or mistake of fact or
law while acting as Borrower's attorney. This power, being coupled with an
interest, is irrevocable until the Obligations have been fully satisfied and
FINOVA's obligation to provide loans hereunder shall have terminated
9.26 Governing Law; Waivers. THIS AGREEMENT, INCLUDING WITHOUT
LIMITATION ENFORCEMENT OF THE OBLIGATIONS, SHALL BE INTERPRETED IN ACCORDANCE
WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF
ARIZONA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. BORROWER
HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT
LOCATED WITHIN THE COUNTY OF MARICOPA IN THE STATE OF ARIZONA OR, AT THE SOLE
<PAGE>
OPTION OF FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN CONTROVERSY. BORROWER WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE.
BORROWER FURTHER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND
CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE IN THE MANNER SET FORTH IN
SECTION 9.12 HEREOF FOR THE GIVING OF NOTICE. BORROWER FURTHER WAIVES ANY RIGHT
IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT ENTERED AGAINST IT.
<PAGE>
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. FINOVA AND BORROWER EACH
HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; (ii) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN FINOVA AND BORROWER; OR (iii)
ANY CONDUCT, ACTS OR OMISSIONS OF FINOVA OR BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
FINOVA OR BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT
OR TORT OR OTHERWISE.
BORROWER:
PEN INTERCONNECT, INC.
Fed. Tax ID #87-0430260
By__/s/ James S. Pendleton_______
President or Vice President
FINOVA:
FINOVA CAPITAL CORPORATION
By_/s/ Mike McCauley__________
Title__Underwriter___________________________
Amended Schedule to
Loan and Security Agreement
Borrower: Pen Interconnect, Inc.
Date: September 5, 1997
This Amended Schedule forms an integral part of the Loan and Security Agreement
between the above Borrower and FINOVA Capital Corporation dated the above date,
and all references herein and therein to "this Agreement" shall be deemed to
refer to said Agreement and to this Schedule. This Amended Schedule amends and
restates in its entirety the Schedule to Loan and Security Agreement dated
September 4, 1997. DEFIN ITIONS (SECTION 1):
"Guarantor(s)" means: James S. Pendleton, Wayne R. Wright and
------------
Stephen J. Fryer (with respect to Term Loan B
referred to below, and with liability limited
to $300,000 principal amount of Term Loan B,
plus interest thereon, plus reasonable costs
in connection therewith, as provided in the
Continuing Guarantees of even date)
"Subordinating Creditor" means the persons listed on Exhibit A
hereto.
TOTAL FACILITY (SECTION 2.1):
$6,300,000
LOANS
(SECTION 2.2):
Revolving Credit Loans: A revolving line of credit
consisting of loans against Borrower's Eligible
Receivables ("Receivable Loans") and against
Borrower's Eligible Inventory ("Inventory Loans")
(the Receivable Loans and the Inventory Loans
shall be collectively referred to as the
"Revolving Credit Loans") in an aggregate
outstanding principal amount not to exceed the
lesser of (a) or (b) below:
<PAGE>
(a) Five Million Dollars ($5,000,000) (the "Revolving
Credit Limit"), less any Loan Reserves, or
(b) the sum of
(i) an amount equal to 85% of the net amount of
Eligible Receivables; plus
(ii) an amount not to exceed the lesser of:
(A) 40% of the value of Borrower's
Eligible Inventory, calculated
at the lower of cost or market
value and determined on a
first-in, first-out basis, or
(B) $1,500,000; less
(iii) any Loan Reserves.
Term Loans: Term loans against the value of
Borrower's machinery, equipment and/or real estate
("Term Loans") in an aggregate outstanding
principal amount not to exceed $1,300,000,
consisting of Term Loan A in the original
principal amount of $800,000 and Term Loan B in
the original principal amount of $500,000;
provided, that the Term Loans, if any, shall be in
such amounts and on such terms as are set forth on
separate promissory notes of Borrower from time to
time, each in form and substance satisfactory to
FINOVA in its sole discretion. Term Loan A shall
be disbursed concurrently herewith. Provided no
Event of Default and no event which, with notice
or passage of time or both, would constitute an
Event of Default has occurred and is continuing,
Term Loan B shall be disbursed at such time as the
Borrower has received net cash proceeds of an
offering of equity securities of the Borrower in
an amount not less than $1,000,000 (the
"Additional Equity Proceeds") ($400,000 of which
Borrower represents and warrants has been
received) and executed and delivered to FINOVA a
promissory note evidencing the same in form and
substance satisfactory to FINOVA in its sole
discretion. Borrower covenants to obtain the
Additional Equity Proceeds in full within 90 days
after the date hereof, and in the event, for any
reason, the Borrower fails to comply with this
covenant, without limiting FINOVA's other rights
and remedies, the interest rate on all Obligations
shall be increased by 2.25% per annum until
Borrower has obtained the Additional Equity
Proceeds in full; provided that such increased
interest rate shall not go into effect so long as
Borrower maintains Excess Availability of not less
than $300,000.
INTEREST AND FEES (SECTION 2.6):
Revolving Interest Rate. Borrower shall pay FINOVA
interest on the daily outstanding balance of
Borrower's Revolving Credit Loans at a per annum
rate of 1.75% in excess of the rate of interest
announced publicly by Citibank, N.A., (or any
successor thereto), from time to time as its
"prime rate" (the "Prime Rate") which may not be
such institution's lowest rate. The interest rate
chargeable hereunder in respect of the Revolving
Credit Loans (herein, the "Revolving Interest
Rate") shall be increased or decreased, as the
case may be, without notice or demand of any kind,
upon the announcement of any change in the Prime
Rate. Each
<PAGE>
change in the Prime Rate shall be effective
hereunder on the first day following the
announcement of such change. Interest charges and
all other fees and charges herein shall be
computed on the basis of a year of 360 days and
actual days elapsed and shall be payable to FINOVA
in arrears on the first day of each month.
Reduction in Revolving Interest Rate. The
Revolving Interest Rate shall be reduced to a rate
equal to the Prime Rate plus 1% per annum, in the
event after the first anniversary of the date
hereof, Borrower meets its quarterly projections
dated March 17, 1997 for the consecutive four
fiscal quarters ending September 30, 1998 and has
Earnings Before Interest, Taxes, Depreciation and
Amortization for the fiscal year ending September
30, 1998 of at least $5,124,000. The foregoing
interest rate reduction shall go into effect when
FINOVA receives financial statements showing that
Borrower is entitled to such interest rate
reduction. In the event the Borrower fails to meet
its projections for any quarterly period ending
after September 30, 1998, the Revolving Interest
Rate shall return to a rate equal to the Prime
Rate plus 1.75% per annum
Term Interest Rate: Borrower shall pay FINOVA
interest on the daily outstanding balance of Term
Loan A at a per annum rate of 10.16%, and interest
on the daily outstanding balance of Term Loan B at
a per annum rate equal to the rate offered on a
U.S. Treasury Note of like term in effect as of
five Business Days prior to the date of
disbursement thereof plus 4.5% per annum.
Minimum Interest Charge. With respect to each
calendar month or portion thereof during the term
of this Agreement (excluding the calendar month in
which this Agreement is executed), Borrower shall
also pay FINOVA, on the first day of the next
month, as a minimum charge, the amount by which
accrued interest on the Revolving Credit Loans for
such month or portion thereof is less than $10,000
(the "Minimum Interest Charge"). Notwithstanding
the occurrence of any Event of Default hereunder
or termination of this Agreement by FINOVA as a
result thereof, the Minimum Interest Charge shall
be paid by Borrower for the unexpired portion of
the Initial Term or any Renewal Term of this
Agreement.
Collateral Monitoring Fee. At the closing of this
transaction and on the first day of each calendar
month thereafter, Borrower shall pay FINOVA a
collateral monitoring fee of $1,500 per month
("Collateral Monitoring Fee"); provided however,
that Borrower agrees and acknowledges that each
Loan Year a full year's fee shall be deemed earned
at the beginning of the respective Loan Year. At
such time as Borrower's Collateral reporting has
been improved to standards acceptable to FINOVA in
its sole discretion, the Collateral Monitoring Fee
shall be reduced to $500 per month (provided that
a full year's fee shall continue to be deemed
earned at the beginning of the
<PAGE>
respective Loan Year as provided above).
Closing Fee. At the closing of this transaction,
Borrower shall pay to FINOVA a closing fee in an
amount equal to $69,500 of the Total Facility
("Closing Fee"), which shall be deemed fully
earned on the date such payment is due. FINOVA
acknowledges that $35,000 of the Closing Fee has
been received by FINOVA.
Annual Renewal Fee. On the first anniversary of
the date of this Agreement, and on each subsequent
anniversary of said date, if this Agreement is in
effect, Borrower shall pay FINOVA a renewal fee in
the amount of $12,600, ("Annual Renewal Fee"),
which shall be deemed fully earned on the date due
and shall be non-refundable.
Unused Line Fee. With respect to each month, or
portion thereof during the term of this Agreement,
Borrower shall unconditionally pay to FINOVA a fee
equal to 0.25% per annum of the difference between
the Revolving Credit Limit and the average daily
outstanding balance of the Revolving Credit Loans
during such month, or portion thereof ("Unused
Line Fee"), which fee shall be calculated and
payable monthly, in arrears, and shall be due and
payable, commencing on the first Business Day of
the first month following the Closing Date and
continuing on the first Business Day of each month
thereafter.
Examination Fee. Borrower agrees to pay to FINOVA
an examination fee in the amount of $600 per
person per day in connection with each audit or
examination of Borrower performed by FINOVA prior
to or after the date hereof, plus all costs and
expenses incurred in connection therewith (the
"Examination Fee"). Without limiting the
generality of the foregoing, Borrower shall pay to
FINOVA an initial Examination Fee in an amount
equal to $600 per person per day, plus all costs
and expenses incurred in connection therewith.
Such initial Examination Fee shall be deemed fully
earned at the time of payment and due and payable
upon the closing of this transaction, and shall be
deducted from any good faith deposit paid by
Borrower to FINOVA prior to the date of this
Agreement.
NOTIF
ICATION OF CLOSING (SECTION 2.13):
The amount for purposes of Section 2.13 shall be
$______________ at the interest rate applicable to
Term Loan A, $__________ at the interest rate
applicable to Term Loan B, and $____________ at
the Revolving Interest Rate.
CONDI
TIONS OF CLOSING (SECTION 4.1):
The obligation of FINOVA to make the initial
advance hereunder or to issue or arrange for the
issuance of the initial Letter of Credit hereunder
is subject to the fulfillment, to the satisfaction
of FINOVA and its counsel, of each of the
following conditions, in addition to the
conditions set forth in Sections 4.1 and 4.2
above:
<PAGE>
(a) Minimum Excess Availability (Section 4.1(b)). Not less
than $300,000. Accounts payable outstanding: 30 days or more
from their due date.
(b) Life Insurance (Section 4.1(u)). Life insurance policies
shall be maintained on the following individuals in the
amount of at least $500,000 each: James S. Pendleton , Wayne
R. Wright , and Stephen J. Fryer
(c) No Material Adverse Change (Section 4.1(v)). Further, no
material adverse change has occurred in the Borrower's
business, operations, financial condition, or assets or in
the prospect of repayment of the Obligations since June 30,
1997.
(d) Validity and Support Agreements. James S. Pendleton ,
Wayne R. Wright , and Stephen J. Fryer shall each have
delivered a Validity and Support Agreement in favor of
FINOVA, and in form and substance satisfactory to FINOVA.
(e) Warrants. Borrower shall have issued to FINOVA
seven-year warrants to purchase 375,000 shares of common
stock of Borrower at $2.00 per share, on terms mutually
agreed, and in connection therewith Borrower shall execute
and deliver an anti-dilution and registration rights
agreement with FINOVA on terms mutually agreed.
Borrower shall cause the conditions precedent set forth in
Section 4.1 of this Agreement and set forth above in this
Schedule to be satisfied, and shall provide evidence to
FINOVA that all such conditions precedent have been
satisfied, on or before September 5, 1997.
BORROWER INFORMATION:
Borrower's State of Incorporation (Section 5.1): Utah
Borrower's copyrights, patents, trademarks, and licenses (Section 5.5):
None. In the event Borrower
hereafter acquires any copyrights, patents,
trademarks, and licenses, Borrower shall
promptly notify FINOVA of the same and
execute and deliver all such documents as
FINOVA shall specify (on FINOVA's then
standard form) for filing in the United
States Patent and Trademark Office or the
United States Copyright Office (as
applicable) in order to grant FINOVA a
first-priority, perfected security interest
therein.
Fictitious Names/Prior Corporate Names (Section 5.2):
Prior Corporate Names: Pen National, Inc.
Fictitious Names: InCirt Technology, Inc., Moto-
Sat, Powerstream Technology Corporation, Pen Technology, Inc.
Borrower Locations (Section 5.16)
Chief Executive Office: 2351 South 2300 West, Salt Lake City, Utah
84119
<PAGE>
Other Location(s): 1382 Bell Ave., Tustin, California 92780
140 Mtn Rd., Orem, Utah
Borrower's Federal Tax Identification Number (Section 5.16): 87-0430260
Permitted Encumbrances (Section 1.1): Leases of and
purchase money security interests in
specific items of Equipment shown on the
California and Utah UCC Searches dated as of
August 15, 1997 and August 8, 1997,
respectively, and purchase money security
interests in specific items of Equipment
created substantially simultaneously with
the acquisition of such Equipment for the
purpose of financing such acquisition,
provided that such security interest shall
attach only to the Equipment acquired.
FINANCIAL COVENANTS (SECTION 6.1.13):
Borrower shall comply with all of the
following covenants. Compliance shall be
determined as of the end of each month or
quarter (as determined by FINOVA in its sole
discretion), except as otherwise
specifically provided below:
Total Debt Service
Coverage Ratio: Borrower shall maintain a Total Debt Service Coverage
Ratio of in the following amounts during the following
periods:
(i) for the period from September 1, 1997 to February 28,
1998: 1.0 to 1.0.
(ii) for the period from September 1, 1997 to March 31,
1998, and for the period from September 1, 1997 to
April 30, 1998: 1.20 to 1.0.
(iii)for the period from September 1, 1997 to May 31, 1998
and to the end of each month thereafter, to and
including August 31, 1998: 1.30 to 1.0.
(iv) for the twelve-month period ending September 30, 1998
and for each consecutive cumulative rolling
twelve-month period ending on the end of each
subsequent calendar quarter throughout the term of this
Agreement: 1.30 to 1.0.
Senior Debt Service
Coverage Ratio: Borrower shall maintain a Senior Debt Service Coverage
Ratio of in the following amounts during the following
periods:
(i) for the period from September 1, 1997 to December 31,
1997 : 1.2 to 1.0.
(ii) for the period from September 1, 1997 to January 31,
1998: 1.30 to 1.0.
(iii)for the period from September 1, 1997 to February 28,
1998: 1.40 to 1.0.
(iv) for the period from September 1, 1997 to March 31, 1998
and to the end of each month thereafter, to and
including August 31, 1998: 1.50 to 1.0.
(v) for the twelve-month period ending September 30, 1998
and for each consecutive cumulative rolling
twelve-month period ending on the end of each
subsequent calendar quarter throughout the term of this
Agreement: 1.50 to 1.0.
EBITDA: Borrower shall maintain EBITDA in the following
amounts during the following periods:
4 months ending 12/31/97 $ 414,000
5 months ending 1/31/98 636,000
6 months ending 2/28/98 941,000
7 months ending 3/31/98 1,327,000
8 months ending 4/30/98 1,733,000
9 months ending 5/31/98 2,195,000
<PAGE>
10 months ending 6/30/98 2,713,000
11 months ending 7/31/98 3,256,000
12 months ending 8/31/98 3,851,000
12 months ending 9/30/98 4,416,000
12 months ending 12/31/98 4,416,000
12 months ending 3/31/99 4,416,000
12 months ending 6/30/99 and ending at the end of each 4,416,000
subsequent calendar quarter throughout the term of this
Agreement
- - --------------------------------------------------------------------------
Tangible Net Worth: Borrower shall maintain Tangible Net
Worth in the following amounts during the following
periods:
4 months ending 12/31/97 $ 7,000,000
5 months ending 1/31/98 7,000,000
6 months ending 2/28/98 7,000,000
7 months ending 3/31/98 7,000,000
8 months ending 4/30/98 7,000,000
9 months ending 5/31/98 7,000,000
10 months ending 6/30/98 7,000,000
11 months ending 7/31/98 7,000,000
12 months ending 8/31/98 7,000,000
12 months ending 9/30/98 7,500,000
12 months ending 12/31/98 7,500,000
12 months ending 3/31/99 7,500,000
12 months ending 6/30/99 7,500,000
12 months ending 9/30/99 and ending at the end of each 8,000,000
subsequent calendar quarter throughout the term of this
Agreement
- - ----------------------------------------------------------
Additional Definitions. For purposes of the foregoing financial covenants, the
following terms have the following meanings:
"EBITDA" means the Borrower's earnings before interest,
taxes, depreciation and other non-cash amortization expenses
and other non-cash expenses of Borrower, determined in
accordance with generally accepted accounting principles,
consistently applied.
"Operating Cash Flow" shall mean Borrower's net income or
loss, determined in accordance with generally accepted
accounting principles, plus the following (to the extent
they were deducted from revenues in the calculation of net
income): (i) depreciation; (ii) amortization; (iii) interest
expense incurred; (iv) income taxes paid or accrued; (v)
accrued (but not yet paid) severance costs; minus all actual
unfinanced capital expenditures, and federal and state
income taxes, to the extent actually paid during such
period.
"Senior Debt Service Coverage Ratio" means the ratio of
Borrower's Operating Cash Flow to Senior Debt Service.
"Senior Debt Service" means principal and interest payments
on the Term Loans, interest payments on the Revolving Loans,
and principal and interest payments on all other
Obligations.
"Total Debt Service Coverage Ratio" means the ratio of
Borrower's Operating Cash Flow to Total Debt Service.
"Total Debt Service" means Senior Debt Service plus all
permitted payments of principal and interest on all other
Indebtedness (not including the Bridge Loans, but including
all payables converted to notes).
<PAGE>
"Tangible Net Worth" means the excess of
total assets over total liabilities,
determined in accordance with generally
accepted accounting principles,
excluding however all assets which would
be classified as intangible assets under
generally accepted accounting
principles, including without limitation
goodwill, licenses, patents, trademarks,
trade names, copyrights, capitalized
software and organizational costs,
licences and franchises. For purposes of
determining Tangible Net Worth, the
Bridge Loans and other indebtedness
which has been subordinated to the
Obligations pursuant to a subordination
agreement on FINOVA's then standard form
or which is otherwise subordinated in a
manner and on terms and conditions
acceptable to FINOVA shall not be
counted as a liability.
NEGA
TIVE COVENANTS (SECTION 6.2):
Employee Advances: Borrower shall not make any loans or
advances to Employees except in the ordinary course
of business and consistent with past practices of
Borrower in an aggregate amount not exceeding at any
time $15,000 (not counting advances on bonuses or
other compensation).
Existing Guaranties: None.
Capital Expenditures: Borrower shall not make or incur any
Capital Expenditure if, after giving effect thereto, the
aggregate amount of all Capital Expenditures by Borrower in
any fiscal year (beginning with the fiscal year ending
September 30, 1998) would exceed $500,000.
Compensation: Borrower shall not pay total compensation,
including salaries, withdrawals, fees, bonuses, commissions,
drawing accounts and other payments, whether directly or
indirectly, in money or otherwise, during any fiscal year to
the following persons (or their replacements) in excess of
$1,450,000 in the aggregate: Jim Pendleton, Alan Weaver,
Wayne Wright, R. duke Deforest, Steve Fryer, Carl Rasmussen,
Daniele Reni.
Indebtedness: Borrower shall not create, incur, assume or
permit to exist any Indebtedness (including Indebtedness in
connection with Capital Leases) in excess of $150,000 other
than (i) the Obligations, (ii) trade payables and other
contractual obligations to suppliers and customers incurred
in the ordinary course of business, (iii) the Bridge Loans
referred to below, and (iv) other Indebtedness existing on
the date of this Agreement and reflected in the Prepared
Financials (other than Indebtedness paid on the date of this
Agreement from proceeds of the initial advances hereunder).
REPO
RTING REQUIREMENTS (SECTION 9.1):
1. Borrower shall provide FINOVA with monthly agings
aged by invoice date and reconciliations of
Receivables within ten (10) days after the end of
each month.
2. Borrower shall provide FINOVA with monthly
accounts payable agings aged by invoice date,
outstanding or held check registers and inventory
certificates within ten (10) days after the end
of each month.
3. Borrower shall provide FINOVA with monthly
perpetual inventory reports for the Inventory
valued on a first-in, first-out basis at the
lower of cost or market (in accordance with GAAP)
or such other inventory reports as are reasonably
requested by FINOVA, all within ten (10) days
after the end of each month.
4. Borrower shall provide FINOVA with monthly
unaudited financial statements within thirty (30)
days after the end of each month.
5. Borrower shall provide FINOVA with audited
consolidated and consolidating fiscal financial
statements within one hundred twenty (120) days
after the end of each fiscal year, as more
specifically described in Section 9.1(b) hereof,
and with an opinion issued by a Certified Public
Accountant which is acceptable to FINOVA.
6. Borrower shall provide FINOVA with annual operating
budgets (including income
<PAGE>
statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal
year of Borrower within thirty (30) days prior to
the end of each fiscal year of Borrower.
7. Borrower's balance sheets for purposes of the
definition of Prepared Financials shall be as of
September 30, 1996.
TERM (SECTION 9.2):
The initial term of this Agreement shall be four
year(s) from the date hereof (the "Initial Term")
and shall be automatically renewed for successive
periods of one (1) year each (each, a "Renewal
Term"), unless earlier terminated as provided in
Section 7 or 9.2 above or elsewhere in this
Agreement.
TERMINATION FEE (SECTION 9.2):
(A) Revolving Credit Loans Facility. The
Termination Fee applicable to the Revolving Credit
Loans facility provided for in Section 9.2(d)
shall be an amount equal to the following
percentage of the average daily outstanding
balance of the Obligations for the 180-day period
(or lesser period if applicable) preceding the
date of termination: :
(i) five percent (5%), if such early termination
occurs on or prior to the first anniversary of the
date of this Agreement;
(ii) two percent (2%), if such early termination
occurs after the first anniversary of the date of
this Agreement, but on or prior to the first
anniversary of the date of this Agreement.
(iii) one percent (1%), if such early termination
occurs after the second anniversary of the date of
this Agreement.
(B) Term Loans. The Termination Fee applicable to
the Term Loans provided for in Section 9.2(d)
shall be equal to :
(i) five percent (5%) of the amount prepaid if
such prepayment is made during the Loan Year
beginning on the Closing Date;
(ii) two percent (2%) of the amount prepaid if
such prepayment is made during the Loan Year
beginning on the first anniversary of the Closing
Date; and
(iii) one percent (1%) of the amount prepaid if
such prepayment is made on or after the second
anniversary of the Closing Date.
(C) Make Whole Premium. Any prepayment of Term
Loans using a fixed interest rate and not a
floating interest rate, other than a prepayment
made pursuant to the Excess Cash Flow Prepayments
described below under "Additional Provisions,"
shall also be accompanied by a payment equal to
the Make Whole Premium. The following definitions
shall apply:
1. "Make Whole Premium" means the positive difference,
if any, between (i) the Discounted Value immediately
<PAGE>
prior to any prepayment of that portion of the Term Loan which is
being prepaid and (ii) the principal balance of the Term Loan
being prepaid as of the date of any such prepayment.
2. "Discounted Value" means the amount determined by
discounting the Remaining Scheduled Payment Amounts
from their respective due dates to the date of the
prepayment of the Term Loan, at a discount factor equal
to the Reinvestment Yield.
3. "Remaining Scheduled Payment Amount" means the amount
of each scheduled payment of principal of and interest
on a Term Loan that would be due on or after the date
of a prepayment of such Term Loan if no payment of the
Term Loan were made prior to its scheduled due date.
4. "Reinvestment Yield" means the rates shown under the
------------------ column heading "Ask YLD" for "Govt.
Bonds & Notes" in the "Treasury Bonds, Notes & Bills"
section of the Wall Street Journal, Eastern Edition,
published on the Business Day prior to the date of any
proposed prepayment of a Term Loan for the government
bond or note with a maturity date having the closest
matching maturity to the Weighted Average Life to
Maturity, or, if there is more than one government bond
or note with a maturity date having the closest
matching maturity to the Weighted Average Life to
Maturity, the highest of the rates shown in the "Ask
YLD" column for any such bond or note, plus 4.00% with
respect to Term Loan A and 4.50% with respect to Term
Loan B.
5. "Weighted Average Life to Maturity" means the number
--------------------------------- of years (calculated
to the nearest one-twelfth year) obtained by dividing
(i) the sum of the products obtained by multiplying
each remaining scheduled payment of principal under the
Term Loans by the number of years (calculated to the
nearest one- twelfth) which will elapse between the
date of a prepayment of the Term Loans and the
scheduled due date of such remaining scheduled
principal payments, by (ii) the outstanding principal
balance of the Term Loans on such prepayment date.
DISBURSEMENT (SECTION 9.11):
Unless and until Borrower otherwise directs FINOVA
in writing, all loans shall be wired to Borrower's
following operating account:
Account No. 007-13181-6
Zions First National Bank
Salt Lake City, Utah
ABA No. 124000054
ADDITIONAL PROVISIONS:
1. Excess Cash Flow Prepayments. Within sixty (60) days following
receipt by FINOVA of Borrower's annual audited financial
statements, commencing with such financial
<PAGE>
statements for Borrower's fiscal year ending
September 30, 1998, FINOVA may deliver a notice to
Borrower requiring Borrower to prepay the Term
Loans in an amount up to fifty percent (50%) of
Borrower's Excess Cash Flow for such year. Any
prepayments required under this section are
strictly at the sole option of FINOVA, and are
payable within thirty (30) days following the date
of demand by FINOVA. All amounts paid pursuant to
this section shall be applied as follows: First to
the unpaid principal balance of Term Loan B and
then to the unpaid principal balance of Term Loan
A. No Termination Fee or other form of prepayment
premium shall be applied to any payments made
under this section.
2. Bridge Loan Payments. Borrower presently has
outstanding indebtedness in the total principal
amount listed on Exhibit A hereto (the "Bridge
Loans"). Borrower shall not make any payments of
principal or interest on the Bridge Loans ("Bridge
Loan Payments"), except as follows:
(a) Within 60 days after the date hereof Borrower may
make Bridge Loan Payments, if, after giving effect
thereto, Borrower has Excess Availability of not less
than $400,000.
(b) After 60 days after the date hereof Borrower may make
Bridge Loan Payments, if, after giving effect thereto,
Borrower has Excess Availability of not less than
$400,000, and Borrower has Total Debt Service Coverage
Ratio of at least 1.2 to 1 for the period from July 1,
1997 to September 30, 1997 and for the period from July
1, 1997 to the end of the most recent month preceding the
month in which the Bridge Loan Payment is to
be made and for which financial reports have
been received.
(c) Notwithstanding (a) or (b) above, Borrower may make
Bridge Loan Payments, if such payments are made with the
identifiable cash proceeds of the issuance by Borrower of
equity or subordinated debt securities (other than
"Additional Equity Proceeds", as defined above, referred
to above relating to Term Loan B), within 30
days after the receipt of such proceeds.
(d) Notwithstanding (a), (b) or (c) above, no Bridge Loan
Payments may be made if, at the time of the payment and
after giving effect thereto, any Event of Default or
event which, with notice or passage of time or both,
would constitute an Event of Default, has occurred and is
continuing.
3. Inactive Subsidiaries. Borrower represents and
warrants that (i) it has only two wholly-owned
subsidiaries, Pen Technology, Inc. and InCirt
Technology, Inc., both of which are inactive and
have no assets, and (ii) it has no partially-owned
subsidiaries. Without limiting any of the other
terms of the Loan Agreement, Borrower shall not
transfer any assets to either of said wholly-owned
subsidiaries or any other subsidiaries or
Affiliates, without FINOVA's prior written
consent.
<PAGE>
4. Adjustments to Definition of "Eligible Receivables".
(a) Clause (v) in the definition of
"Eligible Receivables" in Section 1.1 of the Loan
Agreement is amended to read as follows: "(v) the
account debtor is not located in the United
States, unless the Receivable is supported by a
letter of credit or other form of guaranty or
security, in each case in form and substance
satisfactory to FINOVA, or, in the case of
Receivables owing from Xircom-Malaysia in an
aggregate amount not to exceed $150,000, unless
such Receivables are supported by credit insurance
in form and substance satisfactory to FINOVA".
(b) Clause (viii) in the definition of
"Eligible Receivables" in Section 1.1 of the Loan
Agreement is amended to read as follows: "(viii)
the account debtor's total obligations to Borrower
exceed 15% of all Eligible Receivables (or, in the
case of Triconex Corp., 30% of all Eligible
Receivables, or, in the case of Alaris Medical and
Xircom, Inc., 25% of all Eligible Receivables), to
the extent of such excess".
5. Litigation. In connection with Section 5.7
above, FINOVA acknowledges that certain litigation
has been disclosed in the legal opinion provided
to FINOVA by Borrower's counsel.
6. Change in Stock Ownership. Borrower and FINOVA
agree to modify Section 7.1(n) of the Loan
Agreement by changing "ten percent (10%)" therein
to "twenty percent (20%)".
7. Landlord Waivers. Borrower has provided FINOVA
with fax copies of signed Landlord Waivers, and
Borrower agrees to provide original copies of the
same to FINOVA within 10 days after the date
hereof.
8. Personal Financial Statements of Guarantors.
Borrower shall cause Guarantors to provide FINOVA
with updated financial statements of the
Guarantors in form acceptable to FINOVA, prior to
the funding of Term Loan B.
Borrower: FINOVA:
PEN INTERCONNECT, INC. FINOVA CAPITAL
CORPORATION
By__/s/_James S. Pendelton__________ By__/s/ Mike McCauley____________
President or Vice President Title____________________________
04/97
- - -7
<PAGE>
Exhibit 10.14
THIS EMPLOYMENT AGREEMENT dated the 15th day of October 1996, between ,
Pen Interconnect, Inc. a Utah Corporation, hereinafter called the "Company", and
STEPHEN J FRYER , hereafter called the Employee.
WITNESSETH: WHEREAS, Company desires to obtain the Employee's experience
and abilities in the business of the Company; and
WHEREAS, the Employee desires to accept such engagement upon the terms and
conditions herein after set forth, NOW, THEREFORE, in consideration of the
premises and the mutual covenants herein contained, it is agreed as follows:
1. EMPLOYMENT- Company hereby engages the Employee and the Employee hereby
accepts employment upon the terms and conditions hereinafter set forth.
2. TERM - Subject to the provisions for
termination as hereafter provided, the term of this Agreement shall be for a
minimum period of FIVE YEARS, beginning on the fifteenth of October, 1996. The
term of this Agreement may be extended for ONE additional year, upon the mutual
agreement of the parties.
3. COMPENSATION - As compensation for all services rendered by Employee
under this agreement, Company shall pay Employee an annual salary
determined as follows: (A) Employee shall receive an initial base salary
of $ 75,000 per year, payable at least monthly in equal installments in
accordance with the company's regular payroll schedule. Such amount may be
adjusted as approved by the Board of Directors of the Company.
(B) Employee shall also receive additional commission and
bonuses, as are approved and awarded by the Board of Directors of the Company
per exhibit A attached. 4. FRINGE BENEFITS - (A) Company shall provide a three
weeks paid vacation each year to Employee. Unused vacation time will accrue and
may be carried over to one succeeding year. (A) The Company shall provide the
Employee with a car allowance of a minimum of $550.00 per month, for his / her
use in connection with his/her employment. The Company agrees to pay all minor
operating costs (gas,oil,wash and minor repairs). The employee will be
responsible for (insurance, tires, taxes and registration and all major repairs)
associated with the use of the automobile.
(B) The Employee
shall continue to participate as a member of the Company's major group insurance
plan with the employee paying $ 40.00 of the monthly premium.
(C) The Company shall provide and pay for the
Life Insurance covering the life of the Employee as described on Exhibit B.
(D) The Company shall provide Deferred Compensation and Salary
Continuation Plans to the employee as described on Exhibit C attached.
5. DUTIES - The Employee is engaged for the purpose of performing
services for the company with specific work in the management of the company as
described in Exhibit D.
6. TERMINATION - (a) The Company may terminate the Employee's
employment under this Agreement for cause at any time during the term of this
agreement. As used in this paragraph 6, the term "cause" shall be defined as the
Employee's (i) wilful misconduct, (ii) fraud, (iii) misappropriation, (iv)
embezzlement, (v) failure to abide by any codes of conduct adopted by the
Employer, (vi) failure to follow the Employer's lawful orders and directives,
(vii) failure to meet performance standards or conduct generally applicable to
similarly situated employees of the employer, (viii) conviction of a felony,
(ix) breach or threatened breach of any confidentiality or non-competition
agreement between the Employee and the Company,or (x) conduct which impairs or
damages, or tends to impair or damage, the reputation of the company. In the
event of any termination pursuant 6(a), the Company shall be obligated to pay
the Employee only such compensation as shall be accrued to the Employee up to
and including the date upon which such termination becomes effective. No notice
period shall be required to terminate the Employee under the provisions of this
paragraph 6(a). (b) The Employee may terminate this agreement with cause upon
ten (10) days written notice to the Company, unless during such ten (10) day
period the cause for such termination shall be cured by the Company. As used in
this paragraph 6(b), the term "cause" shall be defined as the Company's
inability or refusal to comply with or perform its obligations and duties
hereunder , including specifically, the payment of any compensation due the
Employee hereunder and any illegal act or willful mis conduct by the employer.
In the event of any termination pursuant to the terms of this paragraph 6(b),
the Company shall be obligated to pay the Employee the compensation which shall
have accrued to the Employee up to and including the date upon which such
termination becomes effective. (c) The Employee and the Company may terminate
this agreement at any time upon their mutual agreement.
7. STOCK OPTIONS-- Stock options may be granted by the company to the
employee as approved by the Board of Directors. 8. NON COMPETITION-- Employee
acknowledges and agrees that he is being employed in a confidential position
and, as a consequence will have complete access to and knowledge of Company's
marketing techniques, customers, potential customers, and the Company's strategy
concerning new markets, and inasmuch as Employee recognizes and agrees that the
development of said customers, potential customers, and markets is an will be
mainly the result of the Company's efforts the Employee covenants and agrees to
with the Company, its successors or assigns, that for the term of this
Agreement, and for a period of 18 months from the date of termination hereof, he
will not engage in or participate in, either directly or indirectly, or be
employed by or in any connection with, or furnish any information concerning the
Company's business to any similar business that Pen is engaged in at the time of
termination for a period of (18) months from the date of termination hereof. If
the termination of employee is because of an illegal act or willful misconduct
by the employer or termination because of a merger or buy out then the waiting
period will be waived.
9. CONFIDENTIALITY- Employee understands, recognizes and
acknowledges that, as a consequence of the performance of his duties hereunder,
he may receive notice or knowledge of, or have disclosed to him, certain
Confidential Information , as defined below, of the Company. Employee
understands, acknowledges and agrees that the Confidential Information is
proprietary and secret and agrees to respect the confidentiality and secrecy of
the same. Employee also understands, agrees and acknowledges that all
Confidential Information is the property of the Company. Except as lawfully
authorized or as may be expressly and specifically required in the performance
of Employees's responsibilities to the Company hereunder, Employee agrees not to
directly or indirectly disclose, reveal, report,publish or transfer possession
of, or access to any Confidential Information to any person or entity. Employee
further agrees to disclose promptly and fully to the company any information
which qualifies as Confidential hereunder, and agrees to turn over or return to
the Company any and all Confidential Information in the Employee's possession or
control upon the request of the Company or upon the termination of the
Employee's and the Company employment relationship. As used herein, the term
"Confidential Information" shall include all intellectual property or
information which is proprietary to the Company or which is submitted or
disclosed to the Company by a third party under obligations of secrecy or
confidentiality or which is not exempted by amendment to this Agreement.
Confidential Information (whether or not
<PAGE>
reduced to writing and in any and all stages of development) shall include, but
shall not be limited to, discoveries, ideas, inventions, designs, concepts,
drawings, specifications, techniques, models, data, software, documentation,
diagrams, flow charts, research, development, processes, procedures, works of
authorship, formulas, improvements, trade secrets, know-how, marketing
techniques, marketing and development plans, product plans, customer names and
addresses, names and financial information, information relating to the
Company's customers or their financial position or marketing plans, strategies,
forecasts, pricing, policies, and any tangible article which embodies such
Confidential Information.
10. INTELLECTUAL PROPERTY- As to any inventions, ideas discoveries
improvements, ideas, devices, writings or other intellectual property (
hereafter collectively referred to as "INVENTIONS") made by the Employee during
the term of his employment, solely of jointly with others,
which are made with the Employer's equipment, supplies, facilities, trade
secrets, or time, which relate to Employer, or the Employer's actual
demonstrably anticipated research or development or the Employee actual or
demonstrably anticipated research or development, or any other device directly
related to the Employee's business, or which result from any work performed by
the Employee for the Employer, the Employee agrees that such Inventions shall be
the sole and exclusive property of the Employer and he promises to assign such
Inventions to the Employer and to cooperate with the Employer to obtain patents
or copyrights on such Inventions for the Employer in the United States and all
foreign countries. The Employee also agrees that the Employer shall have the
right to keep such Inventions as trade secrets, if the Employer so chooses.
10a. WAIVER OF BREACH- The waiver of either party of a breach of any
provision of this Agreement by either party shall not operate or be construed as
a waiver of any subsequent breach by said party.
11. ASSIGNMENT- The rights and obligations of the Company under this
agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of Company.
12. INDEMNIFICATION- The Company agrees to indemnify and hold harmless
the Employee for any contractual liability, including any personal guarantee to
a financial institution as part of any loan to the Company, or any other
liability incurred by Employee as a result of his employment by or association
with the Company. The Company shall pay all legal costs and expenses necessary
to defend any contractual obligations, personal guarantees or other liabilities
associated with the Employee's employment by or association with the Company.
13. GOVERNING LAW- This Agreement shall be governed by and construed
and enforced in accordance with the laws of the State of Utah.
14. INJUNCTIVE RELIEF- Upon a breach or threatened breach by
Employee of any of the provisions of Paragraphs 8 and 9 of this Agreement, the
Company shall be entitled to an injunctions restraining Employee from such
breach. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies for such breach or threatened breach, including
recovery of damages from Employee
15. SEVERABILITY- It is the desire and intent of the parties that
the provisions of this Agreement be enforced to the fullest extent permissible
under the laws and public policies applied in each jurisdiction in which
enforcement is sought. Accordingly, if any particular provision or portion of
this Agreem ent shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the
<PAGE>
operation of this Section in the particular jurisdiction in which such
adjudication is made .
16. ASSIGNMENT- The Company may assign its rights and obligations
under this Agreement to any affiliate of the Company or to any acquire of
substantially all of the business of the Company, and all covenants and
agreements hereunder shall inure to the benefit of and be enforceable by or
against any such assignee. Neither this agreement nor any rights or duties
hereunder may be signed by or delegated by employee.
17. ENTIRE AGREEMENT- This Agreement sets forth the entire agreement
and understanding of the parties and supersedes all prior understandings,
agreements or representations by or between the parties, whether written or
oral, which relate in any way to the subject matter hereof.
18. AMENDMENT- No provision of this Agreement shall be
altered, amended, revoked, or waived except by an instrument in writing signed
by the party sought to be charged with such amendment, revocation or waiver.
19. BINDING EFFECT- Except as otherwise provided herein,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereunto and their respective legal representatives, heirs, successors
and assigns.
IN WITNESS WHEREOF, the parties have executed this agreement as of
date first written.
PEN INTERCONNECT,INC.
______________________ ___/s/ James S. Pendleton________
JAMES S PENDLETON
CHAIRMAN AND CEO EMPLOYEE
<PAGE>
Exhibit 10.15
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT dated the 1st day of April 1997, between
,POWERSTREAM TECHNOLOGY, CO. A wholly owned Subsidiary of Pen Interconnect, Inc.
a Utah Corporation, hereinafter called the "Company", and Daniele Reni
, hereafter called the Employee.
WITNESSETH:
WHEREAS, Company desires to obtain the Employee's experience and abilities in
the business of the Company; and
WHEREAS, the Employee desires to accept such engagement upon the terms and
conditions herein after set forth, NOW, THEREFORE, in consideration of the
premises and the mutual covenants herein contained, it is agreed as follows: 1.
EMPLOYMENT- Company hereby engages the Employee and the Employee hereby accepts
employment upon the terms and conditions hereinafter set forth.
2. TERM - Subject to the provisions for termination as hereafter
provided, the term of this Agreement shall be for a minimum period of Five (5)
YEARS, beginning on the first day of APRIL, 1997. The term of this Agreement may
be extended for ONE additional year, upon the mutual agreement of the parties.
3. COMPENSATION - As compensation for all services rendered by Employee under
this agreement, Company shall pay Employee an annual salary determined as
follows:
(A) Employee shall receive an initial base salary of $
70,000 per year, payable at least monthly in equal installments in
accordance
with the company's regular payroll schedule. Such amount may be adjusted as
approved by the Board of Directors.
(B) Employee shall also receive additional commission and
bonuses, as are approved and awarded by the Board of Directors of the Company
per exhibit A attached. 4. FRINGE BENEFITS - (A) Company shall provide a three
weeks paid vacation each year to Employee. Unused vacation time will accrue and
may be carried over to one succeeding year. (A) The Company shall provide the
Employee with a car allowance of a minimum of $400.00 per month, for his / her
use in connection with his/her employment. The Company agrees to pay all minor
operating costs (gas,oil,wash and minor repairs). The employee will be
responsible for (insurance, tires, taxes and registration and all major repairs)
associated with the use of the automobile.
(B) The Employee
shall continue to participate as a member of the Company's major group insurance
plan with the employee paying $ 40.00 of the monthly premium.
(C) The Company shall provide and pay for the
Life Insurance covering the life of the Employee as described on Exhibit B.
(D) The Company shall provide Deferred Compensation and Salary
Continuation Plans to the employee as described on Exhibit C attached.
5. DUTIES - The Employee is engaged for the purpose of
performing services for the company with specific work in the management of the
company as described in Exhibit D.
6. TERMINATION - (a) The Company may terminate the Employee's
employment under this Agreement for cause at any time during the term of this
agreement. As used in this paragraph 6, the term "cause" shall be defined as the
Employee's (i) wilful misconduct, (ii) fraud, (iii) misappropriation, (iv)
embezzlement, (v) failure to abide by any codes of conduct adopted by the
Employer, (vi) failure to follow the Employer's lawful orders and
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directives, (vii) failure to meet performance standards or conduct generally
applicable to similarly situated employees of the employer, (viii) conviction of
a felony, (ix) breach or threatened breach of any confidentiality or
non-competition agreement between the Employee and the Company,or (x) conduct
which impairs or damages, or tends to impair or damage, the reputation of the
company. In the event of any termination pursuant 6(a), the Company shall be
obligated to pay the Employee only such compensation as shall be accrued to the
Employee up to and including the date upon which such termination becomes
effective. No notice period shall be required to terminate the Employee under
the provisions of this paragraph 6(a). (b) The Employee may terminate this
agreement with cause upon ten (10) days written notice to the Company, unless
during such ten (10) day period the cause for such termination shall be cured by
the Company. As used in this paragraph 6(b), the term "cause" shall be defined
as the Company's inability or refusal to comply with or perform its obligations
and duties hereunder , including specifically, the payment of any compensation
due the Employee hereunder and any illegal act or willful mis conduct by the
employer. In the event of any termination pursuant to the terms of this
paragraph 6(b), the Company shall be obligated to pay the Employee the
compensation which shall have accrued to the Employee up to and including the
date upon which such termination becomes effective. (c) The Employee and the
Company may terminate this agreement at any time upon their mutual agreement.
7. STOCK OPTIONS-- Stock options may be granted by the company to the
employee as approved by the Board of Directors. 8. NON COMPETITION-- Employee
acknowledges and agrees that he is being employed in a confidential position
and, as a consequence will have complete access to and knowledge of Company's
marketing techniques, customers, potential customers, and the Company's strategy
concerning new markets, and inasmuch as Employee recognizes and agrees that the
development of said customers, potential customers, and markets is an will be
mainly the result of the Company's efforts the Employee covenants and agrees to
with the Company, its successors or assigns, that for the term of this
Agreement, and for a period of 18 months from the date of termination hereof, he
will not engage in or participate in, either directly or indirectly, or be
employed by or in any connection with, or furnish any information concerning the
Company's business to any similar business that Pen is engaged in at the time of
termination for a period of (18) months from the date of termination hereof. If
the termination of employee is because of an illegal act or willful misconduct
or mismanagement by the employer or termination because of a merger,buy out or
insolvency then the waiting period will be waived.
9. CONFIDENTIALITY- Employee understands, recognizes and acknowledges
that, as a consequence of the performance of his duties hereunder, he may
receive notice or knowledge of, or have disclosed to him, certain Confidential
Information , as defined below, of the Company. Employee understands,
acknowledges and agrees that the Confidential Information is proprietary and
secret and agrees to respect the confidentiality and secrecy of the same.
Employee also understands, agrees and acknowledges that all Confidential
Information is the property of the Company. Except as lawfully authorized or as
may be expressly and specifically required in the performance of Employees's
responsibilities to the Company hereunder, Employee agrees not to directly or
indirectly disclose, reveal, report,publish or transfer possession of, or access
to any Confidential Information to any person or entity. Employee further agrees
to disclose promptly and fully to the company any information which qualifies as
Confidential hereunder, and agrees to turn over or return to the Company any and
all Confidential Information in the Employee's possession or control upon the
request of the Company or upon the termination of the Employee's and the Company
employment relationship. As used herein, the term "Confidential Information"
shall include all
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intellectual property or information which is proprietary to the Company or
which is submitted or disclosed to the Company by a third party under
obligations of secrecy or confidentiality or which is not exempted by amendment
to this Agreement. Confidential Information (whether or not reduced to writing
and in any and all stages of development) shall include, but shall not be
limited to, discoveries, ideas, inventions, designs, concepts, drawings,
specifications, techniques, models, data, software, documentation, diagrams,
flow charts, research, development, processes, procedures, works of authorship,
formulas, improvements, trade secrets, know-how, marketing techniques, marketing
and development plans, product plans, customer names and addresses, names and
financial information, information relating to the Company's customers or their
financial position or marketing plans, strategies, forecasts, pricing, policies,
and any tangible article which embodies such Confidential Information.
10. INTELLECTUAL PROPERTY- As to any inventions, ideas discoveries
improvements, ideas, devices, writings or other intellectual property (
hereafter collectively referred to as "INVENTIONS") made by the Employee during
the term of his employment, solely of jointly with others, which are made with
the Employer's equipment, supplies, facilities, trade secrets, or time, or which
relate to that of the Employer, or the Employer's actual page 4
demonstrably anticipated
research or development, or the Employee
actual or demonstrably anticipated research or development, or any other device
directly related to the Employee's business, or which result from any work
performed by the Employee for the Employer, the Employee agrees that such
Inventions shall be the sole and exclusive property of the Employer and he
promises to assign such Inventions to the Employer and to cooperate with the
Employer to obtain patents or copyrights on such Inventions for the Employer in
the United States and all foreign countries. The Employee also agrees that the
Employer shall have the right to keep such Inventions as trade secrets, if the
Employer so chooses.
10a. WAIVER OF BREACH- The waiver of either party of a breach of any
provision of this Agreement by either party shall not operate or be construed as
a waiver of any subsequent breach by said party.
11. ASSIGNMENT- The rights and obligations of the Company under this
agreement shall inure to the benefit of and shall be binding upon the successors
and assigns of Company.
12. INDEMNIFICATION- The Company agrees to indemnify and hold harmless
the Employee for any contractual liability, including any personal guarantee to
a financial institution as part of any loan to the Company, or any other
liability incurred by Employee as a result of his employment by or association
with the Company. The Company shall pay all legal costs and expenses necessary
to defend any contractual obligations, personal guarantees or other liabilities
associated with the Employee's employment by or association with the Company.
13. GOVERNING LAW- This Agreement shall be governed by and
construed and enforced in accordance with the laws of the State of Utah.
14. INJUNCTIVE RELIEF- Upon a breach or threatened breach by
Employee of any of the provisions of Paragraphs 8 and 9 of this Agreement, the
Company shall be entitled to an injunctions restraining Employee from such
breach. Nothing herein shall be construed as prohibiting the Company from
pursuing any other remedies for such breach or threatened breach, including
recovery of damages from Employee
15. SEVERABILITY- It is the desire and intent of the parties that
the provisions of this Agreement be enforced to the fullest extent
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permissible under the laws and public policies applied in each jurisdiction in
which enforcement is sought. Accordingly, if any particular provision or portion
of this Agreement shall be adjudicated to be invalid or unenforceable, this
Agreement shall be deemed amended to delete therefrom the portion thus
adjudicated to be invalid or unenforceable, such deletion to apply only with
respect to the operation of this Section in the particular jurisdiction in which
such adjudication is made.
16. ASSIGNMENT- The Company may assign its rights and obligations under
this Agreement to any affiliate of the Company or to any acquire of
substantially all of the business of he Company, and all covenants and
agreements hereunder shall inure to the benefit of and be enforceable by or
against any such assignee. Neither this agreement nor any rights or duties
hereunder may be signed by or delegated by employee.
17. ENTIRE AGREEMENT- This Agreement sets forth the entire agreement
and understanding of the parties and supersedes all prior understandings,
agreements or representations by or between the parties, whether written or
oral, which relate in any way to the subject matter hereof.
18. AMENDMENT- No provision of this Agreement shall be
altered, amended, revoked, or waived except by an instrument in writing signed
by the party sought to be charged with such amendment, revocation or waiver.
19. BINDING EFFECT- Except as otherwise provided herein,
this Agreement shall be binding upon and shall inure to the benefit of the
parties hereunto and their respective legal representatives, heirs, successors
and assigns.
IN WITNESS WHEREOF, the parties have executed this agreement as of
date first written.
PEN INTERCONNECT,INC.
______________________ _____/s/ James S. Pendelton______
JAMES S PENDLETON
PRESIDENT AND CEO EMPLOYEE
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Exhibit 10.16
AGREEMENT AND PLAN OF
REORGANIZATION THROUGH ACQUISITION
THIS AGREEMENT AND PLAN OF REORGANIZATION THROUGH ACQUISITION (the
"Agreement") is entered as of the 1st day of April, 1997, by and between Pen
Interconnect, Inc., a Utah corporation (the "Parent"), PEN TECHNOLOGIES, INC., a
Utah corporation and wholly-owned subsidiary of the Parent (the "Purchaser"),
PowerStream Technology, Inc., a Utah corporation (the "Seller") and for the
limited purposes of Sections 5 and 13 hereof, Daniele Reni, the sole shareholder
of the Seller ("Reni"). The Parent, the Purchaser, the Seller and Reni are
referred to collectively herein as the "Parties".
WHEREAS, the Seller desires to transfer its business and all of its
assets to the Purchaser in exchange for One Hundred Fifty Thousand (150,000)
voting shares of the common stock, par value $.01 per share, of the Parent (the
"Shares"), and the assumption by the Purchaser of certain liabilities and
obligations of the Seller in a transaction intended to qualify as a tax free
reorganization within the meaning of Section 368(a)(1)(C) of the Internal
Revenue Code of 1986, as amended (the "Code"); and
WHEREAS, the Purchaser desires to acquire all of the assets and
business of the Seller in exchange for the Shares and the assumption of certain
of the liabilities and obligations of the Seller; and
WHEREAS, the Boards of Directors of the Parent, the Purchaser and of
the Seller, respectively, and the shareholders of the Seller, have approved the
transactions contemplated by this Agreement;
NOW, THEREFORE, in consideration of the mutual promises and covenants
set forth herein, together with other good and valuable consideration, the
receipt and sufficiency of which hereby are acknowledged, the Parties hereto
agree as follows:
SECTION 1. TRANSFER BY SELLER
1.1 Transfer of Seller's Assets. At the Closing, as defined in Section
3 hereof, the Seller shall transfer and deliver to the Purchaser all of its
properties and assets, tangible or intangible and wherever situated, all as
listed on Exhibit "A" attached hereto and made a part hereof by this reference,
and including without limitation, all right, title, and interest in and to (a)
tangible personal property, including inventories or raw materials, supplies and
finished goods, equipment, manufactured and purchased parts, machinery, goods in
process, and furniture, (b) agreements, contracts, instruments, security
interests, guaranties, and other similar arrangements, and rights thereunder,
(c) approvals, permits, licenses, certificates and similar rights obtained from
governmental agencies, (d) intellectual property, including the name
"PowerStream Technology," research and development and plans thereof, patents,
patents pending, patent applications, trademarks, goodwill associated therewith,
licenses and sublicenses granted and obtained with respect thereto, and rights
thereunder, remedies against infringements thereof, and rights to protection of
interests therein under the laws of all jurisdictions, (e) leaseholds and
subleaseholds therein, (f) prepayments, prepaid expenses, and deferred items,
claims, deposits, refunds and causes of action, (h) accounts, notes, and other
receivables, (i) securities, and (j) cash, (collectively, the "Assets");
provided however, that the Assets shall not include (1) the Seller's corporate
charter,
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qualifications to conduct business as a foreign corporation, arrangements with
registered agents relating to foreign qualifications, taxpayer, and other
identification numbers, seals, minute books, stock transfer books, blank stock
certificates, and other documents relating to the organization, maintenance, and
existence of the Seller as a corporation, or (2) any of the rights of the Seller
under this Agreement.
1.2 Documents of Transfer. The conveyance, transfer, assignment, and
delivery of the Assets to the Purchaser, as herein provided, shall be effected
by bills of sale, endorsements, assignments, drafts, checks, and other
instruments of transfer and conveyance in such form as the Purchaser shall
reasonably request.
1.3 Further Acts. The Seller agrees that it will, at any time and from
time to time after the Closing, upon request of the Purchaser and without
payment of further consideration, do all such further acts, assignments, powers
of attorney, and assurances as may be required for the better transferring and
confirming to the Purchaser, or its successors and assigns, any or all of the
Assets.
SECTION 2. PAYMENT BY THE PURCHASER
2.1 Transfer of the Purchaser's Shares. At the Closing, the Purchaser
shall deliver to the Seller a certificate or certificates representing the
Shares.
2.2 Assumption of Seller's Liabilities. At Closing, the Purchaser shall
assume, and hereby agrees to pay, discharge and perform when due, the
obligations and liabilities of the Seller listed on Exhibit "B" attached hereto
and made a part hereof by this reference. Except as otherwise provided, the
Purchaser will not assume or have any responsibility with respect to any other
obligation, contract or liability of the Seller not included within Exhibit "B".
2.3 Costs Resulting From This Agreement. Except as provided in Section
13.2, the Purchaser hereby agrees to pay any and all legal fees and other costs
which directly result from the consummation of the transactions contemplated by
this Agreement. For purposes of this subsection, legal fees and other costs
which arise directly as a result of the consummation of the transactions
contemplated by this Agreement shall refer only to obligations which will not be
held to represent additional consideration within the meaning of Section
368(a)(1)(C) of the Code.
SECTION 3. THE CLOSING
3.1 The Closing. The closing of the transactions contemplated hereby
(the "Closing") shall take place at such time, date and place as shall be agreed
upon by the Parties; provided however, that in no event shall the Closing occur
later than June 30, 1997.
3.2 Documents to be Delivered by Seller. At the Closing, the Seller
shall deliver to the Purchaser: (1) such instruments of transfer (including
consents and approvals of third parties) as are necessary or appropriate, in the
opinion of legal counsel to the Purchaser, to vest in the Purchaser, its
successors and assigns, the full legal and equitable title to the Assets; (2) a
duly executed power of attorney appointing the Purchaser as the true and lawful
attorney-in-fact for the Seller to institute and prosecute (in its own name, or
in the name of the Seller and for the benefit of the Purchaser) any action or
proceeding deemed by the Purchaser to be necessary or appropriate to perfect,
assert, or enforce its right, title and interest in and to the
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Assets; and (3) such evidence as legal counsel to the Purchaser may reasonably
require to establish that the Seller has complied with the laws of the State of
Utah and the Code relating to the Seller's sale of the Assets and its
liquidation and dissolution pursuant to the provisions of this Agreement.
3.3 Certificates and Documents to be Delivered by Purchaser. At the
Closing, the Purchaser will cause to be delivered to the Seller (1) a
certificate or certificates representing the Shares, and (2) an instrument
evidencing the assumption by the Purchaser of those liabilities of the Seller
specified in Section 2.2 hereof.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF SELLER
The Seller represents and warrants that the statements contained in
this Section 4 are correct and complete as of the date of this Agreement and
will be correct and complete as of the Closing (as though made then and as
though the Closing were substituted for the date of this Agreement throughout
this Section 4), except as set forth in disclosure schedule accompanying this
Agreement.
4.1 Organization and Good Standing. The Seller has been duly organized
and is existing as a corporation in good standing under the laws of the State of
Utah with full power and authority (corporate and other) to own and lease its
properties and to conduct its business as currently conducted. The Seller has no
subsidiary nor owns or controls, or has any other equity investment or other
interest in, directly or indirectly, any other entity.
4.2 Authority. The seller has full power and authority (including full
corporate power and authority) to execute and deliver this Agreements and to
perform its obligations hereunder. Without limiting the generality of the
foregoing, the stockholders and the Board of Directors of the Seller have duly
authorized the execution, delivery and performance of this Agreement by the
Seller. This Agreement constitutes the valid and legally binding obligation of
the Seller, enforceable in accordance with its terms and conditions.
4.3 No Conflicts. To the best of Seller's knowledge, the execution,
delivery and performance of this Agreement and the consummation of the
transactions contemplated hereby will not conflict with or result in a breach or
violation of any term or provision of any instrument to which the Seller is
bound or affected.
4.4 Financial Statements. To the best of Seller's knowledge, Schedule
4.3 hereto contains true and complete copies of (i) the unaudited balance sheet
(the "Balance Sheet") of the Seller at _____________, 1997 (the "Balance Sheet
Date"), and the related unaudited statements of income, shareholders' equity and
cash flows for the three months then ended (the "Financial Statements").
4.5 Title to Property; Encumbrances. To the best of Seller's knowledge,
the Seller has, and immediately prior to the Closing will have, good, valid and
marketable title in fee simple to all property reflected on the Balance Sheet as
owned by the Seller and all property acquired by the Seller since the Balance
Sheet Date, in each case free and clear of all liens and encumbrances except for
sales and other dispositions of inventory in the ordinary course since the
Balance Sheet Date which, in the aggregate, have not been materially different
from prior periods.
4.6 Accounts Receivable. To the best of Seller's knowledge, all
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accounts receivable of the Seller reflected in the Balance Sheet and all ac
counts receivable of the Seller that have arisen since the Balance Sheet Date
(except such accounts receivable as have been collected since such dates) are
valid and enforceable claims.
4.7 Inventories. To the best of Seller's knowledge, except as described
in Schedule 4.6, all inventories of raw materials, work-in-process and finished
goods set forth or reflected in the Balance Sheet or acquired by the Seller
since the Balance Sheet Date, consist of a quality and quantity usable and
saleable in the ordinary course.
4.8 Trademarks; Patents; Etc.
(a) Schedule 4.7(a) contains a true and complete list of all
letters patent, patent applications, trade names, trademarks, service marks,
trademark and service mark registrations and applications, copyrights, copyright
registrations and applications, grants of a license or right to the Seller with
respect to the foregoing, both domestic and foreign, claimed by either the
Seller or used or proposed to be used by the Seller in the conduct of its
business, whether registered or not, (collectively herein, "Registered Rights").
(b) Except as described in Schedule 4.7(b), the Seller owns
and has the unrestricted right to use the Registered Rights and every trade
secret, know-how, process, discovery, development, design, technique, customer
and supplier list, promotional idea, marketing and purchasing strategy,
invention, process, confidential data and or other information (collectively
herein, "Proprietary Information") required for or incident to the design,
development, manufacture, operation, sale and use of all products and services
sold or rendered or proposed to be sold or rendered by the Seller, free and
clear of any right, equity or claim of others. To the best of Seller's
knowledge, Seller has not been notified in any manner of any infringement in the
use of any Proprietary Information. The Seller has taken reasonable security
measures to protect the secrecy, confidentiality and value of all Proprietary
Information.
(c) Schedule 4.7(c) contains a true and complete list and
description of all licenses of or rights to Proprietary Information granted to
the Seller by others or to others by the Seller. Except as described in Schedule
4.7(c), (i) the Seller has not sold, transferred, assigned, licensed or
subjected to any Lien, any Registered Right or Proprietary Information or any
interest therein, and (ii) the Seller is not obligated or under any liability
whatever to make any payments by way of royalties, fees or otherwise to any
owner or licenser of, or other claimant to, any Registered Right or Proprietary
Information.
(d) There is no claim or demand of any Person pertaining to,
or any action that is pending or, to the Shareholders' knowledge, threatened,
which challenges the rights of the Seller in respect of any Registered Right or
any Proprietary Information.
4.9 Indebtedness.
(a) The Seller has no liability or obligation for indebtedness
other than as set forth on Exhibit B, and true and complete copies of all
instruments and documents evidencing, creating, securing or otherwise relating
to such indebtedness have been delivered to the Purchaser heretofore. Except as
described in Schedule 4.8(a), no event has occurred and no condition has become
known to the Seller (including the transactions contemplated hereby) that
constitutes or, with notice or passage of time, or
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both, would constitute a default or a basis of force majeure or other claim of
accelerated or increased rights, termination, excusable delay or nonperformance
by the Seller or any other person under any instrument or document relating to
or evidencing indebtedness that would entitle any person to require the Seller
to pay any portion of the principal amount of such indebtedness prior to the
scheduled maturity thereof. Except as set forth in Schedule 4.8(a), no
instrument or document evidencing, creating, securing or otherwise relating to
indebtedness will require the consent of any person to or as a result of the
consummation of the transactions contemplated by this Agreement.
(b) Schedule 4.8(b) contains a list and brief description of
all agreements or instruments pursuant to which any of the Seller's directors,
employees or shareholders have guaranteed any indebtedness of the Seller (the
"Guaranties"). True and complete copies of all Guaranties have been delivered to
Purchaser.
4.10 Litigation. To the best of Seller's knowledge, the Seller is not a
party, and has not been threatened to be made a party, to any action, suit,
proceeding, or investigation of, in, or before any court or administrative
agency of any government or governmental agency pertaining to Seller, and is not
subject to any outstanding injunction, judgment, order or decree of charge,
issued by a government or governmental agency.
4.11 Consents. To the best of Seller's knowledge, all consents,
authorizations and approvals required of any person to or as a result of the
consummation of the transactions contemplated hereby have been lawfully and
validly obtained by the Seller.
4.12 Information Regarding Shares. The Seller acknowledges that the
Purchaser has delivered to it its Annual Report on Form 10-KSB for the fiscal
year ended September 30, 1996, its Quarterly Report on Form 10-QSB for the
quarter ended December 31, 1996, and Proxy Statement for the shareholder meeting
held on February 18, 1997. The Seller has had the opportunity to review and
discuss the above-referenced documents with the Purchaser and has had the
opportunity to ask questions and make inquiries of representatives of the
Purchaser regarding the Purchaser's financial condition, assets and operations
and the Seller has received satisfactory answers to such questions and
inquiries.
4.13 Restrictions on Shares. The Shares when issued to the Seller will
constitute "restricted securities" as that term is defined in Rule 144, as
promulgated under the Securities Act of 1933, as amended (the "Act"), and as
such may not be transferred except pursuant to an effective registration
statement filed under the Act, or pursuant to a valid exemption from the
registration requirements of the Act. The Purchaser has no obligation,
whatsoever, to register the Shares under the Act and has no present intention to
so register the Shares. If the Seller desires to sell or transfer any interest
in the Shares pursuant to an exemption from registration under the Act and under
state securities laws, the Seller shall first provide the Purchaser with a
description of the circumstances and an opinion of counsel reasonably
satisfactory to counsel to Purchaser that such sale or transfer is so exempt.
The Seller understands that resale to the public will not be available for at
least one year under Rule 144, as amended and effective April 29, 1997. The
Shares are being acquired by the Seller for investment purposes only, solely for
its own account, and without any present intention of participating directly or
indirectly in the distribution or resale of all or any portion of the Shares.
The following legend shall be placed upon the certificate or certificates
representing the Shares:
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The shares represented by this certificate have not been
registered under the Securities Act of 1933. The shares have
been acquired for investment and may not be sold, transferred
or assigned in the absence of an effective registration
statement for these shares under the Securities Act of 1933 or
an opinion of Pen Interconnect, Inc.'s counsel that
registration is not required under said Act.
4.14 Review by Counsel. The Seller has had full and fair opportunity to
have this Agreement and all documents referred to herein reviewed by legal
counsel.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF RENI
Reni represents and warrants that the statements, representations and
warranties issued by the Seller and contained in Section 4.3, Section 4.5,
Section 4.8, Section 4.9 and Section 4.10 hereof are correct and complete as of
the date of this Agreement and will be correct and complete as of the Closing
(as though made then and as though the Closing were substituted for the date of
this Agreement), except as set forth in disclosure schedule accompanying this
Agreement.
SECTION 6. REPRESENTATIONS AND WARRANTIES
OF PURCHASER AND PARENT
The Purchaser and the Parent each represents and warrants that the
statements contained in this Section 6 are correct and complete as of the date
of this Agreement and will be correct and complete as of the Closing (as though
made then and as though the Closing were substituted for the date of this
Agreement throughout this Section 6), except as set forth in disclosure schedule
accompanying this Agreement.
6.1 No Conflicts. The execution, delivery and performance of this
Agreement and the consummation of the transactions contemplated hereby will not
conflict with or result in a breach or violation of any term or provision of any
instrument to which the Purchaser or Parent is bound or affected.
6.2 Authority. The Purchaser and Parent each have full power and
authority (including full corporate power and authority) to execute and deliver
this Agreement and to perform its obligations hereunder. Without limiting the
generality of the foregoing, the Boards of Directors of the Purchaser and the
Parent have duly authorized the execution, delivery and performance of this
Agreement by the Purchaser and the Parent. This Agreement constitutes the valid
and legally binding obligation of the Purchaser and the Parent, enforceable in
accordance with its terms and conditions.
6.3 Access and Information. The Purchaser and the Parent have delivered
to the Seller its true, correct, complete and most recent Annual Report on Form
10-KSB for the fiscal year ended September 30, 1996, its Quarterly Report on
Form 10-QSB for the quarter ended December 31, 1996, and Proxy Statement for the
shareholder meeting held on February 18, 1997. Each of these documents contain
the information required to be included therein by applicable law and as to such
required information do not contain any untrue statements of material fact or
omit a material fact necessary to make the statements contained therein not
misleading.
SECTION 7. CONDUCT OF SELLER PRIOR TO THE CLOSING
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During the period commencing on the date hereof and continuing through
the Closing, the Seller covenants and agrees (except as expressly contem plated
by this Agreement or to the extent that the Purchaser shall otherwise expressly
consent in writing) that:
7.1 Ordinary Course. The Seller shall conduct its business in, and only
in, the ordinary course and shall maintain its properties and assets in good
condition and repair.
7.2 Corporate Changes The Seller shall not declare, set aside, make or
pay any dividend or other distribution in respect of its capital stock or
purchase or redeem, directly or indirectly, any shares of its capital stock, or
liquidate or dissolve or obligate itself to do, other than as contemplated by
this Agreement.
7.3 Indebtedness The Seller shall not incur any indebtedness, sell any
debt securities or lend money to or guarantee the indebtedness of any person.
The Seller shall not restructure or refinance its existing Indebtedness.
SECTION 8. CONDITIONS PRECEDENT TO SELLER'S OBLIGATIONS
The obligations of the Seller under this Agreement are subject to the
Purchaser's fulfillment, before or at the Closing, of each of the following
conditions, unless waived in whole or in part in writing by the Seller:
8.1 Purchaser's Covenants. The Purchaser and the Parent shall have
performed all covenants required by this Agreement to be performed by it at or
before the Closing.
8.2 Delivery of Shares. The Purchaser shall deliver to the Seller a
certificate or certificates representing the Shares.
8.3 Delivery of Assumption Document. The Purchaser shall deliver to the
Seller an assumption document, in a form acceptable to counsel for the Seller,
relating to the assumption of the Seller's obligations as described in Section
2.2.
SECTION 9. CONDITIONS PRECEDENT TO PURCHASER'S
AND PARENT'S OBLIGATIONS
The obligations of the Purchaser and of the Parent under this Agreement
are subject to each of the following conditions, unless waived in whole or in
part in writing by the Purchaser or the Parent:
9.1 Seller's Representations and Warranties. The representations and
warranties of the Seller set forth in Section 4 and of Reni set forth in Section
5 hereof shall be true and correct in all material respects at Closing as though
made at and as of that date, except as affected by transactions contemplated
hereby.
9.2 Seller's Covenants. The Seller shall have performed all covenants
required by this Agreement to be performed by it on or before the Closing.
9.3 Transfer Documents. The Seller shall deliver to the Purchaser
documents sufficient, in the opinion of legal counsel to the Purchaser, to vest
in the Purchaser, its successors and assigns, full legal and equitable title to
the Assets, together with the power of attorney described in Section 3.2.
SECTION 10. APPROVAL OF SELLER'S SHAREHOLDERS
<PAGE>
The Board of Directors of Seller shall and submit and recommend this
Agreement for shareholder adoption and approval, as provided for by the
applicable laws of the State of Utah. The affirmative vote of the holders of a
majority of all issued and outstanding common shares of the Seller shall be
required for the adoption and approval of this Agreement.
SECTION 11. OBLIGATIONS OF SELLER AFTER THE CLOSING DATE
11.1 Dissolution. From and after the Closing, the Seller will not
engage in any business, and as soon thereafter as is practicable will liquidate
and dissolve as a corporation, and, in connection therewith, shall distribute
the Shares received pursuant to Section 2 hereof to Reni in complete
cancellation and redemption of all issued and outstanding common shares of the
Seller.
11.2 Seller's Corporate Records. The Seller will make available to the
Purchaser for inspection and copying all books and records retained by it
pursuant to Section 1.1 hereof upon reasonable request for access thereto.
SECTION 12. TERMINATION
12.1 Circumstances of Termination. This Agreement may be terminated:
(a) by the Board of Directors of the Seller if any condition
provided in Section 7 hereof has not been satisfied or waived on or before the
Closing;
(b) by the Board of Directors of the Purchaser or of the
Parent if any condition provided in Section 8 hereof has not been satisfied or
waived on or before the Closing;
(c) by the Board of Directors of the Seller, the Purchaser or the
Parent if the Closing has not occurred by June 30, 1997;
12.2 Effect of Termination. In the event of a termination of this
Agreement pursuant to Section 11.1 hereof, each party shall pay the costs and
expenses incurred by it in connection with this Agreement and no party (or any
of its officers, directors and shareholders) shall be liable to any other party
for any costs, expenses, damages or loss of anticipated profits, except to the
extent that such termination results from the willful breach by a party hereto
of its representations, warranties, covenants or agreements set forth herein, in
which event the Parties shall retain such legal or equitable remedies as they
may enjoy.
SECTION 13. INDEMNIFICATION
13.1 Survival of Representations and Warranties. The representations
and warranties of the Parties hereto contained in this Agreement or in any
writing delivered pursuant hereto or at the Closing shall survive the Closing
and the consummation of the transactions contemplated hereby (and any
examination or investigation by or on behalf of any party hereto) until the
second anniversary of the Closing.
13.2 Indemnification.
(a) Reni covenants and agrees to defend, indemnify and hold
harmless the Purchaser, the Parent and the Seller and each person who controls
the Purchaser and/or Parent within the meaning of the Act, to the extent of the
value of the Shares, and by returning the Shares to the Parent
<PAGE>
without further recourse, from and against any damages arising out of or
resulting from: (i) any inaccuracy in or breach of any representation or
warranty made by the Seller or Reni in this Agreement or in any writing
delivered by the Seller or Reni pursuant to this Agreement or at the Closing; or
(ii) the failure of the Seller to perform or observe fully any covenant,
agreement or provision to be performed or observed by the Seller pursuant to
this Agreement.
(b) The Purchaser and Parent covenant and agree to defend,
indemnify and hold harmless the Seller and Reni from and against any damages
arising out of or resulting from: (i) any inaccuracy in or breach of any
representation or warranty made by the Purchaser or Parent in this Agreement or
in any writing delivered pursuant to this Agreement or at the Closing; (ii) the
failure by the Purchaser or Parent to perform or observe any covenant, agreement
or condition to be performed or observed by it pursuant to this Agreement.
13.3 Third Party Claims.
(a) If any party entitled to be indemnified pursuant to
Section 13.2 (an "Indemnified Party") receives notice of the assertion by any
third party of any claim or of the commencement by any such third person of any
action (an "Indemnifiable Claim") with respect to which another party hereto (an
"Indemnifying Party") is or may be obligated to provide indemnification, the
Indemnified Party shall promptly notify the Indemnifying Party in writing (the
"Claim Notice") of the Indemnifiable Claim; provided, that the failure to
provide such notice shall not relieve or otherwise affect the obligation of the
Indemnifying Party to provide indemnification hereunder, except to the extent
that any damages directly resulted or were caused by such failure.
(b) The Indemnifying Party shall have thirty days after
receipt of the Claim Notice to undertake, conduct and control, through counsel
of its own choosing, and at its expense, the settlement or defense thereof, and
the Indemnified Party shall cooperate with the Indemnifying Party in connection
therewith; provided, that (i) the Indemnifying Party shall permit the
Indemnified Party to participate in such settlement or defense through counsel
chosen by the Indemnified Party (subject to the consent of the Indemnifying
Party, which consent shall not be unreasonably withheld), provided that the fees
and expenses of such counsel shall not be borne by the Indemnifying Party, and
(ii) the Indemnifying Party shall not settle any Indemnifiable Claim without the
Indemnified Party's consent. So long as the Indemnifying Party is vigorously
contesting any such Indemnifiable Claim in good faith, the Indemnified Party
shall not pay or settle such claim without the Indemnifying Party's consent,
which consent shall not be unreasonably withheld, delayed or conditioned.
(c) If the Indemnifying Party does not notify the Indemnified
Party within thirty days after receipt of the Claim Notice that it elects to
undertake the defense of the Indemnifiable Claim described therein, the
Indemnified Party shall have the right to contest, settle or compromise the
Indemnifiable Claim in the exercise of its reasonable discretion; provided, that
the Indemnified Party shall notify the Indemnifying Party of any compromise or
settlement of any such Indemnifiable Claim.
(d) Anything contained in this Section 13.3 to the contrary
notwithstanding, Reni shall not be entitled to assume the defense for any
Indemnifiable Claim (and shall be liable for the reasonable fees and expenses
incurred by the Indemnified Party in defending such claim) if the Indemnifiable
Claim seeks an order, injunction or other equitable relief or relief for other
than money damages against the Purchaser or the Seller which
<PAGE>
the Purchaser determines, after conferring with its counsel, cannot be separated
from any related claim for money damages and which, if successful, would
adversely affect the business, properties or prospects of the Seller.
13.4 Indemnification Non-Exclusive. The foregoing indemnification
provisions are in addition to, and not in derogation of, any statutory,
equitable or common-law remedy any party may have for breach of representation,
warranty, covenant or agreement.
SECTION 14. GENERAL PROVISIONS
14.1 Waiver. Any failure on the part of either party to comply with any
of the obligations, agreements or conditions hereunder may be waived in writing
by the party to whom such compliance is owed.
14.2 Notices. All notices and other communications hereunder shall be
in writing and shall be deemed to have been given if delivered in person or sent
by prepaid, first class, registered or certified United States mail, with return
receipt requested, as follows:
If to Purchaser or Parent: If to Seller:
Pen Interconnect, Inc. PowerStream Technology, Inc.
2351 South 2300 West 1825 N. Mountain Springs Parkway
Salt Lake City, Utah 84119 Springville, Utah 84663
Attn: James S. Pendleton Attn: Daniele Reni
Fax: 801.977.3887
With Purchaser copy to:
Parsons Behle & Latimer
201 South Main Street
Suite 1800
Salt Lake City, Utah 84111
Attn: Stuart A. Fredman
Fax: 801.536.6111
14.3 Entire Agreement. This Agreement (including the documents referred
to herein) constitutes the entire Agreement between the Parties and supersedes
and cancels any other agreement, representation or communication, whether oral
or written between the Parties hereto relating to the transactions contemplated
herein or the subject matter hereof. \
14.4 Governing Law. This Agreement shall be governed by and construed
in accordance with the laws of the State of Utah, without giving effect to any
choice or conflict of law provision (whether of the State of Utah or other
jurisdiction) which would cause the application of any rule or regulation other
than of the State of Utah.
14.5 Effect. This Agreement shall inure to the benefit of, and be
binding upon, the Parties hereto and their successors and assigns. Any
assignment, however, by either party of its rights under this Agreement without
the written consent of the other party shall be void.
14.6 Amendments. The terms and conditions of this Agreement may be
amended or supplemented at any time by written agreement of both the Seller and
the Purchaser.
14.7 Counterparts. This Agreement may be executed simultaneously in
one
<PAGE>
or more counterparts, each of which shall be deemed an original but all of which
together shall constitute one and the same instrument.
14.8 Time. Time is of the essence in this Agreement.
14.9 Attorneys' Fees. In the event of a default or breach of any
provision of this Agreement, the defaulting party agrees to pay all costs
incurred by the non-defaulting party in enforcing this Agreement, including
reasonable attorneys' fees.
IN WITNESS WHEREOF, the Parties have caused this Agreement to be
executed as of the day and date first shown above.
PURCHASER: SELLER:
PEN TECHNOLOGIES, INC. PowerStream Technology, Inc.
By: _/s/ James S. Pendleton_________ By: /s/ Daniele Reni
Its: ________CEO_________________ Its: President
<PAGE>
Pen Interconnect, Inc. Exhibit 11
Calculation of Earnings per share
<TABLE>
<CAPTION>
Months Weighted
Common Out - Average
Fiscal Year End Shares Standing Shares
September 30, 1997
<S> <C> <C> <C>
Balance at October 1, 1996 3,033,407 12 3,033,407
Contingent Shares 55,568 6 27,784
Acquisition of PowerSteam 150,000 6 75,000
Conversion of bridge loan 88,888 2 14,815
Exercised Warrants 745,000 1 62,083
Balance at September 30, 1997 4,072,863 3,213,089
Loss for fiscal year end September 30, 1997 ($1,735,483)
Loss per share ($0.54)
</TABLE>
<TABLE>
<CAPTION>
Months Weighted
Common Out - Average
Fiscal Year End Shares Standing Shares
September 30, 1996
<S> <C> <C> <C>
Balance at October 1, 1995 1,700,000 12 1,700,000
IPO shares issued 1,000,000 10 833,333
Acquisition of InCirT 333,407 6 166,695
Balance at September 30, 1996 3,033,407 2,700,028
Loss for fiscal year end September 30, 1996 ($709,010)
Loss per share ($0.26)
</TABLE>
<PAGE>
Exhibit 23.1
CONSENT
We have issued our report dated December 12, 1997, accompanying the financial
statements of Pen Interconnect, Inc. appearing in the 1997 Annual Report on Form
10-KSB for the year ended September 30, 1997. We hereby consent to the
incorporation by reference of the aforementioned report in the Registration
Statements of Pen Interconnect, Inc. on Forms S-3 (File No. 33-96444-D,
effective August 4, 1997 and File No. 333-29927, effective August 29, 1997) and
on Form S-8 (File No. 333-2618 effective March 22, 1996).
GRANT THORNTON LLP
Salt Lake City, Utah
January 12, 1998
<PAGE>
Exhibit 99
PEN INTERCONNECT, INC.
2351 South 2300 West
Salt Lake City, Utah 84119
--------------------
Information Statement
This information statement is provided by the Board of Directors of Pen
Interconnect, Inc., a Utah corporation (the "Company"), in connection with
stockholder approval by written consent ratifying the actions of the Board of
Directors in issuing warrants to acquire 1,000,000 shares of Common Stock to
certain lenders.
The foregoing action has been effected by written consents (the
"Consents") executed by the holders of an aggregate of 51% of the Company's
outstanding Common Stock. In accordance with the regulations of the Securities
and Exchange Commission (the "Commission"), the Consents will be effective 20
days following the mailing of this information statement.
The warrants were issued from January through April 1997 to 15
individuals and entities (the "lenders") who loaned an aggregate of $1,000,000
to the Company. The warrants are exercisable at $2.00 per share and expire on
the tenth anniversary of their issuance. The loans are repayable after six
months. If a loan is not repaid when due, the number of shares issuable pursuant
to the lender's warrants doubles. If the loan is not repaid within 30 days of
maturity the exercise price for the warrants decreases to $1.00 per share. If a
loan becomes more than 60 days overdue the exercise price becomes equal to the
lesser of $1.00 per share and the greater of $.55 per share or 75% of the
average closing bid price of the Company's Common Stock during the 15 trading
days immediately preceding the date of exercise (the "Market Price"). If a loan
becomes more than 60 days overdue and the Company's stock is not listed on
Nasdaq, the exercise price becomes equal to the lesser of $1.00 per share and
75% of the Market Price. As of July 31, 1997, loans with a principal amount of
$775,000 remain outstanding. The Company has filed a registration statement to
register the sale of shares of Common Stock issuable on exercise of the
warrants.
Considerations
In general the Company's Certificate of Incorporation authorizes the
Board of Directors to create and issue securities convertible into Common Stock
without shareholder approval. However, the corporate governance rules which
apply to companies listed on the Nasdaq National Market System provide that a
company may not without shareholder approval in any transaction issue at less
than the greater of market value or book value a number of shares equal to more
than 20% of the number of shares of common stock then outstanding. Although the
matter is not free from doubt, the Company believes that it is the position of
Nasdaq that the Company is required to take into account all shares which are
issuable on exercise of the warrants even if it is improbable that the warrants
will be exercised because the exercise price of the warrants is greater than the
recent market price of the Common Stock. Although the exercise price of the
warrants is greater than the market price of the Common Stock, it is arguably
less than the Company's per share book value. Therefore the
<PAGE>
Company has obtained the Consents approving the issuance of the warrants in
order to satisfy the Nasdaq rules.
Vote Required
Under Utah law, the affirmative vote of a majority of the votes
eligible to be cast at a meeting of shareholders is required to approve the
authorization of the issuance of the warrants. The Consents satisfy this
requirement.
Dated: Salt Lake City, Utah
September 29, 1997
By Order of the Board of Directors
/s/ Dennis C. Ellis
Dennis C. Ellis
Secretary
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This Schedule contains summary financial information extracted from
Pen Interconnect, Inc. September 30, 1997 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> YEAR
<FISCAL-YEAR-END> SEP-30-1997
<PERIOD-END> SEP-30-1997
<CASH> 272,148
<SECURITIES> 400,000
<RECEIVABLES> 2,230,114
<ALLOWANCES> (137,058)
<INVENTORY> 3,355,871
<CURRENT-ASSETS> 6,909,396
<PP&E> 3,690,693
<DEPRECIATION> (1,303,063)
<TOTAL-ASSETS> 13,906,084
<CURRENT-LIABILITIES> 5,843,618
<BONDS> 0
40,729
0
<COMMON> 0
<OTHER-SE> 7,104,271
<TOTAL-LIABILITY-AND-EQUITY> 13,906,984
<SALES> 18,238,460
<TOTAL-REVENUES> 18,238,460
<CGS> 18,009,478
<TOTAL-COSTS> 21,152,705
<OTHER-EXPENSES> 69,162
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 612,143
<INCOME-PRETAX> (2,845,083)
<INCOME-TAX> (1,109,600)
<INCOME-CONTINUING> (1,735,483)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,735,483)
<EPS-PRIMARY> 0.54
<EPS-DILUTED> 0.54
</TABLE>
