U.S. Securities and Exchange Commission
Washington, D.C. 20549
Form 10-K
(Mark One)
[x] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended December 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from to
Commission file number 0-27510
TMCI Electronics, Inc.
(Exact name of registrant as specified in its charter)
Delaware 77-0413814
(State or other jurisdiction of incorporation or organization
(I.R.S. Employer Identification No.)
1875 Dobbins Drive, San Jose CA 95133 (Address of principal
executive offices) (Zip Code) Registrant's telephone number (408) 272-5700
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Securities registered under Section 12(g) of the Exchange Act:
Units
(Title of Class)
Common Stock
(Title of Class)
Class A Warrants
(Title of class)
Indicate by check mark whether the Registrant has (1) has 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 |_| No |X|
Indicate by check mark if disclosure of delinquent filers in response to
Item 405 of Regulation S-K is not contained in this form, and disclosure will
not 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-K
or any amendment to this Form 10-K. |_|
State the aggregate market value of voting and non voting common equity
held by non affiliates of the Registrant. The aggregate market value shall be
computed by reference to the price at which the common equity was sold, or the
average of the bid and asked price of such common equity, as of a date specified
within 60 days prior to the date of the filing (See definition of affiliate in
Rule 405 17 C.F.R. 405): $16,898,604.28 as of March 16, 1998.
Note: If a determination of whether a person or entity is an affiliate cannot be
made without unreasonable effort or expense, the aggregate market value of the
common equity held by non-affiliates may be calculated on the basis of
reasonable assumptions under the circumstances provided that the assumptions are
set forth in this Form.
(ISSUERS INVOLVED IN BANKRUPTCY
PROCEEDING DURING THE PAST FIVE YEARS)
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court. Yes |_| No |_|
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
State the number of shares outstanding of each issuer's classes of common
equity, as of the latest practicable date. 4,057,758 as of March 16, 1998.
DOCUMENTS INCORPORATED BY REFERENCE
None
<PAGE>
PART I
This Form 10-K contains 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. Actual results and the timing of
certain events could differ materially from those projected in the
forward-looking statements as a result of difficulties in product development,
sales, competition, changes in the economy and other unforeseen events. In the
event that this annual report is used in connection with an investment in TMCI
Electronics, Inc., prospective investors should carefully consider the
possibility that forward-looking statements discussed herein may differ
materially from the actual operating results.
Item 1. Business
Overview, Formation, and Acquisitions
TMCI Electronics, Inc. ("TMCI") provides custom manufacturing and
value-added services to original equipment manufacturers ("OEMs") through its
four subsidiaries: Touche Manufacturing Company, Inc. ("Touche"), Touche
Electronics, Inc., ("TEI"), Enterprise Industries, Inc. ("EII") and Trinity
Electronics, Inc. ("Trinity," collectively, with Touche, TEI and EII, the
"Subsidiaries" and the Subsidiaries, collectively with TMCI, the "Company"). The
customers of the Company are concentrated into four (4) different segments: (1)
mini and mainframe computers; (2) telecommunications equipment; (3)
semiconductor manufacturing test equipment; and (4) medical test equipment. The
Company manufactures products pursuant to customer specifications after
receiving orders from customers. The principal executive offices of the
Company are located in San Jose, California.
TMCI was incorporated in the State of Delaware on December 7, 1995 for the
purpose of acquiring the businesses of Touche and TEI in anticipation of a
public offering. Touche and TEI were principally owned by Rolando Loera, the
President and Chief Executive Officer of the TMCI. TMCI acquired all of the
issued and outstanding shares of common stock of Touche and TEI on March 11,
1996 from Mr. Loera and all of the minority shareholders of Touche and TEI
pursuant to the terms of certain Stock Purchase Agreements dated December 28,
1995 (the "Stock Purchase Agreements"). Following the exchange of common stock
of Touche and TEI contemplated by the Stock Purchase Agreements, the Company's
business became that of Touche and TEI. The Company now derives its revenues
from the operation of Touche and TEI and its other wholly owned subsidiaries
described below.
The Company actively seeks to enhance its growth through strategic
acquisitions and has made three acquisitions following its formation. Future
acquisitions, if any, will be made only if the Company can find candidates which
fit into its strategic goals and corporate structure.
Pen Interconnect, Inc. On November 1, 1996, the Company and TEI purchased
the net assets of the San Jose Division of Pen Interconnect, Inc., a
manufacturer of wire cable and harness assemblies, for a total purchase price of
three million three hundred thousand dollars ($3,300,000) consisting of two
million dollars ($2,000,000 ) in cash, nine hundred thousand dollars ($900,000)
in two promissory notes and fifty three thousand six hundred sixty nine (53,669)
shares of common stock of TMCI valued at $7.4532 per share determined as the
average of the last reported sales price of the common stock of TMCI for the 20
trading days prior to November 1, 1996. In addition, the Company agreed to pay
an additional six hundred thousand dollars ($600,000) in eighty thousand five
hundred three (80,503) shares of common stock of TMCI valued at $7.45 per share,
subject to the performance of the acquired division in accordance with the terms
of an earn out agreement. Following the closing of the transaction, a dispute
arose regarding the value of certain inventory which resulted in certain
adjustments to the foregoing purchase price. See Item 3 Legal Proceedings.
Enterprise Industries, Inc. On January 24, 1997, the Company acquired all
of the issued and outstanding shares of common stock of Enterprise Industries,
Inc., a metal stamping and manufacturing company, in exchange for one million
five hundred thousand dollars ($1,500,000) consisting of one million dollars
($1,000,000) in cash and ninety six thousand five hundred sixty (96,560) shares
of common stock of TMCI valued at $5.18 per share determined as the average of
the closing prices for TMCI common stock for the 10 trading days prior to
January 1, 1997.
Trinity Electronics, Inc. On December 22, 1997, Trinity Electronics, Inc., a
distributor of board level electronic component parts, merged with and into
TMCI/Trinity Acquisition Corp., a wholly owned subsidiary of TMCI. The parties
negotiated October 1, 1997 as the effective date for accounting purposes. The
sole shareholder of Trinity received a total of four million two hundred ninety
thousand dollars ($4,290,000) consisting of one million dollars ($1,000,000) in
cash, one million two hundred ninety thousand dollars ($1,290,000) in two
promissory notes and four hundred four thousand five hundred thirty-nine shares
(404,539) of TMCI common stock valued at $4.94 per share determined as the
average closing price of common stock of TMCI for the ten trading days prior to
September 4, 1997. The notes pay interest in the amount of 9% per annum. The
$290,000 note is due April 15, 1998. The $1,000,000 note was personally
guaranteed by Rolando Loera, the Chief Executive Officer of the Company, was due
March 9, 1998 and was paid without penalty. The shares are being held in escrow
pursuant to the terms of an escrow agreement as security for the representations
of Trinity and its sole shareholder made in the merger agreement and are being
released from escrow in the amount of 25% one year following the closing, 25%
two years following the closing, 35% three years following the closing and 15%
four years following the closing. In connection with this merger, the Company
received approximately $3,583,000 in goodwill which is being amortized over 15
years. Following the merger, TMCI /Trinity Acquisition Corp. changed its name to
Trinity Electronics, Inc.
Financial Information About Product Lines.
1995 1996 1997
Sales to
Unaffiliated
Customers
Manufacturing $18,952,842 $17,823,148 $23,264,194
Wire and Cable 0 866,334 9,173,355
Turnkey 9,146,077 7,450,346 5,607,052
===========================================
Total 28,098,919 26,139,828 38,044,601
Sales to
Affiliates
Manufacturing $ 4,649,012 $3,712,554 $2,077,246
Wire and Cable 0 0 1,062,571
Turnkey 0 0 0
===========================================
Total 4,649,012 3,712,554 3,139,817
Operating Profit
(loss)
Manufacturing
$ 1,680,311 $451,988 $801,740
Wire and Cable 0 144,848 846,273
Turnkey 42,013 (71,886) 397,476
===========================================
Total 1,722,234 524,950 2,045,489
Identifiable
Assets
Manufacturing $ 8,452,937 $8,914,649 $16,999,053
Turnkey 3,959,230 2,536,886 3,526,700
Cable 0 4,030,092 6,933,093
===========================================
Total 12,412,167 15,481,627 27,458,846
Description of Business.
.
General Market for Contract Manufacturing Services.
The Company focuses on selling products and services to OEMs interested in
utilizing custom manufacturers. OEMs have been increasing their use of custom
manufacturers in order to reduce their investment and focus their resources.
Reduce Investment. Advances in technology of electronic products and
increases in unit volumes require OEMs to invest more heavily in internal
manufacturing through increased working capital, capital equipment, labor,
systems and infrastructure. Use of contract manufacturers such as the Company
allows OEMs to maintain advanced manufacturing capabilities while minimizing
overall resource requirements.
Focus Resources. With the increased level of competition and the pace of
product change in the electronics industry, use of contract manufacturers such
as the Company enables OEMs to focus more sharply on their own core competencies
where they add the greatest value such as product development and marketing.
<PAGE>
Target Market for the Company
The Company provides its custom manufactured products to a wide range of
companies that manufacture: (1) mini and mainframe computers; (2)
telecommunications equipment; (3) semiconductor test equipment; and (4) medical
test equipment, primarily in the Silicon Valley area.
Computer Systems. The Company's manufacturing and assembly businesses provide
a full complement of manufacturing capabilities for mini and mainframe
computers. As the industry is being reshaped by evolutionary changes in
semiconductor design and memory capacity, OEMs are outsourcing more of their
manufacturing of their metal cabinets and enclosures. The Company focuses
primarily on commercial markets.
Telecommunications Equipment. Based on the changing conditions within the
telecommunications industry, the Company believes that the need for
telecommunications equipment will continue to grow at an above average annual
rate. The Company actively markets itself to this industry and believes that,
with its present and future manufacturing and service capabilities, it is well
positioned to service this growing industry. Marketing activities in this
segment are directly in line with the Company's acquisition of facilities for
the production of specific types of wire and cable contained in products used by
the telecommunications equipment industry.
Semiconductor Test Equipment. The Company markets its product manufacturing
and service capabilities in the semiconductor test equipment market areas. The
Company targets principally large and medium-sized corporations that specialize
in the design and development of scientific measurement and production test
devices that may be used by major producers in the semiconductor industry who
design and manufacture wafers that produce computer chips and the like. The
Company will continue to explore and expand new opportunities with its customer
base and look to refine the diversification of its production capabilities in
designing and manufacturing products used within this market segment.
Medical Test Equipment. The Company markets its manufacturing and cable
harness assembly services to existing and prospective OEMs of medical test
equipment. The Company targets customers with strong track records in the
design, development and production of sophisticated medical diagnostic and
analysis equipment, such as MRI equipment, which is used in hospital and medical
clinics by medical doctors to assist in their diagnoses of serious and
complicated patient medical problems. The Company believes that this industry
will grow, offering increased opportunities to companies which are positioned to
provide cost-effective manufacturing and value added services at competitive
prices.
<PAGE>
Operations of the Company
Business Conducted by Subsidiaries
The Company provides its manufacturing services through Touche and EII, its
turnkey and cable and harness assembly services through TEI with a limited
portion provided by Trinity, and its distribution services through Trinity.
Manufacturing. The manufacture and fabrication of custom-designed metal
enclosures cannot be homogenized into a single operation or manufacturing
approach for its entire production line. With each custom order received from a
customer comes a different list of requirements for manufacturing design,
process and finish. In addition, the manufacturing environment allows for the
manufacture of both prototype and production of the various types of customer
products. To support its manufacturing operations, the Company maintains a wide
variety of sophisticated automated machinery and shop equipment, tools, and
supplies.
Touche Manufacturing Company, Inc. Touche manufactures custom designed
fabricated metal cabinets and enclosures for OEMs to house various types of
electronic components. As a full service manufacturing facility, Touche's
engineering and design personnel work closely with each customer to design and
build an initial prototype of the specified cabinet or enclosure. Based upon the
development of the prototype, the Company develops a cost effective
manufacturing process. Touche provides all of the manufacturing processes in
house, which includes metal shearing, punching, bending and welding, as well as
machining, detailing, zinc plating, painting and final assembly. All raw
materials used to manufacture these products are readily available from numerous
suppliers at competitive prices. By controlling the various manufacturing
processes in-house, Touche provides its customers with custom manufactured metal
cabinets or enclosures in a timely and cost-effective manner, giving Touche a
competitive advantage over other manufacturers that have to sub-contract for one
or more of the various manufacturing processes. Approximately 75% of Touche's
manufacturing is performed on a volume production basis for metal cabinets or
enclosures, while the remaining 25% is in developing prototype products for
future use by its customers.
Enterprise Industries, Inc. EII provides production metal stamping, precision
machining and electrical discharge manufacturing services to OEMs. Because EII
has tool and die capability, use of its services generally requires a higher up
front costs for the production of the tools with correspondingly lower per unit
production costs than the processes used by Touche. EII services clients in
automotive, furniture, hardware, audio components, and aerospace industries in
addition to servicing clients in the core industries serviced by the Company and
is focusing its marketing efforts on the target market of the Company. Recently,
EII moved from a 25,000 square foot facility into a 126,000 square foot facility
to accommodate anticipated growth.
Cable and Harness Assembly.
Touche Electronics, Inc. In late 1992, a number of Touche's customers
expressed an interest in identifying methods of reducing their own manufacturing
costs. Accordingly, Touche examined its existing manufacturing capabilities and
considered other types of services that could be offered to its customers in
conjunction with its manufacturing of custom designed fabricated metal cabinets
and enclosures. In early 1993, TEI was formed as a sister company to Touche to
provide value added services. In November, 1996, TEI assumed responsibility for
operating acquired assets of the San Jose Division of Pen Interconnect, Inc.
Accordingly, TEI currently operates two divisions.
Turnkey Division. TEI provides value added turnkey services to many of
Touche's OEM customers. These services are primarily the installation of cable
and harness assemblies into the products manufactured by Touche and also into
enclosure products manufactured by other custom manufacturers and OEMs that do
not have the in-house capability to provide such services. In 1996, TEI added
clean room assembly at the request of its customers as part of its strategy to
expand its value added services. All of TEI's value-added turnkey services are
provided pursuant to contracts or purchase orders with its customers.
Cable and Harness Division. To obtain better prices for the cable and
harness material installed by the Turnkey Division, TEI acquired the net assets
(accounts receivable, inventory and capital equipment) of the San Jose based
division of Pen Interconnect, Inc. The acquired division produces different
types of wire cable and harnesses installed by TEI and other companies in metal
cabinets and enclosures. The cable and harness division both produces cable for
use by TEI in the Turnkey Division and sells cable to OEMs and other contract
manufacturers.
Distribution
Trinity Electronics, Inc. Trinity is primarily a passive electronics
distributor of board level electronic components including capacitors,
resistors, board to board interconnects, back plane interconnects and D-subs
to OEMs and contract manufacturers. Trinity primarily sells to instrumentation
industry accounts. Trinity provides just-in-time, bin stocking, and KanBan
inventory services to its distribution customers. In addition, Trinity
provides cable assembly services to its customers at competitive prices using
franchise lines for assemblies. Sales of electronic parts to OEMs are
approximately 55% of the revenues of Trinity. Sales of assembled cable both
to OEMs and contract manufacturers are approximately 30% of the
revenues of Trinity. Sales of electronic parts to contract manufacturers
are approximately 15% of the revenues of Trinity. In addition to revenues
generated from the operations of Trinity, the Company expects to see
additional benefits through better pricing on connectors used by
the cable and harness division of TEI and introductions to OEM customers of
Trinity that may be interested in utilizing the contract manufacturing services
of the Company.
New Product Service Lines of Business
In 1996, TEI added clean room assembly internally as well as cable and
harness assembly through its acquisition of the San Jose Division of Pen
Interconnect, Inc.
In 1997, the Company added metal stamping and tool and die capability through
its acquisition of EII as well as distribution of board level electronic
components through the acquisition of Trinity.
Marketing and Sales
The marketing strategy of the Company focuses on developing long-term
relationships with OEMs in its target market of computers, telecommunications
equipment, semiconductor test equipment and medical test equipment. The Company
intends to focus its marketing efforts on a greater number of manufacturers of
telecommunications equipment, provided, however, that the marketing efforts of
the Company will continue to reflect the evolution of OEMs from different
segments of the technology industry to use contract manufacturers.
Touche and TEI will continue to focus and concentrate on major existing
customers and to pursue new business from other potential customers in evolving
segments of its core industry focus. EII will focus its efforts on expanding its
business in the core industry segments of Touche and TEI. The ability of the
Company to maintain relationships with major existing customers remains a
significant factor in determining future growth of the Company. The Company
intends to achieve growth through competitive pricing strategies, expansion of
existing turnkey capabilities and more aggressive direct sales efforts
supplemented by sales representatives in geographic areas where the Company does
not have a physical presence. As a result of the limited and focused target
market, the marketing efforts of the Company will rely primarily on direct sales
efforts, which will emphasize its design-engineering and quality control
manufacturing capabilities.
Sales activities of Company are handled by a combination of direct sales
personnel and limited use of independent sales representatives. Because of the
complexity and analysis involved in the customer's design and purchase decision,
management emphasizes active interaction between the direct sales staff, its
independent sales representatives and the buyer or engineer throughout the
selling process.
Customer Service and Support
The Company handles all customer service-related inquiries or complaints
through the sales staff who have been assigned to handle and manage account
relationships. This requirement enables the salesperson to monitor and control
the quality of production during the entire manufacturing process, which is
designed to help prevent production problems before shipment is made to
customers. Such efforts are supported by the engineering department of the
appropriate Subsidiary which is directly involved in the development process of
the products.
To ensure that adequate support is given to customers, each salesperson has
formal sales training augmented by direct participation in the manufacturing
process at the appropriate facility.
Working Capital Practices
Because the Company produces custom designed products, it orders inventory to
fulfill existing orders resulting in minimal financial exposure.
Sources of Supply, Major Suppliers and Backlog
The largest supplier of the Company is Teredyne Connection Systems, Inc.
Purchases from this vendor accounted for approximately 7.6% of the combined
purchases of the Company in calender 1997.
The raw materials, such as sheet metal, wire and cable, and electronic
components used in the development and manufacture of customer products are
generally available from domestic suppliers at competitive prices; fabrication
of certain major components may be subcontracted for on an as-needed basis. With
the exception of other material requirements, sheet metal may be purchased on an
as-needed basis under a consignment arrangement with suppliers. The Company does
not have any material long term contracts for new materials. The Company has not
experienced any significant difficulty in obtaining adequate supplies to perform
under its contracts.
Touche and TEI have established operating policies that require the
development and maintenance of a second vendor source for purchasing materials
and supplies that are needed to perform under contract for their customers. This
purchasing requirement focuses on the prevention of potential problems that
might otherwise originate from a single supplier's financial condition. Such
policies allow greater flexibility in keeping purchasing costs down and greater
assurance that raw material is available in order to meet customer contract and
delivery requirements.
At December 31, 1997, the Company had a firm backlog approximately $
18,000,000. The Company does not believe that its combined rolling backlog at
any particular time is necessarily indicative of its future business or
performance.
Major Customers
Touche and TEI's major customers include various technology industry
related companies, such as Hewlett Packard Company, Lam Research Corporation,
Tandem Computers Inc., Applied Materials, Inc., KLA Instruments, and Varian
Associates, Inc. For the year ended December 31, 1997, revenues derived from two
customers (Lam Research Corporation and Tandem Computers Incorporated) amounted
to approximately 12% and 14% respectively, of total revenue, excluding
intercompany sales. Due to the growth in sales to other customers, reliance on
major customers represents a substantial shift from 1996 when the Company had
three customers each accounting for over 10% of its business individually and
65% of its business in the aggregate. As the sales arrangements with these
customers are terminable upon short notice, the loss of any one of them would
have a material adverse impact on the revenues and profits of the Company, given
the significant percentage of revenues derived from these customers. Although
the Company cannot control the needs of these customers, the Company believes
that expansion of services offered by the Company will strengthen its
relationship with these customers.
Patent, Trademark, Copyright and Proprietary Rights
The Company does not have any patent or copyright applications pending,
because the Company does not offer or provide any original design work that is
not otherwise proprietary to the product design-engineering of their customers.
The Company owns trademark rights to its "Touche" trademark and
servicemark.
Competition
Manufacturing of enclosures for electronic equipment is highly competitive,
fragmented, and involves rapid change. Competitors of the Company range from
small firms able to provide only a few of the services provided by the Company
to substantially bigger, better financed competitors able to provide more value
added services. Competition is generally based on several factors, including
services provided, quality of work, reputation, price and marketing approach.
The Company is established in the industry and maintains a strong competitive
presence by delivering high-quality work in a timely fashion within the
customer's budget constraints with enhanced ability to deliver value added
services.
Because of the continuing change by OEMs from manufacturers to
design-engineering, electronics value added, and marketing organizations,
contract manufacturers are receiving a much greater share of the overall
manufacturing task of products that are designed for manufacture by their
customers. The process itself removes more and more of the subcontracting and
replaces it with a prime contractor status gradually eliminating the need for
submitting joint subcontracting work proposals. By reducing the number of
subcontractors, the customers benefit from the reduction in the turnaround time
and the maintenance of more efficient and quality based manufacturers. The
Company believes that the creation and maintenance of a "one-stop shop"
manufacturing environment makes it an effective competitor in the industry.
Government Regulation
Substantial environmental laws have been enacted in the United States and
California in response to public concern over environmental deterioration. These
laws and the implementing regulations affect nearly every activity of Touche,
TEI and EII. The principal federal and state legislation which has the most
significant effect on the Company's business includes the following: The
Comprehensive Environmental Response; Compensation and Liability Act; The
Resource Conservation and Recovery Act; The Clean Air Act; The Safe Drinking
Water Act; The Emergency Planning and Community Right-to-Know Act; The Clean
Water Act; and The Toxic Substance Control Act. Failure by the Company to comply
with applicable federal and state environmental regulations could result in the
Company incurring substantial fines and penalties and/or having restraining
orders issued against it.
Employees
As of December 31, 1997, the Company employed approximately 585 persons,
including the officers of the Company, all of whom are full-time employees and
none of whom are subject to collective bargaining agreements. Of these full-time
employees, 114 are engaged in administration and finance, 457 in manufacturing,
engineering and production, and 14 in marketing and sales. Many employees of the
Company have overlapping responsibilities in these job descriptions. The Company
has never experienced a work stoppage. The Company believes that its
relationships with its employees are good.
Item 2. Description of Property
Touche leases approximately 224,000 square feet of factory manufacturing
space in three adjacent buildings which are equipped with state-of-the-art metal
fabrication equipment. Touche leases approximately 123,000 square feet at 1875
Dobbins Drive, San Jose, California 95133, which consists of 113,000 square feet
in manufacturing space and approximately 10,000 square feet of office space. In
addition, TEI leases approximately 78,000 square feet of manufacturing space at
1881-1899 Dobbins Drive, San Jose, California 95133. Touche leases approximately
22,000 square feet of manufacturing space at 1565-C Mabury Road, San Jose,
California 95133. EII leases approximately 126,000 square feet of combined
office and manufacturing space in a light industrial building at 7500 Tyrone
Avenue, Van Nuys, California. The Company negotiates all lease agreements on a
triple net basis with landlords.
Item 3. Legal Proceedings
Subsequent to the closing of the acquisition of the San Jose Division of Pen
Interconnect, Inc. ("PII"), a dispute arose regarding various aspects of the
transaction. On February 14, 1997, the Company filed a Demand for Arbitration
against PII, seeking a substantial purchase price reduction, or, in the
alternative, other remedies and damages as provided by law. The Company sought
such remedies based upon overstatement of the value of inventory in connection
with the acquisition, a substantial change in the operation of the division
prior to the acquisition and failure to disclose certain accounts payable to the
Company.
On December 5, 1997, the Company and PII entered into a settlement agreement
pursuant to which PII agreed to cancel the earn out agreement which eliminated
the ability of PII to receive up to an additional six hundred thousand dollars
($600,000) in the form of eighty thousand five hundred three (80,503) shares of
the common stock of the Company. In addition, EII agreed to cancel two
promissory worth nine hundred thousand dollars ($900,000) and accrued interest
as well as release Rolando Loera from his personal guaranty thereon in exchange
for one hundred thirty two thousand twenty three (132,023) shares of common
stock of the Company. The Company delivered an additional five thousand three
hundred sixty seven (5,367) shares of its common stock in satisfaction of its
obligation to issue additional common stock for collection of certain accounts
receivable of PII pursuant to the Asset Purchase Agreement. Further, the Company
released fifty three thousand six hundred sixty nine (53,669) shares of its
common stock owned by PII and being held in escrow as security for the
obligations of PII under the Asset Purchase Agreement. The Company waived
certain additional claims against PII in the amount $77,000. Finally, PII agreed
to cooperate with the Company in obtaining an audit of the acquired division so
that the Company could file the necessary financial statements with the
Securities and Exchange Commission.
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its annual shareholder meeting on December 22, 1997 for the
purpose of approving an amendment to the bylaws to permit a staggered board of
directors; electing directors; approving an amendment to the certificate of
incorporation authorizing ten million (10,000,000) shares of preferred stock;
approving the 1997 Stock Option Plan (the "1997 Plan"); approving the 1997
Employee Stock Purchase Plan (the "ESPP"); and ratifying the appointment of
Moore Stephens, PC as the independent auditors of the Company.
A total of 3,341,981 shares of common stock were present in person or by
proxy at the meeting. For the amendment to the bylaws for the staggered board,
of the shares present and able to vote at the meeting, 1,421,327 shares voted in
favor of the amendment, 166,930 shares voted against the amendment, 29,300
shares abstained from voting, and 1,624,424 shares did not vote. For the
election of directors, of the shares present and able to vote at the meeting,
3,184,151 shares voted in favor of each and every nominee, 157,830 shares voted
against each and every nominee, no shares abstained and no shares went unvoted.
For the amendment to the articles of incorporation to authorize preferred stock,
of the shares present and able to vote at the meeting, 1,384,077 shares voted in
favor of the amendment, 250,280 shares voted against the amendment, 33,200
shares abstained from voting, and 1,624,424 shares did not vote. For the 1997
Plan, of the shares present and able to vote at the meeting, 1,392,977, shares
voted in favor of the 1997 Plan, 244,980 shares voted against the 1997 Plan,
29,600 shares abstained from voting, and 1,624,424 shares did not vote. For the
ESPP, of the shares present and able to vote at the meeting, 1,452,977 shares
voted in favor of the ESPP, 191,180 shares voted against the ESPP, 23,400 shares
abstained from voting, and 1,624,424 shares did not vote. For approval of Moore
Stephens as the independent auditors of the Company, of the shares present and
able to vote at the meeting, 3,300,511 shares voted in favor of approving Moore
Stephens, P.C. as the independent auditors, 11,020 shares voted against
ratifying Moore Stephens, P.C. as the independent auditor, and 30,450 shares
abstained from voting.
<PAGE>
Item 5. Market for Common Equity and Related Stockholder Matters
The Company's Common Stock is quoted on the NASDAQ SmallCap market. The
following table sets forth the reported high and low bid quotation for the
Common Stock of the Company for the periods indicated. Such quotations reflect
inter dealer prices, without retail mark up, mark down or commission and may not
necessarily reflect actual transactions.
Common Stock
High Low
1996
First Quarter $8.375 $6.50
Second Quarter $9.50 $8.375
Third Quarter $9.50 $6.50
Fourth Quarter $7.00 $4.75
1997
First Quarter $6.75 $4.50
Second Quarter $7.00 $4.50
Third Quarter $6.25 $4.50
Fourth Quarter $6.19 $4.00
On March 16, 1998, the closing bid price of the Company's Common Stock as
reported on the NASDAQ SmallCap Market system was $5.66. As of March 12, 1998,
there were approximately 38 holders of record of the Company's Common Stock. The
Company has not paid any dividends on its common stock in the past three years
and anticipates retaining future earnings, if any, to finance the growth of the
Company.
On February 10, 1998, the Company raised $3.3 million through the sale of its
5%, $275,000 principal amount, Convertible Subordinated Debentures. Such
securities were issued in reliance of Rule 506 of Regulation D promulgated by
the U.S. Securities and Exchange Commission pursuant to its authority under the
Securities Act of 1933, as amended, in as much as all investors were accredited
investors as defined in Regulation D. See Item 7 Management's Discussion and
Analysis of Financial Condition and Results of Operations; Subsequent Events.
<PAGE>
Item 6. Selected Financial Data
The following selected historical financial information of the Company is
qualified by reference to and should be read in conjunction with the financial
statements and notes thereto included elsewhere herein. The selected financial
information set forth below for each of the fiscal years ended December 31, 1997
and December 31, 1996 is derived from financial statements contained in this
Form 10-K. The selected financial information for the years December 31, 1995
and December 31, 1994 is derived from financial statements of the Company
audited by Moore Stephens, P.C., independent public accounts, which are included
in the prospectus for the public offering of the Company completed on March 5,
1996. The selected financial data for the year ended December 31, 1993 is
derived from unaudited financial statements of the Company which are not
included in documents filed with the Securities and Exchange Commission.
Selected Financial Data (in thousands except for per share data)
Years Ended
December 31
1997 1996 1995(1) 1994(1) 1993(1)
- -------------------------------------------------------------------------------
Statement of Operations
Data
Net Sales 38,947 26,140 28,099 20,869 14,391
Net Income 1,136 148 473 420 248
Net Income per
Common Share
from Operations (2) 0.31 0.05 0.25 0.22 0.08
Balance Sheet Data
Total Assets 28,543 15,482 12,412 9,332 6,982
Total Long Term
Obligation 4,168 2,501 2,757 2,682 2,576
Shareholders'
Equity 13,299 8,639 2,180 957 257
(1) For comparative purposes, the amounts have been combined to give
retroactive effect to the acquisition by TMCI of all of the outstanding
common stock of Touche and TEI.
(2) See Note 3 to the financial statements for an explanation of the basis
used to calculate net income per share and weighted average common shares
and share equivalents.
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations
Overview
On March 5, 1996, the Company acquired Touche and TEI pursuant to certain
Stock Purchase Agreements executed on December 28, 1995. Prior to that time, the
Company's operations consisted of forming the Company, preparing for the
acquisition of Touche and TEI, as well as preparing for the initial public
offering of its securities discussed below.
The Company's strategy has been to expand its core and value added business
by increasing its product offerings to satisfy the needs of its customers and
their growing demand for more outsourcing of contract manufacturing services. On
November 1, 1996, TEI acquired the San Jose cable and harness manufacturing
division of Pen Interconnect, Inc. On January 1, 1997, the Company acquired
Enterprise Industries, Inc., a metal stamping business. Effective
October 1, 1997, the Company acquired the operations of Trinity
Electronics, Inc., a passive distributor of board level electronic components;
Trinity formally merged with a wholly owned subsidiary of the Company on
December 22, 1997.
<PAGE>
Year Ended
December 31,
1997 1996 1995
---- ---- ----
Sales 100% 100% 100%
Costs of Goods Sold 73.8 77.4 77.2
------------------------------------
Gross Profit 26.2 22.6 22.8
Operating Expenses 20.9 20.6 16.7
------------------------------------
Income From Operations
5.3 2.0 6.1
Net Other Expenses 0.6 1.4 2.5
Income Before Provision for 4.7 0.6 3.6
Income Taxes
Provision for Income Taxes 1.8 0.0 1.9
====================================
Net Income 2.9 0.6 1.7
All figures rounded to the nearest one tenth of one percent.
Results of Operations - For the Fiscal Year Ended December 31, 1997
Compared with the Fiscal Year Ended December 31, 1996
The results of operations utilizes the consolidated results of the Company.
The discussion below should be read in conjunction with the financial statements
and the notes thereto, that appear elsewhere in this report.
Net Sales
The Company's net sales increased approximately $12,806,838 or 49% to
$38,946,666 from $26,139,828 in the fiscal year ended December 31, 1997, as
compared with the fiscal year ended December 31, 1996. Sales growth was due to a
significant increase in sales volume through both existing as well as new
customer orders, and significant growth and continued diversity of operations
through the acquisition of the cable and harness and metal stamping
manufacturing businesses at the end of 1996 and beginning of 1997,
respectively, as new product services continue to be introduced and added to
consolidated operations. In addition, the acquisition of Trinity Electronics,
Inc., effective October 1, 1997 for accounting purposes, impacted positively on
the fourth quarter.
Inasmuch as the Company's two largest customers accounted for approximately
26% of revenues for the fiscal year ended December 31, 1997, with the largest
accounting for 14% of such revenues, the disruption or loss of a significant
amount of business of either one could have a material adverse impact on the
total revenues of the Company. The Company has reduced dependency of the major
customers substantially; in 1996, the three largest customers of the Company
accounted for 65% of total revenues of the Company.
Gross Profit
The Company's gross profit increased approximately $4,288,536 or 73% to
$10,190,618 from $5,902,082 in the fiscal year ended December 31, 1997, as
compared with the fiscal year ended December 31, 1996. As a percentage of sales,
the Company's gross profit increased 3.6% to 26.2% from 22.6 in the fiscal year
ended December 31, 1997, as compared with the fiscal year ended December 31,
1996. The increase in gross profit is primarily due to increased sales and the
acquisition and successful integration of the cable and harness and metal
stamping businesses. The Company's gross profit margin may be materially
impacted by the diversity of its operations which are constantly modified in
order to meet the changing demands of the competitive market bidding processes
with its customers.
Operating Expenses
General and administrative expenses increased approximately $2,760,982 or 51%
to $8,138,114 from $5,337,132 in the fiscal year ended December 31, 1997, as
compared with the fiscal year ended December 31, 1996. As a percentage of sales,
general and administrative expenses remained constant at approximately 21% for
the fiscal year ended December 31, 1997, as compared with the fiscal year ended
December 31, 1996. The dollar increase in general and administrative expenses
resulted primarily from increased overhead and transaction costs associated with
the acquisitions.
<PAGE>
Other Income [Expense]
The Company's other expenses decreased approximately $127,060 or 36% to
$230,554 from $357,614 in the fiscal year ended December 31, 1997, as compared
with the fiscal year ended December 31, 1996. The decrease was primarily due to
the elimination of a one time non-cash finance charge in the amount of $462,122
on certain bridge loans incurred by the Company in 1996 and an increase of
$102,121 in other income, offset by an increase of $274,697 in interest expense
used to finance increases in inventory, the nonreocurrence of $69,742 in
interest income and a reduction of $138,224 in gains from the sale of equipment.
Income Tax Expense
Income tax expense increased $666,765 to 685,764 from $18,999 as a result
of a substantial increase in income from operations and the full
utilization of net operating loss carry forwards in the prior year.
Net Income
Net income before taxes increased approximately $1,654,614 to
$1,821,950 from $167,336 in the fiscal year ended December 31, 1997, as compared
with the fiscal year ended December 31, 1996. The increase in net income was due
primarily to: (1) a net increase in income from operations of approximately
$1,654,614 resulting from increased sales and sales from recently acquired
companies, and (2) a net decrease in other expenses of approximately $127,060.
Net income after taxes increased approximately $987,849 to $1,136,186 from
$148,387 for the fiscal year ended December 31, 1997 compared to the fiscal year
ended December 31, 1996 .
<PAGE>
Results of Operations - For the Fiscal Year ended December 31, 1996
compared with the Fiscal Year Ended December 31, 1995
The Results of Operations discussion utilizes the consolidated results in
1996 compared to the combined results in 1995 from the operating subsidiaries
(Touche and TEI) prior to their acquisition by the Company, eliminating
inter-company transactions.
Net Sales
Net sales decreased approximately $1,950,100 or 7% to $26,139,828 from
$28,089,919 for the fiscal year ended December 31, 1996, as compared with the
fiscal year ended December 31, 1995. The decline in net sales was due primarily
to significant order cancellations and rescheduling of orders by one of the
Company's major customers, which resulted from (1) a change in local market
conditions, and (2) a general slowdown in the semiconductor manufacturing
marketplace. This general slowdown impacted the industry as a whole.
Gross Profit
Gross profit decreased approximately $499,702 or 8% to $5,902,082 from
$6,401,784 for the fiscal year ended December 31, 1996, as compared to the
fiscal year ended December 31, 1995. As a percentage of sales, gross profit
remained constant during the period the fiscal year ended. The decrease is
primarily due to the corresponding reduction in sales.
Operating Expenses
Operating expenses increased approximately $697,672 or 14% to $5,377,132
from $4,679,460 for the fiscal year ended December 31, 1996, as compared to the
fiscal year ended December 31, 1995. This increase was primarily due to an
investment in infrastructure to support planned growth, including two new
operating divisions, plus the acquisition of the San Jose Division of Pen
Interconnect, Inc., which included additional personnel, building rent costs,
repairs, professional fees, promotions of certain engineers to management
positions and other related items.
Other Income [Expense]
Interest expense decreased approximately $292,202 or 47% to $323,679 from
$615,881 for the fiscal year ended December 31, 1996, as compared to the fiscal
year ended December 31, 1995. Interest expense decreased during the fiscal year
ended December 31, 1996 due to a substantial reduction in outstanding long term
debt, capital lease obligations, and bank borrowings, as compared to December
31, 1995.
Income Tax Expense
Income tax expense declined primarily due to the decrease in taxable
income as well as the utilization of net operating loss carry forwards. Proforma
income tax expense for the year ended December 31, 1996 gives effect to the loss
of the S corporation on a combined basis prior to March 5, 1996.
Net Income
Income before income taxes decreased approximately $840,300 or 83% to
$167,336 from $1,007,616 for the fiscal year ended December 31, 1996, as
compared with the fiscal year ended December 31, 1995. The decline in income
before taxes was primarily due to: (1) an increase in financing charges of
$174,244 on certain bridge loans that were made by the Company in the fourth
quarter of 1995 to help fund its initial public offering, and (2) increased
operating expenses incurred to fund two new divisions which produced nominal
income during the fiscal year ended December 31, 1996.
Net Income after taxes decreased by approximately $325,100 or 69% to
$148,337 from $473,416 for the fiscal year ended December 31, 1996, as compared
to the fiscal year ended December 31, 1995.
Liquidity and Capital Resources
The Company renewed and increased its long-term revolving line of credit
("Revolving Line") with Manufacturers Bank ("Mfrs."). The Revolving Line bears
interest at Mfrs.' base rate plus 1/4%. This facility allows the Company to
borrow up to $5,750,000 based on a stipulated percentage of contractually
defined eligible trade accounts receivable. The Company had approximately
$3,856,268 in outstanding borrowings under the Revolving Line and nothing
available (based on the eligible trade accounts) as of December 31, 1997. In
addition, the Company and Mfrs. have agreed to a line of credit facility of up
to $2,000,000 available for equipment purchases, which bears interest at Mfrs.
base fixed rate of 8.75% per annum (the "Equipment Line"). The Company had
approximately $1,214,814 outstanding and $785,186 available under the Equipment
Line as of December 31, 1997.
The Company's working capital decreased by approximately $922,745 from
$4,036,532 to $3,113,787 in the fiscal year ended December 31, 1997 as compared
to the fiscal year ended December 31, 1996. The decrease resulted primarily from
an increase in amounts outstanding under the line of credit of $3,271,268, an
increase in the current portion notes payable of $2,571,882 and an increase in
accounts payable of $1,121,683 offset by an increase in accounts receivable of
approximately $1,423,525, an increase in inventory of approximately $4,550,389,
and an increase in cash of $166,837. The high level of accounts receivable at
December 31, 1997 as compared to December 31, 1996, is due primarily to a
significant increase in sales. The significant increase in inventory during the
same period is due to both an increase in sales and a change in product mix to
products coupled with an increased use of raw materials and longer production
cycles.
The net cash required to fund operating activities increased by $398,944 or
55% to $1,129,241 from $730,297 in the fiscal year ended December 31, 1997, as
compared to the fiscal year ended December 31, 1996. The change primarily
represents an increase of $613,333 in depreciation and amortization expense, an
increase of $2,876,872 in accounts receivable, an increase of $2,864,028 in
accounts payable, and an increase of $2,606,601 in inventory, offset primarily
by the elimination of a $462,122 one time non cash finance charge in 1996,
and an increase of $736,318 in income taxes payable.
Cash used in investing activities remained relatively constant at $2,942,319
in the fiscal year ended December 31, 1997 as compared with $3,064,495 in the
fiscal year ended December 31, 1996. Fluctuations in cash used in investing
activities included an increase of $179,276 for repayment of advances by
stockholders and a reduction of $450,224 in the amount spent for the purchase
of equipment offset by an increase in of $258,312 for the purchase of other
assets, a reduction of $193,650 for the proceeds from the sale of equipment
and an increase of $147,996 in cash used for the purchase of businesses.
Cash generated from financing activities increased $999,432 or 31% to
$4,238,397 from $3,238,965 in the fiscal year ended December 31, 1997 compared
to the fiscal year ended December 31, 1996. The change resulted from an increase
of $1,987,990 in amounts outstanding under the line of credit, an increase of
$2,341,328 of proceeds from notes payable, the non recurrence of a one time
charge of $1,000,000 in 1996 for the repayment of certain bridge notes and the
elimination $734,742 of obligations under the Company's capital lease
obligations, offset by the one time impact of $6,036,798 from the proceeds
of the public offering in 1996, and an increase of $1,317,551 in repayment of
notes payable.
During the fiscal year ended December 31, 1997 and December 31, 1996, the
Company spent approximately $2,496,925 and $643,451, respectively, to purchase
capital equipment which was financed through equipment contracts.
Additionally, management expects the Company's level of future capital
expenditures to increase at a level that is consistent with the Company's
projected growth and operations. Management has projected capital expenditure
requirements of approximately $1,800,000 for the calendar year ending December
31, 1998. This increase will be supported by increased bank borrowings and
internal operations.
The Company experienced tighter cash flow in the fourth quarter of 1997 as a
result of increasing inventory and receivables from increased sales and a change
of product mix. Accordingly, management believes that it will need new sources
of funding either through increased equity investment or an expanded line of
credit facility in order to meet the Company's anticipated operating needs and
projected capital expenditure requirements through the fiscal year ending
December 31, 1998, excluding acquisition related expenses. See following
discussion on sale of debentures and new Fleet Capital Line of Credit.
Subsequent Events
Sale of Debentures. On February 10, 1998, the Company closed an offering of 3
Units, each Unit consisting of 4 of its 5%, $275,000 principal amount
Convertible Subordinated Debentures due February 10, 2001 (the "Debentures") and
100,000 Class B Warrants to purchase common stock of the Company (the
"Warrants") for a total of $3.3 million. Interest on the Debentures accrues
quarterly and is payable annually. From the sale of the Debentures were used to
repay the $1,000,000 note issued in connection with the Trinity acquisition; the
remainder of the proceeds went to working capital.
The Debentures are convertible into common stock at the option of the holder
at a variable conversion price ranging from $3.00 to $5.50 per share depending
on the market value of the common stock of the Company at the time of the notice
of conversion. Accordingly, the Company may be required to issue no less than
600,000 shares nor more than 1,110,000 shares of common stock upon conversion of
the Debentures.
In addition, the Company is issuing 25,000 Warrants per Debenture for each
Debenture outstanding as of the earlier to occur of the one year anniversary of
the closing date of the sale of the Debentures or the date three months
following the registration of the common stock usable upon conversion of the
Debentures and upon the exercise of the Warrants. The Warrants have an exercise
price of $5.50 per share, subject to adjustment for dilutive issuances. The
Company is obligated to register the common stock underlying the Debentures and
the Warrants with the Securities and Exchange Commission.
In connection with the foregoing issuance, the Company paid a finder's fee to
M.J. Segal and Associates in the amount of $176,000 in cash pursuant to terms of
a Non Circumvention and Finder's Fee Agreement (the "Agreement") and a $66,000
credit toward the purchase of one quarter of one Debenture. The Agreement calls
for (1) the issuance of the number of shares of common stock to M.J. Segal and
Associates equal to 5% of the principal amount of the securities sold divided by
the greater of (a) any stated conversion price in the Debenture and (b) the
average of the closing bid and asked prices of the common stock of the Company
for the five trading days prior to the closing and, (2) in this case, a number
of warrants equal to 10% of the number of shares issuable based on the Stated
Conversion Price as defined in the Agreement, to be determined between 60,000
and 110,000. The warrants are to be issued at 125% of the average of the closing
of the bid and asked prices of the common stock of the Company for the five
trading days preceding their issuance, are non callable and expire three years
from their date of issuance.
The Agreement also provides that upon exercise of any Warrants issued in the
offering, M.J. Segal and Associates shall receive a cash fee equal to 4% of the
amount received upon exercise of the Warrants; common stock equal to 5% of the
number of shares issued upon such exercise; and warrants equal to 10% of the
number of shares issued upon such exercise (excluding warrants exercised by M.J.
Segal and Associates or its affiliates). The warrants shall have an exercise
price of 125% of the average of the bid and asked prices for the Company on the
five trading dates preceding the transaction, shall be non callable, and shall
expire three years from the date of issuance.
Fleet Capital Line of Credit. On March 2, 1998, the Company entered into a
Loan and Security Agreement with Fleet Capital Corporation (the "Fleet
Facility") providing for borrowings of up to $25,000,000 based on
certain formulas contained within the Loan and Security Agreement. The
Company paid a finder's fee of $250,000 and a loan fee of $250,000 in connection
with the transaction. As of March 10, 1998, the Company was eligible to
borrow up to $17,222,691 under the Fleet Facility and had borrowed $10,347,841.
Borrowings were in the form of two Term Loans ("Term Loan A" and "Term Loan B,"
respectively), an equipment loan (the Equipment Loan, together with the Term
Loans, the "Fixed Loans") and revolving credit loans (the "Revolving Credit
Loans"). Term Loan A is in the principal amount of $4.7 million and accrues
interest at the rate of prime plus 0.5%. Term Loan B is in the principal
amount of $2.0 million and accrues interest at the rate of prime plus 1.5%. Th
Equipment Loan is in the principal amount of $4.0 million and accrues interest
at the rate of prime plus 0.5%.
The Revolving Credit Loans are in such amount as the Company elects, up to
the borrowing base permitted by the Loan and Security Agreement and accrue
interest at the rate of 0.25% plus prime. As of March 10, 1998, the Company had
$3,647,841 available for borrowing. The Fixed Loans are payable in monthly
installments of principal and interest with principal amortizing over a seven
year period and the balance due on March 2, 2003; interest only on the Revolving
Credit Loans is payable monthly with the principal due upon termination of the
Loan and Security Agreement. Interest on the Fixed Loans and Revolving Credit
Loans is adjusted daily. Interest on the Fixed Loans may be adjusted downward by
0.25% each year for two years if the Company meets certain performance criteria
as reflected in its audited financial statements for the fiscal years ended
December 31, 1998 and December 31, 1999, respectively. Interest on the Revolving
Credit Loan may be adjusted downward by 0.25% only once if the Company meets the
performance criteria as reflected in its audited financial statements for the
fiscal year ended December 31, 1998. In addition, if the Company meets the
conditions specified for December 31, 1998, it may, at its option, have the
interest rate on (1) the Revolving Credit Loan converted into LIBOR plus 2.5%;
(2) Term Loan A and the Equipment Loan converted into LIBOR plus 2.75%; and (3)
Term Loan B converted into LIBOR plus 3.75%.
<PAGE>
New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ("FASB") has issued Statement of
Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Earlier application is permitted. Reclassification of financial
statements for earlier periods provided for comparative purposes is
required. SFAS no. 130 is not expected to have a material impact on the
Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an
Enterprise and Related Information." SFAS No. 131 changes how operating segments
are reported in annual financial statements and requires the reporting of
selected financial information about operating segments in interim financial
reports issued to shareholders. SFAS 131 is effective for periods beginning
after December 15, 1997, and comparative information for earlier years is to be
restated. SFAS No. 131 need not be applied to interim financial statements in
the initial year of its application. SFAS No. 131 is not expected to have a
material impact on the Company.
Inflation
The Company continues to experience the benefits of a low inflation economy
locally, regionally and nationally. However, the Company enters into mostly
short-term fixed price contracts and a large portion of these contracts are
labor intensive. Accordingly, the short-term contracts are less susceptible to
inflationary pressures.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
Not Applicable
Item 8. Financial Statements
The financial statements are attached as an Exhibit hereto and incorporated
herein by reference.
Item 9. Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure
Not applicable.
<PAGE>
PART III
Item 10. Directors, Executive Officers, Promoters and Control
Persons: Compliance with Section 16(a) of the Exchange Act.
The current directors and executive officers of the Company
are as follows:
Name Age Position
-----------------------------------------------------
Rolando Loera 44 Chairman, President and Chief
Executive Officer; Director
Livino D. Ribaya, Jr. 49 Vice President-Manufacturing
Frank Ramirez III 42 Vice President-Engineering
Charles E. Shaw 53 Vice President-Chief Financial
Officer; Director
Robert Loera 31 Controller and Secretary; Director
Thomas F. Chaffin 40 Director
Robert Fink 62 Director
Boris Lipkin 50 Director
Dominic A. Polimeni 51 Director
Mssrs. Shaw and Polimeni serve until the next annual meeting of shareholders
or until their successors are elected and qualified. Mssrs. Fink, Lipkin and
Robert Loera serve until the 1999 annual meeting or until their successors are
elected and qualified. Mssrs. Chaffin and Rolando Loera serve until the 2000
annual meeting or until their successors are elected and qualified. At present,
the Company's bylaws provide for not less than one director nor more than nine
directors. Currently, there are seven directors of the Company. The bylaws
permit the Board of Directors to fill any vacancy and such director may
serve until the next annual meeting of shareholders or until such director's
successor is elected and qualified. Officers serve at the discretion of the
Board of Directors. There are no family relationships among any officers or
directors of the Company except that Robert Loera and Rolando Loera are
brothers.
The principal occupation and business experience for each executive officer
and director of the Company for at least the last five years are as follows:
Rolando Loera. Mr. Rolando Loera has been Chairman, President, Chief
Executive Officer and a Director of the Company since December 1995 and has
held similar positions with Touche since September 1992. Prior to that he was
Chief Financial Officer of a predecessor of Touche for eight years. Mr. Loera
holds a B.A. degree in Business Administration from the University of
Washington.
Livino D. Ribaya, Jr. Mr. Ribaya has been Vice President-Manufacturing of
the Company since December 1995 and has held the same position with Touche
since September 1992. Prior to that he was employed by a predecessor to
Touche since 1978 in a variety of positions. Mr. Ribaya has a B.S. in
Mechanical Engineering from the Mauja Institute of Technology, Manila,
Philippines.
Frank Ramirez III. Mr. Ramirez has been Vice President-Engineering of the
Company since December 1995 and has held the same position with Touche since
1978. Prior to that he was employed by a predecessor to Touche since 1978 in
a variety of positions. Mr. Ramirez has an A.A. degree in Mechanical Drafting
from San Jose City College.
Charles E. Shaw. Mr. Shaw has been Vice President, Chief Financial
Officer, and a Director of the Company since December 1995 and has held the
same positions with Touche since 1993. Prior to that he was President and
Chief Executive Officer of Compro Business Solutions, Inc., a business and
management consulting firm established by Mr. Shaw in 1992. During 1988
through 1992, he served as Vice President and Chief Financial Officer of
Douglas Broadcasting, Inc. a $51 million radio broadcast network. Mr. Shaw
has a B.S. in Business Administration from the City University of New York, a
Masters of Business Administration from New York University and a LL.B. from
LaSalle Law School.
Robert Loera. Mr. Robert Loera has been Controller, Secretary and a
Director of the Company since December 1995 and has been Controller of Touche
since June, 1992. Mr. Robert Loera is Rolando Loera's brother. Mr. Robert
Loera has a B.S. in Business Administration from the University of Washington.
Thomas F. Chaffin. Mr. Chaffin has been a Director of the Company and a
member of the Audit Committee of the Board of Directors since January 1997. He
has been a partner in the law firm of Rosenblum Parish & Isaacs, San Jose, CA
since January 1995. During the period 1988-1995, Mr. Chaffin was a partner in
the law firm of Berliner, Cohen, San Jose, CA. He holds a bachelor's degree in
accounting from the University of California, Santa Barbara and earned a J.D.
with honors from the University of San Francisco School of Law. He also holds a
L.L.M. in Taxation from the New York University School of Law and is a certified
specialist in Taxation Law by the State Bar of California Board of Legal
Specialization.
Robert C. Fink. Mr. Fink has been a Director of the Company since November
1997. From 1993 until his retirement in December, 1997, Mr. Fink has been Senior
Vice President of Corporate Support and Chief Operating Officer of Lam
Research Corporation, a manufacturer of semiconductor processing equipment.
From 1988 to 1993 he served as President of Drytek, Inc., a former subsidiary of
General Signal Corporation. From 1984 to 1988, he was a Director of VLSI
Operation (North America) for ITT Corporation's Semiconductor Division.
Prior to 1984, Mr. Fink served for 12 years as Director of World Wide
Manufacturing Resources for General Instrument Corporation's
Microelectronics Division. Mr. Fink has been a Director of Uniphase
Corporation since April 1995, a Director of Consilium, Inc. since January 1996
and a Director of CVC, Inc. since 1997.
Boris Lipkin. Mr. Lipkin has been a Director of the Company since
November 1997. Mr. Lipkin has been President of the Track Division and
Corporate Vice President of Silicon Valley Group, Inc., a San Jose, CA based
medical test equipment company, since 1995. From 1992 to 1995 he was Vice
President and General Manager of Varian Associates, a semiconductor equipment
company. From 1978 to 1992 he served in various management and engineering
positions at IBM's Fishkill, New York facility. Mr. Lipkin received a Master
of Science Degree in electro mechanical engineering at the Polytechnical
Institute in Kharkov, Russia.
Dominic A. Polimeni. Mr. Polimeni has been a Director of the Company since
March, 1996. Since September, 1997, Mr. Polimeni has been a Director of Nu
Horizons, Inc., a publicly held company based in Melville, New York, which is a
distributor of electronic components. Mr. Polimeni has been the Chairman and
Chief Executive Officer of Quest Electronic Hardware, Inc., a distributor of
fasteners and electronic hardware sold to electronic equipment manufacturers
since February 1996. Mr. Polimeni has also been the President and Chief
Operating Officer of Questron Technology, Inc., a publicly traded company which
owns Quest, since March 31, 1995 and Chairman and Chief Executive Officer of
Questron since February, 1996. He has also been a Managing Director of
Gulfstream Financial Group, Inc., a financial consulting and investment banking
firm, since 1990. He held the position of Chief Financial Officer of Arrow
Electronics, Inc., an international electronics distribution company traded on
the New York Stock Exchange, for four years from 1986 to 1990. He also held
several other positions, including general management positions, with Arrow over
an eight-year period from 1981 to 1990. He has held the position of Chief
Operating Officer of Fugazy Express, Inc., a New York based transportation
company, in its start-up phase, and was a Partner in the New York office of
Arthur Young & Company. He holds a BBA degree from Hofstra University.
<PAGE>
Item 10. Executive Compensation
Below the following table sets forth remuneration paid by the Company during
fiscal years 1995, 1996 and 1997, to the named officers and directors of TMCI.
For the periods shown, no other executive officer received remuneration in
excess of $100,000 per annum.
<TABLE>
Summary Compensation Table
Annual
Name of Individual or Compensation Securities Underlying
Number of Persons in
Group Position with Company Year Salary Options/SARs(#)
<S> <C> <C> <C>
Rolando Loera Chairman, 1997 225,000 200,000
President and CEO 1996 225,000 100,000
1995 150,000
</TABLE>
<TABLE>
Option SAR in Last Fiscal Year
Individual Grants
Potential Realizable
Value at Assumed Annual
Rates of Stock Price
Appreciation for Option
Term
(a) (b) (c) (d) (e) (f) (g)
Name Number of Securities % of Total Exercise Price Expiration 5% 10%
Underlying/Options Options/SARs or Base Price Date
SARS Granted (1) Granted to per Share
Employees
in Fiscal Year
($/sh)
<S> <C> <C> <C> <C> <C> <C>
Rolando Loera 200,000 60% $5.3625 7/08/07 $674,489.48 $1,709,288.78
</TABLE>
<PAGE>
<TABLE>
Aggregated Options/SAR Exercised in Last Fiscal Year and FY-End Option/SAR Values
Number of Securities Value of Unexercised
Underlying Unexercised In-the-Money
Shares Options/SARs at Options/SARs at
Acquired on Value FY-End(#) FY-End($)
Name Exercise(#) Realized($) Exercisable/Unexercisable Exercisable/Unexercisable
<S> <C> <C> <C> <C> <C> <C>
Rolando Loera -0- -0- 100,000/200,000 $25,000/0(1)
(1) The closing price for the common stock of the Company on December 31, 1997
was $4.00 per share.
</TABLE>
Employment Agreement
The Company has entered into an employment agreement ("Agreement") dated as
of December 28, 1995 with Rolando Loera. The term of employment commenced on
March 11, 1996 and will expire on the fifth anniversary thereof. The annual
salary under the Agreement is $225,000. The term of employment will be
automatically extended for an additional five year term in the absence of notice
from either party. This salary may be increased to reflect annual cost of living
increases and may be supplemented by discretionary and performance increases as
may be determined by the Board of Directors except that during the first three
years following the Effective Date, his salary may not exceed $225,000. Mr.
Loera is also eligible to receive an annual bonus of up to $100,000, payable in
four quarterly installments. The Agreement provides that during the initial
three years of the term of employment, an annual bonus of $100,000 will be
awarded to Mr. Loera and that such bonus awards will be used by Mr. Loera to
repay the $303,325 loan TEI to Touche Properties, Inc. referred to in Item 12
below. Mr. Loera relinquished his bonuses in 1996 and 1997. Bonuses during the
remainder of the term of employment will be at the discretion of the Board
of Directors. No objective criteria have been established for determining
the amount of any bonuses for subsequent years.
The Agreement provides, among other things, for participation in an equitable
manner in any profit-sharing or retirement plan for employees or executives and
for participation in other employee benefits applicable to employees and
executives of the Company. The Agreement further provides for the use of an
automobile and other fringe benefits commensurate with his duties and
responsibilities. The Agreement also provides for benefits in the event of
disability. Under the Agreement, the Company is also obligated to procure and
pay the premiums for a $1 million term life policy and, in the event of Mr.
Loera's death, to use the death benefit under such policy to purchase from Mr.
Loera's estate shares of the Company's Common Stock at its fair market value.
Pursuant to the Agreement, employment may be terminated by the Company
with cause or by the executive with or without good reason. Termination by the
Company without cause, or by the executive for good reason, would subject the
Company to liability for liquidated damages in an amount equal to the terminated
executive's current salary ($225,000) and a pro rata portion of his prior year's
bonus (up to $100,000) annually, for the remaining term of the Agreement,
payable in equal monthly installments, without any set-off for compensation
received from any new employment. In addition, the terminated executive would be
entitled to continue to participate in and accrue benefits under all employee
benefit plans and to receive supplemental retirement benefits to replace
benefits under any qualified plan for the remaining term of the Agreement to the
extent permitted by law.
Stock Plans
The Company adopted its 1995 Stock Option Plan, effective December 22,
1995 (the "1995 Plan"). Under such plan, key employees and officers and
consultants of the Company may be granted options to purchase shares of the
Company's Common Stock at their fair market value on the date of grant. The plan
provides for an aggregate of 500,000 options. Options to purchase 100,000 shares
at $3.75 per share were granted to Rolando Loera effective December 22, 1995 and
options to purchase 200,000 shares at 5.3625 were granted to Rolando Loera on
July 7, 1997. The 1995 grant vested on December 21, 1997 and will expire
December 2005. The 1997 grant vests monthly over a three year period and will
expire on July 9, 1997, 2007.
The Board of Directors adopted the Company's 1997 Stock Option Plan,
effective December 1, 1997 (the "1997 Plan"), approved by the stockholders on
December 22, 1997. Under such plan, key employees and officers and consultants
of the Company may be granted options to purchase shares of the Company's Common
Stock at their fair market value on the date of grant. The plan provides for an
aggregate of 1,000,000 options.
Any future awards will be determined by the Board of Directors or a
Committee established by the Board.
The Board of Directors adopted the Company's 1997 Employee Stock Purchase
Plan effective December 1, 1997 approved by the stockholders on December 22,
1997. Under such plan, employees of the Company, including executive officers
may defer up to 20% of their annual compensation for the purchase of common
stock of the Company at a price of 85% of the fair market value of the common
stock on the date of issuance. The plan provides for the issuance of up to
250,000 shares.
Compliance with Section 16(a) of the Exchange Act
Based solely on a review of the Forms 3 and 4 and amendments thereto filed
during the recently completed fiscal year and forms 5 and amendments thereto
with respect to the most recently completed fiscal year, the following
individuals failed to file reports required pursuant to Section 16(a) of the
Securities Exchange Act of 1934, as amended, on a timely basis.
Rolando Loera, Charles Shaw, Livino Ribaya, Frank Ramirez, Robert Loera, Tom
Chaffin, and Dominic Polimeni each failed to file one report on a timely basis
representing one transaction.
Robert Fink and Boris Lipkin each failed to report on a timely basis
representing their election to the Board of Directors and no transactions.
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information regarding the Company's
Common Stock owned on the date of March 16, 1998 by (i) each person who is known
by the Company to own beneficially more than five percent (5%) of the Company's
common stock; (ii) each of the Company's executive officers named in the
compensation table and directors; and (iii) all officers and directors as a
group:
<TABLE>
Name and Position Number Percentage
Address(1) With Company Of Shares of Shares(2)
- -------------------- ------------------------------------------------------------------------
<S> <C> <C>
Rolando Loera Chairman, President and Chief 805,889(3) 19%
Executive Officer; Director
Patrick McQuade President, Trinity Electronics, 404,539 10
Inc.
Thomas Chaffin Director 10,000(4) *
Robert Loera Director; Controller 10,000(4) *
Charles Shaw Director, Chief Financial Officer 10,000(4) *
Dominic A. Polimeni Director 10,000(4) *
Robert Fink Director 0
Boris Lipkin Director 0
Rolando Loera Trustee for Touche Employee
Stock Ownership Plan 27,280(5) *
All Officers and 1,084,429 26%
Directors as a
Group (9 persons)
</TABLE>
* Less than 1%
(1) Unless otherwise noted, c/o TMCI Electronics, Inc., 1875 Dobbins Drive, San
Jose, CA 95133.
(2) Does not include the exercise of up to 1,492,000 Class A
Warrants outstanding as of March 11, 1996.
(3) Includes options to purchase 138,889 shares of Common Stock subject to
outstanding options which have vested.
(4) All shares are subject to options which have vested.
(5) Mr. Loera shares voting power with respect to these shares
(6) Includes 224,040 shares and options to purchase 14,500 shares owned by
certain additional executive officers of the Company.
Item 12. Certain Relationships and Related Transactions
TEI leases approximately 78,000 square feet of space located at 1881-1899
Dobbins Drive, San Jose, California from Touche Properties, Inc. ("TPI"), a
company wholly owned by Rolando Loera, Chairman, President and Chief Executive
Officer of the Company, pursuant to a lease agreement dated November 1, 1993. In
addition, TEI leases space to Touche is one subtenant. Rent expense amounted to
approximately $576,144 in 1997.
In connection with its acquisition of 1881-1899 Dobbins Drive, TPI borrowed
$1,000,000 from the Small Business Administration which was guaranteed by Touche
and TEI. The loan was repaid in full in March, 1998.
TPI also borrowed $303,325 from Touche in December, 1993. This loan bears
interest at 10% per annum, and principal and interest are payable in equal
monthly installments until satisfied. The principal balance on the loan
increased as a result of certain expenses of TPI advanced by Touche. In
1997, TPI paid $67,743 toward the retirement of this loan. The outstanding
balance of the loan as of December 31, 1997 was $469,878.
In addition, in 1993 Touche made loans to Rolando Loera aggregating
$87,190.39. This loan bears interest at 10% per annum and is payable in monthly
installments of $1,000. Certain additions were made to the principal amount of
the loan in fiscal 1995 to account for payments of certain personal expenses of
Rolando Loera by Touche. Accordingly, the outstanding principal balance on the
loan was $111,984 at December 31, 1997. In 1997, Mr. Loera paid $150,000 toward
the retirement of these loans.
During 1996, the Company advanced $95,986 to Frank Ramirez III at 10%
interest amortizing over a 10 year period. As of December 31, 1997, Mr. Ramirez
owed the Company $106,037.
During 1997, the Company sold approximately $5,821,576 in products and
services to Lam Research Corporation. Mr. Robert Fink, a director of the
Company, retired as Senior Vice President of Corporate Support and Chief
Operating Officer of Lam Research Corporation in December 1997.
During 1997, the Company sold approximately $2,038,749 worth of products and
services to Silicon Valley Group Inc. Mr. Boris Lipkin, a director of the
Company is president of the Track Divison and Corporate Vice President of
Silicon Valley Group Inc. The Company sold products to Silicon Valley
Group, Inc. for many years prior to Mr. Lipkin joining the board.
Item 13. Exhibits and Reports on Form 8-K.
(a) Financial Statements
Report of Independent Auditors F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-2 - F-3
Statements of Operations for the
Years Ended December 31, 1997, 1996, and 1995 F-4
Combined Statements of Stockholder's Equity for the F-5
Years Ended December 31, 1997, 1996, and 1995
Combined Statements of Cash Flows for the
Years Ended December 31, 1997, 1996 and 1995 F-6 and
F-7
Notes to Combined Financial Statements F-8 - F-24
(b) Exhibits
The following is a list of Exhibits filed herewith or incorporated by reference
herein as noted below.
3.0 Certificate of Incorporation, filed with Delaware Secretary of State on
December 7, 1995.(a)
3.1 By-laws.(c)
3.2 Certificate of Secretary for amendment to By-laws dated April 6, 1996.(j)
3.3 Certificate of Secretary for mmendment to By-laws dated
December 22, 1997.(j)
4.0 Specimen Copy of Common Stock Certificate.(a)
4.1 Form of Class A Warrant Certificate.(a)
4.2 [Intentionally omitted.]
4.3 Form of Underwriters' Purchase Option, as amended.(b)
4.4 Form of Warrant Agreement, as amended.(b)
10.0 Employment Agreement, Rolando Loera, dated December 28, 1995.(a)
10.1 Lease Agreement dated January 1, 1993 relating to 1875 Dobbins Drive, San
Jose, CA.(a)
10.2 Lease Agreement dated October 25, 1993 relating to 1881-1899 Dobbins Drive
San Jose CA.(a)
10.3 Lease Agreement dated June 21, 1995 relating to 1565-C Mabury Road,San
Jose, CA.(a)
10.4 Touche Manufacturing Company, Inc. Employee Stock Ownership Plan.(a)
10.5 Form of 5% 275,000 in principal amount Secured Convertible Promissory
Debenture
10.6 Asset Purchase Agreement dated November 1, 1996 by and among Pen
Interconnect, Inc., Touche Electronics,Inc. and TMCI Electronics, Inc.(d)
10.7 Stock Purchase Agreement dated effective as of January 1, 1997 by and
among TMCI Electronics, Inc. and the Shareholders of Enterprise
Industries, Inc.(e)
10.8 Merger Agreement and Plan of Reorganization by and among TMCI Electronics,
Inc., TMCI/Trinity Acquisition Corp., Trinity Electronics, Inc. and
Patrick McQuade, dated December 22, 1997.(f)
10.9 Loan and Security Agreement with Fleet Capital Corporation
10.10 Lease Agreement dated relating to 7500 Tyrone Avenue, Van Nuys
California (j)
10.11 1995 Stock Option Plan.(a)
10.12 1997 Employee Stock Option Plan(h)
10.13 1997 Employee Stock Purchase Plan (i)
21.0 Subsidiaries of the Registrant.
23.1 Consent of Moore Stephens, P.C.(d)
a. Incorporated by reference to the Registration Statement on Form SB-2
(No. 33-80973) as originally filed with the Securities and Exchange
Commission (the "SEC") on December 29, 1995 (the "Registration Statement").
b. Incorporated by reference to Amendment No. 1 to the Registration Statement,
as filed with the SEC on February 14, 1996.
c. Incorporated by reference to Amendment No. 2 to the Registration Statement,
as filed with the SEC on March 4, 1996.
d. Incorporated by reference to Exhibit 1.0 to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on November 27, 1996.
e. Incorporated by reference to Exhibit 2.0 the Registrant's Form 8-K filed
with the Securities and Exchange Commission on February 7, 1997.
f. Incorporated by reference to Exhibit 2.0 to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on January 6, 1998.
h. Incorporated by reference to Appendix C to the Definitive Proxy Statement
as filed with the SEC on December 3, 1997.
i. Incorporated by reference to Appendix D to the Definitive Proxy Statement
as filed with the SEC on December 3, 1997
j. Available form the Company upon request
<PAGE>
SIGNATURE PAGE
In accordance with Section 13(a) or 15(d) of the Exchange Act, the registrant
has caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
TMCI Electronics, Inc.
By (Signature and Title) /s/Rolando Loera
------------------------------
ROLANDO LOERA
Chairman,
President and
Chief Executive Officer
Date: March 31, 1998
<PAGE>
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.
Name Date
By: /s/ Rolando Loera March 31, 1998
------------------------------------
ROLANDO LOERA, Chairman, President
and Chief Executive Officer
By: /s/Charles E. Shaw March 31, 1998
-------------------------------------
CHARLES E. SHAW, Vice President
Chief Financial Officer, Director
By: /s/Robert Loera March 31, 1998
-------------------------------------
ROBERT LOERA, Controller, Secretary
and Director
By: /s/ Thomas F. Chaffin March 30, 1998
-------------------------------------
THOMAS CHAFFIN, Director
By:
-------------------------------------
ROBERT C. FINK Director
By:
-------------------------------------
BORIS LIPKIN, Director
By:
-------------------------------------
DOMINIC POLIMENI, Director
<PAGE>
Exhibit Index
The following is a list of Exhibits filed herewith or incorporated by reference
herein as noted below.
3.0 Certificate of Incorporation, filed with Delaware Secretary of State on
December 7, 1995.(a)
3.1 By-laws.(c)
3.2 Certificate of Secretary for amendment to Bylaws dated April 6, 1996.(j)
3.3 Ammendment to the bylaws dated December 22, 1997.(j)
4.0 Specimen Copy of Common Stock Certificate.(a)
4.1 Form of Class A Warrant Certificate.(a)
4.2 [Intentionally omitted.]
4.3 Form of Underwriters' Purchase Option, as amended.(b)
4.4 Form of Warrant Agreement, as amended.(b)
10.0 Employment Agreement, Rolando Loera, dated December 28, 1995.(a)
10.1 Lease Agreement dated January 1, 1993 relating to 1875 Dobbins Drive, San
Jose, CA.(a)
10.2 Lease Agreement dated October 25, 1993 relating to 1881-1899 Dobbins Drive
San Jose CA.(a)
10.3 Lease Agreement dated June 21, 1995 relating to 1565-C Mabury Road,San
Jose, CA.(a)
10.4 Touche Manufacturing Company, Inc. Employee Stock Ownership Plan.(a)
10.5 Form of 5% 275,000 in principal amount Secured Convertible Promissory
Debenture
10.6 Asset Purchase Agreement dated November 1, 1996 by and among Pen
Interconnect, Inc., Touche Electronics,Inc. and TMCI Electronics, Inc.(d)
10.7 Stock Purchase Agreement dated effective as of January 1, 1997 by and
among TMCI Electronics, Inc. and the Shareholders of Enterprise
Industries, Inc.(e)
10.8 Merger Agreement and Plan of Reorganization by and among TMCI Electronics,
Inc., TMCI/Trinity Acquisition Corp., Trinity Electronics, Inc. and
Patrick McQuade, dated December 22, 1997.(f)
10.9 Loan and Security Agreement with Fleet Capital Corporation
10.10 Lease Agreement dated relating to 7500 Tyrone Avenue, Van Nuys
California (j)
10.11 1995 Stock Option Plan.(a)
10.12 1997 Employee Stock Option Plan(h)
10.13 1997 Employee Stock Purchase Plan (i)
21.0 Subsidiaries of the Registrant.
23.1 Consent of Moore Stephens, P.C.(d)
a. Incorporated by reference to the Registration Statement on Form SB-2
(No. 33-80973) as originally filed with the Securities and Exchange
Commission (the "SEC") on December 29, 1995 (the "Registration Statement").
b. Incorporated by reference to Amendment No. 1 to the Registration Statement,
as filed with the SEC on February 14, 1996.
c. Incorporated by reference to Amendment No. 2 to the Registration Statement,
as filed with the SEC on March 4, 1996.
d. Incorporated by reference to Exhibit 1.0 to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on November 27, 1996.
e. Incorporated by reference to Exhibit 2.0 the Registrant's Form 8-K filed
with the Securities and Exchange Commission on February 7, 1997.
f. Incorporated by reference to Exhibit 2.0 to the Registrant's Form 8-K
filed with the Securities and Exchange Commission on January 6, 1998.
h. Incorporated by reference to Appendix C to the Definitive Proxy Statement
as filed with the SEC on December 3, 1997.
i. Incorporated by reference to Appendix D to the Definitive Proxy Statement
as filed with the SEC on December 3, 1997
j. Available form the Company upon request
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
INDEX TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
Report of Independent Auditors.................................. F-1
Consolidated Balance Sheets as of December 31, 1997 and 1996.... F-2 - F-3
Statements of Operations for the Years Ended December 31, 1997,
1996 and 1995................................................... F-4
Statements of Stockholders' Equity for the Years Ended December 31,
1997, 1996 and 1995............................................. F-5
Statements of Cash Flows for the Years Ended December 31, 1997,
1996 and 1995 .................................................. F-6 - F-7
Notes to Financial Statements................................... F-8 - F-25
. . . . . . . . . . .
<PAGE>
REPORT OF INDEPENDENT AUDITORS
To the Board of Directors and Stockholders of
TMCI Electronics, Inc.
San Jose, California
We have audited the accompanying consolidated balance sheets of TMCI
Electronics, Inc. and its subsidiaries as of December 31, 1997 and 1996, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for each of the two years in the period ended December 31, 1997. We have
also audited the combined statements of operations, stockholders' equity, and
cash flows for the year ended December 31, 1995. 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 audit
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 TMCI Electronics,
Inc. and its subsidiaries as of December 31, 1997 and 1996, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1997, in conformity with generally accepted accounting
principles.
MOORE STEPHENS, P. C.
Certified Public Accountants.
New York, New York
February 20, 1998
F-1
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
December 31,
1 9 9 7 1 9 9 6
Assets:
Current Assets:
<S> <C> <C>
Cash $ 312,682 $ 145,845
Accounts Receivable - Net 3,950,341 2,526,816
Inventory 9,721,050 5,170,661
Prepaid Expenses and Other Current Assets 182,968 272,587
Deferred Income Taxes 183,376 187,991
Other Receivables -- 63,669
Notes Receivable - Stockholders 39,312 10,706
---------- -----------
Total Current Assets 14,389,729 8,378,275
---------- -----------
Property and Equipment - Net 6,583,260 3,638,300
---------- -----------
Other Assets:
Notes Receivable - Stockholders 144,292 155,520
Due from Stockholder 111,984 238,167
Due from Related Party 469,878 473,952
Other Assets 277,439 48,152
Goodwill 6,766,564 2,549,261
---------- -----------
Total Other Assets 7,770,157 3,465,052
---------- -----------
Total Assets $28,743,146 $15,481,627
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-2
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
- ------------------------------------------------------------------------------
<TABLE>
December 31,
1 9 9 7 1 9 9 6
Liabilities and Stockholders' Equity:
Current Liabilities:
<S> <C> <C>
Accounts Payable and Accrued Expenses $4,050,925 $ 2,929,242
Due to Affiliate -- 30,634
Line of Credit 3,856,268 585,000
Notes Payable 2,055,256 796,867
Promissory Notes to a Stockholder 1,313,493 --
---------- -----------
Total Current Liabilities 11,275,942 4,341,743
---------- -----------
Long-Term Liabilities:
Notes Payable - Net of Current Portion 3,607,877 2,064,273
Deferred Income Taxes 560,180 436,781
---------- -----------
Total Long-Term Liabilities 4,168,057 2,501,054
---------- -----------
Total Liabilities 15,443,999 6,842,797
---------- -----------
Commitments and Contingencies -- --
---------- -----------
Stockholders' Equity:
Common Stock, $.001 Par Value, 25,000,000 Shares
Authorized, 4,057,758 and 3,499,772 Issued and
Outstanding as of December 31, 1997 and 1996,
Respectively 4,057 3,500
Additional Paid-in Capital 10,890,233 7,366,659
Retained Earnings 2,404,857 1,268,671
---------- -----------
Total Stockholders' Equity 13,299,147 8,638,830
---------- -----------
Total Liabilities and Stockholders' Equity $28,743,146 $15,481,627
=========== ===========
</TABLE>
See Notes to Financial Statements.
F-3
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
December 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
[Consolidated] [Combined]
<S> <C> <C> <C>
Sales - Net $38,946,666 $26,139,828 $28,098,919
Cost of Goods Sold 28,756,048 20,237,746 21,697,135
----------- ----------- -----------
Gross Profit 10,190,618 5,902,082 6,401,784
Operating Expenses 8,138,114 5,377,132 4,679,460
----------- ----------- -----------
Income from Operations 2,052,504 524,950 1,722,324
----------- ----------- -----------
Other Income [Expense]:
Other Income 291,825 189,704 40,394
Interest Income -- 69,742 9,726
Interest Income - Related Party 74,756 29,276 29,276
Interest Expense (598,376) (323,679) (615,881)
Non-Cash Finance Charge -- (462,122) (287,878)
Gain on Sale of Equipment 1,241 139,465 109,655
----------- ----------- -----------
Total Other [Expense] (230,554) (357,614) (714,708)
----------- ----------- -----------
Income Before Provision for Income Taxes 1,821,950 167,336 1,007,616
Provision for Income Taxes 685,764 18,999 534,200
----------- ----------- -----------
Net Income $ 1,136,186 $ 148,337 $ 473,416
=========== =========== ===========
Basic Earnings Per Share $ .31 $ .05 $ .25
=========== =========== ===========
Weighted Average Number of Shares 3,627,582 2,865,445 1,893,600
----------- ----------- -----------
Diluted Earnings Per Share:
Incremental Shares from Assumed Conversion of
Options and Warrants 387,362 332,154 --
----------- ----------- -----------
Adjusted Weighted Average Shares 4,014,944 3,197,599 1,893,600
=========== =========== ===========
Diluted Earnings Per Share $ .28 $ .05 $ .25
=========== =========== ===========
</TABLE>
See Notes to Financial Statements.
F-4
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
- ------------------------------------------------------------------------------
<TABLE>
Common Stock Additional Total
Number of Paid-in Retained Stockholders'
Shares Amount Capital Earnings Equity
-------- -------- ---------- --------- -----------
Balance - December 31, 1994
<S> <C> <C> <C> <C> <C>
[Combined] 600,000 $ 600 $ 279,829 $ 676,610 $ 957,039
Finance Charge Incurred on Bridge
Notes Payable -- -- 750,000 -- 750,000
Net Income for the Year Ended
December 31, 1995 -- -- -- 473,416 473,416
-------- -------- ---------- --------- ----------
Balance - December 31, 1995
[Combined] 600,000 600 1,029,829 1,150,026 2,180,455
Issuance of Common Stock in
Connection with Exchange of
Shares under Common Control 594,880 595 (595) -- --
Issuance of Common Stock to
Former Convertible Debt Holders 298,720 299 165,927 -- 166,226
Issuance of Common Stock to
Bridge Lenders 400,000 400 (400) -- --
Transfer of Subchapter S Retained
Earnings of Acquired Company to
Additional Paid-in Capital -- -- 29,692 (29,692) --
Net Proceeds from Initial Public
Offering and Issuance of Common
Stock 1,472,000 1,472 5,742,340 -- 5,743,812
Issuance of Common Stock in
Connection with Acquisition 134,172 134 399,866 -- 400,000
Net Income for the Year Ended
December 31, 1996 -- -- -- 148,337 148,337
-------- -------- ---------- --------- ----------
Balance - December 31, 1996
[Consolidated] 3,499,772 3,500 7,366,659 1,268,671 8,638,830
Issuance of Common Stock in
Connection with Acquisitions 501,099 501 2,499,499 -- 2,500,000
Issuance of Common Stock in
Connection with Settlement 137,390 137 1,023,994 -- 1,024,131
Cancellation of Common Stock in
Connection with Settlement (80,503) (81) 81 -- --
Net Income for the Year Ended
December 31, 1997 -- -- -- 1,136,186 1,136,186
-------- -------- ---------- --------- ----------
Balance - December 31, 1997
[Consolidated] 4,057,758 $ 4,057 $10,890,233 $2,404,857 $13,299,147
========= ======== =========== ========== ===========
</TABLE>
See Notes to Financial Statements.
F-5
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
December 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
[Consolidated] [Combined]
Operating Activities: -------------- ----------
<S> <C> <C> <C>
Net Income $ 1,136,186 $ 148,337 $ 473,416
----------- ----------- -----------
Adjustments to Reconcile Net Income to
Net Cash [Used for] Provided by Operations:
Depreciation and Amortization 1,453,057 839,724 702,056
Deferred Income Taxes 128,014 (15,465) 201,272
[Gain] on Sale of Equipment (1,241) (139,465) --
Amortization of Deferred Loan Fees -- 28,500 114,000
Non-Cash Finance Charge -- 462,122 287,878
Provision for Bad Debts 67,077 85,000 --
Changes in Assets and Liabilities:
[Increase] Decrease in:
Accounts Receivable (885,329) 1,991,543 (1,855,640)
Inventory (3,881,696) (1,275,095) (800,439)
Prepaid Expenses (48,812) (130,027) (104,192)
Other Receivables -- (63,669) --
Interest Income on Notes Receivable - Stockholder (41,195) (6,134) --
Increase [Decrease] in:
Accounts Payable and Accrued Expenses 466,548 (2,397,500) 2,087,105
Income Taxes Payable 478,150 (258,168) 179,145
----------- ----------- -----------
Total Adjustments (2,265,427) (878,634) 811,185
----------- ----------- -----------
Net Cash - Operating Activities - Forward (1,129,241) (730,297) 1,284,601
----------- ----------- -----------
Investing Activities:
Repayments from and [Advances] to Stockholder 150,000 (29,276) --
Purchase of Other Assets (277,034) (18,722) --
Advances Note Receivable - Stockholders -- (128,794) (170,370)
Incorporation Fees -- -- 354
Purchase of Equipment (664,740) (1,114,964) (343,956)
Proceeds from Sale of Equipment 4,000 197,650 --
Purchase of Businesses - Net of Cash Acquired (2,222,288) (2,074,292) --
Advance Under Note Receivable -- 98,989 8,698
Repayments from Related Party 67,743 4,914 --
----------- ----------- -----------
Net Cash - Investing Activities - Forward $(2,942,319)$(3,064,495)$ (505,274)
</TABLE>
See Notes to Financial Statements.
F-6
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
- ------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
- ------------------------------------------------------------------------------
<TABLE>
Years ended
December 31,
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
[Consolidated] [Combined]
<S> <C> <C> <C>
Net Cash - Operating Activities - Forwarded $(1,129,241)$ (730,297)$ 1,284,601
----------- ----------- -----------
Net Cash - Investing Activities - Forwarded (2,942,319) (3,064,495) (505,274)
----------- ----------- -----------
Financing Activities:
Proceeds from Public Offering -- 6,036,798 --
Advances Under Line of Credit 4,672,732 2,684,742 51,513
Repayments of Line of Credit (1,454,597) (3,744,318) --
Proceeds of Notes Payable 4,359,518 2,018,190 137,085
Repayment of Bridge Loans -- (1,000,000) --
Repayment of Note Payable (3,339,256) (2,021,705) (625,827)
Repayment of Capital Lease Obligations -- (734,742) (251,886)
Payments of Deferred Offering Costs -- -- (292,986)
Proceeds from Bridge Loans -- -- 1,000,000
Advance from Affiliates -- -- (100,182)
Other -- -- (11,288)
----------- ----------- -----------
Net Cash - Financing Activities 4,238,397 3,238,965 (93,571)
----------- ----------- -----------
Net [Decrease] Increase in Cash 166,837 (555,827) 685,756
Cash - Beginning of Years 145,845 701,672 15,916
----------- ----------- -----------
Cash - End of Years $ 312,682 $ 145,845 $ 701,672
=========== =========== ===========
Supplemental Disclosure of Cash Flow Information:
Cash paid during the years for:
Interest $ 563,658 $ 316,567 $ 578,492
Income Taxes $ 159,920 $ 468,419 $ 156,707
Supplemental Schedule of Non-Cash Investing and
Financing Activities:
The following table sets forth property
and equipment costs which were completely
financed through equipment contracts:
$ 2,496,925 $ 643,451 $ 124,035
</TABLE>
See Note 4 with respect to the purchase of businesses.
See Note 14 for information on related party transactions.
In November 1995, the Company incurred a non-cash finance charge of $750,000
in connection with bridge financing, of which $462,122 and $287,878 was charged
to operations at December 31, 1996 and 1995, respectively [See Note 13].
See Note 2 for information about the exchange of shares.
See Notes to Financial Statements.
F-7
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
- ------------------------------------------------------------------------------
[1] Financial Statement Presentation, Organization and Nature of Operations
The financial statements presented include the results of operations of the
parent company, TMCI Electronics, Inc. ["TMCI"], and its wholly-owned
subsidiaries, Touche Manufacturing, Inc. ["Touche"], Touche Electronics, Inc.
["TEI"], Enterprise Industries, Inc. ["Enterprise" or "EII"] and Trinity
Electronics, Inc. ["Trinity"] [collectively, the "Company"]. The Company's
revenues are predominately generated from the manufacture and sale of custom-
fabricated metal enclosures for manufacturers of computers, telecommunications
equipment, semiconductor manufacturing test equipment and medical test
equipment. The Company also assembles and installs wire cable harnesses used in
custom-fabricated metal enclosures for manufacturers of computers,
telecommunications test equipment and medical test equipment. The Company sells
to original equipment manufacturers primarily located in the Silicon Valley,
California area.
All significant intercompany amounts have been eliminated for all periods
presented.
[2] Basis of Presentation
The combined financial statements for the period ended December 31, 1995 give
retroactive effect to the acquisition by TMCI of all of the outstanding common
stock of TEI [an S corporation] and Touche on March 5, 1996. The financial
statements of the Company are presented on a consolidated basis commencing as of
such date. The separate results of TEI and Touche have been combined on an as-if
pooling basis consistent with that of consolidated financial statements giving
retroactive effect to the issuance of 27,280 shares of the Company's common
stock to the stockholders of TEI, and 567,600 shares of the Company's common
stock to the stockholders of Touche. Additionally, the S corporation equity
section of TEI has been reclassified to additional paid-in capital. No
adjustment of assets to "fair value" had been recorded and all intercompany
balances and transactions were eliminated. The accompanying combined financial
statements for 1995 became the historical financial statements upon issuance of
financial statements subsequent to March 5, 1996.
[3] Summary of Significant Accounting Policies
Use of 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 and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period.
Actual results could differ from those estimates.
Cash Equivalents - Cash equivalents are comprised of certain highly liquid
investments with a maturity of three months or less when purchased. At December
31, 1997 and 1996, there were no cash equivalents.
Inventory - Inventory is recorded at the lower of cost or market. Cost, which
includes materials, labor and overhead, is determined using the first-in,
first-out method. The Company reviews inventory items and charges earnings if it
is determined that such inventory has become obsolete. During the years ended
December 31, 1997, 1996 and 1995, the Company charged $78,000, $40,000 and $-0-,
respectively.
Property and Equipment and Depreciation - Property and equipment is stated at
cost. Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the assets which range from 5 to 7 years.
F-8
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #2
- ------------------------------------------------------------------------------
[3] Summary of Significant Accounting Policies [Continued]
Goodwill Amortization - Goodwill is amortized utilizing the straight-line method
over a period of 15 years. Total accumulated amortization as of December 31,1997
and 1996 was $275,198 and $27,593, respectively.
Deferred Loan Costs - Deferred loan costs have been amortized over the term of
the loan using the straight-line method which approximates the interest method.
Earnings Per Share - The Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards ["SFAS"] No. 128, "Earnings per
Share"; which is effective for financial statements issued for periods ending
after December 15, 1997. Accordingly, earnings per share data in the financial
statements for the year ended December 31, 1997, have been calculated in
accordance with SFAS No. 128. Prior periods earnings per share data have been
recalculated as necessary to conform prior years data to SFAS No. 128.
SFAS No. 128 supersedes Accounting Principles Board Opinion No. 15, "Earnings
per Share," and replaces its primary earnings per share with a new basic
earnings per share representing the amount of earnings for the period available
to each share of common stock outstanding during the reporting period. SFAS No.
128 also requires a dual presentation of basic and diluted earnings per share on
the face of the statement of operations for all companies with complex capital
structures. Diluted earnings per share reflects the amount of earnings for the
period available to each share of common stock outstanding during the reporting
period, while giving effect to all dilutive potential common shares that were
outstanding during the period, such as common shares that could result from the
potential exercise or conversion of securities into common stock.
The computation of diluted earnings per share does not assume conversion,
exercise, or contingent issuance of securities that would have an antidilutive
effect on earnings per share [i.e., increasing earnings per share or reducing
loss per share]. The dilutive effect of outstanding options and warrants and
their equivalents are reflected in dilutive earnings per share by the
application of the treasury stock method which recognizes the use of proceeds
that could be obtained upon exercise of options and warrants in computing
diluted earnings per share. It assumes that any proceeds would be used to
purchase common stock at the average market price during the period. Options and
warrants will have a dilutive effect only when the average market price of the
common stock during the period exceeds the exercise price of the options or
warrants.
The 1995 weighted average number of shares gives retroactive effect for the
shares issued in the business combination [See Note 2].
Securities that could potentially dilute earnings per share in the future are
disclosed in Note 22.
Advertising - The Company expenses advertising costs as incurred. Total
advertising costs charged to expense amounted to $15,613, $18,316 and $11,874
for the years ended December 31, 1997, 1996 and 1995, respectively.
Stock Options - The Company accounts for employee stock-based compensation under
the intrinsic value based method as prescribed by Accounting Principles Board
["APB"] Opinion No. 25. The Company applies the provisions of Statement of
Financial Accounting Standards ["SFAS"] No. 123 to non-employee stock-based
compensation and the pro forma disclosure provisions of that statement to
employee stock-based compensation.
F-9
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #3
- ------------------------------------------------------------------------------
[3] Summary of Significant Accounting Policies [Continued]
Impairment - Certain long-term assets of the Company, including goodwill, are
reviewed when changes in circumstances warrant as to whether their carrying
value has become impaired, pursuant to guidance established in Statement of
Financial Accounting Standards ["SFAS"] No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed of." Management
considers assets to be impaired if the carrying value exceeds the future
projected cash flows from related operations [undiscounted and without interest
charges]. If impairment is deemed to exist, the assets will be written down to
fair value.
Risk Concentrations - Financial instruments that potentially subject the Company
to concentrations of credit risk include cash and accounts receivable arising
from its normal business activities. The Company places its cash with high
credit quality financial institutions located in the western United States.
The Company periodically has money in financial institutions that is subject to
normal credit risk beyond insured amounts. This credit risk, representing the
excess of the bank's deposit liabilities reported by the bank over the amounts
that would have been covered by federal insurance, amounted to approximately
$490,000 and $191,000 at December 31, 1997 and 1996, respectively.
The Company's extension of credit to its customers, which are primarily located
in the Silicon Valley, California, results in accounts receivable arising from
its normal business activities. The Company does not require collateral from its
customers, but routinely assesses the financial strength of its customers. Based
upon factors surrounding the credit risk of its customers and the Company's
historical collection experience, an allowance for uncollectible accounts
amounting to $160,356 and $93,279 has been established at December 31, 1997 and
1996, respectively. The Company believes that its accounts receivable credit
risk exposure beyond such allowance is limited. Such assessment may be subject
to change in the near term.
The Company had sales to two unrelated customers in the computer industry
approximating $5,494,000, $4,548,000 representing 14% and 12%, respectively, of
the Company's total net sales for the year ended December 31, 1997. The Company
had sales to three unrelated customers in the computer industry approximating
$7,404,000, $6,285,000 and $3,487,600 representing 28%, 24% and 13%,
respectively, of the Company's total net sales for the year ended December 31,
1996. For the year ended December 31, 1995, sales to these three unrelated
customers approximated $9,273,000, $5,058,000 and $5,339,000 representing 33%,
18% and 19%, respectively. The loss of one or more of these customers may have a
severe impact on the Company in the near term.
Reclassifications - Previously, the Company classified as operating expenses
certain overhead items relating to inventory and cost of goods sold. Commencing
in 1997, the Company is classifying all overhead items into costs of goods sold,
and prior year cost of sales amounts have been reclassified to reflect this
change. As a result of this reclassification, cost of goods sold increased in
the approximate amount of $3,146,000 and $1,705,000 for the years ended 1996 and
1995, respectively. Such change had no effect on previously reported net income
or earnings per share. Certain other items in the 1996 and 1995 financial
statements have been reclassified to conform to the 1997 presentation.
F-10
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #4
- ------------------------------------------------------------------------------
[4] Business Acquisitions
[A] Trinity Electronics, Inc. - On December 22, 1997, the Company completed the
merger of Trinity Electronics, Inc., a California corporation ["Trinity"] with
and into TMCI/Trinity Acquisition Corp., a wholly owned subsidiary of the
Company [the "Merger"].The merger agreement is effective as of October 1, 1997.
The Company paid a total consideration of $4,290,000 in connection with the
Merger, including $1,000,000 in cash, $1,000,000 in a promissory note due March
9, 1998, $290,000 in a promissory note due January 4, 1998 and $2,000,000 in
common stock of the Company resulting in the issuance of 404,539 shares of the
common stock of the Company. The common stock issued in connection with the
Merger is being held in escrow as security for the representations and
warranties of Trinity and the sole shareholder of Trinity and as security for
the performance of the sole shareholder of Trinity of his obligations pursuant
to the Employment Agreement [See Note 16] entered into in connection with the
Merger. The Company acquired assets of approximately $962,000 and assumed
certain liabilities of approximately $255,000. The acquisition was accounted for
utilizing the purchase method and the operations of the new division are
included in the Company's results of operations from October 1, 1997. Goodwill
of approximately $3,583,000 was recorded in connection with the transaction
which is being amortized utilizing the straight-line method over a period of 15
years. Amortization expense of $61,749 was recorded for the period ended
December 31, 1997 and accumulated amortization amounted to $61,749 at December
31, 1997.
[B] Enterprise Industries, Inc. - On January 24, 1997, the Company acquired 100%
of the outstanding shares of capital stock of Enterprise Industries, Inc.
["Enterprise"], a North Hollywood, California based metal stamping manufacturing
business for a total purchase price of $1,500,000, consisting of $1,000,000 in
cash and the issuance of 96,560 shares of the Company's common stock. The common
stock issued in connection with the acquisition is being held in escrow for a
period of two years pending any final adjustments and unrecorded items with
respect to the book value of Enterprise's assets and liabilities as well as
certain representations and warranties made by the seller as defined in the
agreement. Any final adjustments would be recorded against goodwill. The Company
utilized the purchase method and acquired assets of approximately $1,623,000 and
assumed liabilities of approximately $323,000 resulting in goodwill of
approximately $274,000. The goodwill is being amortized utilizing the
straight-line method over a period of 15 years. Amortization expense of $18,267
was recorded for the period ended December 31, 1997 and accumulated amortization
amounted to $18,267 at December 31, 1997. At the same time, the Company entered
into an employment contract with the President of Enterprise [See Note 16].
[C] Pen Interconnect, Inc. - Effective November 1, 1996, the Company
acquired substantially all of the assets and assumed certain liabilities of Pen
Interconnect, Inc.'s San Jose Division [a manufacturer of wire cable harnesses]
for a purchase price of $3,300,000. The Company acquired assets of approximately
$1,309,000 and assumed certain liabilities of $372,000. The consideration paid
consisted of $2,000,000 in cash, $900,000 in promissory notes and 134,172 shares
of TMCI common stock with an agreed-upon guaranteed value of $400,000 at the
date of acquisition of which 80,503 shares were held in escrow subject to the
outcome of an earn out agreement entered into between the Company and Pen
Interconnect, Inc. The promissory notes in the amount of $900,000 were
subsequently exchanged for 132,023 shares of the Company's common stock in
connection with the settlement. See following discussion on the exchange of the
promissory notes for common stock and cancellation of common shares below. The
acquisition was accounted for utilizing the purchase method and the operations
of the new division are included in the Company's results of operations from
November 1, 1996. Goodwill of approximately $2,577,000 [of which approximately
$214,000 was for legal and accounting costs directly related to the acquisition]
was recorded in connection with the transaction which is being amortized
utilizing the straight-line method over a period of 15 years. In addition,
during December 1997, $142,412 was recorded as an adjustment to goodwill as a
result of the settlement discussed below. Amortization expense of $167,589 and
$27,593 was recorded for the period ended December 31, 1997 and 1996, and
accumulated amortization amounted to $195,182 and $27,593 at December 31, 1997
and 1996, respectively.
F-11
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #5
- ------------------------------------------------------------------------------
[4] Business Acquisitions [Continued]
[C] Pen Interconnect, Inc. [Continued] - On December 5, 1997, the Company
settled its outstanding litigation with Pen Interconnect, Inc. ["Pen"] relating
to the asset purchase agreement entered into on November 1, 1996 [the
"Agreement"] pursuant to which the Company purchased certain assets from Pen.
The litigation involved a claim by the Company that the inventory purchased
pursuant to the Agreement had a value of $716,249 rather than the $1,596,905
value given to the inventory in the Agreement. As consideration for release of
the claim by the Company, Pen cancelled its earn out agreement [the "Earn Out
Agreement"] that the Company entered into on November 1, 1996 in connection with
the Agreement. Among other things, cancellation of the Earn Out Agreement
resulted in the cancellation of 80,503 shares of the common stock of the Company
issued to Pen and in the cancellation of the ability of Pen to receive an
additional $600,000 in consideration based on the performance of the division
sold to the Company pursuant to the Agreement. In addition, Pen cancelled
approximately $900,000 in principal amount and approximately $85,000 in accrued
interest on two notes [the "Notes"] issued in connection with the Agreement.
Further, Pen released Rolando Loera, the Chief Executive Officer of the Company
from the personal guaranty that he gave on the Notes and terminated an action
that it filed in the Superior Court of Santa Clara County California to enforce
said guaranty. Finally, Pen agreed to cooperate with the Company in obtaining an
audit of the division of Pen acquired by the Company so that the Company could
file the necessary financial statements with the Securities and Exchange
Commission.
In connection with the settlement of its claim, the Company delivered 132,023
shares of its common stock in exchange for the cancellation of the Notes. In
addition, the Company released from escrow 53,669 shares that it had been
holding as security for the representations and warranties made by Pen in the
Agreement. Further, the Company delivered to Pen an additional 5,367 shares of
its common stock in satisfaction of its obligation to issue additional common
stock for the collection of the accounts receivable in the Agreement. Finally,
the Company waived certain additional claims with respect to approximately
$77,000 in other undisclosed liabilities.
The following pro forma unaudited information presents the results of the
combined operations of TMCI Electronics, Inc., Enterprise, Trinity and San Jose
Division of Pen Interconnect, Inc., treating all as if they were a subsidiary of
TMCI Electronics, Inc. for the entire years ended December 31, 1997 and 1996
with pro forma adjustments as if the acquisition had been consummated as of the
beginning of 1996. This pro forma information does not purport to be indicative
of what would have occurred had the acquisitions been made as of January 1, 1996
and 1997 or results which may occur in the future.
Year ended
December 31,
1 9 9 7 1 9 9 6
Total Revenues $ 42,292,876 $38,534,769
Net Income $ 1,371,614 $ 634,049
Net Income Per Share - Basic $ .35 $ .16
Net Income Per Share - Diluted $ .32 $ .16
F-12
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #6
- ------------------------------------------------------------------------------
[5] Inventory
Inventory consisted of the following:
December 31,
1 9 9 7 1 9 9 6
Raw Materials $ 6,231,925 $ 3,015,968
Work-in Process 2,409,901 1,465,951
Finished Goods 1,079,224 688,742
----------- -----------
Totals $ 9,721,050 $ 5,170,661
------ =========== ===========
[6] Notes Receivable - Stockholders
During 1996, the Company had advanced $166,226 to three stockholders bearing
interest at 10% with a 10 year amortization period commencing December 1, 1997.
During the year ended December 31, 1997, the Company recorded $17,378 in
interest income and the total advances increased to $183,604.
[7] Property and Equipment and Depreciation
Property and equipment is comprised of the following:
December 31,
1 9 9 7 1 9 9 6
Machinery and Equipment $ 8,341,241 $ 5,036,652
Furniture and Fixtures 992,909 620,838
Transportation Equipment 268,525 223,397
Leasehold Improvements 451,608 117,699
----------- -----------
Totals 10,054,283 5,998,586
Less: Accumulated Depreciation 3,471,023 2,360,286
Totals $ 6,583,260 $ 3,638,300
------ =========== ===========
Depreciation expense amounted to $1,205,452, $812,131 and $702,056 for the
years ended December 31, 1997, 1996 and 1995, respectively.
[8] Due from Related Party
The Company- has amounts due from an entity controlled by the majority
stockholder of the Company with interest to 10% per annum. At December 31, 1997
and 1996, the balance due the Company amounted to $469,878 and $473,952,
respectively. Interest income on these amounts approximated $35,000 for each of
the years ended December 31, 1997, 1996 and 1995.
[9] Due from Stockholder - Noncurrent
The December 31, 1997 and 1996 balance due from stockholder is comprised of two
unsecured promissory notes due on demand from the Company's president. Each of
the notes call for interest payable at 10% per annum. Interest income on these
amounts approximated $20,000 for each of the years ended December 31, 1997, 1996
and 1995. The cumulative balance outstanding of these notes was $111,984 and
$238,167 at December 31, 1997 and 1996, respectively.
F-13
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #7
- ------------------------------------------------------------------------------
[10] Lines of Credit
In June 1997, the Company renewed and re-negotiated a new credit agreement
with its bank. The new credit agreement increased the Company's lines of credit
to $5,500,000, increased its term debt by $2,000,000, and allowed the Company to
refinance its existing long-term debt obligations based on a reduced interest
rate. The new and existing credit facilities bear interest at rates ranging from
prime plus .50% to prime plus .25%, are collateralized by all corporate assets
and have been used to pay off the former line of credit and other debt
aggregating approximately $3,200,000. The available portion of the line of
credit was $-0- [based upon eligible accounts receivable] at December 31, 1997.
This new credit agreement requires the Company, among other things, to maintain
minimum levels of earnings, tangible net worth and certain minimum financial
ratios. Effective December 31, 1997, the Company was not in compliance with
certain covenants with its bank and subsequently cured such defaults as a result
of the Company's refinancing of the line [See Note 23]. The line of credit
contained negative covenants among other provisions, requiring the consent for
the disposition of assets, acquisition or merger of any business, guaranty of
any third party obligations, capital restructure, and any distributions or
payment of any dividends in cash or in stock. The weighted average interest rate
on short-term borrowings at December 31, 1997 and 1996 was 9.24 percent and 11.3
percent, respectively.
[11] Notes Payable
Notes payable consist of the following:
<TABLE>
December 31,
1 9 9 7 1 9 9 6
<S> <C> <C>
Notes payable to financial institution with monthly payments of $55,168
including principal and interest at .25% above prime, maturing November 1,
2001, collateralized by all corporate assets $1,914,815 $1,691,747
Promissory notes to a stockholder [the former owner of Trinity] in the amount of
$1,313,493 bearing interest at 9% per annum; maturing in April 1998 and March
1998; unsecured. 1,313,493 --
Bridge loan to financial institution; bears interest at 10.5%; refinanced in
February 1998; collateralized by equipment; [See Note 22]. 1,000,000 --
Notes payable to financial institution with monthly payments of $20,061
principal and interest bearing interest at prime plus .25%; maturing November
2001; collateralized by machinery and equipment. 696,593 --
Notes payable to financial institution with monthly payments of $4,675 with
interest only at 8.75% until January 1998 convertible into term debt; maturing
August 2002; collateralized by machinery and equipment. 620,520 --
Note payable to financial institution with monthly payments of $12,381 interest
only; bearing interest at prime plus .25%; convertible into term debt in
January 1998; maturing August 2002, collateralized by machinery. 594,294 --
---------- ----------
Totals - Forward $6,139,715 $1,691,747
</TABLE>
F-14
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #8
- ------------------------------------------------------------------------------
<TABLE>
[11] Notes Payable [Continued]
December 31,
1 9 9 7 1 9 9 6
<S> <C> <C>
Totals - Forwarded $6,139,715 $1,691,747
Note payable to financing company with monthly payments of $12,435
principal and interest; bearing interest at 8.7%; maturing May 2002;
collateralized by machinery. 540,326 --
Note payable to a financing company with monthly payments of $5,461;
bearing interest at 11.2%; maturing February 2001; collateralized by
equipment. 168,209 --
Note payable to financial institution with monthly payments of $4,181
principal and interest bearing interest at 9.5% per annum; maturing
May 2001; collateralized by machinery and equipment. 128,376 --
Note payable to financial institution with monthly payments of $6,293 including
principal and interest at 8.35% per annum; matures March 2001; collateralized
by machinery and equipment -- 269,393
Promissory notes in the amounts of $500,000 and $400,000 issued in connection
with the acquisition of the cable company, bears interest at the prime rate
plus .5% with monthly payments of $33,276, exchanged for common stock of the
Company in November 1997 [See Note 4C] -- 900,000
Totals 6,976,626 2,861,140
Less: Current Portion including Prommissory Note to a Stockholder 3,368,749 796,867
---------- ----------
Noncurrent Portion $3,607,877 $2,064,273
------------------ ========== ==========
</TABLE>
The prime rate was 8.50% at December 31, 1997.
Current maturities on long-term debt at December 31, 1997 are as follows:
December 31,
1998 $ 3,368,749
1999 1,129,854
2000 1,147,843
2001 1,033,239
2002 296,941
Thereafter --
-----------
Total $ 6,976,626
----- ===========
F-15
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #9
- ------------------------------------------------------------------------------
[12] Bridge Notes Payable
In November and December 1995, the Company borrowed an aggregate of
$1,000,000 in bridge loans, as evidenced by four promissory notes of $250,000
each bearing a rate of eight percent [8%] simple interest. The loans matured on
the consummation of the public offering of the Company's securities [See Note
17C]. As additional consideration, solely for making the loans, the Company
granted the lenders the right to receive an aggregate of 200,000 units
["Bridgeholder's Units"]. Each Bridgeholder's Unit consists of (i) two shares of
Common Stock, (ii) two Class A Redeemable Common Stock Purchase Warrants ["Class
A Warrants"] and (iii) two Class B Redeemable Common Stock Purchase Warrants
["Class B Warrants"]. The Company valued these units at $3.75 per unit taking
into consideration restrictions imposed on the holders of the Bridge Units as to
the salability of the units issued. The Company accounted for the $750,000 value
of the Bridgeholder's Units as debt issue costs which were amortized by the
straight-line method which approximates the interest method over the life of the
promissory notes. For the year ended December 31, 1996 and 1995, amortization of
$462,122 and $287,878, respectively, of such costs are reflected in the
statements of operations.
[13] Income Taxes
Commencing March 5, 1996, the Company filed its tax returns on a consolidated
basis with all of its subsidiaries. Prior to March 5, 1996, TMCI and Touche
filed separate Subchapter C corporation tax returns and TEI was taxed under the
provisions of Subchapter S of the Internal Revenue Code.
Deferred income taxes reflect the tax consequences on future years of
differences between the tax bases of assets and liabilities and their financial
reporting amounts.
The components of the provision for income taxes are as follows:
December 31,
------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Current Tax Expense:
Federal $ 554,581 $ 126,644 $ 354,200
State 3,200 10,120 66,900
---------- ---------- ----------
Totals 557,781 136,764 421,100
Less: Benefit of Net Operating Loss Carryforward -- (102,300) (86,100)
---------- ---------- ----------
Total Current Provision 557,781 34,464 335,000
---------- ---------- ----------
Deferred:
Federal 93,748 40,658 203,800
State 34,235 (56,123) (4,600)
---------- ---------- ----------
Total Deferred Provision 127,983 (15,465) 199,200
---------- ---------- ----------
Total Provision for Taxes $ 685,764 $ 18,999 $ 534,200
------------------------- ========== ========== ==========
F-16
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #10
- ------------------------------------------------------------------------------
[13] Income Taxes [Continued]
The components of the deferred tax liability are as follows:
December 31,
1 9 9 7 1 9 9 6
Deferred Tax Asset:
Alternative Minimum Tax Credits $ 29,626 $ 59,717
Bad Debt Allowance 63,876 37,441
Inventory Capitalization 30,746 21,230
Unused State Tax Credit 59,128 69,603
---------- ----------
Deferred Tax Asset - Current 183,376 187,991
Deferred Tax Liabilities:
Excess Tax Over Book Accumulated Depreciation -
Non-Current (560,180) (436,781)
Net Deferred Tax Liabilities $ (376,804) $ (248,790)
---------------------------- ========== ==========
A reconciliation between the Company's effective tax rate and the U.S. statutory
rate follows:
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
U.S. Statutory Rate Applied to Pretax Income 34% 34% 34%
State Tax Provision - Net of Federal Tax Benefit 5 6 6
Effect of S Corporation Operations -- 13 2
Net Operating Loss Carryforward -- (42) --
Other (1) -- 11
----- ----- ------
Total Effective Tax Rate 38% 11% 53%
------------------------ ===== ===== ======
As of December 31, 1996, the Company utilized the remaining balance of its net
operating loss carryforward as an offset to its federal and state income tax
expense.
[14] Related Party Transactions
In 1995, Touche owed Textron Financial approximately $401,700 which Antonio
Zertuche, Touche's landlord, agreed to repay in exchange for Touche's promissory
note to make monthly installments of approximately $6,322, including interest at
11.5% per annum, maturing December 1996. In January 1996, the Company refinanced
the note, and issued a new note for approximately $291,000 which is the
difference between the Company's original note payable of approximately $401,700
and its cancellation of an outstanding note receivable from the landlord of
approximately $99,000, plus approximately $11,600 in the overpayment of property
taxes on leased property located at 1875 Dobbin Drive, San Jose, California. The
new note payable was satisfied in March 1996, from the proceeds of the initial
public offering.
In addition to acting as Chairman, President and Chief Executive Officer of the
Company, Rolando Loera is also the sole owner of Touche Properties, Inc.
["TPI"], a real estate company which owns and leases the real property located
at 1881-1899 Dobbin Drive [the "Property"] to TEI and Touche, two wholly-owned
subsidiaries of the Company. The rent payments made by TEI and Touche to TPI
amounted to approximately $576,144, $576,144 and $477,640 for the years ended
1997, 1996 and 1995, respectively.
F-17
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #11
- ------------------------------------------------------------------------------
[15] Employee Stock Purchase Plan, Employees' Stock Ownership Plan and
Employees' Defined Contribution Plan
The Board of Directors adopted the Company's 1997 Employee Stock Purchase Plan
effective December 1, 1997 approved by the stockholders on December 22, 1997.
Under such plan, employees of the Company, including executive officers may
defer up to 20% of their annual compensation for the purchase of common stock of
the Company at a price of 85% of the fair market value of the common stock on
the date of issuance. The plan provides for the issuance of up to 250,000
shares.
TMCI has a Noncontributory Employees' Stock Ownership Plan ["the Plan"] covering
all full-time employees who have met certain service requirements. It provides
for discretionary contributions by TMCI as determined annually by the directors
and stockholders. As of December 31, 1997 and 1996, the Plan owned approximately
.7% and .8%, respectively, of TMCI's outstanding shares.
The Company has a voluntary 401(k) savings plan covering all eligible employees.
The Company matches up to 5% of all contributions on a discretionary basis and
each employee vests 100% over 7 years. The Company's contributions which were
charged to expense for the years ended December 31, 1997, 1996 and 1995 were
$4,026, $5,036 and $1,945, respectively.
[16] Commitments and Contingencies
Construction Contract - In December 1997, Enterprise entered into a construction
contract in the amount of $488,532 to demolish and remove an existing building
and to construct an addition to its primary facility. Enterprise anticipates
that the contract will be paid with cash generated from operations.
Operating Leases - The Company leases its production and administrative
facilities. This obligation extends through April 2013. Annual rental increases
on each January 1st shall be adjusted per the average annual Consumer Price
Index - San Francisco/Oakland/San Jose Metropolitan Area. Beginning on May 1,
2003 and continuing through the remaining lease term, the base rent will be the
prevailing market rate.
A portion of the Company's production and administrative facilities are leased
from an affiliate, Touche' Properties, Inc. which is 100% owned by the Company's
sole stockholder. The leases commenced in November 1993 and November 1996 and
expire in November 2013. In addition, the Company's newly acquired wholly-owned
subsidiary, Trinity will be entering into a new lease agreement with Touche
Properties, Inc. The agreement has not been drafted nor executed as of February
20, 1998 and accordingly, the below future minimum lease payments do not include
such payments in the related party leases.
Minimum lease payments for the next five years and thereafter [not including the
CPI increases] are:
Related Party Third Party
Leases Leases
1998 $ 576,144 $ 1,125,227
1999 576,144 1,104,045
2000 576,144 1,104,045
2001 576,144 950,160
2002 576,144 950,160
Thereafter 6,289,572 8,766,840
----------- -----------
Totals $ 9,170,292 $14,000,477
------ =========== ===========
Total rent expense amounted to $1,901,356, $1,038,626 and $730,417 for the years
ended December 31, 1997, 1996 and 1995, respectively.
The Company has minimum future sublease rental income due in the amount of
$45,000 in 1998.
F-18
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #12
- ------------------------------------------------------------------------------
[16] Commitments and Contingencies [Continued]
Employment Agreements - In connection with the merger of Trinity Electronics,
Inc. with and into a wholly owned subsidiary of the Company, TMCI/Trinity
Acquisition Corp. ["New Trinity"] entered into an employment agreement with the
President of Trinity Electronics, Inc. and New Trinity [the "Trinity Employment
Agreement"]. The Trinity Employment Agreement calls for the president of New
Trinity to serve in that capacity for five years at an annual salary of $150,000
per year with an annual bonus [payable in quarterly installments] of not less
than $25,000 per year. In addition to other benefits offered to all employees,
the president of New Trinity shall receive an auto allowance of $1,450 per
month. In the event of voluntary termination by the president of New Trinity or
termination for cause or malfeasance as defined in the employment agreement,
then the president of New Trinity is subject to a covenant not to compete, as
more fully detailed in the employment agreement, for the shorter of (i) two
years from the date of termination of employment or (ii) five years from the
effective date of the employment agreement.
In connection with the acquisition of all of the outstanding shares of
Enterprise, a California corporation, the Company entered into an employment
agreement with the chief executive officer of Enterprise [the "Enterprise
Employment Agreement"]. The Enterprise Employment Agreement calls for the chief
executive officer of Enterprise to serve in that capacity for a term of five
years starting at an annual salary of $50,000 and increasing in increments to
$105,000 by the year 2001 with an annual bonus of 1% of sales of Enterprise and
a 10% earn out provision as defined in the agreement. The agreement is
terminable at the will of either party. In addition, to other benefits offered
to all employees, the chief executive officer of Enterprise shall receive an
auto allowance of $550 per month. In the event of termination other than for
cause or malfeasance, as defined, by the Company, then the chief executive
officer shall receive $100,000 if termination occurs in the first year, $75,000
if termination occurs in the second year, and $50,000 if termination occurs in
the third, fourth or fifth years.
The Company has entered into an employment agreement ["Agreement] dated as of
December 28, 1995 with its president. The term of employment commenced on March
5, 1996, the effective date of the public offering and will expire on the fifth
anniversary thereof. The annual salary under the Agreement is $225,000. The term
of employment will be automatically extended for an additional five year term in
the absence of notice from either party. This salary may be increased to reflect
annual cost of living increases and may be supplemented by discretionary and
performance increases as may be determined by the Board of Directors except that
during the first three years following the effective date, his salary may not
exceed $225,000. The Agreement provides that during the initial three years of
the term of employment, an annual bonus of $100,000 will be awarded to the
president. The 1997 and 1996 bonus was relinquished by the President. Bonuses
during the remainder of the term of employment will be at the discretion of the
Board of Directors.
The Agreement provides, among other things, for participation in an equitable
manner in any profit-sharing or retirement plan for employees or executives and
for participation in other employee benefits applicable to employees and
executives of the Company. The Agreement further provides for the use of an
automobile and other fringe benefits commensurate with his duties and
responsibilities. The Agreement also provides for benefits in the event of
disability.
If employment by the Company of Mr. Loera terminates or Mr. Loera becomes unable
to perform his duties, the Company may be adversely affected.
F-19
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #13
- ------------------------------------------------------------------------------
[17] Stockholders' Equity
[A] Description of Securities - The authorized capital stock of the Company
consists of 25,000,000 shares of common stock, $.001 par value per share. All
shares of common stock are entitled to share equally in dividends from sources
legally available therefor when, as and if declared by the Board of Directors
and, upon liquidation or dissolution of the Company, whether voluntary or
involuntary, to share equally in the assets of the Company available for
distribution to stockholders. All outstanding shares of common stock are validly
authorized and issued, fully paid and nonassessable.
[B] Issuance of Common Stock - On November 6, 1995, the Company issued 600,000
shares of its common stock to its then sole stockholder in exchange for $1,000,
which is reflected retroactively in the statement of stockholders' equity.
[C] Public Offering - On March 11, 1996, the Company closed the initial public
offering of its securities resulting in net proceeds to the Company of
approximately $5,700,000. The Company sold 1,472,000 Units consisting of one
share of common stock, $0.001 par value per share, and one redeemable Class A
warrant at a price of $5.00 per Unit. Each Class A warrant entitles the holder
to purchase one share of common stock at a price of $5.50 per share for a period
of four years beginning March 5, 1997. The Company may redeem the Class A
warrants any time after March 5, 1997, upon thirty days written notice, if the
average closing price or bid price of the common stock, as reported by the
principal market on which the common stock is quoted or traded, equals or
exceeds $8.75 per share, for any 20 consecutive trading days ending within five
days prior to the date of the notice of redemption. The Company used a portion
of the proceeds from the offering to repay the bridge notes described in Note
12.
Effective with the offering, the Company sold the underwriter an option to
purchase up to an aggregate of 128,000 units. Each unit shall be exercisable
during the four-year period commencing one year after March 11, 1996. The
exercise price of the units issuable upon exercise of the underwriter's units
during the period of exercisability shall be $8.25.
[D] Conversion of Debt-to-Equity - Immediately prior to the public offering, the
holders of the convertible promissory notes exercised the conversion right of
the notes and exchanged them for 298,720 shares of TMCI.
[E] Stock Purchase Agreements - On December 28, 1995, the Company entered into
Stock Purchase Agreements [the "Agreements"] with the stockholders of Touche and
TEI to acquire all of the issued and outstanding stock of Touche and TEI.
Immediately prior to the public offering, the Company exchanged its shares of
Touche and TEI for 567,600 and 27,280 shares, respectively, of TMCI.
[F] 1997 Stock Option Plan -The Board of Directors adopted the Company's 1997
Stock Option Plan, effective December 1, 1997, approved by the stockholders on
December 22, 1997. Under such plan, key employees and officers and consultants
of the Company may be granted options to purchase shares of the Company's Common
Stock at their fair market value on the date of grant. The plan provides for an
aggregate of 1,000,000 options. There were no options granted as of December 31,
1997.
Any future awards will be determined by the Board of Directors or a Committee
established by the Board.
1995 Stock Option Plan - The Company has adopted a stock option plan, effective
December 22, 1995. Under such plan, key employees and officers and consultants
of the Company will be granted options to purchase shares of the Company's
common stock at their fair market value on the date of grant. The plan provides
for an aggregate of 500,000 options. On December 22, 1995, the Company's
president was granted options to purchase 100,000 shares of common stock at
$3.75 per share. The options vest two years from the date of grant and will
expire in December 2005. The Plan also permits stock appreciation rights to be
granted in tandem with options.
F-20
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #14
- ------------------------------------------------------------------------------
[17] Stockholders' Equity [Continued]
[F] 1995 Stock Option Plan [Continued] - A summary of the activity under the
plan is as follows:
<TABLE>
Weighted Average
Remaining Weighted-
Contractual Average
Shares Life Exercise Price
-------- -------- ----------
Balance - December 31, 1994 --
<S> <C> <C> <C>
Granted 100,000 10 Years $ 3.75
Exercised --
Forfeited/Expired --
---------
Outstanding - December 31, 1995 100,000 10 Years $ 3.75
-------------------------------
Granted --
Exercised --
Forfeited/Expired --
---------
Outstanding - December 31, 1996 100,000 9 Years $ 3.75
-------------------------------
Granted 324,500 10 Years $ 4.88
Exercised --
Forfeited/Expired --
---------
Outstanding - December 31, 1997 424,500 9.1 Years $ 4.61
------------------------------- =========
Exercisable - December 31, 1997 391,166 9.2 Years $ 4.69
------------------------------- =========
</TABLE>
The weighted-average fair value of options granted during the year ended
December 31, 1997 and 1996 was $2.79 and $2.77, respectively.
No compensation cost was recognized in the periods presented. Had compensation
cost for the Company's stock options issued to employees been determined based
per share upon the fair value at the grant date for stock options issued under
these plans pursuant to the methodology prescribed under Statement of Financial
Accounting Standards ["SFAS"] No. 123, Accounting for Stock-Based Compensation,
the Company's net income and basic earnings per share would have been decreased,
on a pro forma basis, by approximately $344,900 or $.10 per share and $138,500,
or $.05 per share for the years ended December 31, 1997 and 1996, respectively,
which is based upon the amortization of the 1997 and 1995 fair value. The effect
on 1995 earnings was immaterial. The fair value of stock options granted to
employees used in determining the pro forma amounts is estimated at $904,000 and
$277,000 during 1997 and 1995 using the Black-Scholes option-pricing model for
the pro forma amounts with the following weighted average assumptions:
December 31,
------------------------
1 9 9 7 1 9 9 6 1 9 9 5
------- ------- -------
Risk-free Interest Rate 6.00% N/A 5.87%
Expected Life 6 Years N/A 6 Years
Expected Volatility 52.57% N/A 82.07%
Expected Dividends None None None
F-21
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #15
- ------------------------------------------------------------------------------
[17] Stockholders' Equity [Continued]
[F] 1995 Stock Option Plan [Continued] - Net income and net earnings per share
as reported, and on a pro forma basis as if compensation cost had been
determined on the basis of fair value pursuant to SFAS No. 123 is as follows:
December 31,
1 9 9 7 1 9 9 6
Net Income:
As Reported $ 1,136,186 $ 148,337
Pro Forma $ 791,286 $ 9,837
Basic Earnings Per Share:
As Reported $ .31 $ .05
Pro Forma $ .22 $ --
Diluted Earnings Per Share:
As Reported $ .28 $ .05
Pro Forma $ .20 $ --
The Company has agreed to sell to its underwriter, or their designees, for an
aggregate purchase price of $128, an option ["Underwriter's Unit Purchase
Option"] to purchase up to an aggregate of 128,000 Units. The Underwriter's Unit
Purchase Option shall be exercisable during the four-year period commencing one
(1) year after the effective date of the Company's initial public offering. The
Underwriter's Unit Purchase Option may not be assigned, transferred, sold or
hypothecated by the underwriter after the Effective Date, except to officers or
partners of the underwriters or any of the underwriter and selling group members
in this offering. Any profits realized by the underwriter upon the sale of the
units issuable upon exercise of the Underwriter's Unit Purchase Option may be
deemed to be additional underwriting compensation. The exercise price of the
units issuable upon exercise of the Underwriter's Unit Purchase Option during
the period of exercisability shall be $8.25. The exercise price of the
Underwriter's Unit Purchase Option and the number of shares covered thereby are
subject to adjustment in certain events to prevent dilution. For the life of the
Underwriter's Unit Purchase Option, the holders thereof are given, at a nominal
cost, the opportunity to profit from a rise in the market price of the Company's
units, common stock and warrants with a resulting dilution in the interest of
other stockholders. The Company may find it more difficult to raise capital for
its business if the need should arise while the Underwriter's Unit Purchase
Option is outstanding. At any time when the holders of the Underwriter's Unit
Purchase Option might be expected to exercise it, the Company would probably be
able to obtain additional capital on more favorable terms.
[18] Fair Value of Financial Instruments
Effective December 31, 1995, the Company adopted Statement of Financial
Accounting Standards No. 107, "Disclosure About Fair Value of Financial
Instruments," which requires disclosing fair value to the extent practicable for
financial instruments which are recognized or unrecognized in the balance sheet.
The fair value of the financial instruments disclosed herein is not necessarily
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences of realization or settlement.
The following table summarizes financial instruments by individual balance sheet
classifications:
<TABLE>
December 31, 1997 December 31, 1996
Carrying Fair Carrying Fair
Amount Value Amount Value
<S> <C> <C> <C> <C>
Due from Stockholder $ 88,167 $ 88,167 $ 238,167 $ 238,167
Note Receivable - Stockholders $ 144,292 $ 144,292 $ 166,226 $ 166,226
Due from Related Party $ 469,878 $ 469,878 $ 473,952 $ 473,952
Notes Payable - Net of Current Portion $(3,570,985) $(3,570,985) $(2,064,273) $(2,064,273)
</TABLE>
F-22
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #16
- ------------------------------------------------------------------------------
[18] Fair Value of Financial Instruments [Continued]
In assessing the fair value of these financial instruments, the Company was
required to make assumptions, which were based on estimates of market conditions
and risks existing at that time. For certain instruments, including cash,
accounts receivable, notes receivable, accounts payable, amounts due to and from
related parties and affiliates, and short-term debt, management estimates that
the carrying amount approximated fair value for the majority of these
instruments because of their short maturities. Management estimates that the
carrying amount of its long-term indebtedness approximates fair value since the
interest rates currently offered to the Company for debt of the same remaining
maturities approximates the average interest rates which the Company is
currently paying.
[19] New Authoritative Accounting Pronouncements
The Financial Accounting Standards Board ["FASB"] has issued Statement of
Financial Accounting Standards ["SFAS"] No. 130, "Reporting Comprehensive
Income." SFAS No. 130 is effective for fiscal years beginning after December
15, 1997. Earlier application is permitted. Reclassification of financial
statements for earlier periods provided for comparative purposes is required.
SFAS No. 130 is not expected to have a material impact on the Company.
The FASB has issued SFAS No. 131, "Disclosures About Segments of an Enterprise
and Related Information." SFAS No. 131 changes how operating segments are
reported in annual financial statements and requires the reporting of selected
information about operating segments in interim financial reports issued to
shareholders. SFAS No. 131 is effective for periods beginning after December
15, 1997, and comparative information for earlier years is to be restated.
SFAS No. 131 need not be applied to interim financial statements in the initial
year of its application. SFAS No. 131 is not expected to have a material impact
on the Company.
[20] Quarterly Financial Data [Unaudited]
The following quarterly financial data is unaudited, but in the opinion of
management includes all necessary adjustments for a fair presentation of the
interim results.
March 31, June 30, September 30, December 31,
Fiscal 1997:
Revenues $7,442,688 $9,601,706 $10,728,640 $11,173,632
Gross Profit $2,240,544 $2,574,789 $ 3,152,147 $2,223,139
Net Income $ 306,862 $ 395,924 $ 607,671 $ (174,271)
Net Income Per Share - Basi$ .09 $ .11 $ .17 $ (.06)
Net Income Per Share - Dilu$ed .08 $ .10 $ .16 $ (.06)
F-23
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #17
- ------------------------------------------------------------------------------
[20] Quarterly Financial Data [Unaudited] [Continued]
March 31, June 30, September 30, December 31,
Fiscal 1996:
Revenues $7,730,465 $7,519,668 $5,246,434 $5,643,261
Gross Profit $1,403,476 $1,592,279 $1,536,535 $1,369,793
Net Income $ 20,345 $ 272,285 $ 172,741 $(317,034)
Net Income Per Share - Basic $ .02 $ .08 $ .05 $ (.10)
Net Income Per Share - Diluted$ .02 $ .08 $ .05 $ (.10)
Fiscal 1995:
Revenues $7,177,975 $7,626,704 $7,295,213 $5,999,027
Gross Profit $1,769,692 $1,630,678 $1,830,317 $1,171,096
Net Income $ 439,659 $ (15,779) $ 236,325 $(186,789)
Net Income Per Share - Basic $ .24 $ (.01) $ .12 $ (.10)
Net Income Per Share - Diluted$ .24 $ (.01) $ .12 $ (.10)
[21] Litigation
On May 12, 1997, Electronics Manufacturing Systems, Inc., a Delaware corporation
with its principal place of business in the State of Colorado, filed a complaint
in the Superior Court for the County of Santa Clara, action No. CV766138,
against Touche Electronics, Inc. Electronic Manufacturing Systems, Inc. ["EMS"]
claims damages for breach of contract and common counts, under the theories of
an open book account, money owed, and an account stated. Their claims arise out
of an alleged purchase order dated January 8, 1996 from Touche Electronics, Inc.
for the customized construction, ordering, and delivery of parts and components
for custom assemblies. EMS claims that TEI cancelled the purchase order on or
about July 22, 1996. They further assert that they have not been successful in
reselling many of the custom assemblies and parts. EMS seeks the principal sum
of $236,691, plus interest thereon at the legal rate from the date of the
alleged breach. TEI has filed an answer to the complaint and currently is
defending the action. A non-binding judicial arbitration will be held on this
matter in mid April 1998. The company is currently defending its position
vigorously and believes that the results of operations and financial position
will not be materially impacted.
[22] Subsequent Events - Convertible Debentures
On February 10, 1998, the Company closed an offering of three of its debenture
units for a total offering price of $3.3 million. Each unit consists of four of
the Company's 5% $275,000 Convertible Subordinated Debentures due February 10,
2001 [the "Debentures"] and 100,000 Class B Warrants to purchase common stock of
the Company [the "Warrants"]. Interest on the Debentures accrues quarterly and
is payable annually. The Debentures are subordinated to other Senior
Indebtedness as such term is defined in the Debenture. A portion of the proceeds
were used to repay the bridge loan [See Note 11].
The Debentures are convertible at the option of the holder at a variable
conversion price ranging from $3.00 to $5.50 per share depending on the market
value of the common stock of the Company at the time of the notice of
conversion. Accordingly, the Company may be required to issue no less than
600,000 shares nor more than 1,100,000 shares upon conversion of the principal
amount of the Debentures.
In addition, the Company is issuing 25,000 Class B Warrants per Debenture
[subject to adjustment for reclassification, capital reorganization or other
change of the outstanding shares of common stock of the Company] for each
Debenture outstanding as of the earlier to occur of the one year anniversary of
the closing or the date three months following the registration of the common
stock issuable upon conversion of the Debentures and upon the exercise of the
Warrants. The Warrants have an exercise price of $5.50 per share subject to
adjustment for dilutive issuances.
F-24
<PAGE>
TMCI ELECTRONICS, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS, Sheet #18
- ------------------------------------------------------------------------------
[22] Subsequent Events - Convertible Debentures [Continued]
In connection with the foregoing issuance, the Company paid a finder's fee to
M.J. Segal and Associates in the amount of $176, 000 pursuant to the terms of a
Non Circumvention and Finder's Fee Agreement between the Company and M.J. Segal
and Associates [the "Agreement"]. In addition, the Company gave M.J. Segal a
$66,000 credit toward the purchase of one quarter of a Debenture. The Non
Circumvention and Finder's Fee Agreement calls for the issuance of the number of
shares of common stock to M.J. Segal and Associates equal to 5% of the principal
amount of the securities sold divided by the greater of (i) any stated
conversion price in the debenture and (ii) average of the closing bid and asked
prices for the common stock of the Company for the five trading days prior to
closing and, in this case, a number of warrants equal to 10% of the number of
shares issuable based on the Stated Conversion Price [to be determined 60,000
and 110,000].
The Non Circumvention and Finder's Fee Agreement also provides that upon
exercise of any Warrants issued in the offering, M.J. Segal and Associates shall
receive a cash fee equal to 4% of the amount received upon exercise of the
Warrants; common stock equal to 5% of the number or shares issued upon such
exercise; and warrants equal to 10% of the number of shares issued upon exercise
[excluding warrants exercised by M.J. Segal and Associates or its affiliates].
The warrants shall have an exercise price of 125% of the average of the bid and
asked prices for the Company on the five trading days preceding the transaction,
shall be non callable and shall expire three years from the date of issuance.
[23] Events Subsequent to the Date of the Report of Independent Auditors
(Unaudited)
New Line of Credit - On March 2, 1998, the Company entered into a Loan and
Security Agreement with Fleet Capital Corporation [the "Fleet Line"] providing
for borrowings of up to $25,000,000 based on certain formulas contained within
the Loan and Security Agreement. As of March 10, 1998, the Company was eligible
to borrow up to $17,222,691 under the Fleet Line and had borrowed $10,347,841.
In addition, the former line of credit was repaid, certain notes payable were
satisfied and a promissory note to the stockholder [the former owner of Trinity]
was repaid. Borrowings were in the form of two Term Loans ["Term Loan A" and
"Term Loan B,"] respectively, an equipment loan [the Equipment Loan, together
with the Term Loans, the "Fixed Loans"] and revolving credit loans [the
"Revolving Credit Loans"]. Term Loan A is in the principal amount of $4.7
million and bears interest at the rate of prime plus 0.5%. Term Loan B is in the
principal amount of $2.0 million and bears interest at the rate of prime plus
1.5%. The Equipment Loan is in the principal amount of $4.0 million and bears
interest at the rate of prime plus 0.5%. The Revolving Credit Loans are in such
amount as the Company elects, up to the borrowing base permitted by the Loan and
Security Agreement and bear interest at the rate of 0.25% plus prime. As of
March 10, 1998, the Company had $3,647,841 outstanding under the Revolving
Credit Loans. The Fixed Loans are payable in monthly installments of principal
and interest with principal amortizing over a seven year period and the balance
due on March 2, 2003; interest only on the Revolving Credit Loans is payable
monthly with the principal due upon termination of the Loan and Security
Agreement. Interest on the Fixed Loans and Revolving Credit Loans is adjusted
daily. Interest on the Fixed Loans may be adjusted downward by 0.25% each year
for two years if the Company meets certain performance criteria as reflected in
its audited financial statements for the fiscal years ended December 31, 1998
and December 31, 1999, respectively. Interest on the Revolving Credit Loan may
be adjusted downward by 0.25% only once if the Company meets the performance
criteria as reflected in its audited financial statements for the fiscal year
ended December 31, 1998. In addition, if the Company meets the conditions
specified for December 31, 1998, it may, at its option, have the interest rate
on (i) the Revolving Credit Loan converted into LIBOR plus 2.5%; (ii) Term Loan
A and the Equipment Loan converted into LIBOR plus 2.75%; and (iii) Term Loan B
converted into LIBOR plus 3.75%.
. . . . . . . . . . . . .
F-25
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and Stockholders of
TMCI Electronics, Inc.
San Jose, California
Our report on the consolidated financial statements of TMCI Electronics, Inc. is
referenced on Page F-1 and included in this Form 10-K. In connection with our
audits of such financial statements, we have also audited the related financial
statement schedule listed on page F-27 of the Form 10-K.
In our opinion, the financial statement schedule referred to above, when
condidered in relation to the basic financial statements taken as a whole,
presents fairly, in all material aspects, the information required to be
included therein.
MOORE STEPHENS, P.C.
Certified Public Accountants.
New York, New York
February 20, 1998
F-26
<PAGE>
TMCI ELECTRONICS, INC.
- ------------------------------------------------------------------------------
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
- ------------------------------------------------------------------------------
Column A Column B Column C Column D Column E
-------- -------- -------- -------- --------
Balance at Charged to
Beginning Cost and Balance at
Description of Period Expenses Deductions End of Period
Valuation Reserved Deducted in
the Balance Sheet from the Asset
to Which it Applies:
1997 Allowance for Doubtful
Accounts $ 160,356 $ 67,077 $ -- $ 93,279
========== ========= =========== ============
1996 Allowance for Doubtful
Accounts $ 93,279 $ 85,000 $ -- $ 8,279
========== ========= =========== ============
1995 Allowance for Doubtful
Accounts $ 8,279 $ -- $ -- $ 8,279
========== ========= =========== ============
F-27
Exhibit A
TMCI ELECTRONICS, INC.
CONVERTIBLE SUBORDINATED DEBENTURES
THIS SECURITY AND THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF
THIS SECURITY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS. NEITHER THIS
SECURITY, THE SHARES OF COMMON STOCK ISSUABLE UPON CONVERSION OF THIS SECURITY
NOR ANY INTEREST OR PARTICIPATION HEREIN OR THEREIN MAY BE REOFFERED, SOLD,
ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE DISPOSED OF IN THE
ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION IS EXEMPT FROM, OR NOT
SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY, BY ITS ACCEPTANCE HEREOF, AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER SUCH SECURITY, ONLY (A) TO THE COMPANY OR ANY
SUBSIDIARY THEREOF, (B) TO AN "ACCREDITED INVESTOR" WITHIN THE MEANING OF RULE
501 UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR ITS OWN ACCOUNT,
OR FOR THE ACCOUNT OF SUCH AN "ACCREDITED INVESTOR," FOR INVESTMENT PURPOSES AND
NOT WITH A VIEW TO, OR FOR OFFER OR SALE IN CONNECTION WITH, ANY DISTRIBUTION IN
VIOLATION OF THE SECURITIES ACT AND IN A TRANSACTION WHICH IS OTHERWISE EXEMPT
FROM REGISTRATION UNDER THE ACT, (C) PURSUANT TO A REGISTRATION STATEMENT WHICH
HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (D) IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH RULE 904 OF REGULATION S UNDER THE SECURITIES
ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S RIGHT PRIOR TO ANY
SUCH OFFER, SALE OR TRANSFER PURSUANT TO CLAUSES (B), (D) OR (E) TO REQUIRE THE
DELIVERY OF AN OPINION OF COUNSEL, CERTIFICATION AND/OR OTHER INFORMATION
SATISFACTORY TO EACH OF THEM, AND IN EACH OF THE FOREGOING CASES, A CERTIFICATE
OF TRANSFER IN THE FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS
COMPLETED AND DELIVERED BY THE TRANSFEROR TO THE COMPANY.
-1-
<PAGE>
TMCI ELECTRONICS, INC.
CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001
No.
Principal Amount: $
Issue Date: February 10, 1998
Stated Maturity Date: February 10, 2001
Interest Rate: 5.00% per annum
TMCI ELECTRONICS, INC., a Delaware corporation (the "Company"), for value
received, hereby promises to pay to ________________ or registered assigns, the
Principal Amount specified above of ____________________________________________
Dollars at the Company's corporate office on February 10, 2001 in such coin or
currency of the United States of America as at the time of payment shall be
legal tender for the payment of public and private debts.
The principal of this Debenture shall bear interest at the rate of five
percent (5%) per annum, accrued quarterly and paid annually or upon conversion.
Reference is hereby made to the further provisions of this Debenture set
forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
IN WITNESS WHEREOF, the Company has duly caused this instrument to be
executed and has caused a facsimile of its corporate seal to be imprinted
hereon.
Dated: February 10, 1998
TMCI ELECTRONICS, INC.
By__________________________________
Name: Rolando Loera
Title: Chairman, President and Chief
Executive Officer
ATTEST:
- -----------------------------
Secretary
-2-
<PAGE>
TMCI ELECTRONICS, INC.
CONVERTIBLE SUBORDINATED DEBENTURES DUE 2001
1. The Debentures
This Debenture is one of a number of debentures in the denomination of
$275,000 or an integral multiple thereof made by the Company in the aggregate
principal amount of up to $5,500,000, and all maturing on February 10, 2001, and
otherwise having the same provisions. At the discretion of the Company, up to an
additional sixteen (16) Debentures may be issued. The Debentures and any
Debentures issued in exchange therefor as hereinafter provided are herein called
"Debentures."
2. Interest
The unpaid principal amount of this Debenture shall bear interest at the
rate of five percent (5%) per annum calculated on the basis of a 365 day year.
Such interest shall accrue quarterly on March 31, June 30, September 30 and
December 31 of each year until the Debenture is converted or paid in full.
Interest shall be payable in cash and due and payable upon conversion and, until
conversion, on February 10 of each year ("Anniversary Date"). In the event of
conversion of the Debenture prior to an Anniversary Date, the holder shall be
entitled to receive upon conversion accrued but unpaid interest through the end
of the quarter immediately prior to the date of conversion.
3. Execution, Delivery and Dating
Debentures bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the delivery of such Debentures or did not hold such offices at
the date of such Debentures. Each Debenture shall be dated the date of its
delivery.
4. Method of Payment
With respect to the Debentures, the Company will pay cash amounts by a
check payable in money of the United States of America that at the time of
payment is legal tender for payment of public and private debts.
5. Transfer and Exchange
(a) Upon surrender for registration of transfer of any Debenture, together
with a written instrument of transfer satisfactory to the Company duly executed
by the Debentureholder or such
-3-
<PAGE>
Debentureholder's attorney duly authorized in writing, at the office or agency
of the Company, the Company shall execute, in the name of the true designated
transferee(s), one or more new Debentures of any authorized denomination or
denominations, of a like aggregate Principal Amount. The Company shall not
charge a service fee for any registration or transfer or exchange, but the
Company may require payment of a sum sufficient to pay all taxes, assessments or
other governmental charges that may be imposed in connection with the transfer
or exchange of the Debentures from the Debentureholder requesting such transfer
or exchange (other than any exchange of a temporary Debenture for a definitive
Debenture not involving any change in ownership).
At the option of the Holder, Debentures may be exchanged for other
Debentures of any authorized denomination or denominations, of a like aggregate
Principal Amount, upon surrender of the Debentures to be exchanged, together
with a written instrument of transfer satisfactory to the Company duly executed
by the Debentureholder or such Debentureholder's attorney duly authorized in
writing, at such office or agency. Whenever any Debentures are so surrendered
for exchange, the Company shall execute the Debentures which the holder making
the exchange is entitled to receive.
The Company shall not be required to make transfers or exchanges of
Debentures selected for conversion.
(b) If Debentures are issued upon the transfer, exchange or replacement of
Debentures subject to restrictions on transfer and bearing the legends set forth
herein (collectively, the "Legend"), or if a request is made to remove the
Legend on a Debenture, the Debentures so issued shall bear the Legend, or the
Legend shall not be removed, as the case may be, unless (i) there is delivered
to the Company such satisfactory evidence, which shall include an opinion of
counsel, as may be reasonably required by the Company, that neither the Legend
nor the restrictions on transfer set forth therein are required to ensure that
transfers thereof may be made without registration under the Securities Act or
that such Debentures are not "restricted" within the meaning of Rule 144 under
the Securities Act. Upon (i) provision of such satisfactory evidence or (ii)
notification to the Company of the effectiveness of a registration statement
with respect to the Debentures, the Company shall authenticate and deliver a
Debenture that does not bear the Legend. If a Legend is removed from the face of
a Debenture and the Debenture is subsequently held by an affiliate of the
Company, the Legend shall be reinstated.
6. Replacement Debentures
If (a) any mutilated Debenture is surrendered to the Company, or (b) the
Company receives evidence to its satisfaction of the destruction, loss or theft
of any Debenture, and there is delivered to the Company such security or
indemnity as may be required to save the Company harmless, then, in the absence
of notice to the Company that such Debenture has been acquired by a bona fide
purchaser, the Company shall execute and deliver, in exchange for any such
mutilated Debenture or in lieu of any such destroyed, lost or stolen Debenture,
a new Debenture of like tenor and Principal Amount, bearing a number not
contemporaneously outstanding.
-4-
<PAGE>
In case any such mutilated, destroyed, lost or stolen Debenture has become
or is about to become due and payable, the Company in its sole discretion may,
instead of issuing a new Debenture, pay or purchase such Debenture, as the case
may be.
Upon the issuance of any new Debentures under this Section 6, the Company
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed in relation thereto and any other
expenses in connection therewith. Every new Debenture issued pursuant to this
Section 6 in lieu of any mutilated, destroyed, lost or stolen Debenture shall
constitute an original additional contractual obligation of the Company, whether
or not the destroyed, lost or stolen Debenture shall be at any time enforceable
by anyone, and shall be entitled to all benefits hereof equally and
proportionately with any and all other Debentures duly issued hereunder.
The provisions of this Section 6 are exclusive and shall preclude (to the
extent lawful) all other rights and remedies with respect to the replacement or
payment of mutilated, destroyed, lost or stolen Debentures.
7. Debentures Not Redeemable
The Debentures shall not be redeemable by the Company.
8. Successor Company
(a) When Company May Merge or Transfer Assets. So long as any Debentures
shall be outstanding, the Company shall not consolidate with or merge into any
other corporation or other person or convey, transfer or lease its properties
and assets substantially as an entirety (a "Business Combination") to any person
(such successor corporation or person, as the case may be, shall in this Section
8 be referred to as the "Successor Company"), unless
(1) the Successor Company shall be organized and existing under the
laws of the United States of America or any State or the District of
Columbia, and shall expressly assume the due and punctual payment of
the principal of and premium, if any, and interest, if any, on all
the Debentures and the performance of every covenant of the
Debentures on the part of the Company to be performed or observed;
(2) immediately after giving effect to such transaction, no Event of
Default, and no event that, after notice or lapse of time, or both,
would become an Event of Default, shall have happened and be
continuing.
(b) Successor Company Substituted. Upon any Business Combination in
accordance with Section 8(a), the Successor Company or person formed by such
consolidation or into which the Company is merged or to which such conveyance,
transfer or lease is made shall succeed to, and be substituted for, and may
exercise every right and power and shall be required to perform every obligation
of, the Company under the Debentures with the same effect as if such Successor
Company
-5-
<PAGE>
or person had been named as the Company herein, and thereafter, except in the
case of a lease, the predecessor corporation shall be relieved of all
obligations and covenants under the Debentures. The rights of the holders upon
conversion of the Debentures following the Business Combination shall be
proportionately adjusted to take into account the terms of the Business
Combination as follows: the holders of the Debentures shall be entitled to
receive such securities of the Successor Company or other property that they
would have been entitled to receive had they converted their Debentures into
Common Stock on the effective date of the Business Combination.
9. Denominations; Transfer; Exchange
The Debentures are in registered form, without coupons, in denominations
of $275,000 of Principal Amount and integral multiples of $275,000. A Holder may
transfer or exchange Debentures in accordance with Section 5 above. The Company
may require a Holder, among other things, to furnish appropriate endorsements
and transfer documents and to pay any taxes and fees required by law or
permitted hereunder.
10. Persons Deemed Owners
The Company shall treat the Holder of this Debenture as the owner of this
Debenture for all purposes.
11. Amendment; Waiver
(a) With Consent of Holders. With the written consent of the Holders of at
least a majority in aggregate Principal Amount of the Debentures at the time
outstanding, the Company may amend the Debentures. However, without the consent
of each Debentureholder affected, an amendment or supplement to the Debentures
may not:
(1) make any change to the Principal Amount of any Debentures;
(2) reduce the rate of interest referred to in Section 2 or extend
the time for payment of interest on any Debenture;
(3) reduce the Principal Amount of or extend the Stated Maturity of
any Debenture;
(4) reduce the amount of stock issuable in respect of conversion of
any Debenture;
(5) make any Debenture payable in money or securities other than
that stated in the Debenture;
-6-
<PAGE>
(6) impair the right to institute suit for the enforcement of any
payment with respect to, or conversion of, the Debentures.
After an amendment hereunder becomes effective, the Company shall mail to
each Holder a notice briefly describing the amendment of the Company.
(b) Revocation and Effect of Consents, Waivers and Actions. Until an
amendment or waiver becomes effective, a consent to it or any other action by a
Holder of a Debenture hereunder is a continuing consent by the Holder and every
subsequent Holder of that Debenture or portion of the Debenture that evidences
the same obligation as the consenting Holder's Debenture, even if notation of
the consent, waiver or action is not made on the Debenture. However, any such
Holder or subsequent Holder may revoke the consent, waiver or action as to such
Holder's Debenture or portion of the Debenture if the Company receives the
notice of revocation before the date the amendment, waiver or action becomes
effective. After an amendment, waiver or action becomes effective, it shall bind
every Debentureholder except as provided in this Section 11.
12. Special Provisions Applicable to Debentures
(a) Conversion Privilege. Each of the Debentures is convertible into such
number of shares of the Company's common stock, par value $.001 per share
("Common Stock"), as is provided below.
(b) Conversion Terms. Holders of the Debentures may convert the Debentures
in whole or in part in one-quarter or one-fifth increments at any time after the
earlier of the date the Registration Statement is declared effective or six (6)
months following the initial closing under the Offering ("Initial Closing")
provided that the holder notifies the Company with written notice via U.S. Mail,
courier, or confirmed facsimile transmission of the intention to convert.
Provided that an event of default under Section 13 has not occurred, the Company
may call a mandatory conversion at any time (i) after the third anniversary of
the issuance of the Debentures or prior thereto (ii) if the closing bid price
for the Common Stock as reported by NASDAQ is $8.75 per share or higher for a
period of ten (10) consecutive trading days and the Registration Statement has
been declared effective by providing written notice of its intention to call for
conversion to the holders.
(c) Conversion Price. Upon conversion of the Debentures, the Conversion
Price shall be the lesser of the "Stated Conversion Price" or the "Adjusted
Conversion Price." The Stated Conversion Price shall be equal to the lower of
the Market Price (as hereinafter defined) at the date of issuance under the
Offering or the closing bid price on the trading day immediately prior to such
issuance; provided that the Stated Conversion Price shall not exceed $5.50. For
the purpose hereof, Market Price shall mean, as of a particular date, the
average closing bid price of the Common Stock as reported by NASDAQ for the five
(5) trading days immediately preceding such date. The Adjusted Conversion Price
shall be calculated as the greater of (i) the Applicable Percentage of the
Market Price on the date of the notice from the Debentureholder of its intention
to exercise the conversion privilege; or (ii) the "Minimum Conversion Price".
For the purposes hereof, the term
-7-
<PAGE>
Applicable Percentage shall mean eighty percent (80%) during the first year
following the initial closing under the Offering (the "Initial Closing"),
seventy-five percent (75%) during the second year following the Initial Closing
and seventy percent (70%) during the third year following the Initial Closing,
and the term Minimum Conversion Price shall mean $3.00 per share. The minimum
and maximum number of shares of Common Stock per Debenture that would be issued
upon conversion would be 50,000 and 91,667 shares, respectively. The Debentures
may be converted in whole or in one-quarter or one-fifth increments.
(d) Issuance of Shares. Within five (5) business days of the Company's
receipt of a notice of intention to convert under Paragraph (b) of this Section
12 or in the event of a mandatory conversion under such paragraph, the Company
shall issue to the Holder that number of shares of Common Stock equal to the
principal amount of the Debenture being converted divided by the lesser of the
Stated Conversion Price or the Adjusted Conversion Price (subject to the minimum
and maximum number of shares issuable upon conversion of a Debenture as provided
by Paragraph (c) of this Paragraph 12). No fractional shares shall be issued and
any fractional share shall be rounded up to a whole share.
(i) Debentures Subordinate to Senior Indebtedness.
The Company covenants and agrees, and each Holder of
Debentures, by its acceptance thereof, likewise covenants and agrees, that, to
the extent and in the manner hereinafter set forth in this subsection (e), the
indebtedness represented by the Debentures and the payment of the principal of
and interest on the Debentures are hereby expressly made subordinate and subject
in right of payment as provided in this subsection (e) to the prior indefeasible
payment and satisfaction in full in cash or, as acceptable to the holders of
Senior Indebtedness, in any other manner, of all existing and future Senior
Indebtedness.
This subsection (e) shall constitute a continuing offer to all
Persons who, in reliance upon such provisions, become holders of or continue to
hold Senior Indebtedness; and such provisions are made for the benefit of the
holders of Senior Indebtedness; and such holders are made obligees hereunder and
they or each of them may enforce such provisions.
(ii) Payment Over of Proceeds upon Dissolution, etc.
In the event of (A) any insolvency or bankruptcy case or
proceeding, or any receivership, liquidation, reorganization or other similar
case or proceeding in connection therewith, relative to the Company or to its
creditors, as such, or to its assets, whether voluntary or involuntary, or (B)
any liquidation, dissolution or other winding-up of the Company, whether
voluntary or involuntary and whether or not involving insolvency or bankruptcy,
or (c) any general assignment for the benefit of creditors or any other
marshaling of assets or liabilities of the Company, then and in any such event:
-8-
<PAGE>
(1) the holders of Senior Indebtedness shall be entitled to
receive payment and satisfaction in full in cash or, as acceptable to the
holders of Senior Indebtedness, in any other manner, of all amounts due on
or in respect of all Senior Indebtedness, before the Holders of the
Debentures are entitled to receive or retain any payment or distribution
of any kind or character on account of principal of, premium, if any, or
interest on the Debentures; and
(2) any payment or distribution of assets of the Company of
any kind or character, whether in cash, property or securities, by set-off
or otherwise, to which the Holders would be entitled but for the
provisions of this subsection (e) shall be paid by the liquidating trustee
or agent or other Person making such payment or distribution, whether a
trustee in bankruptcy, a receiver or liquidating trustee or otherwise,
directly to the holders of Senior Indebtedness or their representative or
representatives or to the trustee or trustees under any indenture under
which any instruments evidencing any of such Senior Indebtedness may have
been issued, ratably according to the aggregate amounts remaining unpaid
on account of the Senior Indebtedness held or represented by each, to the
extent necessary to make payment in full in cash or, as acceptable to the
holders of Senior Indebtedness, in any other manner, of all Senior
Indebtedness remaining unpaid, after giving effect to any concurrent
payment or distribution, or provision therefor, to the holders of such
Senior Indebtedness; and
(3) in the event that, notwithstanding the foregoing
provisions of this clause (ii), the Holder of any Debenture shall have
received any payment or distribution of assets of the Company of any kind
or character, whether in cash, property or securities, including, without
limitation, by way of set-off or otherwise, in respect of principal of,
premium, if any, and interest on the Debentures before all Senior
Indebtedness is paid and satisfied in full in cash or such payment and
satisfaction thereof in cash is provided for, then and in such event such
payment or distribution upon written notice to the Holder of such
Debenture shall be held by the Holder of such Debenture in trust for the
benefit of the holders of such Senior Indebtedness and shall be
immediately paid over or delivered forthwith to the liquidating trustee or
agent or other person making payment or distribution of assets of the
Company for application to the payment of all Senior Indebtedness
remaining unpaid, to the extent necessary to pay all Senior Indebtedness
in full in cash or, as acceptable to the holders of Senior Indebtedness,
any other manner, after giving effect to any concurrent payment or
distribution, or provision therefor, to or for the holders of Senior
Indebtedness.
The consolidation of the Company with, or the merger of the
Company with or into, another Person or the liquidation or dissolution of the
Company following the transfer of all its assets (as an entirety or
substantially as an entirety) to another person upon the terms and conditions
set forth in Section 8 hereof shall not be deemed a dissolution, winding-up,
liquidation,
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<PAGE>
reorganization, assignment for the benefit of creditors or marshaling of assets
and liabilities of the Company for the purposes of this subsection (e) if the
Person formed by such consolidation or the surviving entity of such merger or
the Person which acquires by transfer such assets (as an entirety or
substantially as an entirety) shall, as a part of such consolidation, merger or
transfer, comply with the conditions set forth in such Section 8 hereof.
(iii) Suspension of Payment when Senior Indebtedness in Default.
(A) Unless clause (ii) of this subsection (e) shall be applicable,
no payment or distribution of any assets or securities of the Company of
any kind or character (including, without limitation, cash, property and
any payment or distribution which may be payable or deliverable by reason
of the payment of any other Indebtedness of the Company being subordinated
to the payment of the Debentures by the Company) may be made by or on
behalf of the Company including, without limitation, by way of set-off or
otherwise, for or on account of principal of, premium, if any, or interest
on the Debentures, or for or on account of the purchase, redemption,
defeasance or other acquisition of the Debentures, and no holder or owner
of any Debentures shall take or receive from the Company, directly or
indirectly in any manner, payment in respect of all or any portion of
Debentures following the delivery by the representative of the holders of
Senior Indebtedness (the "Representative") to the Holders of written
notice of (i) the occurrence of a payment default on Senior Indebtedness
or (ii) the occurrence of a non-payment event of default on Senior
Indebtedness which results in the acceleration of the maturity of Senior
Indebtedness in accordance with its terms, and in any such event, such
prohibition shall continue until such payment default is cured, waived in
writing or ceases to exist or such acceleration has been rescinded or
otherwise cured.
(B) Unless clause (ii) of this subsection (e) hereof shall be
applicable, upon the occurrence of a non-payment event of default on
Senior Indebtedness which does not result in or has not resulted in
acceleration of the maturity of Senior Indebtedness in accordance with its
terms, no payment or distribution of any assets or securities of the
Company of any kind or character (including, without limitation, cash,
property and any payment or distribution which may be payable or
deliverable by reason of the payment of any other Indebtedness of the
Company being subordinated to the payment of the Debentures by the
Company) shall be made by or on behalf of the Company, including, without
limitation, by way of set-off or otherwise, for or on account of any
principal of, premium, if any, or interest on the Debentures or for or on
account of the purchase, redemption, defeasance or other acquisition of
Debentures, and no holder or owner of any Debentures shall take or receive
from the Company, directly or indirectly in any manner, payment in respect
of all or any portion of the Debentures, for a period (a "Payment Blockage
Period") commencing on the date of receipt by the Holders of written
notice from the Representative of such non-payment event of default until
(subject to any blockage of payments that may then be in effect under the
preceding paragraph (A)) the earliest to occur of the following events:
(x) more than 179 days shall have elapsed since the date of receipt of
such written notice by the Holders, (y)
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<PAGE>
such non-payment event of default shall have been cured or waived in
writing or shall have ceased to exist or such Senior Indebtedness shall
have been paid in full in cash and the Holders have been so notified by
either the Representative or the Company or (z) such Payment Blockage
Period shall have been terminated by written notice to the Company or the
Holders from the Representative. Upon the termination of a Payment
Blockage Period, the Company shall resume making any and all required
payments in respect of the Debentures, including any missed payments.
Notwithstanding any other provisions of this Debenture, no event of
default with respect to Senior Indebtedness (other than a payment default)
which existed or was continuing on the date of the commencement of any
Payment Blockage Period initiated by the Representative shall be, or be
made, the basis for the commencement of a second Payment Blockage Period
initiated by the Representative unless such event of default shall have
been cured or waived for a period of not less than 90 consecutive days. In
no event shall a Payment Blockage Period extend beyond 179 days from the
date of the receipt by the Holders of the notice referred to in this
clause (iii)(B) (the "Initial Blockage Period"). Any number of additional
Payment Blockage Periods may be commenced during the Initial Blockage
Period; provided, however, that no such additional Payment Blockage Period
shall extend beyond the Initial Blockage Period. After the expiration of
the Initial Blockage Period, no Payment Blockage Period may be commenced
under this clause (iii)(B) until at least 180 consecutive days have
elapsed from the last day of the Initial Blockage Period.
(C) In the event that, notwithstanding the foregoing, the Holder of
any Debenture shall have received any payment prohibited by the foregoing
provisions of this clause (iii), then and in such event such payment shall
be paid over and delivered forthwith to the Representative initiating the
Payment Blockage Period, in trust for distribution to the holders of
Senior Indebtedness or, if no amounts are then due in respect of senior
Indebtedness, promptly returned to the Company, or otherwise as a court of
competent jurisdiction shall direct.
(iv) Subrogation to Rights of Holders of Senior Indebtedness.
Upon the payment in full of all Senior Indebtedness, the
Holders of the Debentures shall be subrogated to the rights of the holders of
such Senior Indebtedness to receive payments and distributions of cash, property
and securities applicable to the Senior Indebtedness until the principal of,
premium, if any, and interest on the Debentures shall be paid in full. For
purposes of such subrogation, no payments or distributions to the holders of
Senior Indebtedness of any cash, property or securities to which the Holders of
the Debentures would be entitled except for the provisions of this subsection
(e), and no payments pursuant to the provisions of this subsection (e) to the
holders of Senior Indebtedness by Holders of the Debentures shall, as among the
Company, its creditors other than holders of Senior Indebtedness and the Holders
of the Debentures, be deemed to be a payment or distribution by the Company to
or on account of the Senior Indebtedness.
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If any payment or distribution to which the Holders would
otherwise have been entitled but for the provisions of this subsection (e) shall
have been applied, pursuant to the provisions of this subsection (e) to the
payment of all amounts payable under the Senior Indebtedness of the Company,
then and in such case the Holders shall be entitled to receive from the holders
of such Senior Indebtedness at the time outstanding any payments or
distributions received by such holders of such Senior Indebtedness in excess of
the amount sufficient to indefeasibly pay all amounts payable under or in
respect of such Senior Indebtedness in full in cash.
(v) Provisions Solely to Define Relative Rights.
The provisions of this subsection (e) are and are intended
solely for the purpose of defining the relative rights of the Holders of the
Debentures on the one hand and the holders of Senior Indebtedness on the other
hand. Nothing contained in this subsection or elsewhere in this Debenture or in
the Debentures is intended to or shall (A) impair, as among the Company, its
creditors other than holders of Senior Indebtedness and the Holders of the
Debentures, the obligation of the Company, which is absolute and unconditional,
to pay to the Holders of the Debentures the Principal of and interest on the
Debentures as and when the same shall become due and payable in accordance with
their terms, or (B) affect the relative rights against the Company of the
Holders of the Debentures and creditors of the Company other than the holders of
Senior Indebtedness or (C) prevent the Holder of any Debenture from exercising
all remedies otherwise permitted by applicable law upon a default or an event of
default under this Debenture, subject to the rights, if any, under this
subsection (e) of the holders of Senior Indebtedness (1) in any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, arrangement,
reorganization or other similar case or proceeding in connection therewith, or
any liquidation, dissolution or other winding-up, or any assignment for the
benefit of creditors or other marshaling of assets and liabilities referred to
in clause (ii) hereof, to receive, pursuant to and in accordance with such
clause, cash, property and securities otherwise payable or deliverable to such
Holder, or (2) under the conditions specified in clause (iii) to prevent any
payment prohibited by such clause or enforce their rights pursuant clause
(iii)(c) hereof.
The failure to make a payment on account of principal of or
interest on the Debentures by reason of any provision of this subsection (e)
shall not be construed as preventing the occurrence of a default or an event of
default hereunder.
(vi) No Waiver of Subordination Provisions.
(A) No right of any present or future holder of any Senior
Indebtedness to enforce subordination as herein provided shall at any time
in any way be prejudiced or impaired by any act or failure to act on the
part of the Company or by any act or failure to act, in good faith, by any
such holder, or by any non-compliance by the Company with the terms,
provisions and covenants of this Debenture, regardless of any knowledge
thereof any such holder may have or be otherwise charged with.
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(B) Without limiting the generality of clause (A) of this
subsection (e)(vi), the holders of Senior Indebtedness may, at any time
and from time to time, without the consent of or notice to the Holders of
the Debentures, without incurring responsibility to the Holders of the
Debentures and without impairing or releasing the subordination provided
in this subsection (e) or the obligations hereunder of the Holders of the
Debentures to the holders of Senior Indebtedness, do any one or more of
the following: (1) change the manner, place or terms of payment or extend
the time of payment of, or renew or alter, Senior Indebtedness or any
instrument evidencing the same (or any agreement under which Senior
Indebtedness is outstanding; (2) sell, exchange, release or otherwise deal
with any property pledged, mortgaged or otherwise securing Senior
Indebtedness; (3) release any Person liable in any manner for the
collection or payment of Senior Indebtedness; and (4) exercise or refrain
from exercising any rights against the Company and any other Person;
provided, however, that in no event shall any actions limit the right of
the Holders of the Debentures to take any action to accelerate the
maturity of the Debentures pursuant to Section 13 hereof or to pursue any
rights or remedies hereunder or under applicable laws if the taking of
such action does not otherwise violate the terms of this Debenture.
(vii) No Suspension of Remedies.
Nothing contained in this subsection (e) shall limit the right
of the Holders of Debentures to take any action to accelerate the maturity of
the Debentures pursuant to Section 13 or to pursue any rights or remedies
hereunder or under applicable law, subject to the rights, if any, under this
subsection (e) of the holders, from time to time, of Senior Indebtedness.
(f) Anti-dilution and Exchange Provisions. In the event that prior to the
conversion of the Debentures, the Company issues (other than pursuant to stock
option or purchase plans for the benefit of the Company's employees) Common
Stock for cash at a purchase price or convertible securities at a conversion
price or warrants at an exercise price below the conversion price or exercise
price then in effect, respectively (in either case, a "Reduced Price") relating
to the Debentures or the Warrants issued in the Offering, then the
Debentureholders shall have the right to immediately convert their Debentures at
the Reduced Price. In the event that the Company shall issue (other than in an
underwritten public offering) convertible securities prior to the conversion of
the Debentures, holders of the Debentures shall have the right to purchase such
convertible securities using Debentures valued at the face value thereof.
13. Default and Remedies
(a) Events of Default. An Event of Default occurs if:
(i) the Company is in breach of a representation or warranty in the
Securities Purchase Agreement pursuant to which the Debentures were acquired;
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(ii) the Company defaults in payment of the Principal Amount or
accrued interest, as the case may be, in respect of the Debentures when the same
becomes due and payable, and such default continues for a period of 30 days;
(iii) the Company fails either to deliver shares of Common Stock in
accordance with the terms of the Debentures when such Common Stock is required
to be delivered in accordance with the terms of a Debenture;
(iv) the Company fails to comply with any material covenants,
obligation or other agreement in of the Debentures, subject to notice and lapse
of time;
(v) the Company defaults (A) in the payment of any principal on any
debt for borrowed money of the Company (excluding any non-recourse debt), in an
aggregate principal amount in excess of five hundred thousand ($500,000), when
due at its final maturity after giving effect to any applicable grace period and
the holder thereof shall have taken affirmative action to enforce the payment
hereof, or (B) in the performance of any term or provision of any debt for
borrowed money of the Company (excluding any non-recourse debt) in an aggregate
principal amount in excess of five hundred thousand ($500,000) or that results
in such debt becoming or being declared due and payable prior to the date on
which it would otherwise become due and payable, unless, in the case of either
clause (A) or (B) above, (x) such acceleration or action to enforce payment, as
the case may be, has been rescinded or annulled, (y) such debt has been
discharged or (z) a sum sufficient to discharge in full such debt has been
deposited in trust by or on behalf of the Company, debt has been deposited in
trust on or behalf of the Company, in each case, within a period of thirty (30)
days after there has been given, by registered or certified mail, to the Company
by the Holders of at least 10% in principal amount of the Debentures, a written
notice specifying such default or defaults and stating that such notice is a
"Notice of Default" hereunder; or
(vi) the Company pursuant to or within the meaning of any Bankruptcy
Law:
(A) commences a voluntary case or proceeding;
(B) consents to the entry of an order for relief against it
in an involuntary case or proceeding or the commencement
of any case against it;
(C) consents to the appointment of a Custodian of it or for
any substantial part of its property;
(D) makes a general assignment for the benefit of its
creditors;
(E) files a petition in bankruptcy or answer or consent
seeking reorganization or relief; or
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<PAGE>
(F) consents to the filing of such petition or the
appointment of or taking possession by a Custodian;
(vii) a court of competent jurisdiction enters an order or decree
under any Bankruptcy Law that:
(A) is for relief against the Company in an involuntary case
or proceeding, or adjudicates the Company insolvent or
bankrupt;
(B) appoints a Custodian of the Company or for any
substantial part of its property; or
(C) orders the winding up or liquidation of the Company;
and the order or decree remains unstayed and in effect for 60 days.
(b) Acceleration. If an Event of Default occurs and is continuing, unless
the Principal Amount of all the Securities shall have already become due and
payable, the Holders of at least 10% in the aggregate principal amount of the
Debentures at the time outstanding, by notice to the Company may declare the
Principal Amount and all accrued and unpaid interest on all Debentures to be due
and payable, whereupon such Principal Amount and all accrued and unpaid interest
on all the Debentures shall be due and payable immediately.
Debentureholders may not enforce the Debentures except as provided herein.
14. Notices. Any notice or communication shall be in writing and delivered in
person, by reputable overnight courier, by facsimile or mailed by first-class
mail, postage prepaid, addressed as follows:
if to the Company:
TMCI Electronics, Inc.
1875 Dobbin Drive
San Jose, CA 95133
Fax#: 408-254-1537
Attention: Chief Executive Officer
with a copy to:
Gould & Wilkie
One Chase Manhattan Plaza
58th Floor
New York, New York 10005
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<PAGE>
Fax#: 212-809-6890
Attention: Frederick W. London, Esq.
The Company by notice may designate additional or different addresses for
subsequent notices or communications. Any notice or communication given to a
Debentureholder shall be mailed by first-class mail to the Debentureholder at
the Debentureholder's address as it appears on the registration books of the
Company and shall be sufficiently given if so mailed within the time prescribed.
Failure to mail a notice or communication to a Debentureholder or any defect in
it shall not affect its sufficiency with respect to other Debentureholders. If a
notice or communication is mailed in the manner provided above, it is duly
given, whether or not received by the addressee.
15. No Recourse Against Others
A director, officer, employee or stockholder, as such, of the Company
shall not have any liability on any obligations of the Company under the
Debentures or for any claim based on, in respect of or by any reason of such
obligations or their creation. By accepting a Debenture, each Debentureholder
waives and releases all such liability. The waiver and release are part of the
consideration for the issue of the Debentures.
16. Governing Law
This Agreement shall be governed by and interpreted in accordance with the
laws of the State of New York without regard to the principles of conflict of
laws. Each party hereby irrevocably submits to the non-exclusive jurisdiction of
the state and federal courts sitting in the City of New York, borough of
Manhattan, for the adjudication of any dispute hereunder or in connection
herewith or with any transaction contemplated hereby or discussed herein, and
hereby irrevocably waives, and agrees not to assert in any suit, action or
proceeding, any claim that it is not personally subject to the jurisdiction of
any such court, that such suit, action or proceeding is brought in an
inconvenient forum or that the venue of such suit, action or proceeding is
improper. Each party hereby irrevocably waives personal service of process and
consents to process being served in any such suit, action or proceeding by
mailing a copy thereof to such party at the address for such notices to it under
this Agreement and agrees that such service shall constitute good and sufficient
service of process and notice thereof. Nothing contained herein shall be deemed
to limit in any way any right to serve process in any manner permitted by law.
If any provision of this Agreement shall be invalid or unenforceable in any
jurisdiction, such invalidity or unenforceability shall not affect the validity
or enforceability of the remainder of this Agreement in that jurisdiction or the
validity or enforceability of any provision of this Agreement in any other
jurisdiction.
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17. Successors
All agreements of the Company in the Debentures shall bind its successor.
18. Severability
In case any provision in the Debentures shall be invalid, illegal or
unenforceable, the validity, legality and enforceability of the remaining
provisions shall not in any way be affected or impaired thereby.
19. Definitions
For the purposes of this Debenture, except as otherwise expressly provided
or unless the context otherwise requires, the following terms shall have the
meanings indicated:
"Bankruptcy Law" means Title 11, United States Code, or any similar
Federal or state law for the relief of debtors.
"Board of Director" or "Board" means, with respect to any matter, either
the board of directors of the Company or any committee of such board duly
authorized, with respect to such matter, to exercise the powers of such board.
"Business Day" means each day of the year on which banking institutions in
the City of New York are not required or authorized to close.
"Company" means TMCI Electronics, Inc. until a successor replaces it
pursuant to Section 8 hereof, and thereafter, shall mean such successor. The
foregoing sentence shall likewise apply to any subsequent such successor or
successors.
"Common Stock" means, with respect to any Person, any and all shares,
interest or other participations in, and other equivalents (however designated
and whether voting or nonvoting) of, such Person's common stock, whether
outstanding at the Issue Date or issued after the Issue Date, and includes,
without limitation, all series and classes of such common stock.
"Custodian" means any receiver, trustee, assignee, liquidator, custodian
or similar official under any Bankruptcy Law.
"Debentures"means the Convertible Subordinated Debentures due February 10,
2001, as amended or supplemented from time to time in accordance with the terms
hereof and thereof.
"Default" means any event that is or with the passage of time or the
giving of notice or both would be an Event of Default.
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"Holder" or "Debentureholder" means a person in whose name a Debenture is
registered on the Company's books.
"Indebtedness" means (without duplication), with respect to any Person,
any indebtedness at any time outstanding, secured or unsecured, contingent or
otherwise, which is for borrowed money (whether or not the recourse of the
lender is to the whole of the assets of such Person or only to a portion
thereof), or evidenced by bonds, notes, debentures or similar instruments or
representing the balance deferred and unpaid of the purchase price of any
property (excluding, without limitation, any balances that constitute accounts
payable or trade payables, and other accrued liabilities arising in the ordinary
course of business) if and to the extent any of the foregoing indebtedness would
appear as a liability upon a balance sheet of such Person prepared in accordance
with U.S. generally accepted accounting principles ("GAAP"), and shall also
include, to the extent not otherwise included (i) any capitalized lease
Obligations, (ii) Obligations secured by a lien to which the property or assets
owned or held by such Person is subject, whether or not the Obligation or
Obligations secured thereby shall have been assumed (provided, however, that if
such Obligation or Obligations shall not have been assumed, the amount of such
Indebtedness shall be deemed to be the lesser of the principal amount of the
Obligation or the fair market value of the pledged property or assets), (iii)
guarantees of items of other Persons which would be included within this
definition for such other Persons (whether or not such items would appear upon
the balance sheet of the guarantor), (iv) all Obligations for the reimbursement
of any obligor on any letter of credit, banker's acceptance or similar credit
transaction (provided that, in the case of any such letters of credit, the items
for which such letters of credit provide credit support are those of other
Persons which would be included within this definition for such other Persons),
and (v) Obligations of any such Persons under any interest rate agreement
applicable to any of the foregoing if and to the extent such interest rate
agreement Obligations would appear as a liability upon a balance sheet of such
Person prepared in accordance with GAAP. The amount of Indebtedness of any
Person at any date shall be the outstanding balance at such date of all
unconditional Obligations as described above and, with respect to contingent
Obligations, the maximum liability upon the occurrence of the contingency giving
rise to the Obligation, provided (i) that the amount outstanding at any time of
any Indebtedness issued with original issue discount is the principal amount of
such Indebtedness less the remaining unamortized portion of the original issue
discount of such Indebtedness at such time as determined in conformity with GAAP
and (ii) that Indebtedness shall not include any liability for Federal, state,
local or other taxes. Furthermore, guarantees of (or Obligations with respect to
letters of credit supporting) Indebtedness and liens securing Indebtedness
otherwise included in the determination of such amount shall not also be
included.
"NASDAQ" means the National Association of Securities Dealers Automated
Quotation System.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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<PAGE>
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Principal" or "Principal Amount" of a Debenture means the principal
amount due at the Stated Maturity of the Debenture as set forth on the face of
the Debenture.
"SEC" means the Securities and Exchange Commission.
"Securities Act" means the Securities Act of 1933, as amended.
"Senior Indebtedness" means the principal of and premium, if any, and
interest (including, without limitation, interest accruing or that would have
accrued but for the filing of a bankruptcy, reorganization or other insolvency
proceeding whether or not such interest constitutes an allowable claim in such
proceeding) on, and any and all other fees, expense reimbursement obligations
and other amounts due pursuant to the terms of all agreements, documents and
instruments providing for, creating, securing or evidencing or otherwise entered
into in connection with (a) all Indebtedness of the Company owed to lenders
under or in respect of the Company's existing credit facility or such other
facility which it may have in the future, (b) all obligations of the Company
with respect to any interest rate agreement, (c) all obligations of the Company
to reimburse any bank or other person in respect of amounts paid under letters
of credit, acceptances or other similar instruments, (d) all other Indebtedness
of the Company which does not provide that it is to rank pari passu with or
subordinate to the Debentures, (e) all deferrals, renewals, extensions,
replacements, refundings, refinancings and restructurings of, and amendments,
modifications and supplements to, any of the Senior Indebtedness described above
and (f) any trade payable arising from the purchase of goods or materials or for
services obtained in the ordinary course of business or contingent obligations
arising out of customary indemnification agreements with respect to the sale of
assets or securities. Notwithstanding anything to the contrary in the foregoing,
Senior Indebtedness will not include (i) Indebtedness of the Company to any of
its Subsidiaries, (ii) Indebtedness represented by the Debentures or (iii) any
Indebtedness which by the express terms of the agreement or instrument creating,
evidencing or governing the same is junior or subordinate in right of payment to
any item of Senior Indebtedness.
"Stated Maturity", when used with respect to any Debenture, means the date
specified in such Debenture as the fixed date on which the Principal of such
Debenture is due and payable.
"Warrant" or "Warrants" mean the detachable Class B Warrants to purchase
one (1) share of the Company's Common Stock issued pursuant to the Offering.
"Warrant Agreement" means the Agreement between the Company and the
Warrant Agent relating to the Warrants.
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TMCI ELECTRONICS, INC.
TOUCHE MANUFACTURING COMPANY, INC.,
TOUCHE ELECTRONICS, INC.,
ENTERPRISE INDUSTRIES, INC., and
TRINITY ELECTRONICS, INC.
======================================================
LOAN AND SECURITY AGREEMENT
Dated: March 2, 1998
$25,000,000.00
======================================================
------------------------------------------------------
FLEET CAPITAL CORPORATION
------------------------------------------------------
<PAGE>
(vi)
TABLE OF CONTENTS
Page
SECTION 1. CREDIT FACILITY...................................................1
1.1 Revolving Credit Loans.................................................1
1.1.1 Loans and Reserves.................................................1
1.1.2 Use of Proceeds....................................................1
1.2 Term and Equipment Loans...............................................2
1.2.1 Term Loans-A.......................................................2
1.2.2 Term Loan-B........................................................2
1.2.3 Equipment Loans....................................................2
1.3 Letters of Credit; LC Guaranties.......................................2
SECTION 2. INTEREST, FEES AND CHARGES........................................2
2.1 Interest...............................................................2
2.1.1 Rates of Interest..................................................2
2.1.2 Default Rate of Interest...........................................3
2.1.3 Maximum Interest...................................................3
2.1.4 Adjustment to Interest Rate Margin.................................3
2.1.5 LIBOR Rate Loans...................................................3
2.2 Computation of Interest and Fees.......................................3
2.3 Commitment Fee.........................................................4
2.4 Letter of Credit and LC Guaranty Fees..................................4
2.5 Unused Line Fee........................................................4
2.6 Reimbursement of Expenses..............................................4
2.7 Bank Charges...........................................................5
SECTION 3. LOAN ADMINISTRATION...............................................5
3.1 Manner of Borrowing Revolving Credit Loans.............................5
3.1.1 Loan Requests......................................................5
3.1.2 Disbursement.......................................................6
3.1.3 Authorization......................................................6
3.2 Payments...............................................................6
3.2.1 Principal on Revolving Credit Loans................................6
3.2.2 Principal on Term Loans and Equipment Loans........................6
3.2.3 Interest...........................................................7
3.2.4 Costs, Fees and Charges............................................7
3.2.5 Other Obligations..................................................7
3.3 Mandatory Prepayments..................................................7
3.4 Application of Payments and Collections................................7
3.5 All Loans to Constitute One Obligation.................................7
3.6 Loan Accounts..........................................................8
3.7 Statements of Account..................................................8
3.8 Appointment of TMCI as Agent...........................................8
3.9 Funding Losses on LIBOR Loans..........................................8
3.10 Changes in Law and LIBOR Loans........................................9
SECTION 4. TERM AND TERMINATION..............................................9
4.1 Term of Agreement......................................................9
4.2 Termination............................................................9
4.2.1 Termination by Lender..............................................9
4.2.2 Termination by Borrower...........................................10
4.2.3 Termination Charges...............................................10
4.2.4 Effect of Termination.............................................10
SECTION 5. SECURITY INTERESTS...............................................10
5.1 Security Interest in Collateral.......................................11
5.2 Lien Perfection; Further Assurances...................................11
SECTION 6. COLLATERAL ADMINISTRATION........................................11
6.1 General...............................................................12
6.1.1 Location of Collateral............................................12
6.1.2 Insurance of Collateral...........................................12
6.1.3 Protection of Collateral..........................................12
6.2 Administration of Accounts............................................12
6.2.1 Records, Schedules and Assignments of Accounts....................12
6.2.2 Discounts, Allowances, Disputes...................................13
6.2.3 Taxes.............................................................13
6.2.4 Account Verification..............................................13
6.2.5 Maintenance of Dominion Account...................................13
6.2.6 Collection of Accounts, Proceeds of Collateral....................14
6.3 Administration of Inventory...........................................14
6.3.1 Records and Reports of Inventory..................................14
6.3.2 Returns of Inventory..............................................14
6.4 Administration of Equipment...........................................14
6.4 Administration of Equipment...........................................14
6.4.1 Records and Schedules of Equipment................................14
6.4.2 Dispositions of Equipment.........................................14
6.5 Payment of Charges....................................................15
SECTION 7. REPRESENTATIONS AND WARRANTIES...................................15
7.1 General Representations and Warranties................................15
7.1.1 Organization and Qualification....................................15
7.1.2 Corporate Power and Authority.....................................15
7.1.3 Legally Enforceable Agreement.....................................16
7.1.4 Capital Structure.................................................16
7.1.5 Corporate Names...................................................16
7.1.6 Business Locations; Agent for Process.............................16
7.1.7 Title to Properties; Priority of Liens............................16
7.1.8 Accounts..........................................................16
7.1.9 Equipment.........................................................17
7.1.10 Financial Statements; Fiscal Year................................18
7.1.11 Full Disclosure..................................................18
7.1.12 Solvent Financial Condition......................................18
7.1.13 Surety Obligations...............................................18
7.1.14 Taxes............................................................18
7.1.15 Brokers..........................................................19
7.1.16 Patents, Trademarks, Copyrights and Licenses.....................19
7.1.17 Governmental Consents............................................19
7.1.18 Compliance with Laws.............................................19
7.1.19 Restrictions.....................................................19
7.1.20 Litigation.......................................................19
7.1.21 No Defaults......................................................20
7.1.22 Leases...........................................................20
7.1.23 Pension Plans....................................................20
7.1.24 Trade Relations..................................................20
7.1.25 Labor Relations..................................................20
7.1.26 Environmental Matters............................................20
7.1.27 Interdependent Businesses and Operations.........................21
7.1.28 Acquisitions.....................................................21
7.2 Continuous Nature of Representations and Warranties...................21
7.3 Survival of Representations and Warranties............................21
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS..............................21
8.1 Affirmative Covenants.................................................21
8.1.1 Visits and Inspections............................................21
8.1.2 Notices...........................................................22
8.1.3 Financial Statements..............................................22
8.1.4 Landlord and Storage Agreements...................................23
8.1.5 Intentionally Deleted.............................................23
8.1.6 Projections.......................................................23
8.1.7 Compliance with Laws..............................................23
8.1.8 Payment of Taxes, Charges.........................................24
8.1.9 Business and Existence............................................25
8.1.10 Maintain Properties..............................................25
8.1.11 ERISA Compliance.................................................25
8.2 Negative Covenants....................................................25
8.2.1 Mergers; Consolidations; Acquisitions.............................25
8.2.2 Loans.............................................................26
8.2.3 Total Indebtedness................................................26
8.2.4 Affiliate Transactions............................................27
8.2.5 Limitation on Liens...............................................27
8.2.6 Subordinated Debt.................................................27
8.2.7 Distributions.....................................................27
8.2.8 Capital Expenditures..............................................28
8.2.9 Disposition of Assets.............................................28
8.2.10 Stock of Subsidiaries............................................28
8.2.11 Bill-and-Hold Sales, Etc.........................................28
8.2.12 Restricted Investment............................................28
8.2.13 Leases...........................................................28
8.2.14 Tax Consolidation................................................28
8.2.15 Fiscal Year......................................................28
8.3 Specific Financial Covenants..........................................28
8.3.2 Minimum Adjusted Tangible Net Worth...............................28
8.3.2 Cash Flow.........................................................29
SECTION 9. CONDITIONS PRECEDENT.............................................29
9.1 Conditions to Initial Loans and LC Guaranties.........................29
9.1.1 Documentation.....................................................29
9.1.2 Other Loan Documents..............................................29
9.1.3 Availability......................................................29
9.1.4 No Litigation.....................................................30
9.1.5 Acquisitions......................................................30
9.1.6 Landlord Waivers..................................................30
9.1.7 Lien Filings......................................................30
9.1.8 Insurance.........................................................30
9.1.9 Subordinated Debt.................................................30
9.1.10 Solvency.........................................................30
9.1.11 No Material Adverse Change.......................................30
9.1.12 Pen Electronics Litigation.......................................31
9.1.13 Inventory Testing/Analysis.......................................31
9.2 Conditions to All Loans and LC Guaranties.............................31
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT...............31
10.1 Events of Default....................................................31
10.1.1 Payment of Notes.................................................31
10.1.2 Payment of Other Obligations.....................................31
10.1.3 Misrepresentations...............................................31
10.1.4 Breach of Specific Covenants.....................................32
10.1.5 Breach of Other Covenants........................................32
10.1.6 Default Under Security Documents/Other Agreements /Purchase
Documents...............................................................32
10.1.7 Other Defaults...................................................32
10.1.8 Uninsured Losses.................................................32
10.1.9 Adverse Changes..................................................32
10.1.10 Insolvency and Related Proceedings..............................32
10.1.11 Business Disruption; Condemnation...............................32
10.1.12 Change of Ownership.............................................33
10.1.13 ERISA...........................................................33
10.1.14 Challenge to Agreement..........................................33
10.1.15 Intentionally Omitted...........................................33
10.1.16 Criminal Forfeiture.............................................33
10.1.17 Judgments.......................................................33
10.2 Acceleration of the Obligations......................................33
10.3 Other Remedies.......................................................34
10.4 Remedies Cumulative; No Waiver.......................................35
SECTION 11. MISCELLANEOUS...................................................35
11.1 Power of Attorney....................................................35
11.2 Indemnity............................................................36
11.3 Modification of Agreement; Sale of Interest..........................37
11.4 Severability.........................................................37
11.5 Successors and Assigns...............................................37
11.6 Cumulative Effect; Conflict of Terms.................................37
11.7 Execution in Counterparts............................................37
11.8 Notice...............................................................38
11.9 Intentionally Omitted................................................39
11.10 Joint and Several Liability.........................................39
11.11 Suretyship Waivers and Consents.....................................39
11.12 Contribution Agreement..............................................41
11.13 Credit Inquiries....................................................42
11.14 Time of Essence.....................................................42
11.15 Entire Agreement....................................................42
11.16 Interpretation......................................................43
11.17 Governing Law; Consent To Forum.....................................43
11.18 Waivers By Borrowers................................................44
11.19 Prejudgement Remedy Waiver; Commercial Transaction..................44
<PAGE>
-46-
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT is made this 2nd day of March, 1998, by
and between FLEET CAPITAL CORPORATION ("Lender"), a Rhode Island corporation
with an office at 200 Glastonbury Boulevard, Glastonbury, Connecticut 06033 and
TMCI ELECTRONICS, INC., a Delaware corporation ("TMCI"), TOUCHE MANUFACTURING
COMPANY, INC., a California corporation ("Touche Manufacturing"), TOUCHE
ELECTRONICS, INC., a California corporation ("Touche Electronics"), ENTERPRISE
INDUSTRIES, INC., a California corporation ("Enterprise") and TRINITY
ELECTRONICS, INC., a California corporation ("Trinity") (TMCI, Touche
Manufacturing, Touche Electronics, Enterprise and Trinity are each referred to
as a "Borrower" and collectively as the "Borrowers") with their chief executive
office and principal place of business at 1875 Dobbin Drive, San Jose,
California 95133. Capitalized terms used in this Agreement have the meanings
assigned to them in Appendix A, General Definitions. Accounting terms not
otherwise specifically defined herein shall be construed in accordance with GAAP
consistently applied.
SECTION 1. CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other Loan
Documents, Lender agrees to make a Total Credit Facility of up to $25,000,000.00
available upon Borrowers' request therefor, as follows:
1.1 Revolving Credit Loans.
1.1.1 Loans and Reserves. Lender agrees, for so long as no Default or
Event of Default exists, to make Revolving Credit Loans to Borrowers from time
to time, as requested by Borrowers in the manner set forth in subsection 3.1.1
hereof, up to a maximum principal amount at any time outstanding equal to the
Borrowing Base at such time minus the LC Amount and reserves, if any. Lender
shall have the right to establish reserves in such amounts, and with respect to
such matters, as Lender shall deem reasonably necessary or appropriate, against
the amount of Revolving Credit Loans which Borrowers may otherwise request under
this subsection 1.1.1, including, without limitation, with respect to (i) sums
chargeable against Borrowers' Loan Account as Revolving Credit Loans under any
section of this Agreement; (ii) amounts owing by any Borrower to any Person to
the extent secured by a Lien on, or trust over, any Property of any Borrower;
and (iii) such other matters, events, conditions or contingencies as to which
Lender, in its reasonable credit judgment, determines reserves should be
established from time to time hereunder.
1.1.2 Use of Proceeds. The Revolving Credit Loans shall be used solely for
the satisfaction of existing Indebtedness of Borrowers to Manufacturers Bank,
and for Borrowers' general operating capital needs in a manner consistent with
the provisions of this Agreement and all applicable laws.
1.2 Term and Equipment Loans.
1.2.1 Term Loan-A. Lender agrees to make a term loan to Borrowers on the
Closing Date in the principal amount of $4,700,000.00, which shall be repayable
in accordance with the terms of the Term Note-A and shall be secured by all of
the Collateral. The proceeds of the Term Loan-A shall be used solely for
purposes for which the proceeds of the Revolving Credit Loans are authorized to
be used.
1.2.2 Term Loan-B. Lender agrees to make a second term loan to Borrowers
on the Closing Date in the principal amount of $2,000,000.00, which shall be
repayable in accordance with the terms of the Term Note-B and shall be secured
by all of the Collateral. The proceeds of the Term Loan-B shall be used solely
for the purposes for which the proceeds of Revolving Credit Loans are authorized
to be used.
1.2.3 Equipment Loans. Lender agrees, for so long as no Default or Event
of Default exists, to make Loans ("Equipment Loans") to Borrowers from time to
time, during the Original Term, to finance Borrowers' purchases of Equipment for
use in their businesses. Each Equipment Loan shall be in a principal amount
mutually agreed upon but not to exceed ninety percent (90%) of the Eligible
Equipment Cost, shall be secured by all of the Collateral and shall be evidenced
by and payable in accordance with the Equipment Note. The principal amount of
Equipment Loans hereunder shall not exceed, in the aggregate, $1,500,000.00
during any twelve consecutive months during the Original Term and shall not
exceed in the aggregate $4,000,000.00 during the Original Term.
1.3 Letters of Credit; LC Guaranties.
Lender agrees, for so long as no Default or Event of Default exists and if
requested by Borrowers, to (i) issue its, or cause to be issued by its
Affiliates, standby Letters of Credit for the account of Borrower or (ii)
execute LC Guaranties by which Lender or its Affiliate shall guaranty the
payment or performance by Borrower of its reimbursement obligations with respect
to standby Letters of Credit, provided that the LC Amount at any time shall not
exceed $2,000,000.00. No Letter of Credit or LC Guaranty may have an expiration
date that is after the last day of the Original Term or the then applicable
Renewal Term. Any amounts paid by Lender under any LC Guaranty or in connection
with any Letter of Credit shall be treated as Revolving Credit Loans, shall be
secured by all of the Collateral and shall bear interest and be payable at the
same rate and in the same manner as Revolving Credit Loans.
SECTION 2. INTEREST, FEES AND CHARGES
2.1 Interest.
2.1.1 Rates of Interest. Interest shall accrue on the Term Loans and the
Equipment Loans in accordance with the terms of the respective Term Notes and
the Equipment Note. Interest shall accrue on the principal amount of the
Revolving Credit Loans outstanding at the end of each day at a fluctuating rate
per annum equal to .25% plus the Prime Rate. The rate of interest shall increase
or decrease by an amount equal to any increase or decrease in the Prime Rate,
effective as of the opening of business on the day that any such change in the
Prime Rate occurs.
2.1.2 Default Rate of Interest. Upon and after the occurrence of an Event
of Default, and during the continuation thereof, the principal amount of all
Loans shall bear interest at a rate per annum equal to 2.0% above the interest
rate otherwise applicable thereto (the "Default Rate").
2.1.3 Maximum Interest. In no event whatsoever shall the aggregate of all
amounts deemed interest hereunder or under the Term Notes or the Equipment Note
and charged or collected pursuant to the terms of this Agreement or pursuant to
the Term Notes or the Equipment Notes exceed the highest rate permissible under
any law which a court of competent jurisdiction shall, in a final determination,
deem applicable hereto. If any provisions of this Agreement, the Term Notes or
the Equipment Note are in contravention of any such law, such provisions shall
be deemed amended to conform thereto.
2.1.4 Adjustment to Interest Rate Margin. The margin above the Prime Rate
with respect to the Revolving Credit Loans, Term Loans and Equipment Loans shall
be reduced by (a) .25%, the first day after the month following the receipt by
Lender of TMCI's audited financial statements from TMCI's fiscal year ending
December 31, 1998, prepared and delivered in accordance with subsection 8.1.3(i)
evidencing that the Cash Flow for TMCI for the fiscal year then ended, exceeded
$750,000.00 (the "First Adjustment Date"); and (b) with respect to the Term
Loans and Equipment Loans only, by an additional reduction of .25%, the first
day of the month following the receipt by Lender of TMCI's audited financial
statements for TMCI's fiscal quarter ending December 31, 1999, prepared and
delivered in accordance with subsection 8.1.3(i) evidencing that the Cash Flow
for TMCI for the fiscal year then ended exceeded $1,000,000.00 (the "Second
Adjustment Date").
2.1.5 LIBOR Rate Loans. Following the satisfaction of the conditions to
the First Adjustment Date, the Borrowers may elect, in accordance with the terms
of this Agreement, (a) with respect to Revolving Credit Loans, or portions
thereof, as provided herein, for such Loans to bear interest based upon the
LIBOR Rate, at a rate per annum equal to two and one-half percent (2.50%) plus
the LIBOR Rate for the applicable LIBOR Interest Period, (b) with respect to
Term Loan-A and the Equipment Loans or portions thereof, as provided herein, for
such Loans to bear interest based on the LIBOR Rate, at a rate per annum equal
to two and three-quarters percent (2.75%) plus the LIBOR Rate for the applicable
LIBOR Interest Period, and(c) with respect to Term Loan-B or portions thereof,
as provided herein, for such Loan to bear interest based upon the LIBOR Rate, at
a rate per annum equal to three and three-quarters percent (3.75%) plus the
LIBOR Rate for the applicable LIBOR Interest Period. Following the satisfaction
of the conditions to the Second Adjustment Date, the foregoing margins above the
LIBOR Rate will be reduced by one-quarter percent (.25%).
2.2 Computation of Interest and Fees.
Interest, Letter of Credit and LC Guaranty fees and unused line fees
hereunder shall be calculated daily and shall be computed on the actual number
of days elapsed over a year of 360 days. For the purpose of computing interest
hereunder, all items of payment received by Lender shall be deemed applied by
Lender on account of the Obligations (subject to final payment of such items)
one (1) Business Day after receipt by Lender of such items in Lender's account
located in Fleet National Bank, Boston, Massachusetts.
2.3 Commitment Fee.
Borrowers shall pay to Lender a commitment fee of $250,000.00, which shall
be paid concurrently with the initial Loan hereunder. Borrower has deposited
$100,000 with Lender which Lender shall account for and after written approval
thereof shall promptly remit balance after expenses to Borrower.
2.4 Letter of Credit and LC Guaranty Fees.
Borrower shall pay to Lender for standby Letters of Credit and LC
Guaranties of standby Letters of Credit, 1.75% per annum of the aggregate face
amount of such Letters of Credit and LC Guaranties outstanding from time to time
during the term of this Agreement, plus all normal and customary charges
associated with the issuance thereof, which fees and charges shall be deemed
fully earned upon issuance of each such Letter of Credit or LC Guaranty, shall
be due and payable on the first Business Day of each month and shall not be
subject to rebate or proration upon the termination of this Agreement for any
reason.
2.5 Unused Line Fee.
Borrower shall pay to Lender a fee equal to .25% per annum of the average
monthly amount by which the total Credit Facility exceeds the sum of the
outstanding principal balance of the Revolving Credit Loans, Term Loans, and
Equipment Loans plus the LC Amount. The unused line fee shall be payable monthly
in arrears on the first day of each calendar month hereafter.
2.6 Reimbursement of Expenses.
If, at any time or times regardless of whether or not an Event of Default
then exists, Lender incurs reasonable legal or accounting expenses or any other
costs or out-of-pocket expenses in connection with (i) the negotiation and
preparation of this Agreement or any of the other Loan Documents, any amendment
of or modification of this Agreement or any of the other Loan Documents; (ii)
the administration of this Agreement or any of the other Loan Documents and the
transactions contemplated hereby and thereby; (iii) audits and appraisals of
Borrowers' books and records and of the Collateral; (iv) any litigation,
contest, dispute, suit, proceeding or action (whether instituted by Lender,
Borrowers or any other Person) in any way relating to the Collateral, this
Agreement or any of the other Loan Documents or Borrowers' affairs; (v) any
attempt to enforce any rights of Lender against any Borrower or any other Person
which may be obligated to Lender by virtue of this Agreement or any of the other
Loan Documents, including, without limitation, the Account Debtors; or (vi) any
attempt to inspect, verify, protect, preserve, restore, collect, sell, liquidate
or otherwise dispose of or realize upon the Collateral; then all such legal and
accounting expenses, other costs and out of pocket expenses of Lender shall be
charged to Borrowers. All amounts chargeable to Borrowers under this Section 2.6
shall be Obligations secured by all of the Collateral, shall be payable on
demand to Lender, and shall bear interest from the date such demand is made
until paid in full at the rate applicable to Revolving Credit Loans from time to
time. Borrowers shall also reimburse Lender for expenses incurred by Lender in
its administration of the Collateral to the extent and in the manner provided in
Section 6 hereof.
2.7 Bank Charges.
Borrowers shall pay to Lender, on demand, any and all fees, costs or
expenses which Lender pays to a bank or other similar institution (including,
without limitation, any fees paid by Lender) arising out of or in connection
with (i) the forwarding to any Borrower or any other Person on behalf of any
Borrower, by Lender, of proceeds of loans made by Lender to any Borrower
pursuant to this Agreement and (ii) the depositing for collection, by Lender, of
any check or item of payment received or delivered to Lender on account of the
Obligations.
SECTION 3. LOAN ADMINISTRATION.
3.1 Manner of Borrowing Revolving Credit Loans.
Borrowings under the credit facility established pursuant to Section 1
hereof shall be as follows:
3.1.1 Loan Requests. A request for a Revolving Credit Loan bearing
interest with reference to the Prime Rate shall be made, or shall be deemed to
be made, in the following manner: (i) Borrowers may give Lender notice of their
intention to borrow, in which notice Borrowers shall specify the amount of the
proposed borrowing and the proposed borrowing date, no later than 2:30 p.m.,
Hartford, Connecticut time on the proposed borrowing date, provided, however,
that no such request may be made at a time when there exists a Default or an
Event of Default; and (ii) the becoming due of any amount required to be paid
under this Agreement or the Term Notes or the Equipment Note, whether as
interest or for any other Obligation, including, without limitation, at any time
that LIBOR Loans may be available hereunder, upon the maturity of any LIBOR Loan
at the end of the applicable LIBOR Internal Period, shall be deemed irrevocably
to be a request for a Revolving Credit Loan on the due date in the amount
required to pay such interest or other Obligation. As an accommodation to
Borrowers, Lender may permit telephonic requests for loans and electronic
transmittal of instructions, authorizations, agreements or reports to Lender by
Borrowers. Unless Borrowers specifically direct Lender in writing not to accept
or act upon telephonic or electronic communications from a Borrower, Lender
shall have no liability to any Borrower for any loss or damage suffered by any
Borrower as a result of Lender's honoring of any requests, execution of any
instructions, authorizations or agreements or reliance on any reports
communicated to it telephonically or electronically and purporting to have been
sent to Lender by a Borrower and Lender shall have no duty to verify the origin
of any such communication or the authority of the person sending it. At such
time as LIBOR Loans may be available to Borrowers hereunder, Borrowers may
convert any Loan or portion thereof bearing interest with reference to the Prime
Rate to a LIBOR Loan or request a LIBOR Loan by giving Lender not less than
three (3) Business Days prior irrevocable written notice thereof specifying the
amount of such LIBOR Loan, which shall not be less than $500,000 or an integral
multiple of $100,000 in excesses thereof, the date of the requested LIBOR Loan
(which shall be a Business Day) and the duration of the LIBOR Interest Period of
such LIBOR Loan, provided, however, that in no event shall the number of LIBOR
Loans outstanding at any time exceed five (5), and provided, further that no
such Loan request may be made at a time when there exists a Default or an Event
of Default
3.1.2 Disbursement. Borrowers hereby irrevocably authorize Lender to
disburse the proceeds of each Revolving Credit Loan requested, or deemed to be
requested, pursuant to this subsection 3.1.2 as follows: (i) the proceeds of
each Revolving Credit Loan requested under subsection 3.1.1(i) shall be
disbursed by Lender in lawful money of the United States of America in
immediately available funds, in the case of the initial borrowing, in accordance
with the terms of the written disbursement letter from Borrowers, and in the
case of each subsequent borrowing, by wire transfer to such bank account as may
be agreed upon by Borrowers and Lender from time to time or elsewhere if
pursuant to a written direction from Borrowers; and (ii) the proceeds of each
Revolving Credit Loan requested under subsection 3.1.1(ii) shall be disbursed by
Lender by way of direct payment of the relevant interest or other Obligation.
3.1.3 Authorization. Borrowers hereby irrevocably authorize Lender, in
Lender's sole discretion, to advance to Borrowers, and to charge to Borrowers'
Loan Account(s) hereunder as a Revolving Credit Loan, a sum sufficient to pay
all interest accrued on the Obligations during the immediately preceding month
and to pay all costs, fees and expenses at any time owed by Borrowers to Lender
hereunder.
3.2 Payments.
Except where evidenced by notes or other instruments issued or made by
Borrowers to Lender specifically containing payment provisions which are in
conflict with this Section 3.2 (in which event the conflicting provisions of
said notes or other instruments shall govern and control), the Obligation shall
be payable as follows:
3.2.1 Principal on Revolving Credit Loans. Principal payable on account of
Revolving Credit Loans shall be payable by Borrowers to Lender immediately upon
the earliest of (i) the receipt by Lender or Borrowers of any proceeds of any of
the Collateral (other than proceeds that under the terms of this Agreement are
specifically to be applied to the Term Loans or Equipment Loans), to the extent
of said proceeds, (ii) the occurrence of an Event of Default in consequence of
which Lender elects to accelerate the maturity and payment of the Obligations,
or (iii) termination of this Agreement pursuant to Section 4 hereof; provided,
however, that if an Overadvance shall exist at any time, Borrowers shall, on
demand, repay the Overadvance.
3.2.2 Principal on Term Loans and Equipment Loans. Principal payable on
the Term Loans and the Equipment Loans shall be payable in accordance with the
terms of the Notes applicable thereto and shall in any event be payable to
Lender immediately upon the earliest of (i) the occurrence of an Event of
Default in consequence of which Lender elects to accelerate the maturity and
payment of the Obligations or (ii) termination of this Agreement.
3.2.3 Interest. Interest accrued on the Loans shall be due on the earliest
of (i) the first calendar day of each month (for the immediately preceding
month), computed through the last calendar day of the preceding month, (ii) the
occurrence of an Event of Default in consequence of which Lender elects to
accelerate the maturity and payment of the Obligations or (iii) termination of
this Agreement pursuant to Section 4 hereof.
3.2.4 Costs, Fees and Charges. Costs, fees and charges payable pursuant to
this Agreement shall be payable by Borrowers as and when provided in Section 2
hereof, to Lender or to any other Person designated by Lender in writing.
3.2.5 Other Obligations. The balance of the Obligations requiring the
payment of money, if any, shall be payable by Borrowers to Lender as and when
provided in this Agreement, the Other Agreements or the Security Documents, or
on demand, whichever is later.
3.3 Mandatory Prepayments.
Except as provided in subsection 6.4.2 hereof, if any Borrower sells any
of the Equipment or real Property, or if any of the Collateral is lost or
destroyed or taken by condemnation, Borrowers shall pay to Lender, unless
otherwise agreed by Lender, as and when received by Borrowers and as a mandatory
prepayment of the Term Loans or the Equipment Loans, in such order and to such
Loans, as determined by Lender, a sum equal to the proceeds (including insurance
payments) received by Borrowers from such sale, loss, destruction or
condemnation.
3.4 Application of Payments and Collections.
All items of payment received by Lender by 2:30 p.m., Hartford,
Connecticut time, on any Business Day shall be deemed received on that Business
Day. All items of payment received after 2:30 p.m., Hartford, Connecticut time,
on any Business Day shall be deemed received on the following Business Day.
Borrowers irrevocably waive the right to direct the application of any and all
payments and collections at any time or times hereafter received by Lender from
or on behalf of Borrowers, and Borrowers do hereby irrevocably agree that Lender
shall have the continuing exclusive right to apply and reapply any and all such
payments and collections received at any time or times hereafter by Lender or
its agent against the Obligations, in such manner as Lender may deem advisable,
notwithstanding any entry by Lender upon any of its books and records. If as the
result of collections of Accounts as authorized by subsection 6.2.6 hereof a
credit balance exists in the Loan Account, such credit balance shall not accrue
interest in favor of Borrowers, but shall be available to Borrowers at any time
or times for so long as no Default or Event of Default exists. Such credit
balance shall not be applied or be deemed to have been applied as a prepayment
of the Term Loan or any Equipment Loan, except that Lender may, at its option,
offset such credit balance against any of the Obligations upon and after the
occurrence of an Event of Default.
3.5 All Loans to Constitute One Obligation.
The Loans shall constitute one general Obligation of Borrowers, and shall
be secured by Lender's Lien upon all of the Collateral.
3.6 Loan Accounts.
Lender shall enter all Loans as debits to the Loan Account(s) and shall
also record in the Loan Account all payments made by Borrowers on any
Obligations and all proceeds of Collateral which are finally paid to Lender, and
may record therein, in accordance with customary accounting practice, other
debits and credits, including interest and all charges and expenses properly
chargeable to Borrowers.
3.7 Statements of Account.
Lender will account to Borrowers monthly with a statement of Loans,
charges and payments made pursuant to this Agreement, and such account rendered
by Lender shall be deemed final, binding and conclusive upon Borrowers unless
Lender is notified by Borrowers in writing to the contrary within 30 days of the
date each accounting is mailed to Borrowers. Such notice shall only be deemed an
objection to those items specifically objected to therein.
3.8 Appointment of TMCI as Agent.
Borrowers hereby irrevocably appoint and constitute TMCI as their agent to
request Revolving Credit Loans and to take all actions required or permitted
hereunder in the name of and on behalf of each and all the Borrowers. This
appointment shall include, without implied limitation, the designation of TMCI
as the agent of the Borrowers to furnish all notices to the Lender including,
without limitation, any notice under subsection 4.2.2, and to receive all
notices from the Lender including, without limitation, all statements of Loan
Account(s) under this Agreement and the other Loan Documents. This appointment
may not be terminated while this Agreement is in effect or the Obligations are
outstanding without the prior written consent of Lender. Loans may be made by
Lender to TMCI for the benefit of the Borrowers and shall be disbursed by TMCI
to the other Borrowers in accordance with the lending formulas under Section
1.1, and the value of the Eligible Accounts, Eligible Inventory and Equipment of
each Borrower and the advance rates applicable thereto as provided herein. At
any time Lender may, in its discretion, disburse Loans to the Borrowers directly
or as otherwise provided in this Agreement.
3.9 Funding Losses on LIBOR Loans.
In the event that any LIBOR Loan is repaid or terminated for any reason on
a date prior to the expiration of the LIBOR Interest Period with respect thereto
or Borrowers fail to borrow a LIBOR Loan when requested under Section 3.1.1,
then in addition to any other amounts which are due and payable under the terms
of this Agreement (including, but not limited to, Section 4.2.3 hereof)
Borrowers shall pay to Lender, upon Lender's demand therefor, such amount or
amounts as shall compensate Lender for any loss, cost or expense incurred by
Lender as a result of (i) any payment or prepayment (whether pursuant to Section
4.2 or otherwise) of a LIBOR Loan on a date other than the last day of the LIBOR
Interest period applicable to such LIBOR Loan, or (ii) any failure by Borrowers
to pay or prepay a LIBOR Loan on the date specified in the relevant notice of
prepayment delivered by Borrowers, or (iii) any failure by Borrowers to borrow a
LIBOR Loan on the date specified in the applicable notice delivered pursuant to
Section 3.1.1. Such compensation shall include, without limitation, an amount
equal to the excess, if any, of (x) the amount of interest which would have
accrued on the amount so paid or prepaid or not prepaid or borrowed for the
period from the date of such payment, prepayment or failure to prepay or borrow
to the last day of the applicable LIBOR Interest Period for such LIBOR Loan (or,
in the case of a failure to prepay or borrow, the LIBOR Interest Period for such
LIBOR Loan which would have commenced on the date of such failure to prepay or
borrow) at the applicable rate of interest for such LIBOR Loan, over (y) the
amount of interest (as reasonably determined by Lender) that Lender would have
been paid on deposits in the United States dollars of comparable amounts for a
comparable period of time by leading banks in the London Interbank Market. A
certificate as to the amounts due from Borrowers to Lender shall be conclusive,
absent manifest error.
3.10 Changes in Law and LIBOR Loans.
Notwithstanding any other provision hereof, if any applicable law, treaty,
regulation or directive, or any change therein or in the interpretation or
application thereof, shall make it unlawful for Lender to make or maintain its
LIBOR Loans, or if with respect to any LIBOR Rate relating thereto, or adverse
or unusual conditions in the applicable London Interbank Market or changes in
applicable law relating thereto make it, in the reasonable good faith judgment
of Lender, impracticable to fund LIBOR Loans or make the projected LIBOR Rate
unreflective of the actual costs of funds therefor to Lender, the obligation of
Lender to make LIBOR Loans hereunder shall forthwith be canceled and the
Borrowers shall, if any affected LIBOR Loans are then outstanding promptly upon
request of Lender, either pay all such affected LIBOR Loans or convert such
affected LIBOR Loans into Prime Rate Loans. If any such payment or conversion of
any LIBOR Loan is made on a day that is not the last day of the applicable LIBOR
Interest Period, Borrowers shall pay Lender, upon Lender's request, such amount
or amounts as may be required pursuant to Section 3.9 hereof.
SECTION 4. TERM AND TERMINATION
4.1 Term of Agreement.
Subject to Lender's right to cease making Loans to Borrowers upon or after
the occurrence of any Default or Event of Default, this Agreement shall be in
effect for a period of five years from the date hereof, through and including
March 2, 2003 (the "Original Term"), and this Agreement shall automatically
renew itself for one-year periods thereafter (the "Renewal Terms"), unless
terminated as provided in Section 4.2 hereof.
4.2 Termination.
4.2.1 Termination by Lender. Upon at least 90 days prior written notice to
Borrowers, Lender may terminate this Agreement as of the last day of the
Original Term or the then current Renewal Term and Lender may terminate this
Agreement without notice upon or after the occurrence of an Event of Default.
4.2.2 Termination by Borrower. Upon at least 90 days prior written notice
to Lender, Borrowers may, at their option, terminate this Agreement; provided,
however, no such termination shall be effective until Borrowers have paid all of
the Obligations in immediately available funds and all Letters of Credit and LC
Guaranties have expired or have been cash collateralized to Lender's
satisfaction. Any notice of termination given by Borrowers shall be irrevocable
unless Lender otherwise agrees in writing, and Lender shall have no obligation
to make any Loans or issue or procure any Letters of Credit or LC Guaranties on
or after the termination date stated in such notice. Borrowers may elect to
terminate this Agreement in its entirety only. No section of this Agreement or
type of Loan or credit facility available hereunder may be terminated singly.
4.2.3 Termination Charges. At the effective date of termination of this
Agreement for any reason, Borrowers shall pay to Lender (in addition to the then
outstanding principal, accrued interest and other charges owing under the terms
of this Agreement and any of the other Loan Documents) as liquidated damages for
the loss of the bargain and not as a penalty as a result of the agreement by
Lender to defer payment of fees that would otherwise be charged at the inception
of this Agreement, an amount equal to 2% of the Average Loan Balance if
termination occurs during the first twelve-month period of the Original Term
(March 2, 1998 through March 1, 1999); 1% of the Average Loan Balance if
termination occurs during the second 12-month period of the Original Term (March
2, 1999) through March 1, 2000); 1% of the Average Loan Balance if termination
occurs during the third 12 month period of the Original Term (March 2, 2000
through March 1, 2001). If termination occurs on or after March 2, 2001, no
termination charge shall be payable.
4.2.4 Effect of Termination. All of the Obligations shall be immediately
due and payable upon the termination date stated in any notice of termination of
this Agreement. All undertakings, agreements, covenants, warranties and
representations of Borrowers contained in the Loan Documents shall survive any
such termination and Lender shall retain its Liens in the Collateral and all of
its rights and remedies under the Loan Documents notwithstanding such
termination until Borrowers have paid the Obligations to Lender, in full, in
immediately available funds, together with the applicable termination charge, if
any. Notwithstanding the payment in full of the Obligations, Lender shall not be
required to terminate its security interests in the Collateral unless, with
respect to any loss or damage Lender may incur as a result of dishonored checks
or other items of payment received by Lender from Borrowers or any Account
Debtor and applied to the Obligations, Lender shall, at its option, (i) have
received a written agreement, executed by Borrowers and by any Person whose
loans or other advances to Borrowers are used in whole or in part to satisfy the
Obligations, indemnifying Lender from any such loss or damage; or (ii) have
retained such monetary reserves and Liens on such monetary reserves for such
period of time as Lender, in its reasonable discretion, may deem necessary to
protect Lender from any such loss or damage.
SECTION 5. SECURITY INTERESTS
5.1 Security Interest in Collateral.
To secure the prompt payment and performance to such Lender of the
Obligations, each Borrower hereby grants to Lender a continuing Lien upon all of
such Borrower's assets, including all of the following Property and interests in
Property of such Borrower, whether now owned or existing or hereafter created,
acquired or arising and wheresoever located:
(i) Accounts;
(ii) Inventory;
(iii) Equipment;
(iv) General Intangibles;
(v) Investment Property;
(vi) All monies and other Property of any kind now or at any time or
times hereafter in the possession or under the control of Lender or a
bailee or Affiliate of Lender;
(vii) All accessions to, substitutions for and all replacements,
products and cash and non-cash proceeds of (i) through (vi) above,
including, without limitation, proceeds of and unearned premiums with
respect to insurance policies insuring any of the Collateral; and
(viii) All books and records (including, without limitation,
customer lists, credit files, computer programs, print-outs, and other
computer materials and records) of Borrower pertaining to any of (i)
through (vii) above.
5.2 Lien Perfection; Further Assurances.
Borrowers shall execute such UCC-1 financing statements as are required by
the Code and such other instruments, assignments or documents as are necessary
to perfect Lender's Lien upon any of the Collateral and shall take such other
action as may be required to perfect or to continue the perfection of Lender's
Lien upon the Collateral. Unless prohibited by applicable law, each Borrower
hereby authorizes Lender to execute and file any such financing statement on
such Borrower's behalf. The parties agree that a carbon, photographic or other
reproduction of this Agreement shall be sufficient as a financing statement and
may be filed in any appropriate office in lieu thereof. At Lender's request,
Borrowers shall also promptly execute or cause to be executed and shall deliver
to Lender any and all documents, instruments and agreements deemed necessary by
Lender to give effect to or carry out the terms or intent of the Loan Documents.
SECTION 6. COLLATERAL ADMINISTRATION
6.1 General.
6.1.1 Location of Collateral. All Collateral, other than Inventory in
transit and motor vehicles, will at all times be kept by Borrowers and their
Subsidiaries at one or more of the business locations set forth in Exhibit B
hereto and shall not, without the prior written approval of Lender, be moved
therefrom except, prior to an Event of Default and Lender's acceleration of the
maturity of the Obligations in consequence thereof, for (i) sales of Inventory
in the ordinary course of business; and (ii) removals in connection with
dispositions of Equipment that are authorized by subsection 6.4.2 hereof.
6.1.2 Insurance of Collateral. Borrowers shall maintain and pay for
insurance upon all Collateral wherever located and with respect to Borrowers'
business, covering casualty, hazard, public liability and such other risks in
such amounts and with such insurance companies as are reasonably satisfactory to
Lender. Borrowers shall deliver the originals of such policies to Lender with
satisfactory lender's loss payable endorsements, naming Lender as sole loss
payee, assignee or additional insured, as appropriate. Each policy of insurance
or endorsement shall contain a clause requiring the insurer to give not less
than 30 days prior written notice to Lender in the event of cancellation of the
policy for any reason whatsoever and a clause specifying that the interest of
Lender shall not be impaired or invalidated by any act or neglect of any
Borrower or the owner of the Property or by the occupation of the premises for
purposes more hazardous than are permitted by said policy. If Borrowers fail to
provide and pay for such insurance, Lender may, at its option, but shall not be
required to, procure the same and charge Borrowers therefor. Borrowers agree to
deliver to Lender, promptly as rendered, true copies of all reports made in any
reporting forms to insurance companies.
6.1.3 Protection of Collateral. All expenses of protecting, storing,
warehousing, insuring, handling, maintaining and shipping the Collateral, any
and all excise, property, sales, and use taxes imposed by any state, federal, or
local authority on any of the Collateral or in respect of the sale thereof shall
be borne and paid by Borrowers. If Borrowers fail to promptly pay any portion
thereof when due, Lender may, at its option, but shall not be required to, pay
the same and charge Borrowers therefor. Lender shall not be liable or
responsible in any way for the safekeeping of any of the Collateral or for any
loss or damage thereto (except for reasonable care in the custody thereof while
any Collateral is in Lender's actual possession) or for any diminution in the
value thereof, or for any act or default of any warehouseman, carrier,
forwarding agency, or other person whomsoever, but the same shall be at
Borrowers' sole risk.
6.2 Administration of Accounts.
6.2.1 Records, Schedules and Assignments of Accounts. Borrowers shall keep
accurate and complete records of their Accounts and all payments and collections
thereon and shall submit to Lender on such periodic basis as Lender shall
request a sales and collections report for the preceding period, in form
satisfactory to Lender. On or before the fifteenth day of each month from and
after the date hereof, Borrowers shall deliver to Lender, in form acceptable to
Lender, a detailed aged trial balance of all Accounts existing as of the last
day of the preceding month, specifying the names, addresses, face value, dates
of invoices and due dates for each Account Debtor obligated on an Account so
listed ("Schedule of Accounts"), and, upon Lender's request therefor, copies of
proof of delivery and the original copy of all documents, including, without
limitation, repayment histories and present status reports relating to the
Accounts so scheduled and such other matters and information relating to the
status of then existing Accounts as Lender shall reasonably request. In
addition, if Accounts in an aggregate face amount in excess of $25,000 become
ineligible because they fall within one of the specified categories of
ineligibility set forth in the definition of Eligible Accounts or otherwise
established by Lender, Borrowers shall notify Lender of such occurrence on the
first Business Day following such occurrence and the Borrowing Base shall
thereupon be adjusted to reflect such occurrence. If requested by Lender,
Borrowers shall execute and deliver to Lender formal written assignments of all
of their Accounts weekly or daily, which shall include all Accounts that have
been created since the date of the last assignment, together with copies of
invoices or invoice registers related thereto.
6.2.2 Discounts, Allowances, Disputes. If Borrowers grant any discounts,
allowances or credits that are not shown on the face of the invoice for the
Account involved, Borrowers shall report such discounts, allowances or credits,
as the case may be, to Lender as part of the next required Schedule of Accounts.
If any amounts due and owing in excess of $25,000 are in dispute between any
Borrower and any Account Debtor, Borrowers shall provide Lender with written
notice thereof at the time of submission of the next Schedule of Accounts,
explaining in detail the reason for the dispute, all claims related thereto and
the amount in controversy. Upon and after the occurrence of an Event of Default,
Lender shall have the right to settle or adjust all disputes and claims directly
with the Account Debtor and to compromise the amount or extend the time for
payment of the Accounts upon such terms and conditions as Lender may deem
advisable, and to charge the deficiencies, costs and expenses thereof, including
attorney's fees, to Borrowers.
6.2.3 Taxes. If an Account includes a charge for any tax payable to any
governmental taxing authority, Lender is authorized, in its sole discretion, to
pay the amount thereof to the proper taxing authority for the account of
Borrowers and to charge Borrowers therefor, provided, however that Lender shall
not be liable for any taxes to any governmental taxing authority that may be due
by Borrowers.
6.2.4 Account Verification. Whether or not a Default or an Event of
Default has occurred, any of Lender's officers, employees or agents shall have
the right, at any time or times hereafter, in the name of Lender, any designee
of Lender or any Borrower, to verify the validity, amount or any other matter
relating to any Accounts by mail, telephone, telegraph or otherwise. Borrowers
shall cooperate fully with Lender in an effort to facilitate and promptly
conclude any such verification process.
6.2.5 Maintenance of Dominion Account. Borrowers shall maintain Dominion
Accounts pursuant to lockbox arrangements acceptable to Lender with such banks
as may be selected by Borrowers and be acceptable to Lender. Borrowers shall
issue to any such banks an irrevocable letter of instruction directing such
banks to deposit all payments or other remittances received in the lockbox to
the Dominion Account(s) for application on account of the Obligations. All funds
deposited in any Dominion Account shall immediately become the property of
Lender and Borrowers shall obtain the agreement by such banks in favor of Lender
to waive any offset rights against the funds so deposited. Lender assumes no
responsibility for such lockbox arrangements, including, without limitation, any
claim of accord and satisfaction or release with respect to deposits accepted by
any bank thereunder.
6.2.6 Collection of Accounts, Proceeds of Collateral. To expedite
collection, Borrowers shall endeavor in the first instance to make collection of
their Accounts for Lender. All remittances received by Borrowers on account of
Accounts, together with the proceeds of any other Collateral, shall be held as
Lender's property by Borrowers as trustee of an express trust for Lender's
benefit and Borrowers shall immediately deposit same in kind in the Dominion
Account(s). Lender retains the right at all times after the occurrence of a
Default or an Event of Default to notify Account Debtors that Accounts have been
assigned to Lender and to collect Accounts directly in its own name and to
charge the collection costs and expenses, including reasonable attorneys' fees
to Borrowers.
6.3 Administration of Inventory.
6.3.1 Records and Reports of Inventory. Borrowers shall keep accurate and
complete records of their inventory. Borrowers shall furnish to Lender Inventory
reports in form and detail satisfactory to Lender at such times as Lender may
request, but at least once each month, not later than the twentieth day of such
month. Borrowers shall conduct a physical inventory no less frequently than
annually and shall provide to Lender a report based on each such physical
inventory promptly thereafter, together with such supporting information as
Lender shall request.
6.3.2 Returns of Inventory. If at any time or times hereafter any Account
Debtor returns any Inventory to a Borrower the shipment of which generated an
Account on which such Account Debtor is obligated in excess of $25,000 Borrowers
shall immediately notify Lender of the same, specifying the reason for such
return and the location, condition and intended disposition of the returned
Inventory.
6.4 Administration of Equipment.
6.4.1 Records and Schedules of Equipment. Borrowers shall keep accurate
records itemizing and describing the kind, type, quality, quantity and value of
their Equipment and all dispositions made in accordance with subsection 6.6.2
hereof, and shall furnish Lender with a current schedule containing the
foregoing information on at least an annual basis and more often if requested by
Lender. Immediately on request therefor by Lender, Borrowers shall deliver to
Lender any and all evidence of ownership, if any, of any of the Equipment.
6.4.2 Dispositions of Equipment. Borrowers will not sell, lease or
otherwise dispose of or transfer any of the Equipment or any part thereof
without the prior written consent of Lender; provided, however, that the
foregoing restriction shall not apply, for so long as no Default or Event of
Default exists, to (i) dispositions of Equipment which, in the aggregate during
any consecutive twelve-month period, has a fair market value or book value,
whichever is less, of $100,000 or less, provided that all proceeds thereof are
remitted to Lender for application to the Loans, or (ii) replacements of
Equipment that is substantially worn, damaged or obsolete with Equipment of like
kind, function and value, provided that the replacement Equipment shall be
acquired prior to or concurrently with any disposition of the Equipment that is
to be replaced, the replacement Equipment shall be free and clear of Liens other
than Permitted Liens that are not Purchase Money Liens, and Borrowers shall have
given Lender at least 5 Business Days prior written notice of such disposition.
6.5 Payment of Charges.
All amounts chargeable to Borrowers under Section 6 hereof shall be
Obligations secured by all of the Collateral, shall be payable on demand and
shall bear interest from the date such advance was made until paid in full at
the rate applicable to Revolving Credit Loans from time to time.
SECTION 7. REPRESENTATIONS AND WARRANTIES
7.1 General Representations and Warranties.
To induce Lender to enter into this Agreement and to make advances
hereunder, each Borrower warrants, represents and covenants to Lender that:
7.1.1 Organization and Qualification. Each Borrower and its Subsidiaries
is a corporation duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. Each Borrower and its
Subsidiaries is duly qualified and is authorized to do business and is in good
standing as a foreign corporation in each state or jurisdiction listed on
Exhibit C hereto and in all other states and jurisdictions in which the failure
of a Borrower or any of its Subsidiaries to be so qualified would have a
material adverse effect on the financial condition, business or Properties of
such Borrower or any of its Subsidiaries.
7.1.2 Corporate Power and Authority. Each Borrower and its Subsidiaries is
duly authorized and empowered to enter into, execute, deliver and perform this
Agreement and each of the other Loan Documents to which it is a party. The
execution, delivery and performance of this Agreement and each of the other Loan
Documents have been duly authorized by all necessary corporate action and do not
and will not (i) require any consent or approval of the shareholders of any
Borrower or any of their Subsidiaries; (ii) contravene any Borrower's or any of
their Subsidiaries' charter, articles or certificate of incorporation or
by-laws; (iii) violate, or cause any Borrower or any of their Subsidiaries to be
in default under, any provision of any law, rule, regulation, order, writ,
judgment, injunction, decree, determination or award in effect having
applicability to any Borrower or any of their Subsidiaries; (iv) result in a
breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease or instrument to which any Borrower or
any of their Subsidiaries is a party or by which any Borrower or any of their
Subsidiaries or their Properties may be bound or affected; or (v) result in, or
require, the creation or imposition of any Lien (other than Permitted Liens)
upon or with respect to any of the Properties now owned or hereafter acquired by
any Borrower or any of their Subsidiaries.
7.1.3 Legally Enforceable Agreement. This Agreement is, and each of the
other Loan Documents when delivered under this Agreement will be, a legal, valid
and binding obligation of each Borrower and their Subsidiaries enforceable
against each of them in accordance with its respective terms.
7.1.4 Capital Structure. Exhibit D hereto states (i) the correct name of
each of the Subsidiaries of each Borrower, their jurisdictions of incorporation
and the percentage of Voting Stock owned by Borrowers, (ii) the name of each
Borrower's corporate or joint venture Affiliates and the nature of the
affiliation, (iii) the number, nature and holder of five percent (5%) or more of
any class, series or type of outstanding Securities of each Borrower and each
Subsidiary of any Borrower and (iv) the number of authorized, issued and
treasury shares of each Borrower and each Subsidiary of any Borrower. Each
Borrower has good title to all of the shares it purports to own of the stock of
each of its Subsidiaries, free and clear in each case of any Lien other than
Permitted Liens. All such shares have been duly issued and are fully paid and
non-assessable. There are no outstanding options to purchase, or any rights or
warrants to subscribe for, or any commitments or agreements to issue or sell, or
any Securities or obligations convertible into, or any powers of attorney
relating to, shares of the capital stock of any Borrower or any of its
Subsidiaries. There are no outstanding agreements or instruments binding upon
any Borrower's shareholders relating to the ownership of its shares of capital
stock, except as disclosed in Exhibit R hereto.
7.1.5 Corporate Names. No Borrower nor any of its Subsidiaries has been
known as or used any corporate, fictitious or trade names except those listed on
Exhibit E hereto. Except as set forth on Exhibit E, no Borrower nor any of its
Subsidiaries has been the surviving corporation of a merger or consolidation or
acquired all or substantially all of the assets of any Person.
7.1.6 Business Locations; Agent for Process. Each Borrower's and its
Subsidiaries' chief executive office and other places of business are as listed
on Exhibit B hereto. During the preceding one-year period, no Borrower nor any
of its Subsidiaries has had an office, place of business or agent for service of
process other than as listed on Exhibit B. Except as shown on Exhibit B, no
inventory is stored with a bailee, warehouseman or similar party, nor is any
Inventory consigned to any Person.
7.1.7 Title to Properties; Priority of Liens. Each Borrower and its
Subsidiaries has good, indefeasible and marketable title to and fee simple
ownership of, or valid and subsisting leasehold interests in, all of its real
Property, and good title to all of the Collateral and all of its other Property,
in each case, free and clear of all Liens except Permitted Liens. Each Borrower
has paid or discharged all lawful claims which, if unpaid, might become a Lien
against any Borrower's Properties that is not a Permitted Lien. The Liens
granted to Lender under Section 5 hereof are first priority Liens, subject only
to Permitted Liens.
7.1.8 Accounts. Lender may rely, in determining which Accounts are
Eligible Accounts, on all statements and representations made by Borrowers with
respect to any Account or Accounts. Unless otherwise indicated in writing to
Lender, with respect to each Account:
(i) It is genuine and in all respects what it purports to
be, and it is not evidenced by a judgment;
(ii) It arises out of a completed, bona fide sale and delivery of
goods or rendition of services by a Borrower in the ordinary course of its
business and in accordance with the terms and conditions of all purchase
orders, contracts or other documents relating thereto and forming a part
of the contract between such Borrower and the Account Debtor;
(iii) It is for a liquidated amount maturing as stated in the
duplicate invoice covering such sale or rendition of services, a copy of
which has been furnished or is available to Lender;
(iv) Such Account, and Lender's security interest therein, is not,
and will not (by voluntary act or omission of a Borrower) be in the
future, subject to any offset, Lien, deduction, defense, dispute,
counterclaim or any other adverse condition except for disputes resulting
in returned goods where the amount in controversy is deemed by Lender to
be immaterial, and each such Account is absolutely owing to a Borrower and
is not contingent in any respect or for any reason;
(v) No Borrower has made an agreement with any Account Debtor
thereunder for any extension, compromise, settlement or modification of
any such Account or any deduction therefrom, except discounts or
allowances which are granted by Borrowers in the ordinary course of their
businesses for prompt payment and which are reflected in the calculation
of the net amount of each respective invoice related thereto and are
reflected in the Schedules of Accounts submitted to Lender pursuant to
subsection 6.2.1 hereof;
(vi) There are no facts, events or occurrences which in any way
impair the validity or enforceability of any Accounts or tend to reduce
the amount payable thereunder from the face amount of the invoice and
statements delivered to Lender with respect thereto;
(vii) To the best of Borrowers' knowledge, the Account Debtor
thereunder (1) had the capacity to contract at the time any contract or
other document giving rise to the Account was executed and (2) such
Account Debtor is Solvent; and
(viii) To the best of Borrowers' knowledge, there are no proceedings
or actions which are threatened or pending against any Account Debtor
thereunder which might result in any material adverse change in such
Account Debtor's financial condition or the collectibility of such
Account.
7.1.9 Equipment. The Equipment is in good operating condition and repair,
and all necessary replacements of and repairs thereto shall be made so that the
value and operating efficiency of the Equipment shall be maintained and
preserved, reasonable wear and tear excepted. Borrowers will not permit any of
the Equipment to become affixed to any real Property leased to any Borrower so
that an interest arises therein under the real estate laws of the applicable
jurisdiction unless the landlord of such real Property has executed a landlord
waiver or leasehold mortgage in favor of and in form acceptable to Lender, and
Borrowers will not permit any of the Equipment to become an accession to any
personal Property other than Equipment that is subject to first priority (except
for Permitted Liens) Liens in favor of Lender.
7.1.10 Financial Statements; Fiscal Year. The Consolidated and
consolidating balance sheets of TMCI and such other Persons described therein
(including the accounts of all Subsidiaries of TMCI for the respective periods
during which a Subsidiary relationship existed) as of September 30, 1997, and
the related statements of income, changes in stockholder's equity, and changes
in financial position for the periods ended on such dates, have been prepared in
accordance with GAAP, and present fairly the financial positions of TMCI and
such persons at such dates and the results of TMCI's and its Subsidiaries'
operations for such periods. Since September 30, 1997, there has been no
material change in the condition, financial or otherwise, of TMCI and such other
Persons as shown on the Consolidated balance sheet as of such date and no change
in the aggregate value of Equipment and real Property owned by Borrowers, except
changes in the ordinary course of business, none of which individually or in the
aggregate has been materially adverse. The fiscal year of TMCI and each of its
Subsidiaries ends on December 31st of each year.
7.1.11 Full Disclosure. The financial statements referred to in subsection
7.1.10 hereof do not, nor does this Agreement or any other written statement of
Borrowers to Lender, contain any untrue statement of a material fact or omit a
material fact necessary to make the statements contained therein or herein not
misleading. There is no fact which Borrowers have failed to disclose to Lender
in writing which materially affects adversely or, so far as any Borrower can now
foresee, will materially affect adversely the Properties, business, prospects,
profits or condition (financial or otherwise) of any Borrower or any of their
Subsidiaries or the ability of any Borrower or their Subsidiaries to perform
this Agreement or the other Loan Documents.
7.1.12 Solvent Financial Condition. Each Borrower and its Subsidiaries is
now and, after giving effect to the Loans to be made and the Letters of Credit
and LC Guaranties to be issued hereunder, at all times will be, Solvent.
7.1.13 Surety Obligations. No Borrower nor any of their Subsidiaries is
obligated as surety or indemnitor under any surety or similar bond or other
contract issued or entered into any agreement to assure payment, performance or
completion of performance of any undertaking or obligation of any Person.
7.1.14 Taxes. Each Borrower's federal tax identification number is shown
on Exhibit F. The federal tax identification number of each Borrower's
Subsidiaries is shown on Exhibit F hereto. Each Borrower and each of its
Subsidiaries has filed all federal, state and local tax returns and other
reports it is required by law to file and has paid, or made provision for the
payment of, all taxes, assessments, fees, levies and other governmental charges
upon it, its income and Properties as and when such taxes, assessments, fees,
levies and charges that are due and payable, unless and to the extent any
thereof are being actively contested in good faith and by appropriate
proceedings and Borrowers maintains reasonable reserves on their books therefor.
The provision for taxes on the books of Borrowers and their Subsidiaries are
adequate for all years not closed by applicable statutes, and for its current
fiscal year.
7.1.15 Brokers. There are no claims for brokerage commissions, finder's
fees or investment banking fees in connection with the transactions contemplated
by this Agreement except as disclosed on Exhibit Q hereto.
7.1.16 Patents, Trademarks, Copyrights and Licenses. Each Borrower and its
Subsidiaries owns or possesses all the patents, trademarks, service marks, trade
names, copyrights and licenses necessary for the present and planned future
conduct of its business without any known conflict with the rights of others.
All such patents, trademarks, service marks, tradenames, copyrights, licenses
and other similar rights are listed on Exhibit G hereto.
7.1.17 Governmental Consents. Each Borrower and its Subsidiaries has, and
is in good standing with respect to, all governmental consents, approvals,
licenses, authorizations, permits, certificates, inspections and franchises
necessary to continue to conduct its business as heretofore or proposed to be
conducted by it and to own or lease and operate its Properties as now owned or
leased by it.
7.1.18 Compliance with Laws. Each Borrower and its Subsidiaries has duly
complied with, and its Properties, business operations and leaseholds are in
compliance in all material respects with, the provisions of all federal, state
and local laws, rules and regulations applicable to any Borrower or their such
Subsidiary, as applicable, its Properties or the conduct of its business and
there have been no citations, notices or orders of noncompliance issued to any
Borrower or any of their Subsidiaries under any such law, rule or regulation.
Each Borrower and its Subsidiaries has established and maintains an adequate
monitoring system to insure that it remains in compliance with all federal,
state and local laws, rules and regulations applicable to it. No Inventory has
been produced in violation of the Fair Labor Standards Act (29 U.S.C. ss. 201 et
seq.), as amended.
7.1.19 Restrictions. No Borrower nor any of its Subsidiaries is a party or
subject to any contract, agreement, or charter or other corporate restriction,
which materially and adversely affects its business or the use or ownership of
any of its Properties. No Borrower nor any of its Subsidiaries is a party or
subject to any contract or agreement which restricts its right or ability to
incur Indebtedness, other than as set forth on Exhibit H hereto, none of which
prohibit the execution of or compliance with this Agreement or the other Loan
Documents by any Borrower or any of their Subsidiaries, as applicable.
7.1.20 Litigation. Except as set forth on Exhibit I hereto, there are no
actions, suits, proceedings or investigations pending, or to the knowledge of
any Borrower, threatened, against or affecting any Borrower or any of their
Subsidiaries, or the business, operations, Properties, prospects, profits or
condition of any Borrower or any of their Subsidiaries. No Borrower nor any of
their Subsidiaries is in default with respect to any order, writ, injunction,
judgment, decree or rule of any court, governmental authority or arbitration
board or tribunal.
7.1.21 No Defaults. No event has occurred and no condition exists which
would, upon or after the execution and delivery of this Agreement or Borrowers'
performance hereunder, constitute a Default or an Event of Default. No Borrower
nor any of their Subsidiaries is in default, and no event has occurred and no
condition exists which constitutes, or which with the passage of time or the
giving of notice or both would constitute, a default in the payment of any
Indebtedness to any Person for Money Borrowed.
7.1.22 Leases. Exhibit J hereto is a complete listing of all capitalized
leases of Borrowers and their Subsidiaries and Exhibit K hereto is a complete
listing of all operating leases of Borrowers and their Subsidiaries. Each
Borrower and its Subsidiaries is in full compliance with all of the terms of
each of its respective capitalized and operating leases.
7.1.23 Pension Plans. Except as disclosed on Exhibit L hereto, no Borrower
nor any of their Subsidiaries has any Plan. Each Borrower and each of their
Subsidiaries is in full compliance with the requirements of ERISA and the
regulations promulgated thereunder with respect to each Plan. No fact or
situation that could result in a material adverse change in the financial
condition of any Borrower or any of their Subsidiaries exists in connection with
any Plan. No Borrower nor any of their Subsidiaries has any withdrawal liability
in connection with a Multi-employer Plan.
7.1.24 Trade Relations. There exists no actual or threatened termination,
cancellation or limitation of, or any modification or change in, the business
relationship between any Borrower or any of its Subsidiaries and any customer or
any group of customers whose purchases individually or in the aggregate are
material to the business of Borrowers or any of their Subsidiaries, or with any
material supplier, and there exists no present condition or state of facts or
circumstances which would materially affect adversely any Borrower or any of its
Subsidiaries or prevent any Borrower or any of its Subsidiaries from conducting
such business after the consummation of the transaction contemplated by this
Agreement in substantially the same manner in which it has heretofore been
conducted.
7.1.25 Labor Relations. Except as described on Exhibit M hereto, no
Borrower nor any of its Subsidiaries is a party to any collective bargaining
agreement. There are no material grievances, disputes or controversies with any
union or any other organization of any Borrower's or any of its Subsidiaries'
employees, or threats of strikes, work stoppages or any asserted pending demands
for collective bargaining by any union or organization.
7.1.26 Environmental Matters. Each Borrower and their respective
Subsidiaries has obtained and is in compliance with all permits, licenses and
other authorizations required under all Environmental Laws to carry on its
business as now being conducted, except to the extent failure to have any such
permit, license or authorization would not reasonably be expected (either
individually or in the aggregate) to have a material adverse effect on the
Borrowers and their Subsidiaries. Each Borrower and their respective
Subsidiaries is also in compliance with all other limitations, restrictions,
conditions, standards, prohibitions, requirements, obligations, schedules and
timetables contained in any applicable Environmental Law or in any regulation,
code, plan, order, decree, judgment, injunction, notice or demand letter issued,
entered, promulgated or approved thereunder, except to the extent any such
non-compliance would not reasonably be expected (either individually or in the
aggregate) to have a material adverse effect on the Borrowers or their
Subsidiaries.
7.1.27 Interdependent Businesses and Operations. Each of the Borrowers
acknowledges and agrees that it acts interdependently with the other Borrowers
as part of an integrated group of businesses, relies upon the other Borrowers in
its operations and business and will derive direct and indirect economic
benefits from the Loans, Letters of Credit and LC Guaranties to be made and
issued hereunder by Lender. The consolidation of the borrowings by Borrowers
under this Agreement will utilize the combined financial capabilities of the
Borrowers in the most efficient and economical manner and enhances the aggregate
borrowing power of the Borrowers to the mutual benefit and advantage of the
Borrowers.
7.1.28 Acquisitions. No default has occurred under any of the
Purchase Documents.
7.2 Continuous Nature of Representations and Warranties.
Each representation and warranty contained in this Agreement and the other
Loan Documents shall be continuous in nature and shall remain accurate, complete
and not misleading at all times during the term of this Agreement, except for
changes in the nature of any Borrower's or its Subsidiaries' business or
operations that would render the information in any exhibit attached hereto
either inaccurate, incomplete or misleading, so long as Lender has consented to
such changes or such changes are expressly permitted by this Agreement.
7.3 Survival of Representations and Warranties.
All representations and warranties of Borrowers contained in this
Agreement or any of the other Loan Documents shall survive the execution,
delivery and acceptance thereof by Lender and the parties thereto and the
closing of the transactions described therein or related thereto.
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS
8.1 Affirmative Covenants.
During the term of this Agreement, and thereafter for so long as there are
any Obligations to Lender, each Borrower covenants that, unless otherwise
consented to by Lender in writing, it shall:
8.1.1 Visits and Inspections. Permit representatives of Lender, from time
to time, as often as may be reasonably requested, but only during normal
business hours, to visit and inspect the Properties of Borrowers and each of
their Subsidiaries, inspect, audit and make extracts from its books and records,
and discuss with its officers, its employees and its independent accountants,
Borrowers' and each of their Subsidiaries' business, assets, liabilities,
financial condition, business prospects and results of operations.
8.1.2 Notices. Promptly notify Lender in writing of the occurrence of any
event or the existence of any fact which renders any representation or warranty
in this Agreement or any of the other Loan Documents inaccurate, incomplete or
misleading. Notify Lender ten (10) days in advance of Borrowers' non-compliance
with Section 8.1.12 or Section 8.1.13.
8.1.3 Financial Statements. Keep, and cause each Subsidiary to 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 its
financial transactions; and cause to be prepared and furnished to Lender the
following (all to be prepared in accordance with GAAP applied on a consistent
basis, unless Borrowers' certified public accountants concur in any change
therein and such change is disclosed to Lender and is consistent with GAAP):
(i) not later than 90 days after the close of each fiscal year of
TMCI, unqualified audited financial statements of TMCI and its
Subsidiaries as of the end of such year, on a Consolidated and
consolidating basis, certified by a firm of independent certified public
accountants of recognized standing selected by TMCI but acceptable to
Lender (except for a qualification for a change in accounting principles
with which the accountant concurs);
(ii) not later than 45 days after the end of each fiscal quarter
hereafter, including the last fiscal quarter of TMCI's fiscal year,
unaudited interim financial statements of TMCI and its Subsidiaries as of
the end of such quarter and of the portion of TMCI's financial year then
elapsed, on a consolidated and consolidating basis, certified by the
principal financial officer of TMCI as prepared in accordance with GAAP
and fairly presenting the consolidated financial position and results of
operations of TMCI and its Subsidiaries for such quarter and period
subject only to changes from audit and year-end adjustments and except
that such statements need not contain notes;
(iii) not later than 30 days after the end of each month hereafter,
including the last month of TMCI's fiscal year, unaudited interim
financial statements of TMCI and its Subsidiaries as of the end of such
month and of the portion of TMCI's financial year then elapsed, on a
Consolidated and consolidating basis, certified by the principal financial
officer of TMCI as prepared in accordance with GAAP and fairly presenting
the Consolidated financial position and results of operations of TMCI and
its Subsidiaries for such month and period subject only to changes from
audit and year-end adjustments and except that such statements need not
contain notes;
(iv) promptly after the sending or filing thereof, as the case may
be, copies of any proxy statements, financial statements or reports which
TMCI has made available to its shareholders and copies of any regular,
periodic and special reports or registration statements which TMCI files
with the Securities and Exchange Commission or any governmental authority
which may be substituted therefor, or any national securities exchange;
(v) promptly after the filing thereof, copies of any annual report
to be filed in compliance with ERISA in connection with each Plan; and
(vi) such other data and information (financial and otherwise) as
Lender, from time to time, may reasonably request, bearing upon or related
to the Collateral or Borrowers' and each of their Subsidiaries' financial
condition or results of operations.
Concurrently with the delivery of the financial statements described in
clause (i) of this subsection 8.1.3, Borrowers shall forward to Lender a copy of
the accountants' letter to Borrowers' management that is prepared in connection
with such financial statements and also shall cause to be prepared and shall
furnish to Lender a certificate of the aforesaid certified public accountants
certifying to Lender that, based upon their examination of the financial
statements of TMCI and its Subsidiaries performed in connection with their
examination of said financial statements, they are not aware of any Default or
Event of Default, or, if they are aware of such Default or Event of Default,
specifying the nature thereof, and acknowledging, in a manner satisfactory to
Lender, that they are aware that Lender is relying on such financial statements
in making its decisions with respect to the Loans. Concurrently with the
delivery of the financial statements described in clauses (i), (ii) and (iii) of
this subsection 8.1.3, or more frequently if requested by Lender, Borrowers
shall cause to be prepared and furnished to Lender a Compliance Certificate in
the form of Exhibit N hereto executed by the Chief Financial Officer of
Borrower.
8.1.4 Landlord and Storage Agreements. Provide Lender with copies of all
agreements between any Borrower or any of its Subsidiaries and any landlord or
warehouseman which owns any premises at which any Inventory may, from time to
time, be kept.
8.1.5 Intentionally Deleted.
8.1.6 Projections. No later than 30 days prior to the end of each fiscal
year of Borrowers, deliver to Lender Projections of Borrowers for the
forthcoming fiscal year, month by month.
8.1.7 Compliance with Laws. Borrowers shall, at all times, comply in all
material respects with all laws, rules, regulations, licenses, permits,
approvals and orders applicable to it and duly observe all requirements of any
Federal, State or local governmental authority, including, without limitation,
ERISA, the Occupational Safety and Hazard Act of 1970, as amended, the Fair
Labor Standards Act of 1938, as amended, and all statutes, rules, regulations,
orders, permits and stipulations relating to environmental pollution and
employee health and safety, including, without limitation, all of the
Environmental Laws.
(a) Borrowers shall establish and maintain, at their expense, a
system to assure and monitor their continued compliance with all
Environmental Laws in all of their operations, which system shall include
annual reviews of such compliance by employees or agents of Borrowers who
are familiar with the requirements of the Environmental Laws. Copies of
all environmental surveys, audits, assessments, feasibility studies and
results of remedial investigations shall be promptly furnished, or caused
to be furnished, by Borrowers to Lender. Borrowers shall take prompt and
appropriate action to respond to any non-compliance with any of the
Environmental Laws and shall regularly report to Lender on such response.
(b) Borrowers shall give both oral and written notice to Lender
immediately upon any Borrower's receipt of any notice of, or any
Borrower's otherwise obtaining knowledge of, (i) the occurrence of any
event involving the release, spill or discharge, threatened or actual, of
any Hazardous Material or (ii) any investigation, proceeding, complaint,
order, directive, claims, citation or notice with respect to: (A) any non-
compliance with or violation of any Environmental Law by any Borrower or
(B) the release, spill or discharge, threatened or actual, of any
Hazardous Material or (C) the generation, use, storage, treatment,
transportation, manufacture, handling, production or disposal of any
Hazardous Materials or (D) any other environmental, health or safety
matter, which affects any Borrower or its business, operations or assets
or any properties at which any Borrower transported, stored or disposed of
any Hazardous Materials.
(c) Without limiting the generality of the foregoing, whenever
Lender reasonably determines that there is non- compliance, or any
condition which requires any action by or on behalf of Borrowers or any of
their Subsidiaries in order to avoid any material non-compliance, with any
Environmental Law, Borrowers shall, at Lender's request and Borrowers'
expense: (i) cause an independent environmental engineer acceptable to
Lender to conduct such tests of the site where any Borrower's or its
Subsidiaries' non-compliance or alleged non-compliance with such
Environmental Laws has occurred as to such non-compliance and prepare and
deliver to Lender a report as to such non- compliance setting forth the
results of such tests, a proposed plan for responding to any environmental
problems described therein, and an estimate of the costs thereof and (ii)
provide to Lender a supplemental report of such engineer whenever the
scope of such non-compliance, or Borrowers' response thereto or the
estimated costs thereof, shall change in any material respect.
(d) Borrowers shall indemnify and hold harmless Lender, its
directors, officers, employees, agents, invitees, representatives,
successors and assigns, from and against any and all losses, claims,
damages, liabilities, costs, and expenses (including attorneys' fees and
legal expenses) directly or indirectly arising out of or attributable to
the use, generation, manufacture, reproduction, storage, release,
threatened release, spill, discharge, disposal or presence of a Hazardous
Material, including, without limitation, the costs of any required or
necessary repair, cleanup or other remedial work with respect to any
property of Borrowers or any of their Subsidiaries and the preparation and
implementation of any closure, remedial or other required plans. All
representations, warranties, covenants and indemnifications in this
Section 9.3 shall survive the payment of the Obligations and the
termination or non-renewal of this Agreement.
8.1.8 Payment of Taxes, Charges. Pay and cause each of its Subsidiaries to
pay and discharge all taxes, assessments and governmental charges or levies
imposed on it or on its income or profits or on any of its Property prior to the
date on which penalties attached thereto, except for any such tax, assessment,
charge or levy the payment of which is being contested in good faith and by
proper proceedings and against which adequate reserves are being maintained in
accordance with GAAP.
8.1.9 Business and Existence. Preserve and not change its business from
the manufacture and sale of metal fabrications, cable assemblies and electronic
components for original equipment manufacturers, preserve and maintain its
separate corporate existence and all rights, privileges, and franchises in
connection therewith, and maintain its qualification and good standing in all
states in which such qualification is necessary in order for Borrowers to
conduct their businesses in such states or in which the failure of a Borrower to
be so qualified would have a material adverse effect on the financial condition,
business or Properties of such Borrower.
8.1.10 Maintain Properties. Maintain its Properties in good
condition and make all necessary renewals, repairs, replacements, additions
and improvements thereto.
8.1.11 ERISA Compliance. (i) At all times make prompt payment of
contributions required to meet the minimum funding standards set forth in ERISA
with respect to each Plan; (ii) furnish to Lender, promptly upon Lender's
request therefor, copies of any annual report required to be filed pursuant to
ERISA in connection with each Plan and any other employee benefit plan of it and
its subject to said Section; (iii) notify Lender as soon as practicable of any
Reportable Event and of any additional act or condition arising in connection
with any Plan which Borrowers believe might constitute grounds for the
termination thereof by the Pension Benefit Guaranty Corporation or for the
appointment by the appropriate United States district court of a trustee to
administer the Plan; and (iv) furnish to Lender, promptly upon Lender's request
therefor, such additional information concerning any Plan or any other such
employee benefit plan.
8.1.12 Mandatory Conversion of Subordinated Debt. If the subordinated
indebtedness of TMCI under the Convertible Subordinated Debenture due 2001 dated
February 10, 1998 has not previously been converted into common stock of TMCI
prior to February 10, 2001, TMCI shall convert such subordinated indebtedness
into common stock on February 15, 2001.
8.1.13 Mandatory Payment Through Stock Delivery. Payments of the
"Shortfall Amount" under that certain Settlement and Release Agreement by and
among Pen Interconnect, Inc., TMCI Electronics, Inc., Touche Electronics, Inc.,
and Rolando Loera dated December 5, 1997 shall be paid through the delivery of
stock only and not in cash.
8.2 Negative Covenants.
During the term of this Agreement, and thereafter for so long as there are
any Obligations to Lender, each Borrower covenants that, unless Lender has first
consented thereto in writing, it will not:
8.2.1 Mergers; Consolidations; Acquisitions. Merge or consolidate, or
permit any Subsidiary of any Borrower to merge or consolidate, with any Person;
nor acquire, nor permit any of its Subsidiaries to acquire, all or any
substantial part of the Properties of any Person. Notwithstanding the foregoing,
TMCI or a Subsidiary of TMCI may acquire substantially all of the assets or all
of the capital stock of First Source, Inc. provided that Borrowers shall (i)
provide to Lender copies of any letter of intent, memorandum of understanding or
offer letters with respect to such acquisitions promptly following the signing
thereof, (ii) provide to Lender copies of all Purchase Documents relating to
such acquisition at least five (5) Business Days prior to the signing thereof,
which Purchase Documents must be satisfactory to Lender, (iii) arrange for
Lender and its representatives to have access to the entity to be acquired and
its books, records and assets and to the Borrowers' due diligence information
and evaluation thereof prior to any closing on such acquisition for the purpose
of conducting a due diligence investigation thereof and to verify that after
giving effect to such acquisition, Borrowers will continue to have sufficient
Availability, as reasonably determined by Lender, (iv) cause the entity to be
acquired or, if a Subsidiary of TMCI that acquires the business thereof, to
become a co-borrower under this Agreement or a guarantor of the Obligations, as
the Lender may determine, and to grant to Lender a first priority perfected Lien
in all of its personal and real Property, tangible and intangible.
8.2.2 Loans. Make, or permit any Subsidiary of any Borrower to make, any
loans or other advances of money (other than for salary, travel advances,
advances against commissions and other similar advances in the ordinary course
of business) to any Person.
8.2.3 Total Indebtedness. Create, incur, assume, or suffer to exist, or
permit any Subsidiary of any Borrower to create, incur or suffer to exist, any
Indebtedness, except:
(i) Obligations owing to Lender;
(ii) Subordinated Debt existing on the date of this Agreement and
Subordinated Debt issued hereafter on terms and conditions approved by
Lender and subject to a Subordination Agreement acceptable to Lender;
(iii) Indebtedness of any Subsidiary of any Borrower to such
Borrower or of any Borrower to another Borrower;
(iv) accounts payable to trade creditors and current operating
expenses (other than for Money Borrowed) which are not aged more than 120
days from billing date or more than 30 days from the due date, in each
case incurred in the ordinary course of business and paid within such time
period, unless the same are being actively contested in good faith and by
appropriate and lawful proceedings, and Borrowers or such Subsidiary shall
have set aside such reserves, if any, with respect thereto as are required
by GAAP and deemed adequate by Borrowers or such Subsidiary and their
independent accountants;
(v) Obligations to pay Rentals permitted by subsection
8.2.13;
(vi) Permitted Purchase Money Indebtedness;
(vii) contingent liabilities arising out of endorsements of checks
and other negotiable instruments for deposit or collection in the ordinary
course of business; and
(viii) Indebtedness not included in paragraphs (i) through (vii)
above which does not exceed at any time, in the aggregate, the sum of
$100,000.00.
8.2.4 Affiliate Transactions. Enter into, or be a party to, or permit any
Subsidiary of any Borrower to enter into or be a party to, any transaction with
any Affiliate of a Borrower or stockholder, except in the ordinary course of and
pursuant to the reasonable requirements of Borrowers' or such Subsidiary's
business and upon fair and reasonable terms which are fully disclosed to Lender
and are no less favorable to Borrowers than would obtain in a comparable arm's
length transaction with a Person not an Affiliate or stockholder of a Borrower
or such Subsidiary.
8.2.5 Limitation on Liens. Create or suffer to exist, or permit any
Subsidiary of any Borrower to create or suffer to exist, any Lien upon any of
its Property, income or profits, including, without limitation, the capital
stock of the Subsidiaries, whether now owned or hereafter acquired, except:
(i) Liens at any time granted in favor of Lender;
(ii) Liens for taxes (excluding any Lien imposed pursuant to any of
the provisions of ERISA) not yet due, or being contested in the manner
described in subsection 7.1.14 hereto, but only if in Lender's judgment
such Lien does not adversely affect Lender's rights or the priority of
Lender's Lien in the Collateral;
(iii) Liens arising in the ordinary course of a Borrower's business
by operation of law or regulation, but only if payment in respect of any
such Lien is not at the time required and such Liens do not, in the
aggregate, materially detract from the value of the Property of such
Borrower or materially impair the use thereof in the operation of
Borrower's business;
(iv) Purchase Money Liens securing Permitted Purchase
Money Indebtedness;
(v) Liens securing Indebtedness of a Borrower's Subsidiaries to such
Borrower or another such Subsidiary;
(vi) such other Liens as appear on Exhibit O hereto; and
(vii) such other Liens as Lender may hereafter approve in writing.
8.2.6 Subordinated Debt. Make, or permit any Subsidiary of any Borrower to
make, any payment of any part or all of any Subordinated Debt or take any other
action or omit to take any other action in respect of any Subordinated Debt,
except for regularly scheduled payments of interest thereon, so long as no
Default or Event of Default exists hereunder.
8.2.7 Distributions . Declare or make, or permit any Subsidiary of
Borrower to declare or make, any Distributions.
8.2.8 Capital Expenditures. Make Capital Expenditures that are not
financed by way of capitalized leases or purchase money financings or as
otherwise permitted hereunder, which, in the aggregate, as to Borrowers and
their Subsidiaries as a group, exceed $750,000.00 during any fiscal year of
Borrower.
8.2.9 Disposition of Assets. Sell, lease or otherwise dispose of any of,
or permit any Subsidiary of any Borrower to sell, lease or otherwise dispose any
of, its Properties, including any disposition of Property as part of a sale and
leaseback transaction, to or in favor of any Person, except (i) sales of
Inventory in the ordinary course of business for so long as no Event of Default
exists hereunder, (ii) a transfer of Property to a Borrower by a Subsidiary of
such Borrower or (iii) dispositions expressly authorized by this Agreement.
8.2.10 Stock of Subsidiaries. Permit any of its Subsidiaries to issue any
additional shares of its capital stock except director's qualifying shares.
8.2.11 Bill-and-Hold Sales, Etc. Make a sale to any customer on a
bill-and-hold, guaranteed sale, sale and return, sale on approval or consignment
basis, or any sale on a repurchase or return basis.
8.2.12 Restricted Investment. Make or have, or permit any
Subsidiary of any Borrower to make or have, any Restricted Investment.
8.2.13 Leases. Become, or permit any of its Subsidiaries to become, a
lessee under any operating lease (other than a lease under which a Borrower or
any of its Subsidiaries is lessor) of Property if the aggregate Rentals payable
during any current or future period of 12 consecutive months under the lease in
question and all other leases under which Borrowers or any of their Subsidiaries
is then lessee would exceed $1,000,000. The term "Rentals" means, as of the date
of determination, all payments which the lessee is required to make by the terms
of any such operating lease.
8.2.14 Tax Consolidation. File or consent to the filing of any
consolidated income tax return with any Person other than a Borrower or a
Subsidiary of a Borrower.
8.2.15 Fiscal Year. Change its fiscal year.
8.3 Specific Financial Covenants.
During the term of this Agreement, and thereafter for so long as there are
any Obligations to Lender, Borrowers covenant that, unless otherwise consented
to by Lender in writing, TMCI shall:
8.3.1 Minimum Adjusted Tangible Net Worth. Maintain at all times a
Consolidated Adjusted Tangible Net worth of not less than the amount shown below
for the period corresponding thereto:
Period Amount
Closing Date through December $3,750,000.00
31,1998
January 1, 1999 through December $4,500,000.00
31, 1999
Each January 1st thereafter The amount for the
through the following December prior year plus
31st $750,000.00
8.3.2 Cash Flow. Achieve Cash Flow for each fiscal period set forth below
of not less than the amount show below for the period corresponding thereto:
Period Amount
Three Months Ended March 31, 1998 $ - 0 Six Months Ended June
30, 1998 $ - 0 Nine Months Ended September 30, $250,000.00 1998
Twelve Months Ended December 31, $500,000.00 1998 Each Fiscal
Quarter Ending $500,000.00 Thereafter For the Prior Four Fiscal
Quarters
SECTION 9. CONDITIONS PRECEDENT
9.1 Conditions to Initial Loans and LC Guaranties.
Notwithstanding any other provision of this Agreement or any of the other
Loan Documents, and without affecting in any manner the rights of Lender under
the other sections of this Agreement, Lender shall not be required to make the
initial Loans and LC Guaranties under this Agreement unless and until each of
the following conditions has been and continues to be satisfied:
9.1.1 Documentation. Lender shall have received, in form and substance
satisfactory to Lender and its counsel, a duly executed copy of this Agreement
and the other Loan Documents, together with such additional documents,
instruments and certificates as Lender and its counsel shall require in
connection therewith from time to time, all in form and substance satisfactory
to Lender and its counsel.
9.1.2 Other Loan Documents. Each of the conditions precedent set forth in
the other Loan Documents shall have been satisfied.
9.1.3 Availability. Lender shall have determined that immediately after
Lender has made the initial Loans and issued the initial Letters of Credit and
LC Guaranties contemplated hereby, and paid all closing costs incurred in
connection with the transactions contemplated hereby, Availability shall not be
less than $2,000,000.00.
9.1.4 No Litigation. No action, proceeding, investigation, regulation or
legislation shall have been instituted, threatened or proposed before any court,
governmental agency or legislative body to enjoin, restrain or prohibit, or to
obtain damages in respect of, or which is related to or arises out of this
Agreement or the consummation of the transactions contemplated hereby.
9.1.5 Acquisitions. The Borrowers shall have furnished to Lender and its
legal counsel complete copies of all Purchase Documents relating to the
Borrowers' proposed acquisitions of Trinity Electronics, Inc. and First Source,
Inc. and such Purchase Documents shall be in form and substance satisfactory to
Lender.
9.1.6 Landlord Waivers. Landlord, warehouseman or other necessary
agreements satisfactory to Lender shall be furnished to Lender for all locations
where Collateral is located that are not owned by Borrower.
9.1.7 Lien Filings. Lender shall have received copies of all filing
receipts or acknowledgments issued to evidence all filings or recordations
necessary to perfect the Liens of Lender in the Collateral in a form acceptable
to Lender to ensure that such Liens constitute first and only priority valid and
perfected Liens.
9.1.8 Insurance. Borrowers shall deliver to Lender certified copies of
Borrowers' casualty insurance policies, together with loss payable endorsements
on Lender's standard form of loss payee endorsement naming Lender as loss payee,
and certified copies of Borrowers' liability insurance policies, together with
endorsements naming Lender as a co-insured.
9.1.9 Subordinated Debt. Borrowers shall have received a cash investment
of Subordinated Debt of not less than $3,000,000.00 and the holders of all
Subordinated Debt issued by any Borrower shall have duly executed and delivered
to Lender a Subordination Agreement in form and substance satisfactory to
Lender.
9.1.10 Solvency. Lender shall have received such certificates and
documents demonstrating the Solvency of each Borrower, including, without
limitation, the Solvency Certificate after giving effect to the transactions
contemplated by this Agreement and the Purchase Documents, as Lender shall find
acceptable, including, without limitation, the pro forma balance sheet,
forecasted financial statements consisting of balance sheets, income statements
and cash flow statements for Borrowers covering at least the three-year period
commencing on the Closing Date, prepared by Borrowers and a fair valuation
balance sheet for Borrower.
9.1.11 No Material Adverse Change. Since September 30, 1997 there shall
not have occurred any material adverse change in the business, financial
condition or results of operations of the Seller or the Borrower, or the
existence or value of any Collateral, or any event, condition or state of facts
which would reasonably be expected materially and adversely to affect the
business, financial condition or results of operations of Borrower.
9.1.12 Pen Electronics Litigation. The litigation between Pen
Electronics, Inc. and TMCI shall have been resolved in a manner satisfactory
to Lender and Pen Electronics, Inc. shall have released its Liens, if any, on
the assets of the Borrowers.
9.1.13 Inventory Testing/Analysis. Lender shall have conducted further
testing and analysis of the Borrowers' Inventory and of the Borrowers'
management information systems and such testing and analysis shall be
satisfactory to Lender.
9.2 Conditions to All Loans and LC Guaranties.
Notwithstanding any other provision of this Agreement or other Loan
Documents and without affecting in any manner the rights of Lender under the
other sections of this Agreement, Lender shall not be required to make any Loan
or LC Guaranty (including the initial Loans and LC Guaranties) unless each of
the following conditions are satisfied:
(a) All representations and warranties contained herein and in the
other Loan Documents shall be true and correct in all respects.
(b) No material adverse change in the business, financial condition,
or results of operations of any Borrower shall have occurred since the
date of Lender's latest audit of Borrowers including, without limitation,
that no material investigation, litigation or other proceedings shall be
pending or threatened against any Borrower.
(c) No Default or Event of Default shall exist.
(d) Lender shall have received such additional documents,
statements, certificates, information and evidence as Lender may request
and all documents and all actions required to be taken on or before the
making of any Loan shall have been taken.
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
10.1 Events of Default.
The occurrence of one or more of the following events shall constitute an
"Event of Default":
10.1.1 Payment of Notes. Borrowers shall fail to pay any installment of
principal, interest or premium, if any, owing on the Term Notes or the Equipment
Note on the due date of such installment.
10.1.2 Payment of Other Obligations. Borrowers shall fail to pay any of
the Obligations that are not evidenced by the Term Notes or the Equipment Note
on the due date thereof (whether due at stated maturity, on demand, upon
acceleration or otherwise).
10.1.3 Misrepresentations. Any representation, warranty or other statement
made or furnished to Lender by or on behalf of any Borrower, any Subsidiary of
any Borrower in this Agreement, any of the other Loan Documents or any
instrument, certificate or financial statement furnished in compliance with or
in reference thereto proves to have been false or misleading in any material
respect when made or furnished or when reaffirmed pursuant to Section 7.2
hereof.
10.1.4 Breach of Specific Covenants. Borrowers shall fail or neglect to
perform, keep or observe any covenant contained in Sections 5.2, 6.1.1, 6.1.2,
6.2.4, 6.2.5, 6.2.6, 8.1.1, 8.1.3, 8.1.12, 8.1.13, 8.2 or 8.3 hereof on the date
that Borrowers are required to perform, keep or observe such covenant.
10.1.5 Breach of Other Covenants. Borrowers shall fail or neglect to
perform, keep or observe any covenant contained in this Agreement (other than a
covenant which is dealt with specifically elsewhere in Section 10.1 hereof) and
the breach of such other covenant is not cured to Lender's satisfaction within
15 days after the sooner to occur of Borrowers' receipt of notice of such breach
from Lender or the date on which such failure or neglect first becomes known to
any officer of any Borrower.
10.1.6 Default Under Security Documents/Other Agreements/Purchase
Documents. Any event of default shall occur under, or Borrowers shall default in
the performance or observance of any term, covenant, condition or agreement
contained in, any of the Security Documents; or the Other Agreements or the
Purchase Documents and such default shall continue beyond any applicable grace
period.
10.1.7 Other Defaults. There shall occur any default or event of default
on the part of any Borrower under any agreement, document or instrument to which
a Borrower is a party or by which a Borrower or any of its Property is bound,
creating or relating to any Indebtedness (other than the Obligations) if the
payment or maturity of such Indebtedness is accelerated in consequence of such
event of default or demand for payment of such Indebtedness is made.
10.1.8 Uninsured Losses. Any material loss, theft, damage or destruction
of any of the Collateral not fully covered (subject to such deductibles as
Lender shall have permitted) by insurance.
10.1.9 Adverse Changes. There shall occur any material adverse
change in the financial condition or business prospects of any Borrower.
10.1.10 Insolvency and Related Proceedings. Any Borrower shall cease to be
Solvent or shall suffer the appointment of a receiver, trustee, custodian or
similar fiduciary, or shall make an assignment for the benefit of creditors, or
any petition for an order for relief shall be filed by or against any Borrower
under the Bankruptcy Code (if against any Borrower, the continuation of such
proceeding for more than 30 days), or any Borrower shall make any offer of
settlement, extension or composition to their respective unsecured creditors
generally.
10.1.11 Business Disruption; Condemnation. There shall occur a cessation
of a substantial part of the business of any Borrower, any Subsidiary of any
Borrower for a period which significantly affects any Borrower's capacity to
continue its business, on a profitable basis; or any Borrower, or any Subsidiary
of Borrower shall suffer the loss or revocation of any license or permit now
held or hereafter acquired by such Borrower which is necessary to the continued
or lawful operation of its business; or any Borrower shall be enjoined,
restrained or in any way prevented by court, governmental or administrative
order from conducting all or any material part of its business affairs; or any
material lease or agreement pursuant to which Borrower or any Guarantor leases,
uses or occupies any Property shall be canceled or terminated prior to the
expiration of its stated term; or any part of the Collateral shall be taken
through condemnation or the value of such Property shall be impaired through
condemnation.
10.1.12 Change of Ownership. A Change in Control shall occur with respect
to TMCI or TMCI shall cease to own and control, beneficially and of record, all
of the issued and outstanding capital stock of each of its Subsidiaries.
10.1.13 ERISA. A Reportable Event shall occur which Lender, in its sole
discretion, shall determine in good faith constitutes grounds for the
termination by the Pension Benefit Guaranty Corporation of any Plan or for the
appointment by the appropriate United States district court of a trustee for any
Plan, or if any Plan shall be terminated or any such trustee shall be requested
or appointed, or if any Borrower, any Subsidiary of any Borrower is in "default"
(as defined in Section 4219(c)(5) of ERISA) with respect to payments to a
Multiemployer Plan resulting from any Borrower's, or such Subsidiary's complete
or partial withdrawal from such Plan.
10.1.14 Challenge to Agreement. Any Borrower, any Subsidiary of Borrower,
or any Affiliate of any of them, shall challenge or contest in any action, suit
or proceeding the validity or enforceability of this Agreement, or any of the
other Loan Documents, the legality or enforceability of any of the Obligations
or the perfection or priority of any Lien granted to Lender.
10.1.15 Intentionally Omitted.
10.1.16 Criminal Forfeiture. Any Borrower, or any Subsidiary of Borrower
shall be criminally indicted or convicted under any law that could lead to a
forfeiture of any Property of Borrower, or any Subsidiary of Borrower.
10.1.17 Judgments. Any money judgment, in an amount in excess of
$50,000.00 for any single judgment or exceeding $100,000.00 in the aggregate or
any writ of attachment or similar process is filed against any Borrower, or any
Subsidiary of Borrower, or any of their respective Property.
10.2 Acceleration of the Obligations.
Without in any way limiting the right of Lender to demand payment of any
portion of the Obligations payable on demand in accordance with Section 3.2
hereof, upon or at any time after the occurrence of an Event of Default, all or
any portion of the Obligations shall, at the option of Lender and without
presentment, demand protest or further notice by Lender, become at once due and
payable and Borrowers shall forthwith pay to Lender, the full amount of such
Obligations, provided, that upon the occurrence of an Event of Default specified
in subsection 10.1.10 hereof, all of the Obligations shall become automatically
due and payable without declaration, notice or demand by Lender.
10.3 Other Remedies.
Upon and after the occurrence of an Event of Default, Lender shall have
and may exercise from time to time the following rights and remedies:
10.3.1 All of the rights and remedies of a secured party under the Code or
under other applicable law, and all other legal and equitable rights to which
Lender may be entitled, all of which rights and remedies shall be cumulative and
shall be in addition to any other rights or remedies contained in this Agreement
or any of the other Loan Documents, and none of which shall be exclusive.
10.3.2 The right to take immediate possession of the Collateral, and to
(i) require Borrowers to assemble the Collateral, at Borrowers' expense, and
make it available to Lender at a place designated by Lender which is reasonably
convenient to both parties, and (ii) enter any premises where any of the
Collateral shall be located and to keep and store the Collateral on said
premises until sold (and if said premises be the Property of Borrowers,
Borrowers agree not to charge Lender for storage thereof).
10.3.3 The right to sell or otherwise dispose of all or any Collateral in
its then condition, or after any further manufacturing or processing thereof, at
public or private sale or sales, with such notice as may be required by law, in
lots or in bulk, for cash or on credit, all as Lender, in its sole discretion,
may deem advisable. Borrowers agree that 10 days written notice to Borrowers of
any public or private sale or other disposition of Collateral shall be
reasonable notice thereof, and such sale shall be at such locations as Lender
may designate in said notice. Lender shall have the right to conduct such sales
on Borrowers' premises, without charge therefor, and such sales may be adjourned
from time to time in accordance with applicable law. Lender shall have the right
to sell, lease or otherwise dispose of the Collateral, or any part thereof, for
cash, credit or any combination thereof, and Lender may purchase all or any part
of the Collateral at public or, if permitted by law, private sale and, in lieu
of actual payment of such purchase price, may set off the amount of such price
against the Obligations. The proceeds realized from the sale of any Collateral
may be applied, after allowing 2 Business Days for collection, first to the
costs, expenses and attorneys' fees incurred by Lender in collecting the
Obligations, in enforcing the rights of Lender under the Loan Documents and in
collecting, retaking, completing, protecting, removing, storing, advertising for
sale, selling and delivering any Collateral, second to the interest due upon any
of the Obligations; and third, to the principal of the Obligations. If any
deficiency shall arise, Borrowers shall remain jointly and severally liable to
Lender therefor.
10.3.4 Lender is hereby granted a license or other right to use, without
charge, Borrowers' labels, patents, copyrights, rights of use of any name, trade
secrets, tradenames, trademarks and advertising matter, or any Property of a
similar nature, as it pertains to the Collateral, in advertising for sale and
selling any Collateral and Borrowers' rights under all licenses and all
franchise agreements shall inure to Lender's benefit.
10.3.5 Lender may, at its option, require Borrowers to deposit with Lender
funds equal to the LC Amount and, if Borrowers fail to promptly make such
deposit, Lender may advance such amount as a Revolving Credit Loan (whether or
not an Overadvance is created thereby). Any such deposit or advance shall be
held by Lender as a reserve to fund future payments on such LC Guaranties and
future drawings against such Letters of Credit. At such time as all LC
Guaranties have been paid or terminated and all Letters of Credit have been
drawn upon or expired, any amounts remaining in such reserve shall be applied
against any outstanding Obligations, or, if all Obligations have been
indefeasibly paid in full in cash, returned to Borrowers.
10.4 Remedies Cumulative; No Waiver.
All covenants, conditions, provisions, warranties, guaranties,
indemnities, and other undertakings of Borrowers contained in this Agreement and
the other Loan Documents, or in any document referred to herein or contained in
any agreement supplementary hereto or in any schedule or in any Guaranty
Agreement given to Lender or contained in any other agreement between Lender and
Borrowers, heretofore, concurrently, or hereafter entered into, shall be deemed
cumulative to and not in derogation or substitution of any of the terms,
covenants, conditions, or agreements of Borrowers herein contained. The failure
or delay of Lender to require strict performance by Borrowers of any provision
of this Agreement or to exercise or enforce any rights, Liens, powers, or
remedies hereunder or under any of the aforesaid agreements or other documents
or security or Collateral shall not operate as a waiver of such performance,
Liens, rights, powers and remedies, but all such requirements, Liens, rights,
powers, and remedies shall continue in full force and effect until all Loans and
all other Obligations owing or to become owing from Borrowers to Lender shall
have been fully satisfied. None of the undertakings, agreements, warranties,
covenants and representations of Borrowers contained in this Agreement or any of
the other Loan Documents and no Event of Default by Borrowers under this
Agreement or any other Loan Documents shall be deemed to have been suspended or
waived by Lender, unless such suspension or waiver is by an instrument in
writing specifying such suspension or waiver and is signed by a duly authorized
representative of Lender and directed to Borrowers.
SECTION 11. MISCELLANEOUS
11.1 Power of Attorney.
Each Borrower hereby irrevocably designates, makes, constitutes and
appoints Lender (and all Persons designated by Lender) as each such Borrower's
true and lawful attorney (and agent-in-fact) and Lender, or Lender's agent, may,
without notice to Borrowers and in either any or all Borrowers' or Lender's
names, but at the cost and expense of Borrowers:
11.1.1 At such time or times as Lender or said agent, in its sole
discretion, may determine, endorse any Borrower's name on any checks, notes,
acceptances, drafts, money orders or any other evidence of payment or proceeds
of the Collateral which come into the possession of Lender or under Lender's
control.
11.1.2 At such time or times upon or after the occurrence of an Event of
Default as Lender or its agent in its sole discretion may determine: (i) demand
payment of the Accounts from the Account Debtors, enforce payment of the
Accounts by legal proceedings or otherwise, and generally exercise all of
Borrowers' rights and remedies with respect to the collection of the Accounts;
(ii) settle, adjust, compromise, discharge or release any of the Accounts or
other Collateral or any legal proceedings brought to collect any of the Accounts
or other Collateral; (iii) sell or assign any of the Accounts and other
Collateral upon such terms, for such amounts and at such time or times as Lender
deems advisable; (iv) take control, in any manner, of any item of payment or
proceeds relating to any Collateral; (v) prepare, file and sign any Borrower's
name to a proof of claim in bankruptcy or similar document against any Account
Debtor or to any notice of lien, assignment or satisfaction of lien or similar
document in connection with any of the Collateral; (vi) receive, open and
dispose of all mail addressed to Borrowers and to notify postal authorities to
change the address for delivery thereof to such address as Lender may designate;
(vii) endorse the name of Borrowers upon any of the items of payment or proceeds
relating to any Collateral and deposit the same to the account of Lender on
account of the Obligations; (viii) endorse the name of Borrowers upon any
chattel paper, document, instrument, invoice, freight bill, bill of lading or
similar document or agreement relating to the Accounts, Inventory and any other
Collateral; (ix) use Borrowers' stationery and sign the name of Borrowers to
verifications of the Accounts and notices thereof to Account Debtors; (x) use
the information recorded on or contained in any data processing equipment and
computer hardware and software relating to the Accounts, Inventory, Equipment
and any other Collateral; (xi) make and adjust claims under policies of
insurance; and (xii) do all other acts and things necessary, in Lender's
determination, to fulfill Borrowers' obligations under this Agreement.
11.2 Indemnity.
Each Borrower hereby agrees to indemnify Lender and hold Lender harmless
from and against any liability, loss, damage, suit, action or proceeding ever
suffered or incurred by Lender (including reasonable attorneys fees and legal
expenses) in connection with or arising out of the transactions under this
Agreement and the other Loan Documents whether as the result of any Borrower's
failure to observe, perform or discharge any Borrower's duties hereunder, the
actions or omissions of any other Person or otherwise, except to the extent that
such is determined by a final and non-appealable judgment or court order to have
arisen from Lender's gross negligence or willful misconduct. In addition and
without limitation of the foregoing, Borrower shall defend Lender against and
save it harmless from all claims of any Person with respect to the Collateral.
Without limiting the generality of the foregoing, these indemnities shall extend
to any claims asserted against Lender by any Person under any Environmental Laws
or similar laws by reason of any Borrower's or any other Person's failure to
comply with laws applicable to solid or hazardous waste materials or other toxic
substances. Notwithstanding any contrary provision in this Agreement, the
obligation of Borrowers under this Section 11.2 shall survive the payment in
full of the Obligations and the termination of this Agreement.
11.3 Modification of Agreement; Sale of Interest.
This Agreement may not be modified, altered or amended, except by an
agreement in writing signed by Borrowers and Lender. Borrowers may not sell,
assign or transfer any interest in this Agreement, any of the other Loan
Documents, or any of the Obligations, or any portion thereof, including, without
limitation, Borrowers' rights, title, interests, remedies, powers, and duties
hereunder or thereunder. Borrowers hereby consent to Lender'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, Lender's rights, title, interests,
remedies, powers, and duties hereunder or thereunder. In the case of an
assignment, the assignee shall have, to the extent of such assignment, the same
rights, benefits and obligations as it would if it were "Lender" hereunder and
Lender shall be relieved of all obligations hereunder upon any such assignments.
Borrowers agree that they will use their best efforts to assist and cooperate
with Lender in any manner reasonably requested by Lender to effect the sale of
participations in or assignments of any of the Loan Documents or any portion
thereof or interest therein, including, without limitation, assisting in the
preparation of appropriate disclosure documents. Borrowers further agree that
Lender may disclose credit information regarding Borrowers and their
Subsidiaries to any potential participant or assignee.
11.4 Severability.
Wherever possible, each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement shall be prohibited by or invalid under applicable
law, such provision shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
11.5 Successors and Assigns.
This Agreement, the Other Agreements and the Security Documents shall be
binding upon and inure to the benefit of the successors and assigns of Borrowers
and Lender permitted under Section 11.3 hereof.
11.6 Cumulative Effect; Conflict of Terms.
The provisions of the Other Agreements and the Security Documents are
hereby made cumulative with the provisions of this Agreement. Except as
otherwise provided in Section 3.2 hereof and except as otherwise provided in any
of the other Loan Documents by specific reference to the applicable provision of
this Agreement, if any provision contained in this Agreement is in direct
conflict with, or inconsistent with, any provision in any of the other Loan
Documents, the provision contained in this Agreement shall govern and control.
11.7 Execution in Counterparts.
This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts taken together shall constitute but one and the same instrument.
11.8 Notice.
Except as otherwise provided herein, all notices, requests and demands to
or upon a party hereto, to be effective, shall be in writing and shall be sent
by certified or registered mail, return receipt requested, by personal delivery
against receipt, by overnight courier or by facsimile and, unless otherwise
expressly provided herein, shall be deemed to have been validly served, given or
delivered immediately when delivered against receipt, one Business Day after
deposit in the mail, postage prepaid, or with an overnight courier or, in the
case of facsimile notice, when sent, addressed as follows:
If to Lender: Fleet Capital Corporation
200 Glastonbury Boulevard
Glastonbury, Connecticut 06033
Attention: Northeast Loan Administrator
Facsimile No.: (860) 657-7759
With a copy to: Brown, Rudnick, Freed & Gesmer
One Financial Center
Boston, Massachusetts 02111
Attention: Jeffery L. Keffer, Esq.
Facsimile No.: (617) 856-8201
If to Borrower: TMCI Electronics, Inc.
Touche Manufacturing, Inc.
Touche Electronics, Inc. and
Enterprise Industries, Inc.
1875 Dobbin Drive
San Jose, California 95133
Attention: Rolando Loera, Chief Executive Officer
Facsimile No.:(408) 272-4621
With a copy to: Rosenblum, Parish & Isaacs
160 West Santa Clara Street, 15th Floor
San Jose, California 95113
Attention: Tom Chaffin, Esq.
Facsimile No.: (408) 280-2801
or to such other address as each party may designate for itself by notice given
in accordance with this Section 11.8; provided, however, that any notice,
request or demand to or upon Lender pursuant to subsection 3.1.1 or 4.2.2 hereof
shall not be effective until received by Lender.
11.9 Intentionally Omitted.
11.10 Joint and Several Liability.
All Loans, Letters of Credit and LC Guaranties made or issued hereunder
are made to or for the benefit of each of the Borrowers. The Borrowers are
jointly and severally, directly and primarily liable for the full and
indefeasible payment when due and performance of all Obligations and for the
prompt and full payment and performance of all of the promises, covenants,
representations, and warranties made or undertaken by each Borrower under this
Agreement and the Loan Documents and Borrowers agree that such liability is
independent of the duties, obligations, and liabilities of each of the joint and
several Borrowers. In furtherance of the foregoing, each Borrower jointly and
severally, absolutely and unconditionally guaranties to Lender and agrees to be
liable for the full and indefeasible payment and performance when due of all the
Obligations. This guarantee is a continuing guarantee, and shall apply to all
Obligations whenever arising.
11.11 Suretyship Waivers and Consents.
(i) Each Borrower acknowledges that the obligations of such Borrower
undertaken herein might be construed to consist, at least in part, of the
guaranty of obligations of persons other than such Borrower (including the
other Borrower) and, in full recognition of that fact, each Borrower
consents and agrees that Lender may, at any time and from time to time,
without notice or demand (except as provided in and in accordance with the
terms of this Agreement), whether before or after any actual or purported
termination, repudiation or revocation of this Agreement by any Borrower,
and without affecting the enforceability or continuing effectiveness
hereof as to each Borrower: (a) increase, extend, or otherwise change the
time for payment or the terms of the Obligations or any part thereof; (b)
supplement, restate, modify, amend, increase, decrease, or waive, or enter
into or give any agreement, approval or consent with respect to, the
Obligations or any part thereof, this Agreement, or any of the Loan
Documents or any additional security or guarantees, or any condition,
covenant, default, remedy, right, representation, or term thereof or
thereunder; (c) accept new or additional instruments, documents, or
agreements in exchange for or relative to any of the loan Documents or the
Obligations or any part thereof; (d) accept partial payments on the
Obligations; (e) receive and hold additional security or guarantees for
the Obligations or any part thereof; (f) release, reconvey, terminate,
waive, abandon, fail to perfect, subordinate, exchange, substitute,
transfer, or enforce any Collateral, security or guarantees, and apply any
Collateral or security and direct the order or manner of sale thereof as
Lender in its sole and absolute discretion may determine; (g) release any
person from any personal liability with respect to the Obligations or any
part thereof; (h) settle, release on terms satisfactory to Lender or by
operation of applicable laws or otherwise liquidate or enforce any
Obligations and any Collateral or security therefor or guaranty thereof in
any manner, consent to the transfer of any Collateral or security and bid
and purchase at any sale; or (i) consent to the merger, change, or any
other restructuring or termination of the corporate or partnership
existence of any Borrower, and correspondingly restructure the
Obligations, and any such merger, change, restructuring, or termination
shall not affect the liability of any Borrower or the continuing
effectiveness hereof, or the enforceability hereof with respect to all or
any part of the Obligations.
(ii) Lender may enforce this Agreement independently as to each
Borrower and independently of any other remedy or security Lender at any
time may have or hold in connection with the Obligations, and it shall not
be necessary for Lender to marshal assets in favor of any Borrower or to
proceed upon or against or exhaust any Collateral or security or remedy
before proceeding to enforce this Agreement. Each Borrower expressly
waives any right to require Lender to marshal assets in favor of any
Borrower or any guarantor of the Obligations or to proceed against any
other Borrower, and agrees that Lender may proceed against Borrowers or
any Collateral in such order as Lender shall determine in its sole and
absolute discretion.
(iii) Lender may file a separate action or actions against any
Borrower, whether such action is brought or prosecuted with respect to any
security or against any guarantor of the Obligations, or whether any other
person is joined in any such action or actions. Each Borrower agrees that
Lender and each Borrower and any affiliate of any Borrower may deal with
each other in connection with the Obligations or otherwise, or alter any
contracts or agreements now or hereafter existing between any of them, in
any manner whatsoever, all without in any way altering or affecting the
continuing enforceability of this Agreement. Each Borrower, as a joint and
several Borrower hereunder, expressly waives the benefit of any statute of
limitations affecting its joint and several liability hereunder or the
enforcement of the Obligations or any rights of Lender created or granted
herein.
(iv) Lender's rights hereunder shall be reinstated and revived, and
the enforceability of this Agreement shall continue, with respect to any
amount at any time paid on account of the Obligations which thereafter
shall be required to be restored or returned by Lender, all as though such
amount had not been paid. The rights of Lender created or granted herein
and the enforceability of this Agreement at all times shall remain
effective to cover the full amount of all the Obligations even though the
Obligations, including any part thereof or any Collateral, other security
or guaranty therefor, may be or hereafter may become invalid or otherwise
unenforceable as against any Borrower and whether or not any Borrower
shall have any personal liability with respect thereto.
(v) Each Borrower expressly waives any and all defenses now or
hereafter arising or asserted by reason of (a) any disability or other
defense of any other Borrower with respect to the Obligations; (b) the
unenforceability or invalidity of any security or guaranty for the
Obligations or the lack of perfection or continuing perfection or failure
of priority of any security for the Obligations; (c) the cessation for any
cause whatsoever of the liability of any Borrower (other than by reason of
the full payment and performance of all Obligations as required herein);
(d) any failure of Lender to marshall assets in favor of any Borrower; (e)
any failure of Lender to give notice to any Borrower of sale or other
disposition of Collateral of another Borrower or any defect in any notice
that may be given in connection with any such sale or disposition of
Collateral of any Borrower securing the Obligations; (f) any failure of
Lender to comply with applicable law in connection with the sale or other
disposition of any Collateral or other security of any Borrower, for any
Obligation, including any failure of Lender to conduct a commercially
reasonable sale or other disposition of any Collateral or other security
of any Borrower for any Obligation; (g) any act or omission of Lender or
others that directly or indirectly results in or aids the discharge or
release of any Borrower or the Obligations of any Borrower or any security
or guaranty therefor by operation of law or otherwise; (h) any law which
provides that the obligation of a surety or guarantor must neither be
larger in amount nor in other respects more burdensome than that of the
principal or which reduces a surety's or guarantor's obligation in
proportion to the principal obligation; (i) any failure of Lender to file
or enforce a claim in any bankruptcy or other proceeding with respect to
any Borrower; (j) the avoidance of any lien or security interest in assets
of any Borrower in favor of Lender for any reason; or (k) any action taken
by Lender that is authorized by this section or any other provision of any
Loan Document. Until such time, if any, as all of the Obligations have
been indefeasibly paid and performed in full and no portion of any
commitment of Lender to Borrowers under any Loan Document remains in
effect, each Borrowers' indebtedness, claims and rights of subrogation,
contribution, reimbursement, or indemnity against the other Borrowers
shall be fully and completely subordinated to the indefeasible repayment
in full of the Obligations, and each Borrower expressly waives until such
indefeasible payment any right to enforce any remedy that it now has or
hereafter may have against any other Person and waives the benefit of, or
any right to participate in, any Collateral now or hereafter held by
Lender.
(vi) To the fullest extent permitted by applicable law, each
Borrower expressly waives and agrees not to assert, any and all defenses
in its favor based upon an election of remedies by Lender which destroys,
diminishes, or affects such Borrower's subrogation rights against the
other Borrowers, or against any Guarantor, and/or (except as explicitly
provided for herein) any rights to proceed against each other Borrower, or
any other party liable to Lender, for reimbursement, contribution,
indemnity, or otherwise.
(vii) Borrowers and each of them warrant and agree that each of the
waivers and consents set forth herein are made after consultation with
legal counsel and with full knowledge of their significance and
consequences, with the understanding that events giving rise to any
defense or right waived may diminish, destroy, or otherwise adversely
affect rights which Borrowers otherwise may have against each other,
Lender, or others, or against Collateral, and that, under the
circumstances, the waivers and consents herein given are reasonable and
not contrary to public policy or law. If any of the waivers or consents
herein are determined to be contrary to any applicable law or public
policy, such waivers and consents shall be effective to the maximum extent
permitted by law.
11.12 Contribution Agreement.
As an inducement to Lender to enter into the Loan Documents and to make
the loans and extend credit to the Borrowers, each Borrower agrees to indemnify
and hold the other harmless from and each shall have a continuing right of
contribution against the other Borrowers, if and to the extent that a Borrower
makes or is caused to make payments or contributions (from dispositions of its
assets or otherwise) to the repayment and satisfaction of the Obligations in
excess of the aggregate amount of Loan proceeds actually received and used by
such Borrower in its business (such excess amount being referred to as an
"Accommodation Payment"). If an Accommodation Payment is made by a Borrower then
the other Borrowers (such Borrowers being referred to as "Contributing
Borrowers") shall be obligated to make contribution to such Borrower (the
"Paying Borrower") in an amount equal to (A) the product derived by multiplying
the sum of each Accommodation Payment of each Borrower by the Allocable
Percentage of the Borrowers from whom contribution is sought less (B) the
amount, if any, of the then outstanding Accommodation Payment of the
Contributing Borrowers (such last mentioned amount which is to be subtracted
from the aforesaid product to be increased by any amounts theretofore paid by
Contributing Borrowers by way of contribution hereunder, and to be decreased by
any amounts theretofore received by such Contributing Borrowers by way of
contribution hereunder); provided, however, that a Paying Borrower's recovery of
contribution hereunder from the other Borrowers shall be limited to that amount
paid by the Paying Borrower in excess of its Allocable Percentage of all
Accommodation Payments then outstanding of all Borrowers. As used herein, the
term "Allocable Percentage" shall mean, on any date of determination thereof, a
fraction the denominator of which shall be equal to the number of Borrowers who
are parties to this Agreement on such date and the numerator of which shall be
1; provided, however, that such percentages shall be modified in the event that
contribution from a Borrower is not possible by reason of insolvency, bankruptcy
or otherwise by reducing such Borrower's Allocable Percentage equitably and by
adjusting the Allocable Percentage of the other Borrowers proportionately so
that the Allocable Percentages of all Borrowers at all times equals 100%. These
indemnification and contribution obligations shall be unconditional and
continuing obligations of the Borrowers and shall not be waived, rescinded,
modified, limited or terminated in any way whatsoever without the prior written
consent of Lender, in its sole discretion. These indemnification and
contribution obligations are subordinated to the prior indefeasible payment in
full in immediately available funds of all Obligations.
11.13 Credit Inquiries.
Borrowers hereby authorize and permit Lender to respond to usual and
customary credit inquiries from third parties concerning Borrower or any of its
Subsidiaries.
11.14 Time of Essence.
Time is of the essence of this Agreement, the Other Agreements and the
Security Documents.
11.15 Entire Agreement.
This Agreement and the other Loan Documents, together with all other
instruments, agreements and certificates executed by the parties in connection
therewith or with reference thereto, embody the entire understanding and
agreement between the parties hereto and thereto with respect to the subject
matter hereof and thereof and supersede all prior agreements, understandings and
inducements, whether express or implied, oral or written.
11.16 Interpretation.
No provision of this Agreement or any of the other Loan Documents shall be
construed against or interpreted to the disadvantage of any party hereto by any
court or other governmental or judicial authority by reason of such party having
or being deemed to have structured or dictated such provision.
11.17 GOVERNING LAW; CONSENT TO FORUM.
THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED AT AND SHALL BE
DEEMED TO HAVE BEEN MADE IN GLASTONBURY, CONNECTICUT. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CONNECTICUT: PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL BE LOCATED
IN ANY JURISDICTION OTHER THAN CONNECTICUT, THE LAWS OF SUCH JURISDICTION SHALL
GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF LENDER'S LIEN UPON
SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER REMEDIES IN RESPECT OF
SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH JURISDICTION ARE DIFFERENT
FROM OR INCONSISTENT WITH THE LAWS OF CONNECTICUT. AS PART OF THE CONSIDERATION
FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT OR FUTURE DOMICILE OR
PRINCIPAL PLACE OF BUSINESS OF ANY BORROWER OR LENDER, EACH BORROWER HEREBY
CONSENTS AND AGREES THAT THE STATE OF CONNECTICUT SUPERIOR COURT JURIDICAL
DISTRICT OF HARTFORD/NEW BRITAIN AT HARTFORD, CONNECTICUT, OR, AT LENDER'S
OPTION, THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF CONNECTICUT,
HARTFORD DIVISION, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY
CLAIMS OR DISPUTES BETWEEN BORROWERS AND LENDER PERTAINING TO THIS AGREEMENT OR
TO ANY MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. BORROWERS EXPRESSLY
SUBMIT AND CONSENT IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND BORROWERS HEREBY WAIVE ANY OBJECTION WHICH
BORROWERS MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR
FORUM NON CONVENIENS AND HEREBY CONSENT TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. BORROWERS HEREBY WAIVE
PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN ANY SUCH
ACTION OR SUIT AND AGREE THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND OTHER
PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO BORROWERS AT
THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE SHALL BE DEEMED
COMPLETED UPON THE EARLIER OF ANY BORROWER'S ACTUAL RECEIPT THEREOF OR 3 DAYS
AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID. NOTHING IN THIS
AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF LENDER TO SERVE
LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO PRECLUDE THE
ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH FORUM OR THE
TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY OTHER
APPROPRIATE FORUM OR JURISDICTION.
11.18 WAIVERS BY BORROWERS.
EACH BORROWER WAIVES (i) THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY
ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING
OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE
COLLATERAL: (ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT,
PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT,
EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS,
DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER
ON WHICH ANY BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND CONFIRMS
WHATEVER LENDER MAY DO IN THIS REGARD; (iii) NOTICE PRIOR TO TAKING POSSESSION
OR CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY
ANY COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (iv)
THE BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; AND (v) NOTICE OF
ACCEPTANCE HEREOF. EACH BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A
MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS
RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWERS. EACH
BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH
ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
11.19 PREJUDGEMENT REMEDY WAIVER; COMMERCIAL TRANSACTION.
EACH BORROWER HEREBY WAIVES RIGHTS AS IT MAY HAVE TO NOTICE AND/OR HEARING
UNDER ANY APPLICABLE FEDERAL OR STATE LAWS INCLUDING, WITHOUT LIMITATION,
CONNECTICUT GENERAL STATUTES SECTION 52-278A, ET SEQ. AS AMENDED, PERTAINING TO
THE EXERCISE BY LENDER OF SUCH RIGHTS AS THE LENDER MAY HAVE, INCLUDING, BUT NOT
LIMITED TO, THE RIGHT TO SEEK PREJUDGEMENT REMEDIES AND/OR DEPRIVE BORROWERS OF
OR AFFECT THE USE OF OR POSSESSION OR ENJOYMENT OF ANY BORROWER'S PROPERTY PRIOR
TO THE RENDITION OF A FINAL JUDGMENT AGAINST ANY BORROWER. EACH BORROWER FURTHER
WAIVES ANY RIGHT IT MAY HAVE TO REQUIRE LENDER TO PROVIDE A BOND OR OTHER
SECURITY AS A PRECONDITION TO OR IN CONNECTION WITH ANY PREJUDGMENT REMEDY
SOUGHT BY AGENT AND LENDER, AND WAIVE ANY OBJECTION TO THE ISSUANCE OF SUCH
PREJUDGMENT REMEDY BASED ON ANY OFFSETS, CLAIMS, DEFENSES OR COUNTERCLAIMS TO
ANY ACTION BROUGHT BY ANY LENDER. EACH BORROWER HEREBY REPRESENTS, COVENANTS AND
AGREES THAT THE PROCEEDS OF THE LOANS EVIDENCED BY THIS AGREEMENT SHALL BE USED
FOR GENERAL COMMERCIAL PURPOSES AND THAT SUCH LOANS CONSTITUTE A "COMMERCIAL
TRANSACTION" AS DEFINED BY THE STATUTES OF THE STATE OF CONNECTICUT.
<PAGE>
IN WITNESS WHEREOF, this Agreement has been duly executed as an instrument
under seal on the day and year specified at the beginning of this Agreement.
ATTEST: TMCI ELECTRONICS, INC.
("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Name_________________________________
Title__________________________________
[CORPORATE SEAL]
ATTEST: TOUCHE MANUFACTURING COMPANY, INC.
("Borrower")
By ______________________________________
______________________________ Name_________________________________
Secretary/Assistant Secretary Title _________________________________
ATTEST: TOUCHE ELECTRONICS, INC.
("Borrower")
By ______________________________________
______________________________ Name_________________________________
Secretary/Assistant Secretary Title _________________________________
ATTEST: ENTERPRISE INDUSTRIES, INC.
("Borrower")
By ______________________________________
______________________________ Name_________________________________
Secretary/Assistant Secretary Title _________________________________
ATTEST: TRINITY ELECTRONICS, INC.
("Borrower")
By ______________________________________
______________________________ Name_________________________________
Secretary/Assistant Secretary Title _________________________________
Accepted in Glastonbury, Connecticut
FLEET CAPITAL CORPORATION
(Lender)
By ______________________________________
Robert M. Dailey,
Vice President
<PAGE>
-14-
APPENDIX A
GENERAL DEFINITIONS
When used in the Loan and Security Agreement dated as of March 2, 1998, by
and between Fleet Capital Corporation and TMCI, Inc., Touche Manufacturing
Company, Inc., Touche Electronics, Inc., Enterprise Industries, Inc. and Trinity
Electronics, Inc. the following terms shall have the following meanings (terms
defined in the singular to have the same meaning when used in the plural and
vice versa):
Account Debtor - any Person who is or may become obligated under or on
account of an Account.
Accounts - all accounts, contract rights, chattel paper, instruments and
documents, whether now owned or hereafter created or acquired by a Borrower or
in which a Borrower now has or hereafter acquired any interest.
Adjusted Net Earnings From Operations - with respect to any fiscal period,
means the net earnings (or loss) after provision for income taxes for such
fiscal period of Borrower, as reflected on the financial statement of Borrowers
supplied to Lender pursuant to subsection 8.1.3 of the Agreement, but excluding:
any gain or loss arising from the sale of capital
assets;
any gain arising from any write-up of assets;
earnings of any Subsidiary of any Borrower accrued
prior to the date it became a Subsidiary;
earnings of any corporation, substantially all the
assets of which have been acquired in any manner by any Borrower,
realized by such corporation prior to the date of such acquisition;
net earnings of any business entity (other than a
Subsidiary of a Borrower) in which any Borrower has an ownership
interest unless such net earnings shall have actually been received by
a Borrower in the form of cash distributions;
any portion of the net earnings of any Subsidiary of
a Borrower which for any reason is unavailable for payment of
dividends to any Borrower;
the earnings of any Person to which any assets of any
Borrower shall have been sold, transferred of disposed of, or into
which a Borrower shall have merged, or been a party to any
consolidation or other form of reorganization, prior to the date of
such transaction;
any gain arising from the acquisition of any
Securities of any Borrower; and
any gain arising from extraordinary or non-recurring
items.
Adjusted Tangible Assets - all assets except: (i) any surplus resulting
from any write-up of assets subsequent to December 31, 1996; (ii) deferred
assets, other than prepaid insurance and prepaid taxes; (iii) patents,
copyrights, trademarks, trade names, non-compete agreements, franchises and
other similar intangibles; (iv) goodwill, including any amounts, however
designated on a Consolidated balance sheet of a Person or its Subsidiaries,
representing the excess of the purchase price paid for assets or stock over the
value assigned thereto on the books of such Person; (v) Restricted Investments;
(vi) unamortized debt discount and expense; (vii) assets located and notes and
receivables due from obligors outside of the United States of America; and
(viii) Accounts, notes and other receivables due from Affiliates or employees.
Adjusted Tangible Net Worth - at any date means a sum equal to:
the net book value (after deducting related
depreciation, obsolescence, amortization, valuation, and other proper
reserves) at which the Adjusted Tangible Assets of a Person would be
shown on a balance sheet at such date in accordance with GAAP, minus
the amount at which such Person's liabilities
(other than capital stock and surplus) would be shown on such balance
sheet in accordance with GAAP, and including as liabilities all
reserves for contingencies and other potential liabilities.
Affiliate - a Person (other than a Subsidiary): (i) which directly or
indirectly through one or more intermediaries controls, or is controlled by, or
is under common control with, a Person; (ii) which beneficially owns or holds 5%
or more of any class of the Voting Stock of a Person; or (iii) 5% or more of the
Voting Stock (or in the case of a Person which is not a corporation, 5% or more
of the equity interest) of which is beneficially owned or held by a Person or a
Subsidiary of a Person.
Agreement - the Loan and Security Agreement referred to in the first
sentence of this Appendix A, all Exhibits thereto and this Appendix A.
Availability - the amount of money which Borrowers are entitled to borrow
from time to time as Revolving Credit Loans, such amount being the difference
derived when the sum of the principal amount of Revolving Credit Loans then
outstanding (including any amounts which Lender may have paid for the account of
Borrowers pursuant to any of the Loan Documents and which have not been
reimbursed by Borrowers) and the LC Amount is subtracted from the Borrowing
Base. If the amount outstanding is equal to or greater than the Borrowing Base,
Availability is 0.
Average Loan Balance - for any month, the amount obtained by adding the
unpaid balance of the Revolving Credit Loans, Term Loans, Equipment Loans and LC
Amounts at the end of each day for each day during the applicable month and by
dividing such sum by the number of the days in such month.
Bank - Fleet National Bank.
Borrowing Base - as at any date of determination thereof, an amount equal
to the lesser of:
$25,000,000 minus the unpaid principal balances of
the Term Loans and the Equipment Loans at such date; or
an amount equal to:
(a) 85% of the net amount of Eligible Accounts
outstanding at such date;
PLUS
(b) the lesser of (1) $6,000,000 or (2) 55%, of the
value of Eligible Inventory at such date calculated on the basis of the
lower of cost or market with the cost of raw materials and finished
goods calculated on a first-in, first-out basis.
For purposes hereof, the net amount of Eligible Accounts
at any time shall be the face amount of such Eligible Accounts less any
and all returns, rebates, discounts (which may, at Lender's option, be
calculated on shortest terms), credits, allowances or excise taxes of
any nature at any time issued, owing, claimed by Account Debtors,
granted, outstanding or payable in connection with such Accounts at
such time.
Business Day - any day excluding Saturday, Sunday and any day which is a
legal holiday under the laws of the State of Connecticut or the State of
California or is a day on which banking institutions located in either of such
states are closed.
Capital Expenditures - expenditures made or liabilities incurred for the
acquisition of any fixed assets or improvements, replacements, substitutions or
additions thereto which have a useful life of more than one year, including the
total principal portion of Capitalized Lease Obligations.
Capitalized Lease Obligation - any Indebtedness represented by obligations
under a lease that is required to be capitalized for financial reporting
purposes in accordance with GAAP.
Cash Flow - for any period, means TMCI's Consolidated (i) Adjusted Net
Earnings from Operations for such period, plus (ii) depreciation and
amortization expenses for such period, less (iii) unfinanced Capital
Expenditures for such period, less (iv) current maturities and prepayments of
long term Indebtedness that occur during such period and less (v) all
Distributions made during such period, all as determined in accordance with
GAAP.
Change in Control - shall be deemed to have occurred at such time as (i) a
"person" or "group" (within the meaning of Section 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934), becomes the beneficial owner (as defined in
Rule 13d-3 under the Securities Exchange Act of 1934), directly or indirectly,
of more than fifty (50%) percent of the total voting power of all classes of
stock the outstanding of TMCI entitled to vote in the election of directors, or
(ii) a change in the Board of Directors of TMCI occurs in which individuals who
constituted the Board of Directors at the beginning of the two-year period
immediately preceding such change (together with any other director whose
nomination for election by the shareholders of TMCI was approved by a vote of at
least two-thirds of the directors at the beginning of such period or whose
nomination and election was previously so approved) cease for any reason to
constitute a majority of the directors then in office.
Closing Date - the date on which all of the conditions precedent in
Section 9 of the Agreement are satisfied and the initial Loan is made or the
initial Letter of Credit or LC Guaranty is issued under the Agreement.
Code - the Uniform Commercial Code as adopted and in force in the State of
Connecticut, as from time to time in effect.
Collateral - all of the Property and interests in Property described in
Section 5 of the Agreement, and all other Property and interests in Property
that now or hereafter secure the payment and performance of any of the
Obligations.
Consolidated - the consolidation in accordance with GAAP of the accounts
or other items as to which such term applies.
Current Assets - at any date means the amount at which all of the current
assets of a Person would be properly classified as current assets shown on a
balance sheet at such date in accordance with GAAP, except that amounts due from
Affiliates and investments in Affiliates shall be excluded therefrom.
Current Liabilities - at any date means the amount at which all of the
current liabilities of a Person would be properly classified as current
liabilities on a balance sheet at such date in accordance with GAAP, excluding
the Loans and current maturities of any long-term Indebtedness.
Default - an event or condition the occurrence of which would, with the
lapse of time or the giving of notice, or both, become an Event of Default.
Default Rate - as defined in subsection 2.1.2 of the Agreement.
Distribution - in respect of any corporation means and includes: (i) the
payment of any dividends or other distributions on capital stock of the
corporation (except distributions in such stock) and (ii) the redemption or
acquisition of Securities unless made contemporaneously from the net proceeds of
the sale of Securities.
Dominion Account - a special account of Lender established by Borrowers
pursuant to the Agreement at a bank selected by Borrowers, but acceptable to
Lender in its reasonable discretion, and over which Lender shall have sole and
exclusive access and control for withdrawal purposes.
EBIT - with respect to any fiscal period, the sum of TMCI's Consolidated
net earnings (or loss) before interest expense and taxes for said period as
determined in accordance with GAAP.
Eligible Account - an Account arising in the ordinary course of a
Borrower's business from the sale of goods or rendition of services which
Lender, in its reasonable credit judgment, deems to be an Eligible Account.
Without limiting the generality of the foregoing, no Account shall be an
Eligible Account if:
it arises out of a sale made by a Borrower to a
Borrower or a Subsidiary or an Affiliate of a Borrower or to a
Person controlled by an Affiliate of a Borrower; or
it is unpaid for more than 60 days after the
original due date shown on the invoice; or
it is due or unpaid more than 90 days after the
original invoice date; or
50% or more of the Accounts from the Account Debtor are
not deemed Eligible Accounts hereunder; or
the total unpaid Accounts of the Account Debtor exceed
20% of the net amount of all Eligible Accounts (or, in the case of LAM
Research, 30% of the net amount of all Eligible Accounts), to the
extent of such excess; or
any covenant, representation or warranty contained
in the Agreement with respect to such Account has been breached; or
the Account Debtor is also a Borrower's creditor or
supplier, or the Account Debtor has disputed liability with respect to
such Account, or the Account Debtor has made any claim with respect to
any other Account due from such Account Debtor to Borrower, or the
Account otherwise is or may become subject to any right of setoff by
the Account Debtor; or
the Account Debtor has commenced a voluntary case under
the federal bankruptcy laws, as now constituted or hereafter amended,
or made an assignment for the benefit of creditors, or a decree or
order for relief has been entered by a court having jurisdiction in the
premises in respect of the Account Debtor in an involuntary case under
the federal bankruptcy laws, as now constituted or hereafter amended,
or any other petition or other application for relief under the federal
bankruptcy laws has been filed against the Account Debtor, or if the
Account Debtor has failed, suspended business, ceased to be Solvent, or
consented to or suffered a receiver, trustee, liquidator or custodian
to be appointed for it or for all or a significant portion of its
assets or affairs; or
it arises from a sale to an Account Debtor outside the
United States, unless the sale is on letter of credit, guaranty or
acceptance terms, in each case acceptable to Lender in its sole
discretion; or
it arises from a sale to the Account Debtor on a
bill-and-hold, guaranteed sale, sale-or-return, sale-on-approval,
consignment or any other repurchase or return basis; or
the Account Debtor is the United States of America or
any department, agency or instrumentality thereof, unless the Borrower
that generated such Account assigns its right to payment of such
Account to Lender, in a manner satisfactory to Lender, so as to comply
with the Assignment of Claims Act of 1940 (31 U.S.C. ss.203 et seq., as
amended); or
the Account is subject to a Lien other than a
Permitted Lien; or
the goods giving rise to such Account have not been
delivered to and accepted by the Account Debtor or the services giving
rise to such Account have not been performed by the Borrower that
generated such Account and accepted by the Account Debtor or the
Account otherwise does not represent a final sale; or
the Account is evidenced by chattel paper or an
instrument of any kind, or has been reduced to judgment; or
Any Borrower has made any agreement with the Account
Debtor for any deduction therefrom, except for discounts or allowances
which are made in the ordinary course of business for prompt payment
and which discounts or allowances are reflected in the calculation of
the face value of each invoice related to such Account; or
Any Borrower has made an agreement with the Account
Debtor to extend the time of payment thereof.
Eligible Equipment - shall mean Equipment acquired by a Borrower after the
date hereof, which is in new and unused condition, located at Borrowers'
premises and reasonably acceptable to Lender for lending purposes. In
determining such acceptability Lender may, but need not, rely on reports
furnished to Lender by Borrowers, but reliance thereon by Lender from time to
time shall not be deemed to limit Lender's right to revise standards of
eligibility at any time. Without limiting the generality of the foregoing,
Eligibility Equipment shall not include (a) Equipment at the premises of third
parties or subject to a security interest or lien in favor of any third parties,
(b) Equipment which is not subject to Lender's perfected security interest, (c)
fixtures, (d) defective Equipment (e) Equipment not used or usable in the
ordinary course of a Borrower's business as presently conducted; provided,
however, any Equipment which would otherwise be deemed Eligible Equipment at
locations which are not owned and operated by Borrower may nevertheless be
considered Eligible Equipment if Lender shall have received an agreement in
writing, in form and substance satisfactory to Lender, from the owner and/or
operator of such location, as the case may be, pursuant to which such owner
and/or operator, if required by Lender: (I) acknowledges the first priority lien
of Lender on such Equipment, (ii) agrees to waive any and all claims such owner
and/or operator may, at any time, have against such Equipment and (iii) grants
to Lender the right to enter and remain on the premises in order to exercise
Lender's rights and remedies on terms acceptable to Lender. Any Equipment which
Lender determines to be ineligible or unacceptable for lending purposes shall
nevertheless be and remain at all times part of the Collateral.
Eligible Equipment Cost - shall mean the price paid by a Borrower for
Eligible Equipment, including software that is an integral part thereof and that
is sold as part of the purchase price and not an add-on, but excluding any and
all "soft costs", as reasonably determined by Lender, including, without
limitation, shipping, engineering, labor, installation, setup, testing and other
software costs and expenses and further excluding all commissions, fees and
sales, excise and other taxes.
Eligible Inventory - such Inventory of Borrowers (other than packaging
materials and supplies) which Lender, in its reasonable credit judgment, deems
to be Eligible Inventory. Without limiting the generality of the foregoing, no
Inventory shall be Eligible Inventory if:
it is not raw materials or finished goods that is,
in Lender's opinion, readily marketable in its current form; or
it is not in good, new and saleable condition; or
it is slow-moving, obsolete or unmerchantable; or
it does not meet all standards imposed by any
governmental agency or authority; or
it does not conform in all respects to the
warranties and representations set forth in the Agreement,
it is not at all times subject to Lender's duly
perfected, first priority security interest and no other Lien except a
Permitted Lien; or
it is not situated at a location in compliance with
the Agreement or is in transit.
Environmental Claim shall mean, with respect to any Person, any written or
oral notice, claim, demand or other communication (collectively, a "claim") by
any other Person alleging or asserting such Person's liability for investigatory
costs, cleanup costs, governmental response costs, damages to natural resources
or other Property, personal injuries, fines or penalties arising out of, based
on or resulting from (a) the presence, or Release into the environment, of any
Hazardous Material at any location, whether or not owned by such Person, or (b)
circumstances forming the basis of any violation, or alleged violation, of any
Environmental Law. The term "Environmental Claim" shall include, without
limitation, any claim by any governmental authority for enforcement, cleanup,
removal, response, remedial or other actions or damages pursuant to any
applicable Environmental Law, and any claim by any third party seeking damages,
contribution, indemnification, cost recovery, compensation or injunctive relief
resulting from the presence of Hazardous Materials or arising from alleged
injury or threat of injury to the environment.
Environmental Laws shall mean any and all present and future Federal,
state, local and foreign laws, rules or regulations, and any orders or decrees,
in each case as now or hereafter in effect, relating to the regulation or
protection of the environment or to emissions, discharges, releases or
threatened releases of pollutants, contaminants or toxic or hazardous substances
or wastes into the indoor or outdoor environment, including, without limitation,
ambient air, soil, surface water, ground water, wetlands, land or subsurface
strata, or otherwise relating to the manufacture, processing, distribution, use,
treatment, storage, disposal, transport or handling of pollutants, contaminants
or toxic or hazardous substances or wastes.
Equipment - all machinery, apparatus, equipment, fittings, furniture,
fixtures, motor vehicles and other tangible personal Property (other than
Inventory) of every kind and description used in Borrower's operations or owned
by Borrower or in which Borrower has an interest, whether now owned or hereafter
acquired by Borrower and wherever located, and all parts, accessories and
special tools and all increases and accessions thereto and substitutions and
replacements therefor.
Equipment Loans - the Loans to be made by Lender to Borrowers pursuant to
subsection 1.2.2 of the Agreement.
Equipment Note - the Equipment Promissory Note to be executed by Borrowers
in favor of Lender as provided in Section 2.2(B) of the Agreement, which shall
be in the form of Exhibit A-3 to the Agreement.
ERISA - the Employee Retirement Income Security Act of 1974, as amended,
and all rules and regulations from time to time promulgated thereunder.
Event of Default - as defined in Section 10.1 of the Agreement.
GAAP - generally accepted account principles in the United States of
America in effect from time to time.
General Intangibles - all personal property of each Borrower (including
things in action) other than goods, Accounts, chattel paper, documents,
instruments and money, whether now owned or hereafter created or acquired by any
Borrower.
Indebtedness - as applied to a Person means, without duplication
all items which in accordance with GAAP would be
included in determining total liabilities as shown on the liability
side of a balance sheet of such Person as at the date as of which
Indebtedness is to be determined, including, without limitation,
Capitalized Lease Obligations,
all obligations of other Persons which such Person
has guaranteed,
all reimbursement obligations in connection with
letters of credit or letter of credit guaranties issued for the
account of such Person, and
in the case of Borrower (without duplication), the
Obligations.
Hazardous Material shall mean, collectively, (a) any petroleum or
petroleum products, explosives, radioactive materials, asbestos, urea
formaldehyde foam insulation, and transformers or other equipment that contain
polychlorinated biphenyls ("PCB's") in concentrations that are regulated under
the Toxic Substances Control Act, as amended, or any other Environmental Law,
(b) any chemicals or other materials or substances that are now or hereafter
become defined as or included in the definition of "hazardous substances",
"hazardous wastes", "hazardous materials", "extremely hazardous wastes",
"restricted hazardous wastes", "toxic substances", "toxic pollutants",
"contaminants", "pollutants" or words of similar import under any Environmental
Law and (c) any other chemical or other material or substance, exposure to which
is now or hereafter prohibited, limited or regulated under any Environmental
Law.
Inventory - all of each Borrower's inventory, whether now owned or
hereafter acquired including, but not limited to, all goods intended for sale or
lease by Borrower, or for display or demonstration; all work in process; all raw
materials and other materials and supplies of every nature and description used
or which might be used in connection with the manufacture, printing, packing,
shipping, advertising, selling, leasing or furnishing of such goods or otherwise
used or consumed in Borrower's business; and all documents evidencing and
General Intangibles relating to any of the foregoing, whether now owned or
hereafter acquired by Borrower.
Investment Property - all investment property, financial assets,
certificated and uncertificated securities, securities accounts, securities
entitlements, commodities contracts and commodities accounts of the Borrowers,
whether now owned or hereafter acquired or created by Borrowers.
LC Amount - at any time, the aggregate undrawn face amount of all Letters
of Credit and LC Guaranties then outstanding.
LC Guaranty - any guaranty pursuant to which Lender or any Affiliate of
Lender shall guaranty the payment or performance by a Borrower of its
reimbursement obligation under any letter of credit.
Letter of Credit - any letter of credit issued by Lender or any of
Lender's Affiliates for the account of Borrower.
LIBOR Loans - any portion of the Revolving Credit Loans, the Term Loan or
Equipment Loans on which Borrowers elect pursuant to Section 3.1.1 of this
Agreement, to pay interest during the LIBOR Interest Period applicable thereto
at a fixed rate of interest based on the LIBOR Rate.
LIBOR Interest Period - with respect to each LIBOR Loan, the period
commencing on (and including) the date that such LIBOR Loan is made and ending
on (but excluding) the numerically corresponding date in the first, second,
third or sixth month thereafter, as Borrowers may elect in the applicable
request for such LIBOR Loan, provided that:
(i) any LIBOR Interest Period (other than a LIBOR Interest period
determined pursuant to paragraph (iii) below) which would otherwise end on a day
which is not a Business Day shall be extended to the next succeeding Business
Day unless such Business Day falls in another calendar month, in which case such
LIBOR Interest period shall end on the next preceding Business Day.
(ii) any LIBOR Interest Period which begins on the last Business Day of a
calendar month (or on a day for which there is no numerically corresponding day
in the appropriate subsequent calendar month, in which case such LIBOR Interest
period shall end on the next preceding Business Day of the appropriate
subsequent calendar month, and
(iii) any LIBOR Interest Period which begins before the last day of the
Original Term or any Renewal Term, as applicable, and would otherwise end after
the last day of the Original Term or such Renewal Term shall end on the last day
of the Original Term or such Renewal Term.
LIBOR Rate - with respect to any LIBOR Interest Period, the rate per annum
determined by Lender on the basis of the offered rate for deposits in United
States dollars in the London Interbank Market of an amount equal to or
comparable to the amount of the LIBOR Loan to which such LIBOR Interest Period
relates offered for a term comparable to such LIBOR Interest Period as of 1:00
p.m. Boston, Massachusetts time two (2) Business Days period to the first day
for such LIBOR Interest Period. The LIBOR Rate shall be adjusted to the next
higher 1/8th of 1 percent equal to the quotient of (a) the rate set forth in the
previous sentence, divided by (b) a number equal to 1.00 minus the aggregate of
the rates (expressed as a decimal) of the reserve requirements current on the
day that it is two Business Days prior to the beginning of the LIBOR Interest
Period under any regulation promulgated by the Board of Governor of the Federal
Reserve System (or any other governmental authority having jurisdiction over
Lender) as in effect from time to time, dealing with reserve requirements
prescribed for LIBOR funding including any reserve requirements with respect to
"Eurocurrency" liabilities having a term approximately equal to or comparable
with the LIBOR Interest Period under Regulation D of the Board of Governors of
the Federal Reserve System.
Lien - any interest in Property securing an obligation owed to, or a claim
by, a Person other than the owner of the Property, whether such interest is
based on common law, statute or contract. The term "Lien" shall also include
reservations, exceptions, encroachments, easements, rights-of-way, covenants,
conditions, restrictions, leases and other title exceptions and encumbrances
affecting Property. For the purpose of the Agreement, Borrower shall be deemed
to be the owner of any Property which it has acquired or holds subject to a
conditional sale agreement or other arrangement pursuant to which title to the
Property has been retained by or vested in some other Person for security
purposes.
Loan Account - the loan account established on the books of Lender
pursuant to Section 3.6 of the Agreement.
Loan Documents - the Agreement, the Other Agreements and the Security
Documents.
Loans - all loans and advances of any kind made by Lender pursuant to the
Agreement.
Money Borrowed - means (i) Indebtedness arising from the lending of money
by any Person to a Borrower; (ii) Indebtedness, whether or not in any such case
arising from the lending by any Person of money to a Borrower, (A) which is
represented by notes payable or drafts accepted that evidence extensions of
credit, (B) which constitutes obligations evidenced by bonds, debentures, notes
or similar instruments, or (C) upon which interest charges are customarily paid
(other than accounts payable) or that was issued or assumed as full or partial
payment for Property; (iii) Indebtedness that constitutes a Capitalized Lease
Obligation; (iv) reimbursement obligations with respect to letters of credit or
guaranties of letters of credit and (v) Indebtedness of a Borrower under any
guaranty of obligations that would constitute Indebtedness for Money Borrowed
under clauses (i) through (iii) hereof, if owed directly by a Borrower.
Multiemployer Plan - has the meaning set forth in Section 4001(a)(3) of
-------------------
ERISA.
Obligations - all Loans and all other advances, debts, liabilities,
obligations, covenants and duties, together with all interest, fees and other
charges thereon, owing, arising, due or payable from any and all Borrowers to
Lender of any kind or nature, present or future, whether or not evidenced by any
note, guaranty or other instrument, whether arising under the Agreement or any
of the other Loan Documents or otherwise whether direct or indirect (including
those acquired by assignment), absolute or contingent, primary or secondary, due
or to become due, now existing or hereafter arising and however acquired.
Original Term - as defined in Section 4.1 of the Agreement.
Other Agreements - any and all agreements, instruments and documents
(other than the Agreement and the Security Documents), heretofore, now or
hereafter executed by Borrower, any Subsidiary of Borrower or any other third
party and delivered to Lender in respect of the transactions contemplated by the
Agreement.
Overadvance - the amount, if any, by which the outstanding principal
amount of Revolving Credit Loans plus the LC Amount exceeds the Borrowing Base.
Permitted Liens - any Lien of a kind specified in subsection 8.2.5 of the
Agreement.
Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of
Borrowers incurred after the date hereof which is secured by a Purchase Money
Lien and which, when aggregated with the principal amount of all other such
Indebtedness and Capitalized Lease Obligations of Borrowers at the time
outstanding, does not exceed $1,800,000. For the purposes of this definition,
the principal amount of any Purchase Money Indebtedness consisting of
capitalized leases shall be computed as a Capitalized Lease Obligation.
Person - an individual, partnership, corporation, limited liability
company, joint stock company, land trust, business trust, or unincorporated
organization, or a government or agency or political subdivision thereof.
Plan - an employee benefit plan now or hereafter maintained for employees
of Borrower that is covered by Title IV of ERISA.
Projections - Borrowers' forecasted Consolidated and consolidating (a)
balance sheets, (b) profit and loss statements, (c) cash flow statements, and
(d) capitalization statements, all prepared on a consistent basis with
Borrowers' historical financial statements, together with appropriate supporting
details and a statement of underlying assumptions.
Prime Rate - the rate of interest announced or quoted by Bank from time to
time as its prime rate for commercial loans, whether or not such rate is the
lowest rate charged by Bank to its most preferred borrowers; and, if such prime
rate for commercial loans is discontinued by Bank as a standard, a comparable
reference rate designated by Bank as a substitute therefor shall be the Prime
Rate.
Property - any interest in any kind of property or asset, whether real,
personal or mixed, or tangible or intangible.
Purchase Documents - the agreements, documents and instruments relating
to the acquisitions of Trinity Electronics, Inc., First Sources, Inc. and
D.C. Electronics, Inc.
Purchase Money Indebtedness - means and includes (i) Indebtedness (other
than the Obligations) for the payment of all or any part of the purchase price
of any fixed assets, (ii) any Indebtedness (other than the Obligations) incurred
at the time of or within 10 days prior to or after the acquisition of any fixed
assets for the purpose of financing all or any part of the purchase price
thereof, and (iii) any renewals, extensions or refinancings thereof, but not any
increases in the principal amounts thereof outstanding at the time.
Purchase Money Lien - a Lien upon fixed assets which secures Purchase
Money Indebtedness, but only if such Lien shall at all times be confined solely
to the fixed assets the purchase price of which was financed through the
incurrence of the Purchase Money Indebtedness secured by such Lien.
Release shall mean any release, spill, emission, leaking, pumping,
injection, deposit, disposal, discharge, dispersal, leaching or migration into
the indoor or outdoor environment, including, without limitation, the movement
of Hazardous Materials through ambient air, soil, surface water, ground water,
wetlands, land or subsurface strata.
Rentals - as defined in subsection 8.2.12 of the Agreement.
Renewal Terms - as defined in Section 4.1 of the Agreement.
Reportable Event - any of the events set forth in Section 4043(b) of
-----------------
ERISA.
Restricted Investment - any investment made in cash or by delivery of
Property to any Person, whether by acquisition of stock, Indebtedness or other
obligation or Security, or by loan, advance or capital contribution, or
otherwise, or in any Property except the following:
investments in one or more Subsidiaries of Borrowers
to the extent existing on the Closing Date;
Property to be used in the ordinary course of
business;
Current Assets arising from the sale of goods and
services in the ordinary course of business of Borrowers and their
Subsidiaries;
investments in direct obligations of the United States
of America, or any agency thereof or obligations guaranteed by the
United States of America, provided that such obligations mature within
one year from the date of acquisition thereof;
investments in certificates of deposit maturing within
one year from the date of acquisition issued by a bank or trust company
organized under the laws of the United States or any state thereof
having capital surplus and undivided profits aggregating at least
$100,000,000; and
investments in commercial paper given the highest
rating by a national credit rating agency and maturing not more than
270 days from the date of creation thereof.
Revolving Credit Loan - a Loan made by Lender as provided in Section
-----------------------
2.1 of the Agreement.
Schedule of Accounts - as defined in subsection 6.4.1 of the Agreement.
Security - shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.
Security Documents - the Pledge and Security Agreement, Patent Security
Agreement, Trademark Security Agreement and all other instruments and agreements
now or at any time hereafter securing the whole or any part of the Obligations.
Solvent - as to any Person, such Person (i) owns Property whose fair
saleable value is greater than the amount required to pay all of such Person's
Indebtedness (including contingent debts), (ii) is able to pay all of its
Indebtedness as such Indebtedness matures and (iii) has capital sufficient to
carry on its business and transactions and all business and transactions in
which it is about to engage.
Subordinated Debt - Indebtedness of Borrower that is subordinated to the
Obligations in a manner satisfactory to Lender.
Subordination Agreement - a Subordination Agreement to entered into among
Borrower, Lender and the holders of Subordinated Debt in form and substance
satisfactory to Lender.
Subsidiary - any corporation of which a Person owns, directly or
indirectly through one or more intermediaries, more than 50% of the Voting Stock
at the time of determination.
Term Loan - A - the loan described in Section 1.2.1 of the Agreement.
Term Loan - B - the Loan described in subsection 1.2.2 of the Agreement.
Term Notes- the Secured Promissory Notes to be executed by Borrower on or
about the Closing Date in favor of Lender to evidence the Term Loans, which
shall be in the form of Exhibit A-1 and Exhibit A-2 to the Agreement.
Total Credit Facility - $25,000,000.
Voting Stock - Securities of any class or classes of a corporation the
holders of which are ordinarily, in the absence of contingencies, entitled to
elect a majority of the corporate directors (or Persons performing similar
functions).
Working Capital - at any date means Current Assets minus Current
Liabilities.
Other Terms. All other terms contained in the Agreement shall have, when
the context so indicates, the meanings provided for by the Code to the extent
the same are used or defined therein.
Certain Matters of Construction. The terms "herein", "hereof" and
"hereunder" and other words of similar import refer to the Agreement as a whole
and not to any particular section, paragraph or subdivision. Any pronoun used
shall be deemed to cover all genders. The section titles, table of contents and
list of exhibits appear as a matter of convenience only and shall not affect the
interpretation of the Agreement. All references to statutes and related
regulations shall include any amendments of same and any successor statutes and
regulations. All references to any of the Loan Documents shall include any and
all modifications thereto and any and all extensions or renewals thereof.
<PAGE>
LIST OF EXHIBITS
Exhibit A-1 Term Note - A
Exhibit A-2 Term Note - B
Exhibit A-2 Equipment Note
Exhibit B Borrower's and each Subsidiary's Business Locations
Exhibit C Jurisdictions in which Borrower and each Subsidiary is
Authorized to do Business
Exhibit D Capital Structure of Borrower
Exhibit E Corporate Names
Exhibit F Tax Identification Numbers of Subsidiaries
Exhibit G Patents, Trademarks, Copyrights and Licenses
Exhibit H Contracts Restricting Borrower's Right to Incur Debts
Exhibit I Litigation
Exhibit J Capitalized Leases
Exhibit K Operating Leases
Exhibit L Pension Plans
Exhibit M Labor Contracts
Exhibit N Compliance Certificate
Exhibit O Permitted Liens
Exhibit P Environmental
Exhibit Q Broker's Fee
Exhibit R Options
<PAGE>
A-3
SECURED PROMISSORY NOTE-A
$4,700,000.00
March 2, 1998
Glastonbury, Connecticut
FOR VALUE RECEIVED, each of the undersigned (hereinafter collectively, the
"Borrowers"), hereby jointly and severally promises to pay to the order of FLEET
CAPITAL CORPORATION, a Rhode Island corporation (hereinafter "Lender"), in such
coin or currency of the United States which shall be legal tender in payment of
all debts and dues, public and private, at the time of payment, the principal
sum of $4,700,000.00, together with interest from and after the date hereof on
the unpaid principal balance outstanding at a variable rate per annum equal to
.50% above the Prime Rate.
This Secured Promissory Note (the "Note") is the Term Note-A referred to
in, and is issued pursuant to, that certain Loan and Security Agreement between
Borrowers and Lender dated the date hereof (hereinafter, as amended from time to
time, the "Loan Agreement"), and is entitled to all of the benefits and security
of the Loan Agreement. All of the terms, covenants and conditions of the Loan
Agreement and the Security Documents are hereby made a part of this Note and are
deemed incorporated herein in full. All capitalized terms used herein, unless
otherwise specifically defined in this Note, shall have the meanings ascribed to
them in the Loan Agreement.
The rate of interest in effect hereunder shall increase or decrease by an
amount equal to any increase or decrease in the Prime Rate, effective as of the
opening of business on the date that any such change in the Prime Rate occurs.
Interest shall be computed in the manner provided in Section 2 of the Loan
Agreement. The interest rate margin of .50% above the Prime Rate is subject to
reduction in the manner provided in Section 2.1.4 of the Loan Agreement and,
under the circumstances set forth in Section 2.1.5 of the Loan Agreement all, or
a portion, of the outstanding principal amount of this Note may bear interest
based upon the LIBOR Rate.
For so long as no Event of Default shall have occurred the principal
amount and accrued interest of this Note shall be due and payable on the dates
and in the manner hereinafter set forth:
Interest shall be due and payable monthly, in
arrears, on the first day of each month, commencing on April 1, 1998, and
continuing until such time as the full principal balance, together with all
other amounts owing hereunder, shall have been paid in full;
Principal shall be due and payable monthly
commencing on April 1, 1998, and continuing on the first day of each month
thereafter to and including the first day of March, 2003, in installments of
$55,952.38 each; and
The entire remaining principal amount then
outstanding, together with any and all other amounts due hereunder, shall be due
and payable on March 2, 2003.
Notwithstanding the foregoing, the entire unpaid principal balance and accrued
interest on this Note shall be due and payable immediately upon any termination
of the Loan Agreement pursuant to Section 4 thereof.
This Note shall be subject to mandatory prepayment in accordance with the
provisions of Section 3.3 of the Loan Agreement. Borrowers may also terminate
the Loan Agreement and, in connection with such termination, prepay this Note in
the manner provided in Section 4 of the Loan Agreement.
Upon the occurrence of an Event of Default, Lender shall have all of the
rights and remedies set forth in Section 10 of the Loan Agreement.
Borrowers shall pay a late payment fee equal to 5% of the amount of any
installment of principal or interest, or both, required hereunder which is
received by Lender more than 10 days after the due date thereof.
Time is of the essence of this Note. To the fullest extent permitted by
applicable law, Borrowers, for themselves and their legal representatives,
successors and assigns, expressly waives presentment, demand, protest, notice of
dishonor, notice of non-payment, notice of maturity, notice of protest,
presentment for the purpose of accelerating maturity, diligence in collection,
and the benefit of any exemption or insolvency laws.
Wherever possible, each provision of this Note shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Note shall be prohibited or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or remaining provisions of
this Note. No delay or failure on the part of Lender in the exercise of any
right or remedy hereunder shall operate as a waiver thereof, nor as an
acquiescence in any default, nor shall any single or partial exercise by Lender
of any right or remedy preclude any other right or remedy. Lender, at its
option, may enforce its rights against any collateral securing this Note without
enforcing its rights against Borrowers, any guarantor of the indebtedness
evidenced hereby or any other property or indebtedness due or to become due to
Borrowers. Borrowers agree that, without releasing or impairing Borrower's
liability hereunder, Lender may at any time release, surrender, substitute or
exchange any collateral securing this Note and may at any time release any party
primarily or secondarily liable for the indebtedness evidenced by this Note.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of Connecticut.
EACH BORROWER HEREBY WAIVES RIGHTS AS IT MAY HAVE TO NOTICE AND/OR HEARING
UNDER ANY APPLICABLE FEDERAL OR STATE LAWS INCLUDING, WITHOUT LIMITATION,
CONNECTICUT GENERAL STATUTES SECTION 52-278A, ET SEQ. AS AMENDED, PERTAINING TO
THE EXERCISE BY LENDER OF SUCH RIGHTS AS THE LENDER MAY HAVE, INCLUDING, BUT NOT
LIMITED TO, THE RIGHT TO SEEK PREJUDGEMENT REMEDIES AND/OR DEPRIVE BORROWERS OF
OR AFFECT THE USE OF OR POSSESSION OR ENJOYMENT OF ANY BORROWER'S PROPERTY PRIOR
TO THE RENDITION OF A FINAL JUDGMENT AGAINST ANY BORROWER. EACH BORROWER FURTHER
WAIVES ANY RIGHT IT MAY HAVE TO REQUIRE LENDER TO PROVIDE A BOND OR OTHER
SECURITY AS A PRECONDITION TO OR IN CONNECTION WITH ANY PREJUDGMENT REMEDY
SOUGHT BY AGENT AND LENDER, AND WAIVE ANY OBJECTION TO THE ISSUANCE OF SUCH
PREJUDGMENT REMEDY BASED ON ANY OFFSETS, CLAIMS, DEFENSES OR COUNTERCLAIMS TO
ANY ACTION BROUGHT BY ANY LENDER. EACH BORROWER HEREBY REPRESENTS, COVENANTS AND
AGREES THAT THE PROCEEDS OF THE LOANS EVIDENCED BY THIS AGREEMENT SHALL BE USED
FOR GENERAL COMMERCIAL PURPOSES AND THAT SUCH LOANS CONSTITUTE A "COMMERCIAL
TRANSACTION" AS DEFINED BY THE STATUTES OF THE STATE OF CONNECTICUT.
IN WITNESS WHEREOF, Borrowers have caused this Note to be duly executed
and delivered for acceptance by Lender in Glastonbury, Connecticut on the date
first above written.
ATTEST: TMCI ELECTRONICS, INC.,
a Delaware corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: TOUCHE MANUFACTURING COMPANY, INC.
a California corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: TOUCHE ELECTRONICS, INC.,
a California corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: ENTERPRISE INDUSTRIES, INC.,
a California corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: TRINITY ELECTRONICS, INC.,
a California corporation ("Borrower")
By_____________________________________
______________________________ Name_________________________________
Secretary/Assistant Secretary Title _________________________________
<PAGE>
B-3
SECURED PROMISSORY NOTE-B
$2,000,000.00 March 2, 1998
Glastonbury, Connecticut
FOR VALUE RECEIVED, each of the undersigned (hereinafter collectively, the
"Borrowers"), hereby jointly and severally promises to pay to the order of FLEET
CAPITAL CORPORATION, a Rhode Island corporation (hereinafter "Lender"), in such
coin or currency of the United States which shall be legal tender in payment of
all debts and dues, public and private, at the time of payment, the principal
sum of $2,000,000.00, together with interest from and after the date hereof on
the unpaid principal balance outstanding at a variable rate per annum equal to
1.50% above the Prime Rate.
This Secured Promissory Note (the "Note") is the Term Note-B referred to
in, and is issued pursuant to, that certain Loan and Security Agreement between
Borrowers and Lender dated the date hereof (hereinafter, as amended from time to
time, the "Loan Agreement"), and is entitled to all of the benefits and security
of the Loan Agreement. All of the terms, covenants and conditions of the Loan
Agreement and the Security Documents are hereby made a part of this Note and are
deemed incorporated herein in full. All capitalized terms used herein, unless
otherwise specifically defined in this Note, shall have the meanings ascribed to
them in the Loan Agreement. The interest rate margin of 1.50% above the Prime
Rate is subject to reduction in the manner provided in Section 2.1.4 of the Loan
Agreement and, under the circumstances set forth in Section 2.1.5 of the Loan
Agreement all, or a portion, of the outstanding principal amount of this Note
may bear interest based upon the LIBOR Rate.
The rate of interest in effect hereunder shall increase or decrease by an
amount equal to any increase or decrease in the Prime Rate, effective as of the
opening of business on the date that any such change in the Prime Rate occurs.
Interest shall be computed in the manner provided in Section 2 of the Loan
Agreement.
For so long as no Event of Default shall have occurred the principal
amount and accrued interest of this Note shall be due and payable on the dates
and in the manner hereinafter set forth:
Interest shall be due and payable monthly, in
arrears, on the first day of each month, commencing on April 1, 1998, and
continuing until such time as the full principal balance, together with all
other amounts owing hereunder, shall have been paid in full;
Principal shall be due and payable monthly
commencing on April 1, 1998, and continuing on the first day of each month
thereafter to and including the first day of March, 2003, in installments of
$33,333.33 each; and
The entire remaining principal amount then
outstanding, together with any and all other amounts due hereunder, shall be due
and payable on March 2, 2003 .
Notwithstanding the foregoing, the entire unpaid principal balance and accrued
interest on this Note shall be due and payable immediately upon any termination
of the Loan Agreement pursuant to Section 4 thereof.
This Note shall be subject to mandatory prepayment in accordance with the
provisions of Section 3.3 of the Loan Agreement. Borrowers may also terminate
the Loan Agreement and, in connection with such termination, prepay this Note in
the manner provided in Section 4 of the Loan Agreement.
Upon the occurrence of an Event of Default, Lender shall have all of the
rights and remedies set forth in Section 10 of the Loan Agreement.
Borrowers shall pay a late payment fee equal to 5% of the amount of any
installment of principal or interest, or both, required hereunder which is
received by Lender more than 10 days after the due date thereof.
Time is of the essence of this Note. To the fullest extent permitted by
applicable law, Borrowers, for themselves and their legal representatives,
successors and assigns, expressly waives presentment, demand, protest, notice of
dishonor, notice of non-payment, notice of maturity, notice of protest,
presentment for the purpose of accelerating maturity, diligence in collection,
and the benefit of any exemption or insolvency laws.
Wherever possible, each provision of this Note shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Note shall be prohibited or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or remaining provisions of
this Note. No delay or failure on the part of Lender in the exercise of any
right or remedy hereunder shall operate as a waiver thereof, nor as an
acquiescence in any default, nor shall any single or partial exercise by Lender
of any right or remedy preclude any other right or remedy. Lender, at its
option, may enforce its rights against any collateral securing this Note without
enforcing its rights against Borrowers, any guarantor of the indebtedness
evidenced hereby or any other property or indebtedness due or to become due to
Borrowers. Borrowers agrees that, without releasing or impairing Borrowers'
liability hereunder, Lender may at any time release, surrender, substitute or
exchange any collateral securing this Note and may at any time release any party
primarily or secondarily liable for the indebtedness evidenced by this Note.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of Connecticut.
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and
delivered for acceptance by Lender in Glastonbury, Connecticut on the date first
above written.
ATTEST: TMCI ELECTRONICS, INC.,
a Delaware corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: TOUCHE MANUFACTURING COMPANY, INC.,
a California corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: TOUCHE ELECTRONICS, INC.,
a California corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: ENTERPRISE INDUSTRIES, INC.
a California corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: TRINITY ELECTRONICS, INC.,
a California corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
<PAGE>
A-3
SECURED PROMISSORY NOTE
$4,000,000.00 March 2, 1998
Glastonbury, Connecticut
FOR VALUE RECEIVED, each of the undersigned (hereinafter collectively the
"Borrowers"), hereby jointly and severally promises to pay to the order of FLEET
CAPITAL CORPORATION, a Rhode Island corporation (hereinafter "Lender"), in such
coin or currency of the United States which shall be legal tender in payment of
all debts and dues, public and private, at the time of payment, the principal
sum of $4,000,000.00 or such amount as may be advanced from time to time to
Borrowers as Equipment Loans under the Loan Agreement (as hereinafter defined),
together with interest from and after the date hereof on the unpaid principal
balance outstanding at a variable rate per annum equal to .50% above the Prime
Rate.
This Secured Promissory Note (the "Note") is the Equipment Note referred
to in, and is issued pursuant to, that certain Loan and Security Agreement
between Borrowers and Lender dated the date hereof (hereinafter, as amended from
time to time, the "Loan Agreement"), and is entitled to all of the benefits and
security of the Loan Agreement. All of the terms, covenants and conditions of
the Loan Agreement and the Security Documents are hereby made a part of this
Note and are deemed incorporated herein in full. All capitalized terms used
herein, unless otherwise specifically defined in this Note, shall have the
meanings ascribed to them in the Loan Agreement. The interest rate margin of
.50% above the Prime Rate is subject to reduction in the manner provided in
Section 2.1.4 of the Loan Agreement and, under the circumstances set forth in
Section 2.1.5 of the Loan Agreement all, or a portion, of the outstanding
principal amount of this Note may bear interest based upon the LIBOR Rate.
The rate of interest in effect hereunder shall increase or decrease by an
amount equal to any increase or decrease in the Prime Rate, effective as of the
opening of business on the date that any such change in the Prime Rate occurs.
Interest shall be computed in the manner provided in Section 2 of the Loan
Agreement.
For so long as no Event of Default shall have occurred the principal
amount and accrued interest of this Note shall be due and payable on the dates
and in the manner hereinafter set forth:
Interest shall be due and payable monthly, in
arrears, on the first day of each month, commencing on April 1, 1998, and
continuing until such time as the full principal balance, together with all
other amounts owing hereunder, shall have been paid in full;
Principal shall be due and payable monthly
commencing on April 1, 1998, and continuing on the first day of each month
thereafter to and including the first day of March, 2003, in installments equal
to 1/84th of the aggregate amount theretofore advanced to Borrowers as Equipment
Leases; and
The entire remaining principal amount then
outstanding, together with any and all other amounts due hereunder, shall be due
and payable on March 2, 2003.
Notwithstanding the foregoing, the entire unpaid principal balance and accrued
interest on this Note shall be due and payable immediately upon any termination
of the Loan Agreement pursuant to Section 4 thereof.
This Note shall be subject to mandatory prepayment in accordance with the
provisions of Section 3.3 of the Loan Agreement. Borrowers may also terminate
the Loan Agreement and, in connection with such termination, prepay this Note in
the manner provided in Section 4 of the Loan Agreement.
Upon the occurrence of an Event of Default, Lender shall have all of the
rights and remedies set forth in Section 10 of the Loan Agreement.
Borrowers shall pay a late payment fee equal to 5% of the amount of any
installment of principal or interest, or both, required hereunder which is
received by Lender more than 10 days after the due date thereof.
Time is of the essence of this Note. To the fullest extent permitted by
applicable law, Borrowers, for themselves and their legal representatives,
successors and assigns, expressly waives presentment, demand, protest, notice of
dishonor, notice of non-payment, notice of maturity, notice of protest,
presentment for the purpose of accelerating maturity, diligence in collection,
and the benefit of any exemption or insolvency laws.
Wherever possible, each provision of this Note shall be interpreted in
such manner as to be effective and valid under applicable law, but if any
provision of this Note shall be prohibited or invalid under applicable law, such
provision shall be ineffective to the extent of such prohibition or invalidity
without invalidating the remainder of such provision or remaining provisions of
this Note. No delay or failure on the part of Lender in the exercise of any
right or remedy hereunder shall operate as a waiver thereof, nor as an
acquiescence in any default, nor shall any single or partial exercise by Lender
of any right or remedy preclude any other right or remedy. Lender, at its
option, may enforce its rights against any collateral securing this Note without
enforcing its rights against Borrowers, any guarantor of the indebtedness
evidenced hereby or any other property or indebtedness due or to become due to
Borrowers. Borrowers agree that, without releasing or impairing Borrower's
liability hereunder, Lender may at any time release, surrender, substitute or
exchange any collateral securing this Note and may at any time release any party
primarily or secondarily liable for the indebtedness evidenced by this Note.
This Note shall be governed by, and construed and enforced in accordance
with, the laws of the State of Connecticut.
<PAGE>
IN WITNESS WHEREOF, Borrower has caused this Note to be duly executed and
delivered and accepted in Glastonbury, Connecticut on the date first above
written.
ATTEST: TMCI ELECTRONICS, INC.,
a Delaware corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: TOUCHE MANUFACTURING COMPANY, INC.,
a California corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: TOUCHE ELECTRONICS, INC.,
a California corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: ENTERPRISE INDUSTRIES, INC.,
a California corporation ("Borrower")
______________________________ By________________________________________
Secretary/Assistant Secretary Title_____________________________________
ATTEST: TRINITY ELECTRONICS, INC.,
a California corporation ("Borrower")
By________________________________________
Secretary/Assistant Secretary Title_____________________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and the consolidated statement of operations and is
qualified in its entirety by reference to such statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> Dec-31-1997
<PERIOD-END> Dec-31-1997
<CASH> 312,682
<SECURITIES> 0
<RECEIVABLES> 3,950,341
<ALLOWANCES> 0
<INVENTORY> 9,721,050
<CURRENT-ASSETS> 14,389,729
<PP&E> 6,583,260
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,743,146
<CURRENT-LIABILITIES> 11,275,942
<BONDS> 0
0
0
<COMMON> 4,057
<OTHER-SE> 13,295,090
<TOTAL-LIABILITY-AND-EQUITY> 28,743,146
<SALES> 38,946,666
<TOTAL-REVENUES> 38,946,666
<CGS> 28,756,048
<TOTAL-COSTS> 8,138,114
<OTHER-EXPENSES> (367,822)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 598,376
<INCOME-PRETAX> 1,821,950
<INCOME-TAX> 685,764
<INCOME-CONTINUING> 1,136,186
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,136,186
<EPS-PRIMARY> 0.31
<EPS-DILUTED> 0.28
</TABLE>
