<PAGE>
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _______________ to ______________
Commission File No. 333-3621
CHANNELL COMMERCIAL CORPORATION
(Exact name of Registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation or organization)
95-2453261
(I.R.S. Employer Identification No.)
26040 Ynez Road, Temecula, California
(Address of principal executive offices)
92591
(Zip Code)
(909) 694-9160
(Registrant's telephone number, including area code)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
------ -----
9,237,000 shares of common stock of the Registrant were outstanding at
June 30, 1997.
<PAGE>
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(amounts in thousands, except per share data)
<TABLE>
<CAPTION>
Six months ended Three months ended
June 30 June 30
------- ------- ------- -------
1997 1996 1997 1996
------- ------- ------- -------
<S> <C> <C> <C> <C>
Net sales $28,468 $23,240 $15,664 $12,961
Cost of goods sold 16,320 12,713 8,659 6,975
------- ------- ------- -------
Gross profit 12,148 10,527 7,005 5,986
Commission income 336 510 188 280
------- ------- ------- -------
12,484 11,037 7,193 6,266
Operating expenses
Selling 3,571 3,441 1,818 1,888
General and administrative 2,248 795 1,038 425
License fees -- related party -- 531 -- --
Research and development 473 267 238 139
------- ------- ------- -------
6,292 5,034 3,094 2,452
------- ------- ------- -------
Income from operations 6,192 6,003 4,099 3,814
Interest (expense) income 501 128 202 63
------- ------- ------- -------
Income before income taxes 6,693 5,875 4,301 3,751
Income taxes 2,744 220 1,763 98
------- ------- ------- -------
Net income $ 3,949 $ 5,655 $ 2,538 $ 3,653
======= ======= ======= =======
Net income per share $ 0.43 $ 0.28
======= =======
Weighted average shares outstanding 9,237 9,237
======= =======
PRO FORMA INFORMATION:
Historical income before income
taxes $ 5,875 $ 3,751
Pro forma income taxes 2,409 1,564
------- -------
Pro forma net income $3,466 $ 2,187
====== =======
Pro forma net income per share $ 0.45 $ 0.28
====== =======
Pro forma weighted average shares
outstanding 7,695 7,695
====== =======
</TABLE>
Page 1 of 12
<PAGE>
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
(amounts in thousands, except share and per share data)
<TABLE>
<CAPTION>
Unaudited
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash $ 6,362 $ 9,190
Investments 11,406 11,406
Accounts receivable (net) 9,363 6,685
Inventories 5,775 2,908
Deferred income taxes 363 321
Prepaid expenses 499 764
------- -------
Total current assets 33,768 31,274
PROPERTY AND EQUIPMENT AT COST, NET 10,651 10,608
DEFERRED INCOME TAXES 519 559
GOODWILL 1,037 --
OTHER ASSETS 408 217
------- -------
TOTAL ASSETS $46,383 $42,658
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 2,413 $ 2,048
Current maturities of capital lease obligations 161 135
Accrued expenses 1,609 1,167
Income taxes payable 149 1,548
------- -------
Total current liabilities 4,332 4,898
------- -------
NOTE PAYABLE 400 --
------- -------
CAPITAL LEASE OBLIGATIONS 278 338
------- -------
COMMITMENTS -- --
STOCKHOLDERS' EQUITY
Preferred stock -- --
Common stock, par value $.01 per share, authorized --
19,000,000 shares; issued and outstanding --
9,237,000 shares 92 92
Additional paid-in capital 27,991 27,991
Retained earnings 13,290 9,339
------- -------
TOTAL STOCKHOLDERS' EQUITY 41,373 37,422
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $46,383 $42,658
======= =======
</TABLE>
Page 2 of 12
<PAGE>
CHANNELL COMMERCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(amounts in thousands)
<TABLE>
<CAPTION>
Six months ended
June 30,
---------------------------
1997 1996
------------- -------------
<S> <C> <C>
OPERATING ACTIVITIES:
Net income $ 3,949 $ 5,655
Non-cash items included in net income:
Depreciation and amortization 1,007 804
(Increase) decrease in assets:
Accounts receivable (1,443) (2,659)
Inventories (1,343) (31)
Prepaid expenses 303 45
Deferred income taxes (1) --
Other (106) (402)
Increase (decrease) in liabilities
Accounts payable (294) 1,013
Accrued expenses (347) 53
Income taxes payable (1,399) 21
------- -------
Net cash provided by operating activities 326 4,499
------- -------
INVESTING ACTIVITIES:
Acquisition of property and equipment (998) (977)
Acquisition of RMS Electronics, Inc. (2,085) --
------- -------
Net cash used in investing activities (3,083) (977)
------- -------
FINANCING ACTIVITIES:
Repayment of debt -- (558)
Repayment of obligations under capital lease (71) 66
Dividends paid -- (3,199)
------- -------
Net cash used in financing activities (71) (3,691)
------- -------
Decrease in cash (2,828) (169)
Cash, beginning of period 9,190 1,375
------- -------
Cash, end of period $ 6,362 $ 1,206
======= =======
Cash paid during the period for:
Interest $ 63 $ 132
======= =======
Income taxes $ 4,241 $ 229
======= =======
Noncash investing and financing activities:
Note payable issued for acquisition
of RMS Electronics, Inc. $ 400
=======
</TABLE>
Page 3 of 12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
(Amounts in thousands except per share data)
1. Unaudited financial statements: In the opinion of management, all
adjustments, consisting only of normal recurring adjustments necessary for
a fair presentation of (a) the results of operations for the three- and
six- month periods ended June 30, 1997 and 1996, (b) the financial position
at June 30, 1997, and (c) the statements of cash flows for the six-month
periods ended June 30, 1997 and 1996 have been made. The results for the
three- and six-month periods ended June 30, 1997, are not necessarily
indicative of the results for the entire year 1997.
2. Pro forma financial information: Prior to the Company's Initial Public
Offering of common stock in July 1996 (the "IPO"), it was an S Corporation
for federal and state income tax purposes. The pro forma income statement
presentation reflects a provision for income taxes as if the Company had
always been a C Corporation using an assumed effective tax rate of
approximately 41%.
Pro forma net income per share has been computed by dividing pro forma net
income by the pro forma weighted average shares outstanding. Pro forma
weighted average shares outstanding of 7,695 for the six months ended June
30, 1996 includes 1,558 shares assumed to have been sold by the Company at
a price of $11.00 per share, the net proceeds of which were used to fund
the distributions to stockholders.
3. Exclusive licensing agreements: The exclusive licensing agreements relating
to the Channell Patents were terminated in April 1996 and, accordingly, no
license fees expense has been reflected in the accompanying statements of
income since the three-month period ended March 31, 1996.
4. Inventories: Inventories stated at the lower of cost or market (first-in,
first-out method) are summarized as follows:
<TABLE>
<CAPTION>
June 30,
1997
--------
<S> <C>
Raw materials $ 1,319
Work-in process 855
Finished goods 3,601
-------
$ 5,775
=======
</TABLE>
Page 4 of 12
<PAGE>
5. Marketable Securities: The Company has invested in certain U.S. Government
issued debt instruments and other taxable securities. These investments are
classified as "available for sale" as defined by Statement of Financial
Accounting Standards No. 115. The investment in these securities are
therefore recorded at fair value with any differences between fair value
and cost recorded as a separate component of stockholders' equity. At June
30, 1997, there were no material differences between the fair value and
cost of these marketable securities.
6. Effective January 3, 1997, the Company acquired the assets of RMS
Electronics, Inc. As of this date, the Company has prepared consolidated
financial statements with its wholly owned subsidiary, RMS U.K.
7. In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 (SFAS No. 128), Earnings Per
Share. SFAS No. 128 establishes standards for computing and presenting
earnings per share (EPS) and applies to entities with publicly held common
stock. SFAS No. 128 simplifies the standards for computing earnings per
share previously found in APB Opinion No. 15 and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS
with a presentation of basic EPS. It also requires dual presentation of
basic and diluted EPS on the face of the statement of earnings for all
entities with complex capital structures and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation.
SFAS No. 128 is effective for financial statements issued for periods
ending after December 15, 1997, and earlier application is not permitted.
The pro forma basic and diluted EPS calculated under SFAS No. 128 would
equal the primary earnings per share for the periods ended June 30, 1997
and 1996.
8. On July 1, 1997, the Company purchased 100% of the shares of Standby
Electronics Corp., a privately held Canadian corporation.
Page 5 of 12
<PAGE>
Part I - Financial Information
Item 2 - Management's Discussion and Analysis of Results of Operations and
Financial Condition
RESULTS OF OPERATIONS
COMPARISON OF THE SIX MONTHS ENDED JUNE 30, 1997 WITH THE SIX MONTHS ENDED
JUNE 30, 1996
Net Sales. Net sales increased $5.3 million or 22.8% from $23.2
million in the first six months of 1996 to $28.5 million in the first six
months of 1997. CATV net sales increased $4.7 million or 22.9% from $20.5
million in the first six months of 1996 to $25.2 million in the first six
months of 1997 as a result of the sales of $3.6 million of RF passive
electronic devices by RMS and $1.1 million of continued moderate growth
from system upgrade and new network construction projects.
Telecommunications net sales increased $0.6 million or 22.2% from $2.7
million in the first six months of 1996 to $3.3 million in the first six
months of 1997 as a result of increased activity in conventional
copper-based telephone products.
Domestic net sales increased $3.1 million or 14.6% from $21.2 million
in the first six months of 1996 to $24.3 million in the first six months of
1997, principally due to sales of $1.9 million of RF passive devices and
$1.2 million of outside plant products for network construction.
International net sales increased $2.2 million or 110.0% from $2.0 million
in the 1996 period to $4.2 million in the 1997 period, principally as a
result of $1.7 million of RF passive devices.
Gross Profit. Gross profit increased $1.6 million or 15.2% from $10.5
million in the first six months of 1996 to $12.1 million in the first six
months of 1997. $1.0 million of this improvement is due to RF passive
devices. Gross margin decreased from 45.3% to 42.7% during the comparable
periods due to a 27.8% margin contribution from the sales of RF passive
devices.
Commission Income. Commission income decreased $0.2 million or 33.3%
from $0.5 million in the first six months of 1996 to $0.3 million in the
first six months of 1997. The decrease is a result of aggressive pricing by
competition and lower sales volume of cable-in-conduit products due to
severe winter weather conditions in the eastern part of the United States
during the first quarter of 1997.
Page 6 of 12
<PAGE>
Selling. Selling expense increased $0.2 million or 5.9% from $3.4
million in the first six months of 1996 to $3.6 million in the first six
months of 1997, primarily as a result of increased sales and marketing
expenses related to the RMS acquisition, offset by salaries and expenses of
an officer now included in general and administrative expenses due to
expanded responsibility. As a percentage of net sales, selling expense
decreased from 14.8% in the 1996 period to 12.5% in the 1997 period.
General and Administrative. General and administrative expenses
increased $1.4 million or 175.0% from $0.8 million in the first six months
of 1996 to $2.2 million in the first six months of 1997, primarily as a
result of increased payroll and employee benefits in the amount of $0.5
million due to increased staffing in administrative and information systems
departments as a result of the RMS acquisition and the salaries of an
executive officer now included in general and administrative. Travel,
legal, auditing and professional services increased $0.6 million as a
result of being a publicly traded company. Depreciation, insurance and
facilities expenses increased $0.2 million as a result of the RMS
acquisition. As a percentage of net sales, general and administrative
expense increased from 3.4% in the 1996 period to 7.9% in the 1997 period.
License Fees. License fees decreased $0.5 million in 1997 as a result
of the termination of the Channell Patents during 1996.
Research and Development. Research and development expenses increased
$0.2 million or 66.6% from $0.3 million in the first six months of 1996 to
$0.5 million in the first six months of 1997 primarily as a result of
increased payroll and expenses associated with increased staffing. As a
percentage of net sales, research and development expense increased from
1.1% in 1996 to 1.2% in 1997. Research and development expense will
continue to be higher for the remainder of 1997 as the Company implements
its new product development plans.
Income from Operations. As a result of the items discussed above,
income from operations increased $0.2 million or 3.3% from $6.0 million in
the first six months of 1996 to $6.2 million in the first six months of
1997, while operating margin decreased from 25.8% to 21.8%.
Income Taxes. Income taxes increased $2.5 million from $0.2 million in
the first six months of 1996 to $2.7 million in the first six months of
1997 due to the termination of the S Corporation status at the time of the
Initial Public Offering. Since the Initial Public Offering, the Company
pays Federal and State income taxes at a C Corporation rate.
Page 7 of 12
<PAGE>
COMPARISON OF THE THREE MONTHS ENDED JUNE 30, 1997 WITH THE THREE MONTHS
ENDED JUNE 30, 1996
Net Sales. Net sales increased $2.7 million or 20.8% from $13.0
million in the second quarter of 1996 to $15.7 million in the second
quarter of 1997. CATV net sales increased $2.3 million or 19.8% from $11.6
million in the second quarter of 1996 to $13.9 million in the second
quarter of 1997 as a result of the sales of $1.6 million of RF passive
electronic devices by RMS and continued moderate growth from system upgrade
projects. Telecommunications net sales increased $0.4 million or 28.6% from
$1.4 million in the second quarter of 1996 to $1.8 million in the second
quarter of 1997. This increase is due to increased sales of copper based
telephone products.
Domestic net sales increased $1.3 million or 11.0% from $11.8 million
in the second quarter of 1996 to $13.1 million in the second quarter of
1997 due to sales of $0.9 million of RF passive devices and $0.4 million of
outside plant products for network construction. International net sales
increased $1.4 million or 116.7% from $1.2 million in the 1996 period to
$2.6 million in the 1997 period. This sales increase is a result of $0.7
million of RF passive devices and $0.7 million on new broadband and telco
construction projects.
Gross Profit. Gross profit increased $1.0 million or 16.7% from $6.0
million in the second quarter of 1996 to $7.0 million in the second quarter
of 1997, $0.5 million of this improvement is due to RF passive devices and
$0.5 million is due to improved product mix. Gross margin decreased from
46.2% to 44.7% during the comparable periods, due to a 31.3% margin
contribution from the sales of RF passive devices.
Commission Income. Commission income decreased $0.1 million or 33.3%
from $0.3 million in the second quarter of 1996 to $0.2 million in the
second quarter of 1997, primarily as a result of aggressive pricing by
competition.
Selling. Selling expense decreased $0.1 million or 5.3% from $1.9
million in the second quarter of 1996 to $1.8 million in the second quarter
of 1997. As a percentage of net sales, selling expense decreased from 14.6%
in the 1996 period to 11.6% in the 1997 period.
General and Administrative. General and administrative expenses
increased $0.6 million or 150.0% from $0.4 million in the second quarter of
1996 to $1.0 million in the second quarter of 1997. The increase is a
result of increased payroll in the amount of $0.3 million due to increased
staffing and the salaries of an executive officer now included in general
and administrative. Travel, legal and professional services increased $0.3
million as a result of being a publicly traded company. As a percentage of
net sales, general and administrative expense increased from 3.3% in the
1996 period to 6.6% in the 1997 period.
Page 8 of 12
<PAGE>
License Fee. License fee expense was not incurred in the second
quarter of 1997 as a result of the termination of the license fee
agreements in April 1996.
Research and Development. Research and development expenses increased
$0.1 million or 100.0% from $0.1 million in the second quarter of 1996 to
$0.2 million in the second quarter of 1997 as a result of increased
staffing to implement new product development plans. As a percentage of net
sales, research and development expenses increased from 1.1% to 1.5% during
the period.
Income from Operations. As a result of the items discussed above,
income from operations increased $0.3 million or 7.9% from $3.8 million in
the second quarter of 1996 to $4.1 million in the second quarter of 1997,
while operating margin decreased from 29.4% to 26.1%.
Income Taxes. Income taxes increased $1.7 million from $0.1 million in
the second quarter of 1996 to $1.8 million in 1997 as a result of the
Company becoming a C Corporation at the time of the Initial Public
Offering.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $0.3 million and $4.5
million for the six months ended June 30, 1997 and 1996, respectively. Net
cash used in financing activities was $0.1 million and $3.7 million for the
six months ended June 30, 1997 and 1996, respectively. Net cash used in
investing activities was $3.1 million and $1.0 million for the six months
ended June 30, 1997 and 1996, respectively.
Accounts receivable increased from $6.7 million at December 31, 1996,
to $9.4 million at June 30, 1997, as a result of higher sales during the
period and the acquisition of RMS Electronics, Inc. Inventories increased
from $2.9 million at December 31, 1996 to $5.8 million at June 30, 1997 as
a result of increased work-in-process and finished goods required for
increased sales volume and the acquisition of RMS Electronics, Inc.
The Company made capital expenditures of $1.0 million during the first
six months of both 1996 and 1997, and anticipates increased capital
spending for product tooling, test equipment, and computer hardware and
software.
The Company has historically financed its operations and capital
expenditures through internally generated funds and bank borrowings. The
Company currently maintains a revolving credit facility with a $5.0 million
working capital revolving line of credit and a $5.0 million equipment
revolving line of credit, neither of which currently has any outstanding
balance. Availability of advances under the revolving credit facility
expires on May 1, 1999.
Page 9 of 12
<PAGE>
The Company believes that income from operations, coupled with borrowings
under its revolving credit facility and proceeds from the IPO, will be
sufficient to fund the Company's capital expenditure and working capital
requirements.
Page 10 of 12
<PAGE>
Part II - Other Information
Item 1. Legal Proceedings
The Company is from time to time involved in ordinary routine litigation
incidental to the conduct of its business. The Company regularly reviews all
pending litigation matters in which it is involved and establishes reserves
deemed appropriate for such litigation matters. Management believes that no
presently pending litigation matters will have a material adverse effect on the
Company's financial statements taken as a whole or on its results of operations.
Item 2. Changes in Securities
None
Item 3. Defaults Upon Senior Securities
None
Item 4. Submission of Matters to a Vote of Security Holders
None
Item 5. Other Information
None
Item 6. Exhibits and Reports on Form 8-K
Exhibit
Number Description
- ------ -----------
3.1 Restated Certificate of Incorporation of the Company (1)
3.2 Bylaws of the Company (1)
4 Form of Common Stock Certificate (1)
10.1 Tax Agreement between the Company and the Existing Stockholders (1)
10.2 Channell Commercial Corporation 1996 Incentive Stock Plan (including
form of Stock Option Agreements and Restricted Stock Agreement) (1)
10.3 Business Loan Agreement dated as of May 13, 1997 between the Company
and Bank of America National Trust and Savings Association ("Bank of
America") (3)
10.5 The Company's Profit Sharing Plan (1)
10.6 Agreement dated as of September 30, 1982 between the Company and
Integral Corporation, as amended (1)
10.7 Telephone Sales Agreement dated as of January 23, 1991 between the
Company and Integral Corporation (1)
10.8 Employment Agreement between the Company and William H. Channell, Sr.
(1)
10.9 Employment Agreement between the Company and William H. Channell, Jr.
(1)
10.10 Channell Commercial Corporation 1996 Performance-Based Annual
Incentive Compensation Plan (1)
10.11 Lease dated December 22, 1989 between the Company and William H.
Channell, Sr., as amended (1)
10.12 Lease dated May 29, 1996 between the Company and the Channell Family
Trust (1)
10.13 Lease dated May 17, 1994 between the Company and the Z. Paul Akian and
Sonia Akian Family Trust (1)
10.14 Lease dated March 1, 1994 between the Company and Allstate Life
Insurance Company (1)
Page 11 of 12
<PAGE>
10.15 Lease dated November 2, 1989 between the Company and Meadowvale Court
Property Management Ltd., as amended (1)
10.16 Lease Agreement dated as of March 1, 1996 between Winthrop Resources
Corp. and the Company (1)
10.17 Form of Indemnity Agreement (1)
10.18 Form of Agreement Regarding Intellectual Property (1)
10.19 401(k) Plan of the Company (1)
10.20 Letter Agreement regarding employment, Andrew M. Zogby (2)
10.21 Letter Agreement regarding employment, John B. Kaiser (2)
11 Computation of Proforma Income per Share (2)
27 Financial Data Schedule (3)
- -------
(1) Incorporated by reference to the indicated exhibits filed in connection
with the Company's Registration Statement on Form S-1 (File No. 333-3621).
(2) Incorporated by reference to the indicated exhibits filed in connection with
the Company's Form 10-K on March 31, 1997.
(3) Filed herewith.
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CHANNELL COMMERCIAL CORPORATION
(Registrant)
Dated: August 8, 1997 By: /s/ Gary W. Baker
------------------------------
Gary W. Baker
Chief Financial Officer
Page 12 of 12
<PAGE>
EXHIBIT 10.3
================================================================================
[BANK OF AMERICA LOGO] BUSINESS LOAN AGREEMENT
National Trust and Savings Association
================================================================================
This Agreement dated as of May 13, 1997, is between Bank of America National
Trust and Savings Association (the "Bank") and CHANNELL COMMERCIAL CORPORATION
(the "Borrower").
1. FACILITY NO. 1: LINE OF CREDIT AMOUNT AND TERMS
1.1 LINE OF CREDIT AMOUNT.
(a) During the availability period described below, the Bank will provide a line
of credit to the Borrower. The amount of the line of credit (the "Facility
No. 1 Commitment") is Five Million Dollars ($5,000,000).
(b) This is a revolving line of credit. During the availability period, the
Borrower may repay principal amounts and reborrow them.
(c) Each advance must be for at least Fifteen Thousand Dollars ($15,000), or for
the amount of the remaining available line of credit, if less.
(d) The Borrower agrees not to permit the outstanding principal balance of the
line of credit to exceed the Facility No. 1 Commitment.
1.2 AVAILABILITY PERIOD. The line of credit is available between the date of
this Agreement and May 1, 1999 (the "Facility No. 1 Expiration Date") unless the
Borrower is in default.
1.3 INTEREST RATE.
(a) Unless the Borrower elects an optional interest rate as described below, the
interest rate is the Bank's Reference Rate.
(b) The Reference Rate is the rate of interest publicly announced from time to
time by the Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by the Bank based on various factors, including the
Bank's costs and desired return, general economic conditions and other
factors, and is used as a reference point for pricing some loans. The Bank
may price loans to its customers at, above, or below the Reference Rate.
Any change in the Reference Rate shall take effect at the opening of
business on the day specified in the public announcement of a change in the
Bank's Reference Rate.
1.4 REPAYMENT TERMS.
(a) The Borrower will pay interest on June 1, 1997, and then monthly thereafter
until payment in full of any principal outstanding under this line of
credit.
(b) The Borrower will repay in full all principal and any unpaid interest or
other charges outstanding under this line of credit no later than the
Facility No. 1 Expiration Date.
(c) Any amount bearing interest at an optional interest rate (as described
below) may be repaid at the end of the applicable interest period, which
shall be no later than thirty (30) days after the Facility No. 1 Expiration
Date.
1.5 OPTIONAL INTEREST RATES. Instead of the interest rate based on the Bank's
Reference Rate, the Borrower may elect to have all or portions of the line of
credit (during the availability period) bear interest at the rate(s) described
below during an interest period agreed to by the Bank and the Borrower. Each
interest rate is
-1-
<PAGE>
a rate per year. Interest will be paid on the last day of each interest period,
and on the first day each month during the interest period. At the end of any
interest period, the interest rate will revert to the rate based on the
Reference Rate, unless the Borrower has designated another optional interest
rate for the portion.
1.6 FIXED RATE. The Borrower may elect to have all or portions of the principal
balance of the line of credit bear interest at the Fixed Rate, subject to the
following requirements:
(a) The "Fixed Rate" means the fixed interest rate the Bank and the Borrower
agree will apply to the portion during the applicable interest period.
(b) The interest period during which the Fixed Rate will be in effect will be no
shorter than 30 days and no longer than 180 days.
(c) Each Fixed Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000).
(d) The Borrower may not elect a Fixed Rate with respect to any portion of the
principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(e) Any portion of the principal balance of the line of credit already bearing
interest at the Fixed Rate will not be converted to a different rate during
its interest period.
(f) Each prepayment of a Fixed Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount (if
any) by which
(i) the additional interest which would have been payable on the amount
prepaid had it not been paid until the last day of the interest period,
exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the certificate of deposit market for
a period starting on the date on which it was prepaid and ending on the
last day of the interest period for such portion.
1.7 OFFSHORE RATE. The Borrower may elect to have all or portions of the
principal balance of the line of credit bear interest at the Offshore Rate,
subject to the following requirements:
(a) The "Offshore Rate" means the interest rate the Bank and the Borrower agree
will apply to the portion during the applicable interest period.
(b) The interest period during which the Offshore Rate will be in effect will be
no shorter than 30 days and no longer than one year. The last day of the
interest period will be determined by the Bank using the practices of the
offshore dollar inter-bank market.
(c) Each Offshore Rate portion will be for an amount not less than Five Hundred
Thousand Dollars ($500,000).
(d) The Borrower may not elect an Offshore Rate with respect to any portion of
the principal balance of the line of credit which is scheduled to be repaid
before the last day of the applicable interest period.
(e) Any portion of the principal balance of the line of credit already bearing
interest at the Offshore Rate will not be converted to a different rate
during its interest period.
(f) Each prepayment of an Offshore Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by the amount of accrued
interest on the amount prepaid, and a prepayment fee equal to the amount (if
any) by which
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(i) the additional interest which would have been payable on the amount
prepaid had it not been paid until the last day of the interest period,
exceeds
(ii) the interest which would have been recoverable by the Bank by placing
the amount prepaid on deposit in the offshore dollar market for a
period starting on the date on which it was prepaid and ending on the
last day of the interest period for such portion.
(g) The Bank will have no obligation to accept an election for an Offshore Rate
portion if any of the following described events has occurred and is
continuing:
(i) Dollar deposits in the principal amount, and for periods equal to the
interest period, of an Offshore Rate portion are not available in the
offshore dollar inter-bank markets; or
(ii) the Offshore Rate does not accurately reflect the cost of an Offshore
Rate portion.
2. FACILITY NO. 2: LINE OF CREDIT AMOUNT AND TERMS
2.1 Equipment Line.
(a) From time to time during the availability period, the Bank will make
equipment loans (the "Equipment Loans") to the Borrower as provided herein.
Each Equipment Loan must be for at least Twenty Five Thousand Dollars
($25,000), or for the amount of the remaining available line of credit, if
less. The total of all Equipment loans outstanding under the Equipment Line
(the "Facility No. 2") plus the outstanding amounts of any standby letter of
credit issued pursuant to Paragraph 2.4, including amounts drawn on letters
of credit and not yet reimbursed, may not exceed at any one time Five
Million Dollars ($5,000,000) (the "Facility No. 2 Commitment").
(b) This is a revolving line of credit with a within line facility for standby
letters of credit and the Borrower may, during the availability period,
reborrow amounts repaid or prepaid.
(c) The Borrower shall use the proceeds of each Equipment Loan to purchase
equipment for use in the Borrower's business. All equipment acquired with
the proceeds of such advances shall be free and clear of any security
interests, liens, encumbrances or rights of others. Each request for an
Equipment Loan shall be accompanied by a copy of the purchase order or
invoice for the equipment to be purchased with the proceeds of such
Equipment Loan. The amount of each Equipment Loan shall not exceed 80% of
the purchase price including tax, license and accessories of the equipment
being purchase.
(d) The Borrower shall repay principal of each Equipment Loan in sixty (60)
approximately equal monthly installments, commencing on the first day of the
month following the date the Equipment Loan is made and continuing on the
first day of each successive month thereafter until the first day of the
sixtieth month following the month in which the Equipment Loan is made (the
"Equipment Loan Maturity Date"), on which date all remaining principal and
interest then owing with respect to the Equipment Loan shall be due and
payable.
(e) The Borrower may at any time prepay an Equipment Loan in full or in part.
Partial prepayments shall be applied to the most remote installments of the
Equipment Loan.
(f) The principal balance of each Equipment Loan shall bear interest at a rate
per annum equal to the Bank's Reference Rate plus .25 of a percentage point.
The Borrower will pay interest monthly on the first day of each month until
the Equipment Loan Maturity Date, on which date all accrued and unpaid
interest shall be due and payable.
(g) Each Equipment Loan shall be evidenced by a promissory note, in form and
content acceptable to the Bank.
2.2 OPTIONAL INTEREST RATES. Instead of the interest rate based on the Bank's
Reference Rate, the Borrower may elect to have all or portions of an Equipment
Loan bear interest at the rate(s) described below
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during an interest period agreed to by the Bank and the Borrower. Each interest
rate is a rate per year. Interest will be paid on the last day of each interest
period, and on the first day each month during the interest period. At the end
of any interest period, the interest rate will revert to the rate based on the
Reference Rate, unless the Borrower has designated another optional interest
rate for the portion.
2.3 LONG TERM RATE. The Borrower may elect to have all or portions of an
Equipment Loan bear interest at the Long Term Rate, subject to the following
requirements:
(a) The interest period during which the Long Term Rate will be in effect will
be one year or more. The Borrower will immediately begin repaying principal
of the Long Term Rate portion under an amortization schedule agreed to by
the Bank and the Borrower at the time of the designation. These payments
will be separate from the payments required by the Paragraph 2.1(d) above
which will be calculated without taking into account any Long Term Rate
portions.
(b) The "Long Term Rate" means the fixed interest rate the Bank and the Borrower
agree will apply to the portion during the applicable interest period.
(c) Each Long Term Rate portion will be for an amount not less than One Hundred
Thousand Dollars ($100,000).
(d) Any Equipment Loan already bearing interest at the Long Term Rate will not
be converted to a different rate during its interest period.
(e) The Borrower may prepay the Long Term Rate portion in whole or in part in
the minimum amount of One Hundred Thousand Dollars ($100,000). The Borrower
will give the Bank irrevocable written notice of the Borrower's intention to
make the prepayment, specifying the date and amount of the prepayment. The
notice must be received by the Bank at least 5 banking days in advance of
the prepayment. All prepayments of principal on the Long Term Rate portion
will be applied on the most remote principal installment or installments
then unpaid.
(f) Each prepayment of a Long Term Rate portion, whether voluntary, by reason of
acceleration or otherwise, will be accompanied by payment of all accrued
interest on the amount of the prepayment and the prepayment fee described
below.
(g) The prepayment fee will be the sum of fees calculated separately for each
Prepaid Installment, as follows:
(i) The Bank will first determine the amount of interest which would have
accrued each month for the Prepaid Installment had it remained
outstanding until the applicable Original Payment Date, using the Long
Term Rate;
(ii) The Bank will then subtract from each monthly interest amount
determined in (i), above, the amount of interest which would accrue for
that Prepaid Installment if it were reinvested from the date of
prepayment through the Original Payment Date, using the following rate:
(A) If the Original Payment Date is more than 5 years after the date of
prepayment: the Treasury Rate plus one-quarter of one percentage
point;
(B) If the Original Payment Date is 5 years or less after the date of
prepayment: the Money Market Rate.
(iii) If (i) minus (ii) for the Prepaid Installment is greater than zero,
the Bank will discount the monthly differences to the date of
prepayment by the rate used in (ii) above. The sum of the discounted
monthly differences is the prepayment fee for that Prepaid Installment.
(h) The following definitions will apply to the calculation of the prepayment
fee:
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"Money Market" means the domestic certificate of deposit market, the
eurodollar deposit market or other appropriate money market selected by the
Bank.
"Money Market Rate" means the fixed interest rate per annum which the Bank
determines could be obtained by reinvesting a specified Prepaid Installment
in the Money Market from the date of prepayment through the Original Payment
Date.
"Original Payment Dates" means the dates on which principal of the Long Term
Rate portion would have been paid if there had been no prepayment. If a
portion of the principal would have been paid later than the end of the
interest period in effect at the time of prepayment, then the Original
Payment Date for that portion will be the last day of the interest period.
"Prepaid Installment" means the amount of the prepaid principal of the Long
Term Rate portion which would have been paid on a single Original Payment
Date.
"Treasury Rate" means the interest rate yield for U.S. Government Treasury
Securities which the Bank determines could be obtained by reinvesting a
specified Prepaid Installment in such securities from the date of prepayment
through the Original Payment Date.
(i) The Bank may adjust the Treasury Rate and Money Market Rate to reflect the
compounding, accrual basis, or other costs of the Long Term Rate portion.
Each of the rates is the Bank's estimate only and the Bank is under no
obligation to actually reinvest any prepayment. The rates will be based on
information from either the Telerate or Reuters information services, The
---
Wall Street Journal, or other information sources the Bank deems
-------------------
appropriate.
2.4 STANDBY LETTERS OF CREDIT UNDER FACILITY NO. 2.
(i) Facility No. 2 may be used for financing standby letters of credit with
a maximum maturity of 12 months but not to extend more than 180 days
beyond the maturity of May 1, 1999.
(ii) The amount of outstanding standby letters of credit, including amounts
drawn on letters of credit and not yet reimbursed, may not exceed at
any one time Five Hundred Thousand Dollars ($500,000).
The Borrower agrees:
(a) any sum drawn under a letter of credit may, at the option of the Bank, be
added to the principal amount outstanding under this Agreement. The amount
will bear interest and be due as described elsewhere in this Agreement.
(b) if there is a default under this Agreement, to immediately prepay and make
the Bank whole for any outstanding letters of credit.
(c) the issuance of any letter of credit and any amendment to a letter of credit
is subject to the Bank's written approval and must be in form and content
satisfactory to the Bank and in favor of a beneficiary acceptable to the
Bank.
(d) to sign the Bank's form Application and Agreement for Standby Letter of
Credit.
(e) to pay any issuance and/or other fees that the Bank notifies the Borrower
will be charged for issuing and processing letters of credit for the
Borrower.
(f) to allow the Bank to automatically charge its checking account for
applicable fees, discounts, and other charges.
(g) to pay the Bank a non-refundable fee equal to 1.50% per annum of the
outstanding undrawn amount of each standby letter of credit, payable
quarterly in advance, calculated on the basis of the face amount outstanding
on the day the fee is calculated.
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3. EXPENSES
The Borrower agrees to reimburse the Bank for any expenses it incurs in the
preparation of this Agreement and any agreement or instrument required by this
Agreement. Expenses include, but are not limited to, reasonable attorneys'
fees, including any allocated costs of the Bank's in-house counsel.
4. DISBURSEMENTS, PAYMENTS AND COSTS
4.1 REQUESTS FOR CREDIT. Each request for an extension of credit will be made
in writing in a manner acceptable to the Bank, or by another means acceptable to
the Bank.
4.2 DISBURSEMENTS AND PAYMENTS. Each disbursement by the Bank and each payment
by the Borrower will be:
(a) made at the Bank's branch (or other location) selected by the Bank from time
to time;
(b) made for the account of the Bank's branch selected by the Bank from time to
time;
(c) made in immediately available funds, or such other type of funds selected by
the Bank;
(d) evidenced by records kept by the Bank. In addition, the Bank may, at its
discretion, require the Borrower to sign one or more promissory notes.
4.3 TELEPHONE AUTHORIZATION.
(a) The Bank may honor telephone instructions for advances or repayments given
by any one of the individuals authorized to sign loan agreements on behalf
of the Borrower, or any other individual designated by any one of such
authorized signers.
(b) Advances will be deposited in and repayments will be withdrawn from the
Borrower's account number 06004-12147, or such other of the Borrower's
accounts with the Bank as designated in writing by the Borrower.
(c) The Borrower indemnifies and excuses the Bank (including its officers,
employees, and agents) from all liability, loss, and costs in connection
with any act resulting from telephone instructions it reasonably believes
are made by any individual authorized by the Borrower to give such
instructions. This indemnity and excuse will survive this Agreement.
4.4 DIRECT DEBIT (PRE-BILLING).
(a) The Borrower agrees that the Bank will debit the Borrower's deposit account
number 06004-12147, or such other of the Borrower's accounts with the Bank
as designated in writing by the Borrower (the "Designated Account") on the
date each payment of interest becomes due for Facility No. 1 and on the date
each payment of principal and interest for Facility No. 2 from the Borrower
becomes due (the "Due Date"). If the Due Date is not a banking day, the
Designated Account will be debited on the next banking day.
(b) Approximately 10 days prior to each Due Date, the Bank will mail to the
Borrower a statement of the amounts that will be due on that Due Date (the
"Billed Amount"). The calculation will be made on the assumption that no
new extensions of credit or payments will be made between the date of the
billing statement and the Due Date, and that there will be no changes in the
applicable interest rate.
(c) The Bank will debit the Designated Account for the Billed Amount, regardless
of the actual amount due on that date (the "Accrued Amount").
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If the Billed Amount debited to the Designated Account differs from the
Accrued Amount, the discrepancy will be treated as follows:
(i) If the Billed Amount is less than the Accrued Amount, the Billed Amount
for the following Due Date will be increased by the amount of the
discrepancy. The Borrower will not be in default by reason of any such
discrepancy.
(ii) If the Billed Amount is more than the Accrued Amount, the Billed Amount
for the following Due Date will be decreased by the amount of the
discrepancy.
Regardless of any such discrepancy, interest will continue to accrue based
on the actual amount of principal outstanding without compounding. The Bank
will not pay the Borrower interest on any overpayment.
(d) The Borrower will maintain sufficient funds in the Designated Account to
cover each debit. If there are insufficient funds in the Designated Account
on the date the Bank enters any debit authorized by this Agreement, the
debit will be reversed.
4.5 BANKING DAYS. Unless otherwise provided in this Agreement, a banking day is
a day other than a Saturday or a Sunday on which the Bank is open for business
in California. For amounts bearing interest at an offshore rate (if any), a
banking day is a day other than a Saturday or a Sunday on which the Bank is open
for business in California and dealing in offshore dollars. All payments and
disbursements which would be due on a day which is not a banking day will be due
on the next banking day. All payments received on a day which is not a banking
day will be applied to the credit on the next banking day.
4.6 TAXES. The Borrower will not deduct any taxes from any payments it makes to
the Bank. If any government authority imposes any taxes on any payments made by
the Borrower, the Borrower will pay the taxes and will also pay to the Bank, at
the time interest is paid, any additional amount which the Bank specifies as
necessary to preserve the after-tax yield the Bank would have received if such
taxes had not been imposed. Upon request by the Bank, the Borrower will confirm
that it has paid the taxes by giving the Bank official tax receipts (or
notarized copies) within 30 days after the due date. However, the Borrower will
not pay the Bank's net income taxes.
4.7 ADDITIONAL COSTS. The Borrower will pay the Bank, on demand, for the Bank's
costs or losses arising from any statute or regulation, or any request or
requirement of a regulatory agency which is applicable to all national banks or
a class of all national banks. The costs and losses will be allocated to the
loan in a manner determined by the Bank, using any reasonable method. The costs
include the following:
(a) any reserve or deposit requirements; and
(b) any capital requirements relating to the Bank's assets and commitments for
credit.
4.8 INTEREST CALCULATION. Except as otherwise stated in this Agreement, all
interest and fees, if any, will be computed on the basis of a 360-day year and
the actual number of days elapsed. This results in more interest or a higher
fee than if a 365-day year is used.
4.9 INTEREST ON LATE PAYMENTS. At the Bank's sole option in each instance, any
amount not paid when due under this Agreement (including interest) shall bear
interest from the due date at the Bank's Reference Rate plus 1.25 percentage
points. This may result in compounding of interest.
4.10 DEFAULT RATE. Upon the occurrence and during the continuation of any
default under this Agreement, advances under this Agreement will at the option
of the Bank bear interest at a rate per annum which is 1.00 percentage point
higher than the rate of interest otherwise provided under this Agreement. This
will not constitute a waiver of any default.
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5. CONDITIONS
5.1 CONDITION TO ALL CREDIT. The Bank must receive the following items, in form
and content acceptable to the Bank, before it is required to extend any credit
to the Borrower under this Agreement:
(a) AUTHORIZATIONS. Evidence that the execution, delivery and performance by
the Borrower (and any guarantor) of this Agreement and any instrument or
agreement required under this Agreement have been duly authorized.
(b) OTHER ITEMS. Any other items that the Bank reasonably requires.
5.2 CONDITION TO EACH EQUIPMENT LOAN. Before each Equipment Loan, including the
first, the Bank must receive the following item(s), in form and content
acceptable to the Bank:
(a) A promissory note evidencing the Equipment Loan.
6. REPRESENTATIONS AND WARRANTIES
When the Borrower signs this Agreement, and until the Bank is repaid in full,
the Borrower makes the following representations and warranties. Each request
for an extension of credit constitutes a renewed representation.
6.1 ORGANIZATION OF BORROWER. The Borrower is a corporation duly formed and
existing under the laws of the state where organized.
6.2 AUTHORIZATION. This Agreement, and any instrument or agreement required
hereunder, are within the Borrower's powers, have been duly authorized, and do
not conflict with any of its organizational papers.
6.3 ENFORCEABLE AGREEMENT. This Agreement is a legal, valid and binding
agreement of the Borrower, enforceable against the Borrower in accordance with
its terms, and any instrument or agreement required hereunder, when executed and
delivered, will be similarly legal, valid, binding and enforceable.
6.4 GOOD STANDING. In each state in which the Borrower does business, it is
properly licensed, in good standing, and, where required, in compliance with
fictitious name statutes.
6.5 NO CONFLICTS. This Agreement does not conflict with any law, agreement, or
obligation by which the Borrower is bound.
6.6 FINANCIAL INFORMATION. All financial and other information that has been or
will be supplied to the Bank is:
(a) sufficiently complete to give the Bank accurate knowledge of the Borrower's
(and any guarantor's) financial condition.
(b) in form and content required by the Bank.
(c) in compliance with all government regulations that apply.
6.7 LAWSUITS. There is no lawsuit, tax claim or other dispute pending or
threatened against the Borrower, which, if lost, would impair the Borrower's
financial condition or ability to repay the loan, except as have been disclosed
in writing to the Bank.
6.8 PERMITS, FRANCHISES. The Borrower possesses all permits, memberships,
franchises, contracts and licenses required and all trademark rights, trade name
rights, patent rights and fictitious name rights necessary to enable it to
conduct the business in which it is now engaged.
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6.9 OTHER OBLIGATIONS. The Borrower is not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
6.10 INCOME TAX RETURNS. The Borrower has no knowledge of any pending
assessments or adjustments of its income tax for any year.
6.11 NO EVENT OF DEFAULT. There is no event which is, or with notice or lapse
of time or both would be, a default under this Agreement.
6.12 LOCATION OF BORROWER. The Borrower's place of business (or, if the
Borrower has more than one place of business, its chief executive office) is
located at the address listed under the Borrower's signature on this Agreement.
7. COVENANTS
The Borrower agrees, so long as credit is available under this Agreement and
until the Bank is repaid in full:
7.1 USE OF PROCEEDS. To use the proceeds of Facility No. 1 only to support
operating cash flow needs. To use the proceeds of Facility No. 2 only to
finance the purchase of new equipment or vehicles. To use the standby letter of
credit under Facility No. 2 only for performance bonds for purchase orders on
new equipment.
7.2 FINANCIAL INFORMATION. To provide the following financial information and
statements and such additional information as requested by the Bank from time to
time:
(a) Within 90 days of the Borrower's fiscal year end, the Borrower's annual
financial statements. These financial statements must be audited (with an
unqualified opinion) by a Certified Public Accountant ("CPA") acceptable to
the Bank. The statements shall be prepared on a consolidated basis.
(b) Within 45 days of the period's end, the Borrower's quarterly financial
statements. These financial statements may be Borrower prepared. The
statements shall be prepared on a consolidated basis.
(c) Copies of the Borrower's Form 10-K Annual Report, Form 10-Q Quarterly Report
and Form 8-K Current Report within 30 days after the date of filing with the
Securities and Exchange Commission.
(d) By January 31st of each year, the Borrower's projections prepared on a
quarterly format for that fiscal year.
7.3 TANGIBLE NET WORTH. To maintain on a consolidated basis tangible net worth
equal to at least the sum of the following:
(a) Thirty Five Million Dollars ($35,000,000); plus
(b) the sum of 80% of net income after income taxes plus 100% of any new equity
(without subtracting losses) earned in each quarterly accounting period
commencing with March 31, 1997.
"Tangible net worth" means the gross book value of the Borrower's assets
(excluding goodwill, patents, trademarks, trade names, organization expense,
treasury stock, unamortized debt discount and expense, deferred research and
development costs, deferred marketing expenses, and other like intangibles) less
total liabilities, including but not limited to accrued and deferred income
taxes, and any reserves against assets.
7.4 TOTAL LIABILITIES TO TANGIBLE NET WORTH RATIO. To maintain on a
consolidated basis a ratio of total liabilities to tangible net worth not
exceeding 0.50:1.0.
"Total liabilities" means the sum of current liabilities plus long term
liabilities.
7.5 CASH FLOW TO DEBT SERVICE COVERAGE RATIO. To maintain on a consolidated
basis a cash flow to debt service coverage ratio of at least 1.30:1.0.
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"Cash flow to debt service coverage ratio" means the ratio of cash flow to sum
of interest expense, the current portion of long term debt to the Bank (existing
and new), current portion of other long term debt and current portion of long
term debt for lease obligations. "Cash flow" is defined as the sum of net
profit after tax, plus interest expense plus depreciation and amortization, less
dividends and non-financed capital expenditures. Beginning March 31, 1997, this
ratio will be calculated at the end of each quarter, and thereafter for the two
quarters ended June 30, 1997, and for the three quarters ended September 30,
1997, and for the four quarters ended December 31, 1997. This ratio will be
calculated at the end of each fiscal quarter, using the results of that quarter
and each of the 3 immediately preceding quarters. The current portion of long
term debt will be measured as of the last day of the period being measured.
7.6 LIMITATION ON LOSSES. Not to incur on a consolidated basis a net loss after
taxes and extraordinary items in any two consecutive quarterly accounting
periods.
7.7 OTHER DEBTS. Not to have outstanding or incur any direct or contingent
debts (other than those to the Bank), or become liable for the debts of others
without the Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies, or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of business.
(c) Obtaining surety bonds in the usual course of business.
(d) Debts and lines of credit in existence on the date of this Agreement
disclosed in writing to the Bank.
7.8 OTHER LIENS. Not to create, assume, or allow any security interest or lien
(including judicial liens) on property the Borrower now or later owns, including
but not limited to accounts receivable and inventory, except:
(a) Deeds of trust and security agreements in favor of the Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to the
Bank.
7.9 LOANS TO OFFICERS. Not to make any loans, advances or other extensions of
credit to any of the Borrower's executives, officers, or directors or
shareholders (or any relatives of any of the foregoing).
7.10 OUT OF DEBT PERIOD. To repay any advances in full, and not to draw any
additional advances on its Facility No. 1 revolving line of credit, for a period
of at least 30 consecutive days in each line-year. "Line-year" means the period
from May 1, 1997 and May 1, 1998, and each subsequent one-year period (if any).
7.11 NOTICES TO BANK. To promptly notify the Bank in writing of:
(a) any lawsuit over Five Hundred Thousand Dollars ($500,000) against the
Borrower (or any guarantor).
(b) any substantial dispute between the Borrower (or any guarantor) and any
government authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in the Borrower's (or any guarantor's) financial
condition or operations.
(e) any change in the Borrower's name, legal structure, place of business, or
chief executive office if the Borrower has more than one place of business.
7.12 BOOKS AND RECORDS. To maintain adequate books and records.
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7.13 AUDITS. To allow the Bank and its agents to inspect (including taking and
removing samples for environmental testing) the Borrower's properties and
examine, audit and make copies of books and records at any reasonable time. If
any of the Borrower's properties, books or records are in the possession of a
third party, the Borrower authorizes that third party to permit the Bank or its
agents to have access to perform inspections or audits and to respond to the
Bank's requests for information concerning such properties, books and records.
{}The Bank has no duty to inspect the Borrower's properties or to examine,
audit, appraise or copy books and records and the Bank shall not incur any
obligation or liability by reason of not making any such inspection or inquiry.
In the event that the Bank inspects the Borrower's properties or examines,
audits, appraises, or copies books and records, the Bank will be acting solely
for the purposes of protecting the Bank's security and preserving the Bank's
rights under this Agreement. Neither the Borrower nor any other party is
entitled to rely on any inspection or other inquiry by the Bank. The Bank owes
no duty of care to protect the Borrower or any other party against, or to inform
the Borrower or any other party of, any adverse condition that may be observed
as affecting the Borrower's properties or premises, or the Borrower's business.
The Bank may in its discretion disclose to the Borrower or any other party any
findings made as a result of, or in connection with, any inspection of the
Borrower's properties.
7.14 COMPLIANCE WITH LAWS. To comply with the laws (including any fictitious
name statute), regulations, and orders of any government body with authority
over the Borrower's business.
7.15 PRESERVATION OF RIGHTS. To maintain and preserve all rights, privileges,
and franchises the Borrower now has.
7.16 MAINTENANCE OF PROPERTIES. To make any repairs, renewals, or replacements
to keep the Borrower's properties in good working condition.
7.17 COOPERATION. To take any action requested by the Bank to carry out the
intent of this Agreement.
7.18 GENERAL BUSINESS INSURANCE. To maintain insurance as is usual for the
business it is in.
7.19 ADDITIONAL NEGATIVE COVENANTS. Not to, without the Bank's written
consent:
(a) engage in any business activities substantially different from the
Borrower's present business.
(b) liquidate or dissolve the Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture, syndicate, or
other combination.
(d) lease, or dispose of all or a substantial part of the Borrower's business or
the Borrower's assets.
(e) acquire or purchase a business or its assets for a consideration, including
assumption of debt, in excess of Two Million Five Hundred Thousand Dollars
($2,500,000) in the aggregate.
(f) sell or otherwise dispose of any assets for less than fair market value, or
enter into any sale and leaseback agreement covering any of its fixed or
capital assets.
(g) voluntarily suspend its business for more than 7 days in any 30 day period.
8. HAZARDOUS WASTE INDEMNIFICATION. The Borrower will indemnify and hold
harmless the Bank from any loss or liability directly or indirectly arising out
of the use, generation, manufacture, production, storage, release, threatened
release, discharge, disposal or presence of a hazardous substance. This
indemnity will apply whether the hazardous substance is on, under or about the
Borrower's property or operations or property leased to the Borrower. The
indemnity includes but is not limited to attorneys' fees (including the
reasonable estimate of the allocated cost of in-house counsel and staff). The
indemnity extends to the Bank, its parent, subsidiaries and all of their
directors, officers, employees, agents, successors, attorneys and assigns.
"Hazardous substances" means any substance, material or waste that is or becomes
designated or regulated as "toxic," "hazardous," "pollutant," or "contaminant"
or a similar designation or regulation under any federal, state or local law
(whether under common law, statute, regulation or otherwise) or judicial or
administrative interpretation
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of such, including without limitation petroleum or natural gas. This indemnity
will survive repayment of the Borrower's obligations to the Bank.
9. DEFAULT
If any of the following events occur, the Bank may do one or more of the
following: declare the Borrower in default, stop making any additional credit
available to the Borrower, and require the Borrower to repay its entire debt
immediately and without prior notice. If an event of default occurs under the
paragraph entitled "Bankruptcy," below, with respect to the Borrower, then the
entire debt outstanding under this Agreement will automatically be due
immediately.
9.1 FAILURE TO PAY. The Borrower fails to make a payment under this Agreement
when due.
9.2 FALSE INFORMATION. The Borrower has given the Bank false or misleading
information or representations.
9.3 BANKRUPTCY. The Borrower (or any guarantor) files a bankruptcy petition, a
bankruptcy petition is filed against the Borrower (or any guarantor) , or the
Borrower (or any guarantor) makes a general assignment for the benefit of
creditors.
9.4 RECEIVERS. A receiver or similar official is appointed for the Borrower's
(or any guarantor's) business, or the business is terminated.
9.5 LAWSUITS. Any lawsuit or lawsuits are filed on behalf of one or more trade
creditors against the Borrower in an aggregate amount of Five Hundred Thousand
Dollars ($500,000) or more in excess of any insurance coverage.
9.6 JUDGMENTS. Any judgments or arbitration awards are entered against the
Borrower (or any guarantor), or the Borrower (or any guarantor) enters into any
settlement agreements with respect to any litigation or arbitration, in an
aggregate amount of Five Hundred Thousand Dollars ($500,000) or more in excess
of any insurance coverage.
9.7 GOVERNMENT ACTION. Any government authority takes action that the Bank
believes materially adversely affects the Borrower's (or any guarantor's)
financial condition or ability to repay.
9.8 MATERIAL ADVERSE CHANGE. A material adverse change occurs in the Borrower's
(or any guarantor's) financial condition, properties or prospects, or ability to
repay the loan.
9.9 CROSS-DEFAULT. Any default occurs under any agreement in connection with
any credit the Borrower (or any guarantor) has obtained from anyone else or
which the Borrower (or any guarantor) has guaranteed .
9.10 DEFAULT UNDER RELATED DOCUMENTS. Any other document required by this
Agreement is violated or no longer in effect.
9.11 OTHER BANK AGREEMENTS. The Borrower (or any guarantor) fails to meet the
conditions of, or fails to perform any obligation under any other agreement the
Borrower (or any guarantor) has with the Bank or any affiliate of the Bank.
9.12 OTHER BREACH UNDER AGREEMENT. The Borrower fails to meet the conditions
of, or fails to perform any obligation under, any term of this Agreement not
specifically referred to in this Article.
10. ENFORCING THIS AGREEMENT; MISCELLANEOUS
10.1 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to the Bank and all financial covenants will be made under
generally accepted accounting principles, consistently applied.
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<PAGE>
10.2 CALIFORNIA LAW. This Agreement is governed by California law.
10.3 SUCCESSORS AND ASSIGNS. This Agreement is binding on the Borrower's and
the Bank's successors and assignees. The Borrower agrees that it may not assign
this Agreement without the Bank's prior consent. The Bank may sell
participations in or assign this loan, and may exchange financial information
about the Borrower with actual or potential participants or assignees. If a
participation is sold or the loan is assigned, the purchaser will have the right
of set-off against the Borrower.
10.4 ARBITRATION.
(a) This paragraph concerns the resolution of any controversies or claims
between the Borrower and the Bank, including but not limited to those that
arise from:
(i) This Agreement (including any renewals, extensions or modifications of
this Agreement);
(ii) Any document, agreement or procedure related to or delivered in
connection with this Agreement;
(iii) Any violation of this Agreement; or
(iv) Any claims for damages resulting from any business conducted between
the Borrower and the Bank, including claims for injury to persons,
property or business interests (torts).
(b) At the request of the Borrower or the Bank, any such controversies or claims
will be settled by arbitration in accordance with the United States
Arbitration Act. The United States Arbitration Act will apply even though
this Agreement provides that it is governed by California law.
(c) Arbitration proceedings will be administered by the American Arbitration
Association and will be subject to its commercial rules of arbitration.
(d) For purposes of the application of the statute of limitations, the filing of
an arbitration pursuant to this paragraph is the equivalent of the filing of
a lawsuit, and any claim or controversy which may be arbitrated under this
paragraph is subject to any applicable statute of limitations. The
arbitrators will have the authority to decide whether any such claim or
controversy is barred by the statute of limitations and, if so, to dismiss
the arbitration on that basis.
(e) If there is a dispute as to whether an issue is arbitrable, the arbitrators
will have the authority to resolve any such dispute.
(f) The decision that results from an arbitration proceeding may be submitted to
any authorized court of law to be confirmed and enforced.
(g) The procedure described above will not apply if the controversy or claim, at
the time of the proposed submission to arbitration, arises from or relates
to an obligation to the Bank secured by real property located in California.
In this case, both the Borrower and the Bank must consent to submission of
the claim or controversy to arbitration. If both parties do not consent to
arbitration, the controversy or claim will be settled as follows:
(i) The Borrower and the Bank will designate a referee (or a panel of
referees) selected under the auspices of the American Arbitration
Association in the same manner as arbitrators are selected in
Association-sponsored proceedings;
(ii) The designated referee (or the panel of referees) will be appointed by
a court as provided in California Code of Civil Procedure Section 638
and the following related sections;
(iii) The referee (or the presiding referee of the panel) will be an active
attorney or a retired judge; and
-13-
<PAGE>
(iv) The award that results from the decision of the referee (or the panel)
will be entered as a judgment in the court that appointed the referee,
in accordance with the provisions of California Code of Civil
Procedure Sections 644 and 645.
(h) This provision does not limit the right of the Borrower or the Bank to:
(i) exercise self-help remedies such as setoff;
(ii) foreclose against or sell any real or personal property collateral; or
(iii) act in a court of law, before, during or after the arbitration
proceeding to obtain:
(A) an interim remedy; and/or
(B) additional or supplementary remedies.
(i) The pursuit of or a successful action for interim, additional or
supplementary remedies, or the filing of a court action, does not constitute
a waiver of the right of the Borrower or the Bank, including the suing
party, to submit the controversy or claim to arbitration if the other party
contests the lawsuit. However, if the controversy or claim arises from or
relates to an obligation to the Bank which is secured by real property
located in California at the time of the proposed submission to arbitration,
this right is limited according to the provision above requiring the consent
of both the Borrower and the Bank to seek resolution through arbitration.
(j) If the Bank forecloses against any real property securing this Agreement,
the Bank has the option to exercise the power of sale under the deed of
trust or mortgage, or to proceed by judicial foreclosure.
10.5 SEVERABILITY; WAIVERS. If any part of this Agreement is not enforceable,
the rest of the Agreement may be enforced. The Bank retains all rights, even if
it makes a loan after default. If the Bank waives a default, it may enforce a
later default. Any consent or waiver under this Agreement must be in writing.
10.6 ADMINISTRATION COSTS. The Borrower shall pay the Bank for all reasonable
costs incurred by the Bank in connection with administering this Agreement.
10.7 ATTORNEYS' FEES. The Borrower shall reimburse the Bank for any reasonable
costs and attorneys' fees incurred by the Bank in connection with the
enforcement or preservation of any rights or remedies under this Agreement and
any other documents executed in connection with this Agreement, and including
any amendment, waiver, "workout" or restructuring under this Agreement. In the
event of a lawsuit or arbitration proceeding, the prevailing party is entitled
to recover costs and reasonable attorneys' fees incurred in connection with the
lawsuit or arbitration proceeding, as determined by the court or arbitrator. As
used in this paragraph, "attorneys' fees" includes the allocated costs of in-
house counsel.
10.8 ONE AGREEMENT. This Agreement and any related security or other
agreements required by this Agreement, collectively:
(a) represent the sum of the understandings and agreements between the Bank and
the Borrower concerning this credit; and
(b) replace any prior oral or written agreements between the Bank and the
Borrower concerning this credit; and
(c) are intended by the Bank and the Borrower as the final, complete and
exclusive statement of the terms agreed to by them.
In the event of any conflict between this Agreement and any other agreements
required by this Agreement, this Agreement will prevail.
-14-
<PAGE>
10.9 NOTICES. All notices required under this Agreement shall be personally
delivered or sent by first class mail, postage prepaid, to the addresses on the
signature page of this Agreement, or to such other addresses as the Bank and the
Borrower may specify from time to time in writing.
10.10 HEADINGS. Article and paragraph headings are for reference only and
shall not affect the interpretation or meaning of any provisions of this
Agreement.
10.11 COUNTERPARTS. This Agreement may be executed in as many counterparts as
necessary or convenient, and by the different parties on separate counterparts
each of which, when so executed, shall be deemed an original but all such
counterparts shall constitute but one and the same agreement.
10.12 PRIOR AGREEMENT SUPERSEDED. This Agreement supersedes the Business Loan
Agreement entered into as of April 19, 1995, between the Bank and the Borrower,
and any credit outstanding thereunder shall be deemed to be outstanding under
this Agreement.
This Agreement is executed as of the date stated at the top of the first page.
<TABLE>
<S> <C>
[LOGO OF BANK OF AMERICA]
BANK OF AMERICA
NATIONAL TRUST AND SAVINGS ASSOCIATION CHANNELL COMMERCIAL CORPORATION
X /s/ Curt L. McCombs X /s/ William H. Channell, Sr.
---------------------------------- ----------------------------------
By: Curt L. McCombs By: William H. Channell, Sr.
Title: Vice President Title: Chairman & C.E.O.
ADDRESS WHERE NOTICES TO THE BANK ADDRESS WHERE NOTICES TO THE BORROWER
ARE TO BE SENT: ARE TO BE SENT:
3650 14th Street, 2nd Floor 26040 Ynez Road
Riverside, CA 92501 Temecula, CA 92390
</TABLE>
-15-
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FINANCIAL
STATEMENTS AND NOTES THERETO CONTAINED IN THE COMPANY'S ANNUAL REPORT ON FORM
10-K FILED ON MARCH 31, 1997 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> 6-MOS 12-MOS
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1996
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> JUN-30-1997 DEC-31-1996
<CASH> 6,362 9,190
<SECURITIES> 11,406 11,406
<RECEIVABLES> 9,363 6,685
<ALLOWANCES> 0 0
<INVENTORY> 5,775 2,908
<CURRENT-ASSETS> 33,768 31,274
<PP&E> 19,918 18,868
<DEPRECIATION> (9,267) (8,260)
<TOTAL-ASSETS> 46,383 42,658
<CURRENT-LIABILITIES> 4,332 4,898
<BONDS> 0 0
0 0
0 0
<COMMON> 92 92
<OTHER-SE> 41,281 37,330
<TOTAL-LIABILITY-AND-EQUITY> 46,383 42,658
<SALES> 28,468 47,282
<TOTAL-REVENUES> 28,804 48,267
<CGS> 16,320 25,447
<TOTAL-COSTS> 6,292 9,642
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 501 (291)
<INCOME-PRETAX> 6,693 13,469
<INCOME-TAX> 2,744 2,359
<INCOME-CONTINUING> 3,949 11,110
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 3,949 11,110
<EPS-PRIMARY> .43 1.06
<EPS-DILUTED> .43 1.06
</TABLE>
