SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
(Mark one)
[ X ] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1999
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ______________
Commission File No. 001-12739
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
- --------------------------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
FLORIDA 59-2327381
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
1810 N.E. 144TH STREET
NORTH MIAMI, FLORIDA 33181
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(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (305) 944-7710
Check whether the issuer: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
past 12 months (or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
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The number of shares outstanding of the issuer's Common Stock, as of
September 30, 1999, is 3,229,921 shares.
Transitional Small Business Disclosure Format (check one)
Yes No X
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<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
----
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets at December 31, 1998 and
September 30, 1999 (unaudited)......................................................................3
Condensed Consolidated Statements of Income for the
three months and nine months ended September 30, 1999 and 1998 (unaudited)..........................4
Condensed Consolidated Statements of Shareholders' Equity
for the nine months ended September 30, 1999 (unaudited)............................................5
Condensed Consolidated Statements of Cash Flows for the
nine months ended September 30, 1999 and 1998 (unaudited)...........................................6
Notes to Condensed Consolidated Financial Statements (unaudited)....................................7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION...............................................................................10
PART II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS..................................................................................14
Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS..........................................................14
Item 3. DEFAULTS UPON SENIOR SECURITIES....................................................................14
Item 4. SUBMISSION OF MATTERS TO VOTE
OF SECURITY HOLDERS................................................................................14
Item 5. OTHER INFORMATION..................................................................................14
Item 6. EXHIBITS AND REPORTS ON FORM 8-K...................................................................14
</TABLE>
2
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
SEPTEMBER 30,
1999 DECEMBER 31,
(UNAUDITED) 1998
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
CURRENT
Cash $ 1,057,606 $ 1,407,106
Accounts receivable, net of allowance for doubtful accounts of
$209,000 at December 31, 1998 and $87,609 at September 30,
1999 3,778,983 3,037,807
Inventories 6,597,029 6,157,889
Prepaid expenses and other current assets 364,806 424,164
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TOTAL CURRENT ASSETS 11,798,424 11,026,966
PROPERTY AND EQUIPMENT, NET 553,476 635,667
INTANGIBLE ASSETS 830,010 637,613
OTHER ASSETS 163,358 114,658
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$ 13,345,268 12,414,904
================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT
Notes payable $ 2,391,212 $ 2,472,895
Accounts payable and accrued expenses 3,106,182 3,538,313
Income taxes payable 493,406 425,461
Other current liabilities 164,634 94,380
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TOTAL CURRENT LIABILITIES 6,155,434 6,531,049
LONG TERM LIABILITIES 532,012 221,126
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TOTAL LIABILITIES 6,687,446 6,752,175
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COMMITMENT AND CONTINGENCY (NOTE 4)
- ----------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY
Preferred stock, $.001 par value; 1,000,000 shares authorized;
none issued -- --
Common stock, $.001 par value; 20,000,000 shares authorized;
issued: 3,081,715 at December 31, 1998 and 3,229,921 at
September 30, 1999 3,230 3,082
Paid-in capital 9,609,004 9,363,902
(Deficit) (2,721,431) (3,569,399)
Cumulative foreign currency translation adjustment (232,981) (134,856)
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TOTAL SHAREHOLDERS' EQUITY 6,657,822 5,662,729
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$ 13,345,268 12,414,904
================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
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<S> <C> <C> <C> <C>
NET SALES $ 7,333,762 $ 5,213,425 $ 20,008,899 $ 15,975,563
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OPERATING EXPENSES:
Cost of sales 4,671,109 3,539,312 11,852,511 9,516,078
Selling, general and
administrative expenses 2,349,872 2,056,649 7,012,867 6,334,009
Write off of uncollectible
accounts receivable and
inventory - 2,081,474 - 2,081,474
- ---------------------------------------------------------------------------------------------------------------------
Total operating expenses 7,020,981 7,677,435 18,865,378 17,931,561
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) FROM OPERATIONS 312,781 (2,464,010) 1,143,521 (1,955,998)
Other income (expense):
Interest (80,951) (73,447) (191,703) (199,062)
Other (29,542) (9,962) 72,267 33,886
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES 202,288 (2,547,419) 1,024,085 (2,121,174)
Provision (benefit) for income taxes 58,766 (914,011) 176,117 (881,172)
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 143,522 $ (1,633,408) $ 847,968 $ (1,240,002)
=====================================================================================================================
Net income (loss) per common share $ 0.05 $ (0.72) $ 0.27 $ (0.54)
Net income (loss) per common share $ 0.04 $ (0.72) $ 0.24 $ (0.54)
assuming dilution
=====================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(UNAUDITED)
<TABLE>
<CAPTION>
ACCUMULATED
OTHER COMPRE- TOTAL STOCK-
COMMON PAID-IN COMPREHENSIVE HENSIVE HOLDERS'
STOCK CAPITAL DEFICIT INCOME INCOME EQUITY
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1999 $ 3,082 $ 9,363,902 $(3,569,399) $(134,856) - $ 5,662,729
NET INCOME - - 847,968 847,968 847,968
SHARES ISSUED IN CONJUNCTION
WITH ACQUISITION OF
CCCI 86 149,914 - - - 150,000
STOCK OPTIONS EXERCISED 62 95,188 - - - 95,250
CUMULATIVE FOREIGN CURRENCY
TRANSLATION ADJUSTMENT _ _ _ (98,125) (98,125) (98,125)
--------
$749,843
=================================================================================================================================
BALANCE AT SEPTEMBER 30,
1999 $3,230 $9,609,004 $(2,721,431) $(232,981) $6,657,822
=================================================================================================================================
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(NOTE 2)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
==================================================================================================================================
OPERATING ACTIVITIES:
<S> <C> <C>
Net income $ 847,968 $(1,240,002)
Adjustments to reconcile net income to net cash used in operating activities:
Provision for losses on accounts receivable 49,960 -
Depreciation and amortization 121,659 219,360
Deferred income taxes - (1,034,410)
Amortization of goodwill 95,385 -
Write off of uncollectible accounts receivable and inventory - 2,081,474
Options issued in connection with consulting services - 25,000
(Increase) decrease, net of business segment acquired, in:
Accounts receivable (400,337) (388,277)
Inventories (320,719) 256,390
Income tax receivable 9,976 (429,000)
Prepaid expenses and other current assets 49,381 141,054
Deferred tax assets 9,045 -
Other assets (57,825) (60,927)
Increase (decrease) in:
Accounts payable and accrued expenses (765,704) (1,024,548)
Income taxes payable 67,945 41,828
Other liabilities 67,094 -
Deferred tax liability 27,624 -
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Net cash (used in) operating activities (198,548) (1,412,058)
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INVESTING ACTIVITIES:
Cash acquired in CCCI 339,812 -
Additions to property and equipment (39,468) (112,000)
Purchase of CCCI (299,451) -
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Net cash provided by (used in) investing activities 893 (112,000)
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FINANCING ACTIVITIES:
Net proceeds (payments) on borrowings (81,338) 1,714,907
Proceeds from exercise of options 95,250 -
Eliminate overdraft (67,632) -
- ----------------------------------------------------------------------------------------------------------------------------------
Net cash (used in) provided by financing activities (53,720) 1,714,907
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NET INCREASE (DECREASE) IN CASH (251,375) 190,849
Effect of exchange rate changes on cash (98,125) 54,366
CASH, AT BEGINNING OF YEAR 1,407,106 424,036
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CASH, AT END OF PERIOD $1,057,606 $ 669,251
==================================================================================================================================
Supplemental information:
Cash paid for:
Interest $ 191,703 $ 211,587
Taxes $ 108,172 $ 329,889
</TABLE>
SEE ACCOMPANYING NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF The accompanying unaudited condensed
PRESENTATION consolidated financial statements have been
prepared in accordance with generally
accepted accounting principles for interim
financial information and with the
instructions to Form 10-QSB. Accordingly,
they do not include all of the information
and footnotes required by generally
accepted accounting principles for complete
financial statements. In the opinion of
management, all adjustments (consisting of
normal recurring accruals) considered
necessary for a fair presentation have been
included. Operating results for the
nine-month period ended September 30, 1999
are not necessarily indicative of the
results that may be expected for the year
ended December 31, 1999. For further
information, refer to the consolidated
financial statements and footnotes thereto
included in the Company's Annual Report on
Form 10-KSB for the year ended December 31,
1998.
2. ACQUISITIONS In March 1999, the Company completed the
acquisition of the assets of Communications
Components Company, Inc. ("CCCI"), a
manufacturer of network connectivity
products and systems for $800,000, payable
$250,000 in cash, 86,206 shares of common
stock of the Company valued at $150,000,
assignment to the seller of a CCCI
receivable in the amount of $100,000, and a
$300,000 note payable with interest at 8%
per annum over three years. This
acquisition was accounted for under the
purchase method, whereby the purchase price
was allocated to the underlying assets and
liabilities based upon their estimated fair
values. The excess cost over net assets
acquired amounted to approximately
$289,000. This amount will be amortized
over ten years.
On October 31, 1998, the Company acquired
all the outstanding common stock of its
distributor, AESP-Ukraine. The purchase
price of this acquisition was valued at
approximately $490,000, the amount equal to
the outstanding amount then due from the
distributor to the Company. This
acquisition was accounted for under the
purchase method, whereby the purchase price
was allocated to the underlying assets and
liabilities based upon their estimated fair
values.
The following unaudited proforma
information presents the results of
operations of the Company and its
subsidiaries as if both of these
acquisitions had occurred on January 1,
1998:
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1999 1998
-------------------------------------------------- ------------------ ------------------
<S> <C> <C>
Net sales $20,310,499 $17,939,316
Net income (loss) 870,407 (2,078,180)
Net income (loss) per common share 0.27 (0.88)
Net income (loss) per common share -
assuming dilution 0.25 (0.88)
</TABLE>
The unaudited pro forma information assumes
the amortization of the excess cost over
net asset acquired and the elimination of
intercompany sales.
7
<PAGE>
3. EARNINGS PER SHARE The following reconciles the components of
the earnings per share (EPS) computation:
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED 1999 1998
SEPTEMBER 30,
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common share
Net income available to
common shares $143,522 3,155,825 $0.05 $(1,633,408) 2,282,201 $(0.72)
Effect of Dilutive
Securities:
Exercisable options to
purchase shares of
common stock 308,821 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to
common shareholders plus
assumed conversions $143,522 3,464,646 $0.04 $(1,633,408) 2,281,201 $(0.72)
- ------------------------------------------------------------------------------------------------------------------------------------
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 1999 1998
30,
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME SHARES PER-SHARE INCOME SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) AMOUNT (NUMERATOR) (DENOMINATOR) AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings per common share
Net income available to
common shares $847,968 3,187,312 $0.27 $(1,240,002) 2,282,201 $(0.54)
Effect of Dilutive Securities:
Exercisable options to
purchase shares of
common stock 316,807 -
- ------------------------------------------------------------------------------------------------------------------------------------
Net income available to
common shareholders plus
assumed conversions $847,968 3,504,119 $0.24 $(1,240,002) 2,282,201 $(0.54)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
8
<PAGE>
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.
AND SUBSIDIARIES
The convertible stockholder notes amounting
to $1,434,125 were convertible at $4.00 per
share and were considered anti-dilutive for
the three and nine months ended September
30, 1998. These notes were converted into
common shares on December 31, 1998.
Options to purchase 23,000 shares, 40,000
shares and 90,000 shares of common stock at
$2.13, $2.13, and $3.69 per share,
respectively, were outstanding during 1999,
but not included in the computation of
diluted EPS as the options' exercise price
was greater than the average market price
of the common shares. The options, with
expirations from 2006 to 2007, were
outstanding at September 30, 1999.
Options to purchase 200,000 shares, 360,500
shares, 36,000 shares, 23,000 shares,
40,000 shares and 120,000 shares of common
stock at $6.00, $6.00, $5.88, $4.00, $6.00,
and $3.69 per share, respectively, were
outstanding during 1998, but not included
in the computation of diluted EPS as the
options' exercise price was greater than
the average market price of the common
shares. The options, with expirations from
2002 to 2007, were outstanding at September
30, 1998.
4. POTENTIAL In August, 1999, the Company signed a
ACQUISITION non-binding letter of intent to acquire
substantially all of the assets and
business of BICC-KD GmbH, headquartered in
Munich, Germany. The letter of intent has
expired by its terms, although the Company
continues to negotiate with the seller and
hopes to complete an acquisition of this
business in the future. There can be no
assurance that an acquisition of BICC-KD
will be consummated.
5. LINE OF CREDIT In September 1999, the Company obtained a
new $3.5 million line of credit from a
financial institution. Borrowings under the
new line of credit, which matures on
September 2, 2000, bear interest at the
rate of prime plus one-half (.5) percent.
Borrowings under the new line of credit are
based on specific percentages of the
Company's receivables and inventories. The
line of credit is secured by a lien on the
Company assets, including its accounts
receivable and inventories. The line of
credit is also guaranteed by the Company's
principal shareholders, who have pledged
the shares of the Company's common stock
which they own to secure their respective
guarantees. Under the terms of the loan
agreement relating to the new line of
credit, the Company is required to comply
with certain affirmative and negative
covenants and to maintain certain financial
benchmarks and ratios during future
periods.
As of November 1, 1999, approximately $2.1
million was outstanding under the line of
credit and approximately $1.0 million was
currently available for additional
borrowing based on applicable borrowing
base formulas. The Company was in
compliance with the covenants under its new
loan agreement at September 30, 1999.
9
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
EXCEPT FOR THE HISTORICAL INFORMATION CONTAINED HEREIN, THE MATTERS
DISCUSSED IN THIS QUARTERLY REPORT ON FORM 10-QSB CONTAIN FORWARD-LOOKING
STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933 AND
SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, WHICH ARE INTENDED TO BE
COVERED BY THE SAFE HARBORS CREATED THEREBY. THESE FORWARD-LOOKING STATEMENTS
INVOLVE RISKS AND UNCERTAINTIES, INCLUDING BUT NOT LIMITED TO THE FOLLOWING:
COMPETITION FROM OTHER MANUFACTURERS AND DISTRIBUTORS OF CONNECTIVITY AND
NETWORKING PRODUCTS BOTH NATIONALLY AND INTERNATIONALLY; THE BALANCE OF THE MIX
BETWEEN ORIGINAL EQUIPMENT MANUFACTURER SALES (WHICH HAVE COMPARATIVELY LOWER
GROSS PROFIT MARGINS WITH LOWER EXPENSES) AND RETAIL SALES (WHICH HAVE
COMPARATIVELY HIGHER GROSS PROFIT MARGINS WITH HIGHER EXPENSES) FROM PERIOD TO
PERIOD; AND THE COMPANY'S DEPENDENCE ON THIRD PARTIES FOR MANUFACTURING AND
ASSEMBLY OF PRODUCTS AND THE ABSENCE OF SUPPLY AGREEMENTS. THESE AND ADDITIONAL
FACTORS ARE DISCUSSED HEREIN AND IN THE COMPANY'S ANNUAL REPORT ON FORM 10-KSB
FOR 1998 (THE "FORM 10-KSB"). THE FORWARD-LOOKING STATEMENTS CONTAINED HEREIN
AND THEREIN INVOLVE AND ARE SUBJECT TO KNOWN AND UNKNOWN RISKS, UNCERTAINTIES
AND OTHER FACTORS WHICH COULD CAUSE THE COMPANY'S ACTUAL RESULTS, PERFORMANCE
(FINANCIAL OR OPERATING) OR ACHIEVEMENTS TO DIFFER FROM THE FUTURE RESULTS,
PERFORMANCE (FINANCIAL OR OPERATING), ACHIEVEMENTS EXPRESSED OR IMPLIED BY SUCH
FORWARD-LOOKING STATEMENT. INVESTORS ARE CAUTIONED NOT TO PLACE UNDUE RELIANCE
ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK ONLY AS OF THE DATE HEREOF. THE
COMPANY UNDERTAKES NO OBLIGATION TO PUBLICLY RELEASE ANY REVISIONS TO THESE
FORWARD-LOOKING STATEMENTS TO REFLECT EVENTS OR CIRCUMSTANCES AFTER THE DATE
HEREOF OR TO REFLECT THE OCCURRENCE OF UNANTICIPATED EVENTS.
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION
WITH THE INFORMATION SET FORTH IN "MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN
OF OPERATION" IN THE FORM 10-KSB.
RESULTS OF OPERATIONS
For the nine months ended September 30, 1999, the Company had net sales
of $20.0 million, an increase of $4.0 million or 25.2% over net sales of $16.0
million for the nine months ended September 30, 1998. For the quarter ended
September 30, 1999, the Company had net sales of $7.3 million, an increase of
$2.1 million or 40.7 % over net sales of $5.2 million for the quarter ended
September 30, 1998.
The increase in sales primarily resulted from increases in domestic
sales for both OEM and Retail products. OEM sales were up $1.4 million or 81.4%
for the first nine months of 1999, compared to the first nine months of 1998,
and up $400,000 or 67.5% for the third quarter of 1999, compared to the third
quarter of 1998. Similarly, Retail sales increased $1.1 million or 22.8% for the
first nine months of 1999, compared to the first nine months of 1998, and
$300,000 or 16.6% for the third quarter of 1999, compared to the third quarter
of 1998. The Company's 1999 sales also benefited from sales by CCCI of $300,000
and $900,000, respectively, for the three and nine month periods.
10
<PAGE>
International sales increased $600,000 or 6.2% for the first nine
months of 1999, compared to the first nine months of 1998, and $1.1 million or
6.7% for the third quarter of 1999, compared to the third quarter of 1998.
International sales were adversely impacted in the third quarter of 1998 by the
cessation of sales by the Company to its exclusive distributor in Russia.
The Company's gross profit margin was 40.8% for the nine months ended
September 30, 1999 compared to 40.4% for the nine months ended September 30,
1998, and was 36.3% for the third quarter of 1999 compared to 32.1% for the
third quarter of 1998. The primary reason for these changes was the increase in
domestic Retail sales from period to period, partially offset by an increase in
domestic OEM sales. As the Company has previously stated, the mix of OEM and
Retail business in any particular period will impact (positively or negatively)
the gross profit margin in that particular period. Generally, OEM business
generates a lower margin than the Company's retail or international business,
and OEM sales typically have lower gross profit margins but have considerably
less overhead corresponding to the sale.
Selling, general, and administrative ("SGA") expenses increased
$700,000 or 10.7% for the nine months ended September 30, 1999, compared to the
nine months ended September 30, 1998, and $300,000 or 14.3% for the third
quarter 1999, compared to the third quarter of 1998. As a percentage of net
sales, SG&A for the three and nine months ended September 30, 1999 was 32.0% and
35.0% respectively. Comparatively, SG&A for the three and nine months ended
September 30, 1998 was 39.4% and 39.6% respectively. These decreases in SG&A as
a percentage of net sales reflect the benefits of the Company's continued
efforts to control its costs and economies of scale.
During the 1998 three and nine month periods, the Company incurred a
one-time write-off of $2.1 million relating to its Russian related inventory and
receivables. For information regarding this write-off, see the Company's 1998
Form 10-KSB. No such write-off occurred in 1999.
As a result of the aforementioned factors, income from operations for
the three months ended September 30, 1999 increased $2.8 million to $313,000,
compared to the $2.5 million loss for the three months ended September 30, 1998.
For the first nine months of 1999 income from operations increased $3.1 million
to $1.1 million, compared to a $2.0 million loss for the first nine months of
1998.
Interest expense remained relatively constant from period to period.
Other income for the three and nine month periods ended September 30, 1999
reflects the benefits from changes in currency exchange rates at September 30,
1999 compared to exchange rates at December 31, 1998. Taxes for both 1999 and
1998 benefited from net operating loss carry forwards and carry backs arising as
a result of the Company's 1998 losses.
As a result of the forgoing factors, the Company had net income of
$848,000 for the nine months ended September 30, 1999, an increase of $2.1
million over a $1.2 million loss for the nine months ended September, 30, 1998.
For the three months ended September 30, 1999 the Company had net income of
$144,000, an increase of $1.8 million compared to a $1.6 million loss for the
three months ended September 30, 1998.
11
<PAGE>
Primary earnings per share were $.27 for the nine months ended
September 30, 1999, compared to a loss per share of $(.54) for the nine months
ended September 30, 1998. Fully diluted earnings per share were $.24 for the
nine months ended September 30, 1999, compared to a fully diluted loss per share
of $(.54) for the nine months ended September 30, 1998. For the three months
ended September 30, 1999 primary earnings per share were $.05, compared to a
loss of $(.72) per share for the three months ended September 30, 1998. Fully
diluted earnings per share for the three months ended September 30, 1999 were
$.04, compared to a loss of $(.72) per share for the three months ended
September 30, 1998.
Weighted average shares outstanding on a primary basis were 3.2 million
for both the three and nine month 1999 periods, compared to 2.3 million for both
the three and nine month 1998 periods. Weighted average shares outstanding on a
fully diluted basis were 3.5 million for both the three and nine month 1999
periods, compared to 2.3 million for both the three and nine month 1998 periods.
LIQUIDITY & CAPITAL RESOURCES
Historically, the Company has financed its operations primarily with
cash flow from operations and with borrowings under its available lines of
credit.
At September 30, 1999, the Company's working capital was $5.6 million,
an increase of 25.5% over the working capital of $4.5 million as of December 31,
1998. The increase resulted primarily from increases in accounts receivable of
$400,000, increases in inventories of $321,000, and a decrease in accounts
payable and accrued expenses of $766,000, partially offset by a decrease in cash
of $251,000.
For the nine months ended September 30, 1999, $199,000 of cash was used
in operations. Net income of $848,000 was applied to the aforementioned
reduction in accounts payable and accrued expenses and increases in accounts
receivable and inventory. Net cash gained through investing activities was
$1,000. Cash of $54,000 was used in financing activities, which was applied to
payments on borrowings and to eliminate a bank overdraft, offset by $95,000 of
cash received from the exercise of stock options. As a result of the foregoing,
the Company's cash position decreased $251,000 between December 31, 1998 and
September 30, 1999.
In September 1999, the Company obtained a new $3.5 million line of
credit from a financial institution. Borrowings available under the new line of
credit, which matures on September 2, 2000, bear interest at the rate of prime
plus one-half (.5) percent. Borrowings under the new line of credit are based on
specific percentages of the Company's receivables and inventories. The line of
credit is secured by a lien on the Company assets, including its accounts
receivable and inventories. The line of credit is also guaranteed by the
Company's principal shareholders, who have pledged the shares of the Company's
common stock which they own to secure their respective guarantees. Under the
terms of the loan agreement relating to the new line of credit, the Company is
required to comply with certain affirmative and negative covenants and to
maintain certain financial benchmarks and ratios during future periods.
As of November 1, 1999, approximately $2.1 million was outstanding
under the line of credit and approximately $1.0 million was available for
additional borrowing based on applicable borrowing base
12
<PAGE>
formulas. The Company was in compliance with the covenants under its new loan
agreement at September 30, 1999.
The Company believes that its current cash position, internally
operated cash flow and its borrowings available under its new line of credit
will be sufficient to satisfy the Company's anticipated working capital needs
over the next twelve months. However, the Company anticipates that it will need
to raise additional capital to in order to be in a position to complete future
acquisitions, as well as to pay deferred obligations incurred in connection with
the Company's acquisition of CCCI. The Company expects to raise the required
capital through future sales of its debt and/or equity securities. Although
there can be no assurance, the Company expects to be able to raise the funds
required to meet its current obligations and to fund future acquisitions.
The Company does not believe that inflation has had a material effect
on its financial condition or operating results for the last several years, and
the Company has historically been able to pass along increased costs in the form
of adjustments to the prices it charges to its customers.
IMPACT OF THE YEAR 2000
The Company has completed its assessment of the potential impact of
Year 2000 related problems on its operations, including its information
technology systems (computer systems) and non-information technology systems
(plant and equipment and its manufacturing and assembly processes). With respect
to its information technology systems, the Company believes that its present
computer systems are Y2K compliant. The Company has completed an update of its
computer system in order to have the computer system capable of handling the
projected growth and diversification of the Company's present and acquired
businesses. The Company has also made an examination of its non-information
technology systems. The Company, having substantially completed its information
systems and non-information systems evaluation has a reasonable belief that it
no longer has any material exposure to the Y2K problem in any aspect of its
business operations or infrastructure.
13
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
Not applicable
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 29, 1999, the Company held its 1999 Annual
Meeting of Shareholders, at which the holders of 1,794,908
shares of the Company's outstanding common stock
(approximately 55.9%) were represented either in person or by
proxy. At the shareholders' meeting, the shareholders adopted
an amendment to the Company's 1996 stock option plan
increasing the number of shares for which options may be
granted under the plan to 530,000 shares. Such amendment was
adopted by a vote of 1,718,583 shares in favor, 57,200 shares
opposed and 12,325 shares abstaining. Additionally, the
shareholders voted at the meeting to elect the following
persons to serve as directors of the Company until the 2000
Annual Meeting of Shareholders or until their successors are
elected and qualified: Slav Stein, Roman Briskin, Terrence R.
Daidone, William B. Coldrick and L. Phillips Reames. All
directors received the following votes: 1,784,658 in favor and
10,250 opposed.
ITEM 5. OTHER INFORMATION
None
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan Agreement between the Company and
CommerceBank, N.A., dated September 23, 1999
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
In accordance with 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.
ADVANCED ELECTRONIC SUPPORT
PRODUCTS, INC.
Date: November 15, 1999 By: /s/ Slav Stein
------------------------------------
Slav Stein, President and CEO
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EXHIBIT INDEX
EXHIBIT DESCRIPTION
- ------- -----------
10.1 Loan Agreement between the Company and CommerceBank, N.A., dated
September 23, 1999
27.1 Financial Data Schedule
EXHIBIT 10.1
----------
LOAN AGREEMENT
Between
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC.,
as the Borrower,
and
COMMERCEBANK, N.A.,
as the Lender
----------
Dated as of September 23, 1999
<PAGE>
LOAN AGREEMENT
THIS LOAN AGREEMENT (this "Agreement") is executed and entered into as
of September 23, 1999 by and between COMMERCEBANK, N.A. (the "Lender"), and
ADVANCED ELECTRONIC SUPPORT PRODUCTS, INC., a Florida corporation (the
"Borrower"). Each capitalized term used herein and not otherwise defined shall
have the meaning ascribed thereto in Article 1 hereof.
W I T N E S S E T H :
WHEREAS, the Lender wishes to lend to the Borrower, and the Borrower
wish to borrow from the Lender $3,500,000 in the form of a line of credit
secured by certain personal property of Borrower.
NOW, THEREFORE, for mutual and valuable consideration, the receipt and
adequacy of which are hereby acknowledged, the parties agree with each other as
follows:
ARTICLE 1
DEFINITIONS
SECTION 1.1 DEFINED TERMS. The following terms when used in this
Agreement, including its preamble and recitals, shall, except where the context
otherwise requires, have the following meanings (such meanings to be equally
applicable to the singular and plural forms thereof):
"ADVANCE" shall mean an advance of proceeds of the Line of Credit to
the Borrower pursuant to this Agreement, on any given Advance Date.
"ADVANCE DATE" shall mean the date as of which an Advance is made.
"ADVANCE REQUEST" shall mean the written request for an Advance under
the Line of Credit as identified in Section 2.2 hereof.
"AFFILIATE" shall mean, with respect to any Person, any Person directly
or indirectly controlling or controlled by the Person; any Person under common
control with the Person any Person for whom the Person serves as general
partner, and any Subsidiary of such Person. For purposes of this definition,
"control," when used with respect to any specified Person, means the power to
direct the management and policies of such Person, directly or indirectly,
whether through ownership of voting securities, by contract or otherwise.
"AGREEMENT" shall mean this Loan Agreement, as the same may be amended,
renewed, modified and supplemented from time to time.
"AGREEMENT DATE" shall mean the date of this Agreement as indicated on
page one of this Agreement.
"APPLICABLE LAW" shall mean, in respect of any Person, all provisions
of constitutions, statutes, treaties, rules, regulations, guidelines, directives
and orders of Governmental Authorities applicable to such Person, and all orders
and decrees of all courts and arbitrators in proceedings or actions to which the
Person in question is a party or by which it or any of its property is bound.
<PAGE>
"AUTHORIZED SIGNATORY" shall mean the President and such other senior
personnel of the Borrower as may be duly authorized and designated in writing by
the Borrower to execute documents, agreements and instruments on behalf of the
Borrower.
"BORROWER" shall mean Advanced Electronic Support Products, Inc. and
its permitted successors and assigns.
"BORROWING BASE" shall have the meaning set forth in Section 2.2(b)
hereof.
"BUSINESS DAY" shall mean a day on which banks are not authorized or
required to be closed in Fort Lauderdale, Florida.
"CAPITALIZED LEASE OBLIGATION" shall mean that portion of any
obligation of a Person as lessee under a lease which at the date of
determination would be required to be capitalized on the balance sheet of such
lessee in accordance with generally accepted accounting principles.
"CODE" shall mean the Internal Revenue Code of 1986, as amended from
time to time.
"COLLATERAL" shall mean all personal property and other collateral from
time to time assigned, mortgaged or pledged by the Borrower or any other Person
to the Lender as security for the Loan.
"COLLATERAL DOCUMENTS" shall mean, without limitation, the Security
Agreement and all UCC financing statements.
"COMMITMENT LETTER" shall mean that certain letter agreement dated July
16, 1999 among the Lender, the Borrower and the Guarantors.
"DOMESTIC ACCOUNTS RECEIVABLE" shall be accounts receivable of the
Borrower due on account of deliveries to be made within the United States.
"DOMESTIC ELIGIBLE ACCOUNTS RECEIVABLE" shall mean at any date of
determination thereof (which date shall be in Lender's sole reasonable
discretion) all Domestic Accounts Receivable of the Borrower which are Eligible
Receivables and which are not Eligible Insured Domestic Accounts Receivable.
"ELIGIBLE DOMESTIC INVENTORY" shall be Eligible Inventory which is
physically located in the State of Florida.
"ELIGIBLE FOREIGN ACCOUNTS RECEIVABLE" shall mean at any date of
determination thereof (which date shall be selected in Lender's sole reasonable
discretion) all Foreign Accounts Receivable of Borrower which are Eligible
Receivables and which are not Eligible Insured Foreign Accounts Receivables.
There shall be excepted from Eligible Foreign Accounts Receivable all
receivables from Subsidiaries or Affiliates of Borrower.
"ELIGIBLE INSURED DOMESTIC ACCOUNTS RECEIVABLE" shall mean, at any date
of determination thereof, (which date shall be at Lender's sole reasonable
discretion) Domestic Accounts Receivable of Borrower which are Eligible
Receivables and are insured in full by a policy issued by a credit insurance
company reasonable satisfactory to Lender whose policy terms are reasonably
satisfactory to Lender.
"ELIGIBLE INSURED FOREIGN ACCOUNTS RECEIVABLE" shall mean, at any date
of determination thereof, (which date shall be at Lender's sole reasonable
discretion) Foreign Accounts Receivable of Borrower which are Eligible
Receivables and are insured in full by a policy issued by a credit insurance
company reasonable satisfactory to Lender whose policy terms are reasonably
satisfactory to Lender.
2
<PAGE>
"ELIGIBLE INVENTORY" shall mean finished goods inventory of Borrower in
which Lender has a perfected first priority security interest, subject only to
Permitted Liens, reduced by the amount of the obsolescence reserves (if any)
shown on the consolidated financial statements of Borrower, and excluding
(without duplication):
(a) Inventory that is subject to any lien other than the lien
in favor of Bank;
(b) Inventory that is obsolete, damaged, unsalable or
otherwise unfit for use;
(c) Inventory constituting raw materials, work-in-process or
is in transit;
(d) Inventory, that is on consignment or Inventory that is
packaging materials, packing supplies and other similar types of goods, as
determined by Lender in its sole discretion; and
(e) Inventory that is otherwise deemed unacceptable by Lender
in its reasonable discretion provided such discretion is exercised in good
faith.
"ELIGIBLE RECEIVABLES" shall mean Receivables of the Borrower in which
Lender has a perfected first priority security interest (subject only to
Permitted Liens) and which meet the following requirements at the time the
Receivable is created and continues to meet such requirements until the
Receivable is collected:
(a) The Receivable is due not more than (90) days from the
invoice date thereof;
(b) Fifty percent (50%) of any Receivables due from one
Receivable Debtor if and to the extent such Receivables constitute ten percent
(10%) or more of all Receivables.
(c) The Receivable is not a portion of a Receivable from one
Receivable Debtor to the extent in excess of twenty percent (20%) of all
Receivables.
(d) The Receivable is not an intercompany receivable.
(e) The Receivable arose from the performance of services or
an outright sale of Goods (as defined in the Security Agreement) by Borrower,
such goods have been shipped to the Receivable Debtor; and Borrower have
possession of, or has delivered to Lender if required by Lender, shipping and
delivery receipts evidencing such shipment (a Receivable that is subject to a
"price protection" or "stock rotation agreement" shall be eligible but shall
qualify only to the extent of the amount actually owed at the applicable time
under the terms os such agreements by the applicable Receivable Debtor);
(f) The Receivable is not subject to any Lien (subject only to
Permitted Liens), and Borrower has not made and will not make any further
assignment thereof or create any further security interest therein, nor permit
Borrower's rights therein to be breached by attachment, levy, garnishment or
other judicial process (a Receivable that is subject to a "price protection" or
"stock rotation agreement" shall be eligible but shall qualify only to the
extent of the amount actually owed at the applicable time under the terms os
such agreements by the applicable Receivable Debtor);
(g) The Receivable is not subject to set-off, credit,
allowance or adjustment by the Receivable Debtor, except any discount allowed
for prompt payment, and the Receivable Debtor has not complained as to its
liability thereon and has not returned any material portion of the Goods from
the sale of which the Receivable arose;
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<PAGE>
(h) The Receivable arose in the ordinary course of Borrower's
business and did not arise from the performance of services or a sale of Goods
between the Borrower and to an employee of Borrower or Subsidiary or Affiliate
of Borrower;
(i) No notice of bankruptcy, insolvency or receivership of the
Receivable Debtor has been received by or is known to Borrower;
(j) The Receivable is not owed by the United States; and
(k) Lender has not notified the Borrower that the Receivable
or Receivable Debtor is unsatisfactory to Lender in its reasonable discretion.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974,
as in effect on the Agreement Date and as such Act may be amended thereafter
from time to time, and all rules and regulations from time to time promulgated
thereunder.
"ERISA AFFILIATE" shall mean any Person who for purposes of Title IV of
ERISA is a member of the Borrower's controlled group, or under common control
with the Borrower, within the meaning of Section 414(b) or 414(c) of the Code.
"EVENT OF DEFAULT" shall mean any of the events, acts, conditions or
occurrences specified in Section 6.1 hereof, provided that any requirement for
notice or lapse of time, or both, has been satisfied.
"FINANCIAL STATEMENTS" shall mean, for any Person and for any period,
the consolidated balance sheet of such Person prepared by an independent
certified public accountant as of the end of such period (if such period is a
fiscal year, and if not prepared by that persons internal staff) and the related
consolidated statements of income of such Person, for such period and for the
elapsed portion of the fiscal year ended with the last day of such period, which
shall be in comparative form with respect to the consolidated financial results
of such Person for the corresponding period of the preceding fiscal year, and
which shall be certified by the President of such Person to be, in his or her
opinion, complete and correct in all material respects and to present fairly in
all material respects, in accordance with generally accepted accounting
principles consistently applied, the consolidated financial position of such
Person as of the end of such period and the consolidated results of operations
for such period, and for the elapsed portion of the year ended with the last day
of such period, subject only to normal year-end adjustments and a lack of
footnotes with respect to internal company prepared statements.
"FOREIGN ACCOUNTS RECEIVABLE" shall be accounts receivable of Borrower
due on account of deliveries to be made outside of the United States.
"GUARANTORS" shall mean Slav Stein and Roman Briskin, each individual
residents of the State of Florida.
"GUARANTY" shall mean the guaranty agreements of even date herewith
executed and delivered by each Guarantor in favor of Lender.
"GOVERNMENTAL ACTION" shall mean all permits, authorizations,
registrations, consents, approvals, waivers, exceptions, variances, orders,
judgments, written interpretations, decrees, licenses, exemptions, publications,
filings, notices to and declarations of or with, or required by, any
Governmental Authority, or required by any Applicable Law, and shall include,
without limitation, all environmental and operating permits and licenses that
are required for the full use, occupancy, zoning and operation of any properties
of the Borrower.
4
<PAGE>
"GOVERNMENTAL AUTHORITY" shall mean any nation or government, any state
or other political subdivision thereof, any municipality, any court and any
entity exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"INDEBTEDNESS" shall mean, with respect, to any Person, (a) all items,
except items of shareholders and partners equity or capital stock or surplus,
which in accordance with generally accepted accounting principles would be
included in determining total liabilities as shown on the liability side of a
balance sheet of such Person, and (b) to the extent not otherwise included, all
Capitalized Lease Obligations of such Person.
"INDEBTEDNESS FOR MONEY BORROWED" shall mean, with respect to any
Person, all money borrowed and Indebtedness represented by notes payable and
drafts accepted representing extensions of credit (excluding accounts payable
incurred in the ordinary course of business), all obligations evidenced by
bonds, debentures, notes or other similar instruments (including, without
duplication, reimbursement obligations in respect of letters of credit issued in
connection with other Indebtedness), all Indebtedness upon which interest
charges are customarily paid, and all Indebtedness issued or assumed as full or
partial payment outside the ordinary course of business for property or
services, whether or not any such notes, drafts, obligations or Indebtedness
represent Indebtedness for money borrowed. For purposes of this definition,
interest which is accrued but not paid on the original due date or within any
applicable cure or grace period as provided by the underlying contract for such
interest shall be deemed Indebtedness for Money Borrowed.
"INSURANCE REQUIREMENTS" shall mean all terms and conditions of any
insurance policy to be maintained by the Borrower pursuant to any Loan Document,
and all requirements of the issuer of any such policy.
"LENDER" shall mean Commercebank, N.A., any Person to which all or a
portion of any Loan is assigned or participated in accordance with Section 7.3
hereof and their permitted successors and assigns.
"LENDER'S OFFICE" shall mean the office of the Lender located at 220
Alhambra Circle, Coral Gables, Florida 33134, or such other office or offices as
may be designated pursuant to the provisions of Section 7.1 hereof.
"LIEN" shall mean, with respect to any property, any mortgage, lien,
pledge, assignment, charge, security interest, title retention agreement, levy,
execution, seizure, attachment, garnishment or other encumbrance of any kind in
respect of such property, whether or not choate, vested or perfected.
"LINE OF CREDIT" shall mean the amount advanced by the Lender under the
Line of Credit Note in accordance with the terms of such note and Section 2.2 of
this Agreement.
"LINE OF CREDIT MATURITY DATE" shall mean September 2, 2000 or such
earlier date as payment of the Line of Credit shall be due and payable in full,
whether by mandatory prepayment, acceleration or otherwise.
"LINE OF CREDIT NOTE" shall mean that certain promissory note of even
date herewith in the aggregate principal amount of Three Million Five Hundred
Thousand Dollars ($3,500,000) executed and delivered by the Borrower to the
Lender, whereby the Borrower are obligated to repay the Line of Credit to the
Lender, as the same may be amended or supplemented from time to time.
"LOAN DOCUMENTS" shall mean, without limitation, this Agreement, the
Line of Credit Note, each Guaranty, each Stock Pledge Agreement, the Commitment
Letter, all legal opinions of counsel to the Borrower in connection herewith,
and all other documents, instruments, certificates and agreements executed or
delivered
5
<PAGE>
by the Borrower or its Affiliates in connection with or contemplated by any of
such instruments. In the event of any conflict between the terms of the
Commitment Letter and this Agreement, the terms of this Agreement shall control.
"LOAN GUARANTY" OR "LOAN GUARANTEES" shall mean and include, without
duplication, (i) a guaranty, direct or indirect, in any manner, of any part or
all of an obligation, (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of non-performance) of any part
or all of an obligation, including, without limiting the foregoing, any
reimbursement obligations as to amounts drawn down by beneficiaries of
outstanding letters of credit, (iii) any indirect obligation secured by any Lien
to which any property or asset owned by the Borrower is subject, whether or not
the obligation secured thereby shall have been assumed by the Borrower, and (iv)
any residual or recourse liability of the Borrower with respect to the
obligations of any Person beyond the Borrower's initial investment in such
Person, including, without limitation, any net worth maintenance or similar
arrangement whereby any obligation to contribute to any Person is created. In
determining the amount of any Guaranty, the amount of such Guaranty shall equal
the maximum principal amount which could be outstanding under the terms of the
documents evidencing such debt from time to time.
"MATERIAL" and "MATERIALLY" shall mean, with respect to any Person,
material to (i) the consolidated financial position, business, assets or
consolidated results of operations of such Person, (ii) the ability of such
Person to perform its obligations under the Loan Documents, or (iii) the value
or condition of any property or business of such Person taken as a whole.
"MATERIALLY ADVERSE EFFECT" shall mean, with respect to any Person, any
Materially adverse effect upon the business, assets, liabilities, financial
condition, results of operations or business prospects of such Person, or the
ability of such Person to own and operate its properties or to perform its
obligations under the Loan Documents.
"MAXIMUM LINE OF CREDIT AMOUNT" shall mean Three Million Five Hundred
Thousand Dollars ($3,500,000) or such greater amount as the Lender may consent
to in writing from time to time.
"MAXIMUM RATE" shall mean the maximum rate or amount of interest
allowed by Applicable Law.
"MULTIEMPLOYER PLAN" shall have the meaning assigned to such term in
Section 3(37) of ERISA or Section 414(f) of the Code.
"NECESSARY AUTHORIZATIONS" shall mean all authorizations, consents,
permits, approvals, licenses and exemptions from, and all filings and
registrations with, and all reports to, any governmental or other regulatory
authority, whether federal, state or local, and all agencies thereof, necessary,
appropriate or useful for the conduct of the businesses and the ownership (or
lease) of the properties and assets of the Borrower.
"OBLIGATIONS" shall mean (i) all payment and performance obligations of
the Borrower and Borrower's Affiliates under any Loan Document to or for the
benefit of the Lender, and (ii) the obligation to pay an amount equal to the
amount of any and all damage (other than lost profits) which the Lender may
suffer by reason of a breach by the Borrower or any other Persons of any
obligation, covenant or undertaking with respect to any Loan Document not
otherwise included in clause (i).
"PBGC" shall mean the Pension Benefit Guaranty Corporation or any
successor thereto.
"PERMITTED LIENS" shall mean, as applied to any Person:
6
<PAGE>
(i) Liens in favor of the Lender given to secure the
Obligations;
(ii) Liens for real estate taxes not yet delinquent and Liens
for taxes, assessments, judgments, governmental charges or levies or claims the
non-payment of which is being diligently contested in good faith by appropriate
proceedings and for which adequate reserves have been set aside on such Person's
books, but only so long as no foreclosure, distraint, sale or similar
proceedings have been commenced with respect thereto which remain unstayed or
otherwise unbonded for a period of thirty (30) days after their commencement;
(iii) Liens of carriers, warehousemen, mechanics, laborers and
materialmen incurred in the ordinary course of business for sums not yet due or
being diligently contested in good faith and for which reserves or appropriate
provisions, if any, as shall be required by generally accepted accounting
principles, shall have been made therefor;
(iv) Liens incurred in the ordinary course of business for
worker's compensation, social security and unemployment insurance and statutory
obligations;
(v) Easements, rights-of-way, restrictions and other similar
encumbrances on the use of real property which do not interfere with the
ordinary conduct of the business of such Person, or Liens incidental to the
conduct of the business of such Person or to the ownership of its properties
which were not incurred in connection with Indebtedness or other extensions of
credit and which do not in the aggregate materially detract from the value of
such properties or materially impair their use in the operation of the business
of such Person;
(vi) Liens on leasehold improvements under applicable landlord
lien laws and landlord's liens; and
(vii) Liens of record as of the Agreement Date as set forth on
Schedule 1 attached hereto and approved by the Lender in its sole discretion.
"PERSON" shall mean an individual, corporation, partnership, limited
liability company, trust or unincorporated organization or a government, or any
agency or political subdivision thereof.
"PLAN" shall mean an employee benefit plan within the meaning of
Section 3(3) of ERISA or any other plan maintained for employees of the Borrower
or any Affiliate which is covered by ERISA.
"PROHIBITED TRANSACTION" shall mean any transaction set forth in
Section 406 of ERISA or Section 4975 of the Code.
"RECEIVABLE DEBTOR" shall mean the Person obligated to make payment to
a Borrower on a Domestic Accounts Receivable and Foreign Accounts Receivable.
"RECEIVABLES" shall have the meaning assigned in the Security
Agreement.
"REPORTABLE EVENT" shall have the meaning given to such term in Section
4043 of ERISA and the Regulations thereunder.
"REQUIREMENT OF LAW" shall mean all Applicable Law, now or hereafter
enacted and in force, affecting any assets or properties of the Borrower, or the
demolition, construction, use or alteration thereof, including any that require
repairs, modifications or alterations in or to any assets or properties of the
Borrower or in any way limit the use and enjoyment thereof (including all
building, zoning and fire codes and the Americans with Disabilities Act of 1990,
42 U.S.C. /section/ 1201 ET. SEQ. and any other similar Applicable Law, and any
that may relate
7
<PAGE>
to Environmental Laws or any requirements thereof, and all permits, certificates
of occupancy, licenses, authorizations and regulations relating thereto, and all
covenants, agreements, restrictions and encumbrances contained in any
instruments which are either of record or known to the Borrower affecting any
assets or properties of the Borrower and any easements, licenses or other
agreements entered into pursuant to this Agreement.
"SECURITIES LAWS" shall mean the Securities Act of 1933, as amended,
the securities or blue sky laws of any applicable state or other jurisdiction
and any rules or regulations promulgated thereunder.
"SECURITY AGREEMENT" shall mean that certain security agreement of even
date herewith between Borrower, as debtor, and Lender, as secured party.
"STATED RATE" shall mean the rate or amount of interest due or payable
hereunder or under the Note.
"STOCK PLEDGE AGREEMENT" shall mean each security agreement and
agreement for a pledge of stock of even date herewith executed and delivered by
a Guarantor in favor of Lender
"SUBSIDIARY" shall mean as to any Person, any corporation, association
or other business entity a majority (by number of votes) of the shares of stock
of any class or classes (or equivalent interests) of which is at the time owned
by such Person or by one or more of its Subsidiaries or by such Person and one
or more of its Subsidiaries, if the holders of the shares of stock of such class
or classes (or equivalent interests) (a) are ordinarily, in the absence of
contingencies, entitled to vote for the election of a majority of the directors
(or persons performing similar functions) of such business entity, even though
the right to so vote has been suspended by the happening of such a contingency,
or (b) are at the time entitled, as such holders, to vote for the election of a
majority of the directors (or persons performing similar functions) of such
business entity, whether or not the right to so vote exists by reason of the
happening of a contingency.
"TANGIBLE NET WORTH" shall be defined as total assets of the Borrower's
minus total liabilities of the Borrower less the amount of intangibles
(including, without limitation, goodwill, non-compete agreements, trade names,
and shareholder loans, etc.) determined on a consolidated basis.
"TAX" shall mean any tax, duty, levy, impost, assessment or other
governmental charge imposed by any Governmental Authority.
"WRITTEN" OR "IN WRITING" shall mean any form of written communication,
including written communication by telecopier or telex.
SECTION 1.2 INTERPRETATION. Each definition of an agreement in this
Article 1 shall include such agreement as modified, amended, restated or
supplemented from time to time by the Lender and the Borrower, and except where
the context otherwise requires, the singular shall include the plural and vice
versa. Except where otherwise specifically restricted, reference to a party to
this Agreement or any Loan Document includes that party and its successors and
assigns. All terms used herein which are defined in Article 9 of the Uniform
Commercial Code in effect in the State of Florida on the date hereof and which
are not otherwise defined herein shall have the meanings as set forth therein.
SECTION 1.3 CROSS REFERENCES. Unless otherwise specified, references in
this Agreement and in each other Loan Document to the term "hereof" or "herein"
or to any Article or Section are references to this Agreement or such other Loan
documents or such Article or Section of this Agreement or such other Loan
Document, as the case may be. Unless otherwise specified, references in any
Article, Section or definition to the term "hereof" or "herein" or to any clause
are references to this Agreement or such other Loan Document, as the case may
be, or to such clause of such Article, Section or definition.
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<PAGE>
ARTICLE 2
LOANS
SECTION 2.1 USE OF PROCEEDS. The Borrower agrees that the loan proceeds
of the loan shall be utilized upon the terms and subject to the conditions of
the Loan Documents, and utilized to pay off Borrower's existing secured line of
credit with SunTrust Bank, Miami, N.A. and to finance accounts receivable and
inventory of the Borrower and for other general working capital purposes.
SECTION 2.2 THE LINE OF CREDIT.
(a) REVOLVING LINE OF CREDIT. At the Borrower's request,
Lender shall make advances to the Borrower equal to a total principal amount not
to exceed lessor of: (i) the maximum Line of Credit Amount, or (ii) the
Borrowing Base. The Line of Credit shall be evidenced by and payable in
accordance with the terms of the Line of Credit Note in the face amount of the
Maximum Line of Credit Amount. The Line of Credit Note shall evidence the
outstanding principal balance of the Line of Credit, as it may change from time
to time. The principal balance of the Line of Credit, or so much thereof as may
be advanced, shall be payable in full on the Line of Credit Maturity Date.
Advances under the Line of Credit shall be subject to the following terms:
(i) Advances of proceeds of the Line of Credit shall
be limited to the Maximum Line of Credit Amount at any time outstanding;
(ii) Should there occur any overdraft of any deposit
receivable maintained by the Borrower with the Lender, the Lender may, at its
option, disburse funds (whether or not in excess of the Maximum Line of Credit
Amount) to eliminate such overdraft and such disbursement shall be deemed an
Advance of Line of Credit proceeds hereunder entitled to all of the benefits of
the Loan Documents. Nothing herein shall be deemed an authorization of or
consent to the creation of an overdraft in any receivable or create any
obligation to make such advances on the part of the Lender;
(iii) All Advances by the Lender to or for the
receipt of the Borrower, whether or not in excess of the Maximum Line of Credit
Amount, shall be considered part of the Indebtedness under the Line of Credit
Note, shall bear interest as provided in the Line of Credit Note, and shall be
entitled to all rights and benefits hereunder and under all other Loan
Documents; and
(iv) The Borrower shall not request and the Lender
will not be required to consider requests for Advances after the Line of Credit
Maturity Date; provided that the Lender may in its discretion extend such date
in writing and further provided that the repayment obligations of the Borrower
for Advances made by the Lender after such date (as it may be extended) shall be
binding on the Borrower and any Guarantor or other persons liable for any
Indebtedness to the same extent as obligations with respect to Advances made
prior to such date.
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(b) LIMITATIONS ON ADVANCES. The outstanding balance of the
Line of Credit may increase and decrease from time to time, and Advances
thereunder may be repaid and reborrowed, but the total of Advances outstanding
at any one time under the Line of Credit shall never exceed the lesser of:
(i) The Maximum Line of Credit Amount; and
(ii) The "Borrowing Base," which shall be the
aggregate of the following:
(1) Fifty percent (50%) of Eligible
Domestic Inventory; provided,
however, that this portion of the
Borrowing Base, after the
application of such limitation,
shall not exceed One Million Seven
Hundred Fifty Thousand Dollars
($1,750,000.00) ;
(2) Ninety-Five Percent (95%) of
Eligible Insured Domestic Accounts
Receivable;
(3) Eighty Percent (80%) of Domestic
Eligible Accounts Receivable;
(4) Ninety Percent (90%) of Eligible
Insured Foreign Accounts
Receivable; and
(5) Fifty Percent (50%) of Eligible
Foreign Accounts Receivable.
Notwithstanding the definition of Borrowing Base above, the portion of the
Borrowing Base under items (b)(ii)(3) and (5) above with respect to uninsured
Receivables shall not exceed Five Hundred Thousand Dollars ($500,000.00) (after
the application of the stated percentage limitation).
In the event that the outstanding Advances exceed the lesser of (i) the Maximum
Line of Credit Amount, or (ii) the Borrowing Base, then the Borrower shall
within ten (10) calendar days cure such deficiency by either pledging additional
collateral to Lender or paying down the Line of Credit in an amount at least
equal to such deficiency.
(c) CASH COLLATERAL ACCOUNT. All proceeds of the Receivables
and other monies collected by the Borrower shall be deposited in a DDA cash
collateral account (the "Cash Collateral Account") with Lender. The Cash
Collateral Account shall be swept each Business Day by Lender and the other
proceeds shall be applied to reduce the Line of Credit or if there are no
outstandings under the Line of Credit, the proceeds shall be deposited in the
Borrower's DDA operating account.
(d) NOTICE AND MANNER OF BORROWING. Unless another
satisfactory procedure for disbursements is agreed upon in writing by the
parties, the following procedure will be used for disbursement of proceeds of
the Line of Credit. The Borrower shall deliver a written and signed Advance
Request to the Lender not later than 12:00 noon, Miami time, on the Business Day
of the proposed Advance Date, in the form attached hereto as Exhibit A, setting
forth the amount of the requested Advance, setting forth the Borrowing Base as
of the date of the last Borrowing Base certificate required to be delivered
hereunder and a reconciliation from the previous Advance Request (or monthly
report) of Advances and payments of principal hereunder, specifying the date,
and the amount of the proposed Advance of proceeds, and providing such other
information as the Lender may reasonably require.
(e) AUDITS. The Borrowing Base shall be subject to "Red Flag"
audits conducted by an auditor selected by Lender at Borrower's expense. In the
absence of an Event of Default, Lender may conduct not more than five (5) such
audits in any twelve month period at Borrower's expense. The audit shall be
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conducted in a manner satisfactory to Lender in its sole discretion and shall
confirm Borrower's compliance with the requirements of this Agreement.
(f) CALCULATION OF INTEREST. All interest under the Note or
hereunder shall be calculated on the basis of a 360-day year for the actual
number of days elapsed in an interest period (actual/360 method), unless the
Lender shall otherwise elect.
SECTION 2.3 WITHHOLDING; SETOFF. All payments of principal, interest
and any other sums due under this Agreement and any other Loan Document shall be
made in the amounts required without reduction, setoff or counterclaim by the
Borrower, notwithstanding the assertion of any right of recoupment or setoff or
of any counterclaim by the Borrower, and without any deduction or withholding by
the Borrower for or on receivable of any present or future Taxes.
SECTION 2.4 APPLICATION OF PAYMENTS. Payments made to the Lender, or
otherwise received by the Lender (from realization on any Collateral for the
Obligations or otherwise), shall be distributed as follows: FIRST, to the costs
and expenses, if any, incurred by the Lender in the collection of such amounts
under this Agreement or any of the other Loan Documents, including, without
limitation, any reasonable costs incurred in connection with the sale or
disposition of any collateral for the Obligations; SECOND, to the fees, if any,
then due and payable hereunder or under any other Loan Document; THIRD, to any
unpaid interest which may have accrued on the Obligations; FOURTH, to any unpaid
principal of the Obligations; FIFTH, to any other Obligations not otherwise
referred to in this Section; SIXTH, to damages other than lost profits incurred
by the Lender by reason of any breach hereof or of any other Loan Documents; and
SEVENTH, upon satisfaction in full of all Obligations, to the Borrower or as
otherwise required by law.
SECTION 2.5 SECURITY FOR THE LOAN. The Loans shall be secured by the
following instruments as to the Collateral and in the manner set forth therein:
(a) UCC Financing Statements;
(b) Security Agreement; and
(c) Guaranties.
SECTION 2.6 CONDITIONS PRECEDENT TO FUNDING. The Lender's obligation to
initially fund the Line of Credit is subject to the conditions precedent
described in this Agreement and the commitment letter, and includes, without
limitation, the following:
(a) The Borrower's and the Guarantor's execution and
delivery of all of the Loan Documents to which they
are a party;
(b) Delivery of the Borrower's and the Guarantor's
counsel's legal opinion in form and substance
satisfactory to the Lender and Lender's counsel; and
(c) Delivery of the other information and documentation
required under the Commitment Letter, this Agreement
and/or as is described in the closing checklist
delivered to the Borrower; and
(d) Payment in full to the Lender of the Commitment Fees
described in the Commitment Letter, and payment of
all of the Lender's reasonable costs and expenses,
including without limitation, payment of the Lender's
counsel's legal fees and costs.
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SECTION 2.7 CONDITIONS PRECEDENT TO EACH LINE OF CREDIT ADVANCE. The
following conditions, in addition to any other requirements set forth in this
Agreement, shall have been met or performed by the Advance Date with respect to
any Line of Credit Advance Request:
(a) ADVANCE REQUEST. The Borrower shall have delivered to the
Lender an Advance Request and other information, as required under in Section
2.2.
(b) NO DEFAULT. No default shall have occurred and be
continuing or will occur upon the making of the Advance in question and the
Borrower shall have delivered to the Lender an officer's certificate to such
effect, which may be incorporated in the Advance Request.
(c) CORRECTNESS OF REPRESENTATIONS. All representations and
warranties made by the Borrower and any Guarantor herein or otherwise in writing
in connection herewith shall be true and correct in all material respects with
the same effect as though the representations and warranties had been made on
and as of the proposed Advance Date, and the Borrower shall have delivered to
the Lender, an officer's certificate to such effect, which may be incorporated
in the Advance Request.
(d) NO ADVERSE CHANGE. There shall have been no Material
Adverse Effect with respect to the condition, financial or otherwise, of the
Borrower or any Guarantor from such condition as it existed on the date of the
most recent financial statements of such Person delivered prior to date hereof.
(e) PERIODIC REPORT. The Lender shall have received a current
Report as required by Section 4.2 sufficient in form and substance to calculate
and verify the Borrowing Base.
(f) FURTHER ASSURANCES. The Borrower shall have delivered such
further documentation or assurances as the Lender may reasonably require.
SECTION 2.8 DEBIT FOR INTEREST AND EXPENSES. The Lender may debit the
Cash Collateral Account and/or make Advances to the Borrower (whether or not in
excess of the Maximum Loan Amount and/or the Borrowing Base) and apply such
amounts to the payment of interest, fees, expenses and other amounts to which
the Lender may be entitled from time to time and the Lender is hereby
irrevocably authorized to do so without consent of the Borrower.
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ARTICLE 3
GENERAL REPRESENTATIONS
AND COVENANTS
The Borrower hereby makes the following representations and warranties
as of the date hereof and further makes the following covenants and agreements
throughout the term hereof and so long as any Obligations remains outstanding:
SECTION 3.1 INCORPORATION AND QUALIFICATION. The Borrower is, and will
remain, a corporation duly organized, validly existing and in good standing
under the laws of the State of Florida and is, and will become or remain, duly
qualified, authorized to do business and in good standing in each jurisdiction
in which the character of its properties or the nature of its businesses
requires such qualification or authorization.
SECTION 3.2 POWER AND AUTHORITY. The Borrower has, and will maintain
its corporate, power and authority to own its properties and to conduct its
businesses as now and hereinafter proposed to be conducted, including, without
limitation, the power and authority to enter into this Agreement and the Loan
Documents and to consummate the transactions contemplated hereby, and thereby.
SECTION 3.3 AUTHORIZATION AND ENFORCEABILITY. The Borrower has duly
authorized, and will duly authorize, the execution, delivery and performance of
this Agreement and the Loan Documents and the consummation of the transaction
contemplated hereby by all necessary corporate action on the part of the
Borrower, has executed and delivered, and will execute and deliver, this
Agreement and the Loan Documents, and this Agreement and the Loan Documents are,
and will be and remain, valid, binding and enforceable against the Borrower in
accordance with their terms.
SECTION 3.4 CONSENTS AND APPROVALS. The Borrower has obtained, and will
obtain and maintain, each and every consent, approval, authorization, permit,
license, franchise, patent, copyright, trademark, trade name or similar action,
and has effected, and will effect or maintain, any filing or registration or
similar action, required by any Governmental Authority or other Person or
necessary in connection with the ownership of its properties or the conduct of
its businesses, including, without limitation, in connection with the execution,
delivery and performance of this Agreement and the Loan Documents, and the
consummation of the transactions contemplated hereby and thereby and is not in
violation, and will not cause or permit any violation of any of the foregoing or
of any valid rights of other Persons in any of the foregoing, except where the
failure thereof would have a material adverse effect on Borrower.
SECTION 3.5 LEGAL COMPLIANCE. The Borrower has complied, and will
comply, in all material respects with all Applicable Laws, including, without
limitation, ERISA, tax laws, labor and employment laws, Environmental Laws,
securities laws, zoning laws, and other laws, in connection with the ownership
of its properties or the conduct of its businesses, including, without
limitation, in connection with the execution, delivery and performance of this
Agreement and the Loan Documents, the consummation of the transaction
contemplated hereby and thereby.
SECTION 3.6 PAYMENT AND PERFORMANCE. The Borrower has paid and
performed, and will pay and perform, in all material respects, each and every
payment and performance obligation of any Applicable Law, regulation, judgment
decree or order of any Governmental Authority, and of the Certificate or
Articles of Incorporation or By-Laws of the Borrower, and of any indenture,
agreement or other instrument to which the Borrower is, or becomes, a party or
by which its properties are, or become, bound, including, without limitation,
the payment and performance of each and every Obligation in connection with this
Agreement and the Loan Documents, the consummation of the transaction
contemplated hereby.
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SECTION 3.7 NO DEFAULT. The Borrower is not in breach or default, and
will not cause or permit the breach or default, and the execution, delivery and
performance of this Agreement and the Loan Documents, the consummation of the
transactions contemplated hereby will not result in the breach or default, and
no event has occurred or failed to occur which has not been remedied or waived,
the occurrence or non-occurrence of which constitutes, or with the passage of
time or giving of notice or both would constitute, any breach or default, of any
Applicable Law, regulation, judgment decree or order of any Governmental
Authority, any breach or default of the Certificate or Articles of Incorporation
or By-Laws of the Borrower, or of any indenture, agreement or other instrument
to which the Borrower is, or becomes, a party or by which its properties are, or
become, bound.
SECTION 3.8 ACCOUNTING MATTERS. Except for changes required by GAAP or
the Securities Laws, the Borrower has maintained, and will maintain, a system of
accounting established and administered in accordance with generally accepted
accounting principles consistently applied on a fiscal year basis ended December
31 and has not changed for the past three (3) years, and will not change,
accounting methods or fiscal years without the prior written consent of Lender,
which consent shall not be unreasonably withheld.
SECTION 3.9 TITLE TO ASSETS. The Borrower has, and will acquire and
maintain, good, legal and marketable title in, or a valid leasehold interest in,
all of its assets and properties, free and clear of any Liens, except Permitted
Liens.
SECTION 3.10 MAINTENANCE OF ASSETS. The Borrower has maintained,
operated and administered, and will maintain, operate and administer, its
properties and businesses in the ordinary course of business and in compliance
in all material respects with any and all city, county, state or federal
ordinances, laws, regulations or codes applicable thereto.
SECTION 3.11 TAXES. The Borrower has filed, and will file, all United
States Federal income tax returns and all other tax returns by their respective
due dates, including extensions, and the Borrower has paid, and will pay, all
taxes due with respect to the Borrower pursuant to such returns or pursuant to
any assessment received by the Borrower, except any such taxes or charges which
are being diligently contested in good faith by appropriate proceedings and for
which adequate reserves in accordance with generally accepted accounting
principles have been set aside by the Borrower on its books. The charges,
accruals and reserves on the books of the Borrower in respect of taxes or other
governmental charges are, and will be and remain, adequate for purposes of GAAP.
The Borrower has paid, and will pay all taxes, fees and other charges in
connection with the execution, delivery, recording, filing and registration of
the Loan Documents as the same respectively become due or provisions for such
payment have been, or will be, made to the satisfaction of the Lender in its
sole discretion.
SECTION 3.12 ASSESSMENTS AND LIENS. The Borrower has paid, and will
pay, all assessments or other governmental charges as the same respectively
become due, all taxes, assessments (general or special) and governmental charges
of any kind whatsoever that may be at any time lawfully assessed or levied
against or with respect to the Borrower or its properties or businesses, and any
interest thereon and has discharged and will promptly discharge or cause to be
discharged all Liens upon the Borrower or its properties or businesses, except
for Permitted Liens. Notwithstanding the previous sentence, but subject in any
case to the other requirements hereof and of the Loan Documents, the Borrower
shall not be required to pay any tax, charge, assessment or imposition nor to
remove any Lien nor to comply with any law, ordinance, rule, order, regulation
or requirement so long as the Borrower shall contest, in good faith, the amount
or validity thereof, in an appropriate manner or by appropriate proceedings.
Each such contest shall be promptly prosecuted to final conclusion (subject to
the right of the Borrower to settle any such contest), and in any event the
Borrower will save the Lender harmless against all losses, judgments, decrees
and costs (including attorneys' fees and expenses in connection therewith) and
will, promptly after the final determination of such contest or settlement
thereof, pay and discharge the amounts which shall be levied, assessed or
imposed or determined to be payable therein, together with all penalties, fines,
interests, costs and expenses thereon or in connection therewith.
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SECTION 3.13 GENERAL INSURANCE. The Borrower has obtained, and will
obtain and maintain, such comprehensive public liability insurance, workers'
compensation insurance, and casualty insurance as may be required by Applicable
Law, as may be reasonably required by the Lender (it being understood that its
current insurance is acceptable) and shall insure and keep insured all
Collateral and other properties with good and responsible insurance companies
reasonably satisfactory to the Lender in its sole discretion. Each such
insurance company must have a rating of A- or better (Excellent or Superior),
and Class XII or better, in A.M. Best's Insurance Reports. All insurance
policies shall provide for at least thirty (30) days prior written notice to the
Lender of any termination of or proposed cancellation or nonrenewal of such
policy and each insurance policy insuring assets pledged to the Lender as
Collateral shall name the Lender, as an additional named loss payee, to the
extent of the Obligations secured by such assets, or the Lender, as an
additional insured, as appropriate, pursuant to certificates in form and
substance reasonably satisfactory to the Lender. The Borrower have furnished,
and will furnish, to the Lender certificates of insurance meeting the foregoing
requirements upon demand therefor.
SECTION 3.14 LABOR MATTERS. The Borrower has complied, and will comply,
with all Applicable Laws and regulations in all material respects relating to
the employment of labor, including those related to wages, hours, collective
bargaining, discrimination, and the payment of Social Security and similar
taxes.
SECTION 3.15 ERISA. The Borrower and its ERISA Affiliates have
complied, and will comply, in all material respects, with all requirements of
ERISA and the Code. The Borrower and its ERISA Affiliates have filed, and will
file, all annual reports and other disclosures required to be filed pursuant to
ERISA or the Code in connection with each Plan.
SECTION 3.16 VISITS AND INSPECTIONS. The Borrower will, during regular
business hours, permit representatives of the Lender to (a) visit and inspect
its properties and procedures, including, without limitation any Collateral, (b)
inspect and make extracts from and copies of its books and records at the
expense of the Borrower, and (c) discuss with its officers and accountants its
business, procedures, assets, liabilities, financial positions, results of
operations and business prospects; provided, however, that Lender shall use
reasonable efforts not to unduly disrupt Borrower's operations.
SECTION 3.17 SOLVENCY. The Borrower is solvent on the Agreement Date
and this Agreement and the Loan Documents and the transactions contemplated
herein and therein (a) are not, and will not be, made or incurred with intent to
hinder, delay or defraud any Person to whom the Borrower has been, is now, or
may hereafter become indebted; (b) do not, and will not, render the Borrower
insolvent; (c) do not, and will not, leave the Borrower with an unreasonably
small capital with which to engage in its businesses or in any business or
transaction in which it intends to engage; and (d) are not, and will not be,
entered into with the intent to incur, or with the belief that the Borrower
would incur, debts that would be beyond its ability to pay as such debts mature.
SECTION 3.18 DEPOSITORY ACCOUNTS. The Borrower shall maintain its
principal depository relationships with the Lender through depository accounts
with the Lender.
SECTION 3.19 CAPITALIZATION. The authorized capital of the Borrower
consists, or will consist, immediately prior to the Closing, of:
(a) COMMON STOCK. 20,000,000 shares of common stock,
par value $.01 per share ("Common Stock"), of which 3,209,921 are issued and
outstanding. 1,000,000 shares of preferred stock, of which 0 are issued and
outstanding. All of the issued and outstanding shares of Common Stock have been
duly authorized and validly issued and are fully paid and nonassessable. The
common stock of the Company listed on Schedule 1 of each Pledge Agreement
constitutes all of the common stock of the Company presently owned by the
respective Guarantor in accordance with the stock transfer records of the
Company.
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(b) OPTIONS/WARRANTS. Except as described in Schedule
3.19 to this Agreement, (i) no subscription, warrant, option, convertible
security or other right (contingent or otherwise) to purchase or acquire any
equity interests or shares of capital stock of the Borrower in favor of either
Guarantor is authorized or outstanding, (ii) the Borrower has no obligation
(contingent or otherwise) to issue any subscription, warrant, option,
convertible security or other such right or to issue or distribute to either of
the Guarantors, and (iii) the Borrower has no obligation (contingent or
otherwise) to purchase, redeem or otherwise acquire any equity interests or
shares of its capital stock or any interest therein from either of the
Guarantors.
All of the issued and outstanding equity interests or shares
of capital stock of the Borrower, as applicable, have been offered, issued and
sold by the Borrower in compliance in all material respects with applicable
federal and state securities laws.
SECTION 3.20 AESP SHARES. Borrower represents and warrants that 580,140
of the shares of common stock of AESP which constitute part of the Collateral
under the Pledge Agreements owned by each of the Guarantors (the "Pledged
Shares") have been registered by AESP under the Act, for sales on the Nasdaq
Stock Exchange at prices prevailing at the time of such sales, and for private
sales directly by Guarantor, under a "Prospectus" dated May 12, 1998, pursuant
to a Registration Statement on Form S-3, No. 333-51429, filed by AESP (the "AESP
Registration Statement"). The AESP Registration Statement was declared effective
on May 12, 1998 by the Securities and Exchange Commission ("SEC"), no order
suspending the AESP Registration Statement has been issued and no proceedings
for that purpose have been instituted or, to the knowledge of Borrower and
Guarantor, threatened by the SEC, and the AESP Registration Statement remains
effective as of the date hereof. If the AESP Registration Statement continues to
be effective at the time of an Event of Default, then, upon such Event of
Default, such shares of AESP may be resold in a private sale directly by
Guarantor to the Lender and the shares of AESP thereby issued in the Lender's
name will be registered (unrestricted) securities under the Act, or such shares
of AESP may be sold on the Nasdaq Stock Exchange at prices prevailing at the
time of such sales by the Lender's delivery to a broker of the Guarantor's stock
certificates, duly endorsed stock powers and a copy of the above-referenced
Prospectus dated May 12, 1998 as such Prospectus may be amended from time to
time (provided no amendment removes from resale by Guarantor, the AESP Shares
which constitute part of the Collateral under each Pledge Agreement). The
Pledged Shares may be sold by the Lender under Rule 144 promulgated under the
Act without restriction or limitation, and the remaining Shares may be sold
under Rule 144 after January 2000, provided: (i) AESP complies with Rule 144(c)
promulgated under the Act; (ii) Lender complies with Rule 144 (d), (e), (f),
(g), (h) and (i) promulgated under the Act; and (iii) Lender is not deemed an
affiliate of AESP. In conjunction with the foregoing, Borrower represents and
warrants that Borrower shall take all reasonable actions within Borrower's
control to maintain the effective status of the AESP Registration Statement and
to cause AESP to timely file its periodic reports contemplated by Rule 144 (c).
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ARTICLE 4
INFORMATION REPRESENTATIONS
AND COVENANTS
The Borrower hereby makes the following representations and warranties
as of the date hereof and further makes the following covenants and agreements
throughout the term hereof and so long as any Obligation remains outstanding:
SECTION 4.1 FINANCIAL INFORMATION. The Borrower has delivered audited
consolidated Financial Statements for the period ended December 31, 1998 and
will deliver within one hundred twenty (120) days after each fiscal year
consolidated audited Financial Statements for such fiscal year. Additionally,
the Borrower shall deliver to the Lender, within ninety (90) days after the end
of each calendar quarter its quarterly 10-Qs. Such Financial Statements
furnished to the Lender are, and will be, true and complete copies thereof, do,
and will, present fairly in all material respects, in accordance with generally
accepted accounting principles consistently applied the consolidated financial
position of the Borrower on and as of the dates and for the periods then ended.
There are not, and will not be, any material assets or liabilities, contingent
or otherwise, of the Borrower other than those disclosed in such Financial
Statements or promptly in writing to Lender. There are not, and will not be, any
material unrealized or anticipated losses of the Borrower as of the date such
financial statements are furnished to the Lender which have not been previously
disclosed and identified as such in writing to the Lender.
SECTION 4.2 PERIODIC BORROWING BASE REPORTS. Within fifteen (15) days
of the end of each month (or more frequently if required by the Lender), a
report listing Receivables and all Eligible Receivables of the Borrower as of
the last Business Day of such month (the "Accounts Receivable Report") which
shall include the amount and age of each Receivable, the name and mailing
address of each Receivable Debtor and such other information as the Lender may
require in order to verify the Eligible Receivables, all in reasonable detail
and in form acceptable to the Lender in its absolute discretion, and if
requested by the Lender, in its absolute discretion, a report listing all
Inventory and all Eligible Inventory of the Borrower as of the last Business Day
of such month, the cost thereof, and such other information as the Lender may
require relating thereto, all in form acceptable to the Lender (the "Inventory
Report").
SECTION 4.3 LITIGATION; NOTICES. Except as promptly disclosed in
writing to Lender, there is no action, suit, proceeding, investigation or
inquiry affecting or instituted, pending or threatened against, the Borrower or
any property or business of the Borrower. The Borrower shall give to the Lender
prompt written notice of the following events as to which the Borrower has
received notice or otherwise become aware thereof:
(a) the commencement of all proceedings and investigations by
or before any governmental body and all actions and proceedings in any court or
before any arbitrator against or, to the extent known to the Borrower, in any
other way relating adversely and directly to the Borrower (Borrower is a party),
or any of its properties, assets or businesses (i) in which the recovery sought
is in excess of $100,000 unless the claim is covered by insurance from a third
party insurer (other than an Affiliate) and such insurer has affirmatively
agreed that such claim is covered by such insurance (to the extent the loss
exceeds deductible amounts, which deductible amounts shall not exceed $10,000
per occurrence); (ii) which, in the case of proceedings in any court or before
any arbitrator, if adversely determined, could have a Materially Adverse Effect;
(iii) which, in the case of proceedings by or before any governmental body which
in the reasonable judgment of the Borrower may be determined adversely to the
Borrower, and if so determined could have a Materially Adverse Effect, or (iv)
which calls into question the validity of this Agreement or any other Loan
Document;
(b) any occurrence of an event which has a Materially Adverse
Effect on the Borrower or the Guarantors;
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(c) any Event of Default; any default by the Borrower under
any material agreement (other than this Agreement) to which the Borrower is
party or by which any of its properties is bound, including, without limitation,
any default under any agreement to borrow money in a principal amount of
$100,000 or more; or the occurrence of any event which could have a Materially
Adverse Effect on the Borrower giving in each case the details thereof and
specifying the action proposed to be taken with respect thereto; and
(d) any material decrease in the amounts of insurance coverage
maintained by the Borrower from that existing as of the Commitment Date.
SECTION 4.4 ADDITIONAL INFORMATION. The Borrower shall furnish to the
Lender, within twenty (20) Business Days of any request therefor, such
additional information as the Lender may reasonably request.
SECTION 4.5 ACCURACY AND COMPLETENESS OF INFORMATION. All information,
reports, prospectuses, notices and other papers and data relating to the
Borrower and furnished by or on behalf of the Borrower to the Lender were, and
will be, at the time furnished, complete and correct in all material respects.
None of such information, reports, prospectuses, notices and other papers and
data contains, or will contain, any material misstatement of fact or omits, or
will omit, to state a material fact or any fact necessary to make the statements
contained therein not materially misleading.
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ARTICLE 5
NEGATIVE REPRESENTATIONS
AND COVENANTS
The Borrower hereby makes the following representations and warranties
as of the date hereof and further makes the following covenants and agreements
throughout the term hereof and so long as any Obligation remains outstanding:
SECTION 5.1 AMENDMENT AND WAIVER. The Borrower has not entered into,
and shall not cause or permit, any amendment of, or, agree to or accept or
consent to any waiver of any of the provisions of its Articles of Incorporation
or By-Laws, not previously disclosed in writing to and approved by, the Lender
in its sole discretion.
SECTION 5.2 SUBSIDIARIES. Except as disclosed in the Financial
Statements the Borrower does not have any Subsidiaries. The Borrower shall not
create any new Subsidiaries without prior written consent of Lender, which shall
not be unreasonably withheld.
SECTION 5.3 LIQUIDATION, CHANGE IN OWNERSHIP, DISPOSITION OF ASSETS.
The Borrower shall not at any time (i) liquidate or dissolve itself (or suffer
any liquidation or dissolution) or otherwise wind up; (ii) consolidate with or
merge into any other Person or permit any other Person to consolidate or merge
into the Borrower; (iii) sell, lease, abandon or transfer a substantial portion
of, the Borrower's assets in any one or series of transactions except in the
ordinary course of the Borrower's business; or (iv) purchase or otherwise
acquire all or substantially all of the property, assets or business operations
of, or more than fifty percent (50%) of the outstanding stock, partnership or
membership interests or voting power of, any other Person in any one or series
of transactions.
SECTION 5.4 NO ADDITIONAL INDEBTEDNESS. The Borrower are not, and shall
not create, incur, assume, cause or permit itself to become, directly or
contingently obligated for any Indebtedness for Money Borrowed, except: Two
Hundred Fifty Thousand Dollars ($250,000) in other Indebtedness for Borrowed
Money.
SECTION 5.5 NO LIENS. The Borrower is not, and shall not create, incur,
assume, cause or permit to itself to become, directly or contingently obligated
upon any mortgage, deed of trust, lien, security interest, hypothecation,
assignment, deposit arrangement or other preferential arrangement, change or
other encumbrance (including, without limitation, any conditional sale or title
retention agreement or finance lease) of any nature upon or with respect to its
properties, whether now owned or hereafter acquired other than Permitted Liens.
The Borrower has not, and shall not, sign or file any UCC financing statement
which names as debtor the Borrower or any security agreement permitting any
secured party thereunder to file such financing statement other than filings or
agreements related to Permitted Liens or for leased property.
SECTION 5.6 NO SALE LEASEBACKS. Without the prior written consent of
the Lender, which consent shall not be unreasonably withheld, the Borrower has
not, and shall not, sell, transfer or otherwise dispose of any of its properties
or assets and thereafter directly or indirectly lease back the same or similar
property.
SECTION 5.7 NO GUARANTIES. Except as set forth in Schedule 5.7, the
Borrower has not, and shall not, at any time, Loan Guaranty, assume, or be
obligated with respect to, or permit to be outstanding any Loan Guaranty of, any
obligation of any other Person.
SECTION 5.8 PROHIBITED TRANSACTIONS. The Borrower has not, and shall
not, directly or indirectly, engage in a Prohibited Transaction with a
disqualified person within the meaning of Section 4975 of the Code.
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SECTION 5.9 AFFILIATE TRANSACTIONS. The Borrower not, and shall not, at
any time engage in any transaction with an Affiliate, or any Person under common
control with the Borrower (any such Person being deemed an Affiliate for all
purposes of this Section 5.9), nor made, or make, an assignment or other
transfer of any of its properties or assets to any such Person, on terms less
advantageous to the Borrower than if such transaction had been effected with a
non-affiliate. In addition, the Borrower has not made, and shall not at any time
make, loans or advances to any Affiliate on terms which are less advantageous to
the Borrower than if such transactions had been effected with a non-affiliate of
the Borrower which could have a Materially Adverse Effect on the Borrower.
Borrower may sell product to its Subsidiaries at cost plus 10% and not be in
violation of this section.
SECTION 5.10 LABOR LIABILITIES. There are not, and the Borrower will
not cause or permit, any pending or threatened disputes, labor controversies,
strikes or work stoppages with any employees of the Borrower.
SECTION 5.11 ERISA LIABILITIES. Except as set forth on Schedule 5.12
hereto, the Borrower and its ERISA Affiliates have not maintained and do not
maintain. The Borrower does not have, and will not cause or permit the creation
or existence of, any Plans which are subject to the minimum funding limitations
under Section 412 of the Code. The Borrower is not, and will not become, a
participant in and is not, and will not become, obliged to make any payment to a
Multiemployer Plan. The Borrower and its ERISA Affiliates do not have, and will
not cause or permit, (a) any withdrawal liability in connection with a
Multiemployer Plan; (b) any accumulated funding deficiency within the meaning of
ERISA; or (c) any liability or any fact or circumstance which could result in
any liability to PBGC, the Internal Revenue Service, the Department of Labor or
any participant in connection with any Plan (other than accrued benefits which
are or may become payable to participants or beneficiaries of any such Plan). No
Reportable Event, Prohibited Transaction, or other fact or circumstance which
may have an adverse effect on the Plan's tax qualified status exists, or will be
caused or permitted to exist, in connection with any Plan. The Borrower shall
notify the Lender as soon as practicable, and in any event within ten days after
the Borrower or any ERISA Affiliate knows or has reason to know, of the
occurrence of any Reportable Event or Prohibited Transaction with respect to any
Plan, or of any act or condition arising in connection with any Plan which
Borrower or any ERISA Affiliate believes might constitute grounds for the
termination of such Plan by the PBGC or the appointment by the appropriate
United States district court of a trustee to administer such Plan.
SECTION 5.12 MANAGEMENT. Excluding the death of a Guarantor, both of
the Guarantors shall remain members of senior management of the Borrower in
roles comparable to their existing roles with the Borrower,.
SECTION 5.13 NO MATERIALLY ADVERSE EFFECT. There has not occurred since
the end of the most recent fiscal year of the Borrower, and the Borrower shall
not cause or permit to exist or occur, any event, fact or situation which has
had or could reasonably be expected to have a Materially Adverse Effect.
SECTION 5.14 FINANCIAL COVENANTS.
(a) DEBT TO TANGIBLE NET WORTH. As of the end of each fiscal
year of the Borrower, the Borrower shall have a debt to Tangible Net Worth ratio
of not more than 1.7:1. Such ratio shall be tested annually based on the
Borrower's year end financial statements.
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(b) TANGIBLE NET WORTH. Borrower shall at all times maintain a
Tangible Net Worth of not less than $5,500,000.
SECTION 5.15 AESP REGISTRATION STATEMENT. Either (i) the AESP
Registration Statement must remain effective during the period during which
Advances are outstanding hereunder, or (ii) the following must be applicable:
the Pledged Shares may be sold by the Lender after an Event of Default under and
pursuant to the Loan Agreement, on the Nasdaq Stock Exchange under Rule 144
promulgated under the Act, without restriction, except AESP's meeting the
requirements of Rule 144(c) promulgated under the Act, at prices prevailing at
the time of such sales by the Lender's delivery to a broker of the Guarantor's
stock certificates, duly endorsed stock powers and a copy of the AESP Prospectus
(and Borrower shall deliver a current opinion letter from Borrower's counsel
confirming the foregoing, which opinion shall be in form and substance and from
counsel reasonably acceptable to the Lender).
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ARTICLE 6
DEFAULT
SECTION 6.1 EVENTS OF DEFAULT. Each of the following shall constitute
an Event of Default, whatever the reason for such event and whether it shall be
voluntary or involuntary or be effected by operation of law or pursuant to any
judgment or order of any court or any order, rule or regulation of any
governmental or non-governmental body:
(a) Any representation or warranty made or deemed to have been
made under this Agreement or any Loan Document shall prove to have been
incorrect or misleading in any Material respect when made or deemed to have been
made;
(b) The Borrower (i) shall fail to pay interest, fees or other
amounts (other than principal, and with respect to fees and other amounts, such
fees and other amounts have been invoiced to Borrower) due within five (5)
Business Days of when due and payable hereunder, under the Note or under any
other Loan Document, or (ii) shall fail to pay any payment of principal when due
and payable hereunder, under the Note, or under any other Loan Document;
(c) The Borrower shall default in the performance or
observance of any agreement or covenant contained in Article 5 hereof;
(d) The Borrower shall default in the performance or
observance of any agreement or covenant contained in this Agreement not
specifically referred to elsewhere in this Section 6.1, and such default shall
not be cured to the Lender's sole satisfaction within a period of thirty (30)
days from the occurrence of such default;
(e) There shall occur any default in the performance or
observance of any agreement or covenant or breach of any representation or
warranty contained in any of, or a default under any of, the Loan Documents
(other than this Agreement or as otherwise provided in this Section 6.1), which
shall not be cured to the Lender's sole satisfaction within the applicable cure
period, if any, provided for in such Loan Document;
(f) There shall be entered a decree or order for relief in
respect of the Borrower under Title 11 of the United States Code, as now
constituted or hereafter amended, or any other applicable Federal or state
bankruptcy law or other similar law of the United States of America or any other
jurisdiction, or appointing a receiver, liquidator, assignee, trustee,
custodian, sequestrator or similar official of the Borrower or of any
substantial part of its properties, or ordering the winding-up or liquidation of
the affairs of the Borrower or an involuntary petition shall be filed against
the Borrower and a temporary stay entered, and in any such case (i) such
petition and stay shall not be diligently contested, or (ii) any such petition
and stay shall continue undismissed for a period of sixty (60) consecutive days;
(g) The Borrower shall file a petition, answer or consent
seeking relief under Title 11 of the United States Code, as now constituted or
hereafter amended, or any other applicable Federal or state bankruptcy law or
other similar law of the United States of America or any other jurisdiction, or
the Borrower shall consent to the institution of proceedings thereunder or to
the filing of any such petition or to the appointment or taking of possession of
a receiver, liquidator, assignee, trustee, custodian, sequestrator or other
similar official of the Borrower or of any substantial part of their respective
properties, or the Borrower shall fail generally to pay its respective debts as
they become due, or shall make a general assignment for the benefit of
creditors, or the Borrower shall take any action in furtherance of any such
action;
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(h) One or more final judgments shall be entered by any court
or courts against the Borrower for the payment of money which exceed $100,000 in
the aggregate which are not fully covered by insurance or by reserves shown on
the Borrower's financial statements which have been delivered to the Lender in
accordance with this Agreement and which are not bonded or satisfied within
twenty (20) business days after entry of such judgment or a warrant of
attachment or execution or similar process shall be issued or levied against
property of the Borrower which, together with all other such property subject to
other such process, exceeds in value $100,000 in the aggregate, and if, within
thirty (30) days after the entry, issue or levy thereof, such judgment, warrant
or process shall not have been paid or discharged or stayed pending appeal, or
if, after the expiration of any such stay, such judgment, warrant or process
shall not have been paid or discharged;
(i) Any event shall occur which is reasonably likely to have a
Materially Adverse Effect on the Borrower or the Guarantors or with respect to
the death of a Guarantor, three (3) months after the death of such Guarantor;
(j) There shall occur any default under any indenture,
agreement or instrument evidencing or securing Indebtedness of the Borrower in
any amount with Lender, or in an aggregate principal amount of $100,000 or more
with any other person or entity, or under any other agreement with is Material
to the business, assets, liabilities, financial condition, results of operation
or business prospects of such Person, which default shall not be cured within
any applicable cure period for such default set forth thereunder;
(k) All or any portion of any Loan Document shall at any time
and for any reason be declared to be null and void, or a proceeding shall be
commenced by the Borrower or by any governmental authority having jurisdiction
over the Borrower seeking to establish the invalidity or unenforceability
thereof (exclusive of questions of interpretation of any provision thereof), or
the Borrower shall deny that it has any liability or obligation for the payment
of principal or interest purported to be created under any Loan Document; and
(l) The Borrower shall conceal, remove, or permit to be
concealed or removed, any of their respective assets, with intent to hinder,
delay or defraud their respective creditors, or make or allow a transfer of any
of their respective assets which may be fraudulent under any bankruptcy,
fraudulent conveyance, fraudulent transfer or similar law, or makes any transfer
of assets outside the ordinary course of business to or for the benefit of a
creditor at a time when other creditors similarly situated, have not been paid,
or allows, while insolvent, any creditor to obtain a Lien on any of their
respective assets through legal proceedings or distraint which is not vacated
within thirty (30) days from the date thereof.
SECTION 6.2 REMEDIES. If an Event of Default shall have
occurred and shall be continuing:
(a) All principal and interest on the Loans and the Line of
Credit Note and all other amounts owed under this Agreement or the Line of
Credit Note shall thereupon and concurrently therewith become due and payable,
and the Commitment shall forthwith terminate, all without any action by the
Lender, or the holders of the Line of Credit Note, or any of them, and without
presentment, demand, protest or other notice of any kind, all of which are
expressly waived, anything in this Agreement or in the Line of Credit Note to
the contrary notwithstanding.
(b) The Lender may exercise all of the post-default rights
granted to it under the Loan Documents or under Applicable Law.
(c) The rights and remedies of the Lender hereunder shall be
cumulative and not exclusive.
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ARTICLE 7
MISCELLANEOUS
SECTION 7.1 NOTICES.
(a) All notices and other communications under this Agreement
shall be in writing and shall be deemed to have been given three (3) Business
Days after deposit in the mail, designated as certified mail, return receipt
requested, postage-prepaid, or one (1) Business Day after being entrusted to a
reputable commercial overnight delivery service for next business day delivery.
All notices and other communications under this Agreement shall be given to the
parties hereto at the following addresses:
(i) If to the Borrower, to it at:
Advanced Electronic Support Products, Inc.
1810 N.E. 144th Street
North Miami, FL 33181
Attn: Slav Stein
with a copy to:
Akerman, Senterfitt & Eidson
1 S.E. Third Avenue
Miami, FL 33131
Attn: Philip Schwartz, Esq.
(ii) If to the Lender, to it at:
Commercebank, N.A.
220 Alhambra Circle
Coral Gables, FL 33134
Attn: David F. Sauers, Vice President
with a copy to:
Tripp Scott, P.A.
110 S.E. 6th Street, 15th Floor
Fort Lauderdale, FL 33301
Attn: Gregory A. McLaughlin, Esq.
Copies shall be provided to persons other than parties hereto only in the case
of notices under Article 7 hereof. Failure to provide copies of notices given
hereunder to parties which are not parties to this Agreement shall not effect
the validity of a notice which is otherwise properly given.
(b) Any party hereto may change the address to which notices
shall be directed under this Section 8.1 by giving ten (10) days written notice
of such change to the other parties.
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SECTION 7.2 EXPENSES. The Borrower agrees promptly to pay:
(a) all reasonable out-of-pocket expenses of the Lender in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Loan Documents, and the transactions contemplated hereby
and thereby, which in each case shall include reasonable out-of-pocket expenses
and fees of outside counsel to, and experts, agents and consultants of, the
Lender, including, without limitation, all such costs, expenses and fees on
trial, on appeal or in bankruptcy or other proceedings.
(b) all reasonable out-of-pocket costs and expenses of the
Lender directly relating to the administration of the transactions contemplated
in this Agreement or the Loan Documents, including any assignments of the Loans,
the consideration, preparation, negotiation, execution and delivery of any
proposed waiver, amendment or consent by the Lender relating to this Agreement
or the other Loan Documents, all actions and activities relating to the
Collateral, the creation, perfection or protection of any Liens, and the
protection, collection, enforcement and obtaining performance of this Agreement
and the and the Loan Documents, which in each case shall include reasonable
out-of-pocket expenses and fees of outside counsel to, and experts, agents and
consultants of, the Lender, including, without limitation, all such costs,
expenses and fees on trial, on appeal or in bankruptcy or other proceedings.
(c) all reasonable out-of-pocket costs and expenses in
connection with any Event Default, any enforcement of this Agreement or the Loan
Documents, any restructuring, refinancing or "work out" of the transactions
contemplated by this Agreement or the Loan Documents or any insolvency
proceeding, and of obtaining performance under this Agreement or the Loan
Documents, and all out-of-pocket costs and expenses of collection if any default
is made in the payment of the Line of Credit Note, including, without
limitation, all out-of-pocket expenses in connection with sale or disposition of
any collateral for the Obligations, which in each case shall include
out-of-pocket expenses and fees of outside counsel, and experts, agents and
consultants of, the Lender, including, without limitation, all such costs,
expenses and fees on trial, on appeal or in bankruptcy or other proceedings.
(d) all transfer, stamp, documentary, excise, property,
registration, recordation and other similar taxes, assessments and charges
levied by or payable to any Governmental Authority in respect of this Agreement,
any Loan Document, any collateral for any obligations or any document referred
to in this Agreement or any other Loan Document.
SECTION 7.3 ASSIGNMENT.
(a) BY THE BORROWER. The Borrower may not assign or transfer
any of its rights or obligations hereunder or under the Line of Credit Note or
under any Loan Document without the prior written consent of the Lender in its
sole discretion.
(b) BY THE LENDER. The Lender may, at any time, issue
participations in and/or sell, assign, transfer or otherwise dispose of, its
rights and obligations under this Agreement, the Line of Credit Note and the
Loan Documents to another financial institution. The Borrower agree to
reasonably assist Lender in Lender's efforts to assign or issue participations
in this transaction if requested by the Lender.
SECTION 7.4 COUNTERPARTS. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all such
separate counterparts shall together constitute but one and the same instrument.
SECTION 7.5 GOVERNING LAW; CONSENT TO JURISDICTION. This Agreement and
the Line of Credit Note shall be construed in accordance with and governed by
the internal laws of the State of Florida without giving effect to its conflict
of law principles. The Borrower hereby irrevocably consents to personal
jurisdiction
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and venue in the trial courts of Miami-Dade County, Florida or the United States
District Court for the Southern District of Florida over any suit, action or
proceeding arising out of or relating to this Agreement, the Line of Credit Note
or any Loan Document, or arising out of the Obligations, and the Borrower hereby
irrevocably agrees that all claims in respect of any such suit, action or
proceeding may be heard and determined in such courts. The Borrower hereby
agrees that service of the summons and complaint and all other process which may
be served in any such suit, action or proceeding may be effected by mailing by
registered mail a copy of such process in care of the Borrower at the Borrower's
address set forth in Section 7.1 hereof and that personal service of process
shall not be required. Nothing herein shall be construed to prohibit service of
process by any other method permitted by law, or the bringing of any suit,
action or proceeding in any other jurisdiction. The Borrower agree that final
judgment in such suit, action or proceeding shall be conclusive and may be
enforced in any other jurisdiction by suit on the judgment or in any other
manner provided by law.
SECTION 7.6 SEVERABILITY. Any provision of this Agreement which is
prohibited or unenforceable shall be ineffective to the extent of such
prohibition or unenforceability without invalidating the remaining provisions
hereof in that jurisdiction or affecting the validity or enforceability of such
provision in any other jurisdiction.
SECTION 7.7 HEADINGS. Headings used in this Agreement are for
convenience only and shall not be used in connection with the construction or
interpretation of any provision hereof.
SECTION 7.8 ENTIRE AGREEMENT. Except as otherwise expressly provided
herein, this Agreement, together with each of the Loan Documents, embody the
entire agreement and understanding among the parties hereto and thereto and
supersede all prior agreements, understandings, and conversations relating to
the subject matter hereof and thereof. The Borrower represents and warrants to
the Lender that it has read the provisions of this Section and discussed the
provisions of this Section and the rest of this Agreement and the Loan Documents
with counsel for the Borrower, and the Borrower acknowledges and agrees that the
Lender is expressly relying upon such representations and warranties of the
Borrower (as well as the other representations and warranties of the Borrower
set forth in this Agreement and the Loan Documents) in entering into this
Agreement and the Loan Documents.
SECTION 7.9 AMENDMENT AND WAIVER. Neither this Agreement nor any Loan
Documents, nor any term hereof or thereof may be amended orally, nor may any
provision hereof or thereof be waived orally but only by an instrument in
writing signed by the Lender and, in the case of an amendment, by the Borrower.
SECTION 7.10 INDEMNITY. The Borrower shall indemnify and hold harmless
the Lender and its agents, employees, representatives, officers and directors
from and against any and all claims, liabilities, losses, damages, penalties,
actions, demands, judgments, suits, costs, expenses (including fees and expenses
of experts, agents, consultants and counsel), and disbursements of any kind or
nature which may be imposed on, incurred by or asserted against any such Person
by any party (a) resulting from any breach by the Borrower of any representation
or warranty made hereunder, (b) arising out of (i) the Loans, the making or
administration of the Loans, or in any way relating to or arising out of this
Agreement, the Loan Documents or any other document contemplated by this
Agreement, or (ii) allegations of any participation by the Lender in the affairs
of the Borrower or allegations that the Lender has any joint liability of the
Borrower for any reason whatsoever, (c) arising out of the existence or
administration of any collateral for the Obligations or Liens therein, (d)
arising out of the purchase, design, construction, preparation, installation,
inspection, delivery, non-delivery, acceptance, rejection, ownership,
management, possession, operation, rental, lease, sublease, repossession,
maintenance, repair, alteration, modification, addition or substitution,
storage, transfer of title, redelivery, use, financing, refinancing,
disposition, operation, condition, sale, return or other disposition of all or
any part or any interest in the Collateral or the imposition of any Lien (or
incurring of any liability to refund or pay over any amount as a result of any
Lien) thereon, including, without limitation: (1) claims or penalties arising
from any violation of law or in tort (strict liability or otherwise), (2) latent
or other defects, whether or not discoverable, (3) any claim based upon a
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violation or alleged violation of the terms of any restriction, easement,
condition or covenant or other matter affecting title to the collateral, (4) the
making of any modifications in violation of any standards imposed by any
insurance policies required to be maintained by the Borrower pursuant to this
Agreement or any Loan Document which are in effect at any time with respect to
the collateral or any part thereof, and (5) any claim for patent, trademark or
copyright infringement; except, in any case referred to above, for any portion
of such claim, liability, loss, damage, penalty, action, judgment, suit, cost,
expense or disbursement resulting from such indemnified Person's gross
negligence or willful misconduct determined in such case by a non-appealable
judicial order. Notwithstanding any other provision of this Section 7.10, in no
event shall Borrower be liable for incidental, consequential or special damages.
The provisions of this Section 7.10 shall survive the termination of this
Agreement.
SECTION 7.11 OTHER RELATIONSHIPS. No relationship created under this
Agreement or under any Loan Document shall in any way affect the ability of the
Lender to enter into or maintain business relationships with the Borrower and
its Affiliates beyond the relationships expressly contemplated by this Agreement
and the Loan Documents.
SECTION 7.12 REPRODUCTION OF DOCUMENTS. This Agreement, all Loan
Documents and all documents or instruments referred to herein or therein or
delivered pursuant thereto, including (a) consents, waivers and modifications
which may subsequently be executed, (b) documents received by the Lender in
connection with the making, purchasing or maintaining of the Loans and (c)
financial statements, certificates and other information previously or
subsequently furnished to the Lender, may be reproduced by the Lender by any
photographic, photostatic, microfilm, micro-card, miniature photographic,
photographic or other similar process, and the Lender may destroy any original
documents so reproduced. With respect to the documentation required to be
delivered by the Borrower pursuant to this Agreement or any Loan Document, the
Borrower shall be entitled to furnish manually signed originals of any such
documents to the Lender. The Borrower agrees and stipulates that any such
reproduction shall, to the extent permitted by Applicable Law, be admissible in
evidence as the original itself in any judicial or administrative proceeding
(whether or not the original is in existence and whether or not the reproduction
was made by the Lender in the regular course of business) and that any
enlargement, facsimile or further reproduction of the reproduction shall
likewise be admissible in evidence.
SECTION 7.13 INTERPRETATION. Should any provision of this Agreement or
a Loan Document require a judicial interpretation, it is agreed that the
judicial body interpreting or construing this Agreement or such Loan Document
shall not apply the assumption that the terms of this Agreement or such Loan
Document shall be made more strictly construed against one party by reason of
the rule of legal construction that an instrument is to be construed more
strictly against the party which itself or through its agents prepared the
agreement. The Lender and the Borrower acknowledge and agree that they and their
attorneys and agents have each participated equally in the negotiation and
preparation of this Agreement and the Loan Documents.
SECTION 7.14 SURVIVAL. All representations and warranties made under
this Agreement or any Loan Document and all statements, certifications and other
information provided in or pursuant to this Agreement or any Loan Document shall
be deemed to be made, and shall be true and correct in all material respects, at
and as of each of the delivery of each Performance Certificate, except to the
extent previously fulfilled in accordance with the terms hereof and except to
the extent that by their respective terms such representations and warranties
relate solely to a prior date. All representations and warranties made under
this Agreement shall survive expiration or termination of this Agreement and any
Loan Document, and shall not be waived by, the execution hereof by the Lender,
any investigation or inquiry by the Lender, or the making or repayment of any
Loan or Advance under this Agreement.
SECTION 7.15 TIME OF THE ESSENCE. Time is of the essence as to the Loan
Documents.
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SECTION 7.16 SET OFF. In addition to any rights now or hereafter
granted under applicable law and not by way of limitation on any such rights,
upon the occurrence of a Default and during the continuation thereof, Lender is
hereby authorized by the Borrower at any time from time to time, without notice
to the Borrower or any other person, any such notice being expressly waived, to
set off and to appropriate and to apply any and all deposits (general or
special, time or demand, including, but not limited to, indebtedness evidenced
by certificates of deposit, in each case whether matured or unmatured) and any
other indebtedness at any time held or owing by the Lender to or for the credit
of the Borrower against and on account of the obligations and liabilities of the
Borrower to the Lender.
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ARTICLE 8
WAIVER OF JURY TRIAL
SECTION 8.1 WAIVER OF JURY TRIAL. THE BORROWER HEREBY KNOWINGLY,
VOLUNTARILY AND INTENTIONALLY WAIVES ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN
RESPECT OF ANY LITIGATION, PROCEEDINGS, OR COUNTERCLAIMS ARISING OUT OF, UNDER
OR IN CONNECTION WITH THIS LOAN AGREEMENT OR ANY OF THE LOAN DOCUMENTS. FURTHER,
THE BORROWER HEREBY CERTIFIES THAT NO REPRESENTATIVES OR AGENTS OF THE LENDER
NOR THE BORROWER OR THE LENDER'S COUNSEL HAS REPRESENTED, EXPRESSED OR
OTHERWISE, THAT THE LENDER WOULD NOT IN THE EVENT OF SUCH LITIGATION SEEK TO
ENFORCE THIS WAIVER OF RIGHT TO JURY TRIAL PROVISION. THE BORROWER ACKNOWLEDGES
THAT THE LENDER HAS BEEN INDUCED TO ENTER INTO THIS TRANSACTION BY, INTER ALIA,
THE PROVISIONS OF THIS SECTION. THE BORROWER AGREES NOT TO SEEK TO CONSOLIDATE
ANY SUCH ACTION IN WHICH A JURY TRIAL HAS BEEN WAIVED WITH ANY OTHER ACTION BY
WHICH A JURY TRIAL CANNOT BE WAIVED.
29
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed this Loan
Agreement or caused it to be executed under seal by their duly authorized
officers, all as of the day and year first above written.
"LENDER" "BORROWER"
COMMERCEBANK, N.A. ADVANCED ELECTRONIC SUPPORT
PRODUCTS, INC.
By: /s/ David F. Sauers By: /s/ Slav Stein
--------------------------- ----------------------
Name: David F. Sauers Name: Slav Stein
Title: Vice President Title: President
30
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains financial information extracted from the Company's
Quarterly Report on Form 10-QSB for the quarter ended September 30, 1999 and is
qualified in its entirety by reference to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,057,606
<SECURITIES> 0
<RECEIVABLES> 3,866,592
<ALLOWANCES> (87,609)
<INVENTORY> 6,597,029
<CURRENT-ASSETS> 11,798,424
<PP&E> 553,476<F1>
<DEPRECIATION> 0
<TOTAL-ASSETS> 13,345,268
<CURRENT-LIABILITIES> 6,155,434
<BONDS> 0
0
0
<COMMON> 3,230
<OTHER-SE> 6,654,592
<TOTAL-LIABILITY-AND-EQUITY> 13,345,268
<SALES> 20,008,899
<TOTAL-REVENUES> 20,008,899
<CGS> 11,852,511
<TOTAL-COSTS> 18,865,378
<OTHER-EXPENSES> (72,267)
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 191,703
<INCOME-PRETAX> 1,024,085
<INCOME-TAX> 176,117
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 847,968
<EPS-BASIC> 0.27
<EPS-DILUTED> 0.24
<FN>
<F1> Net of depreciation
</FN>
</TABLE>
