SECURITIES AND EXCHANGE COMMISSION
Washington, DC 25049
-----------------------
FORM 10-Q
(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended September 30, 1999
( ) Transition report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the transition period from __________ to
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Commission File Number 0-21903
ORA ELECTRONICS, INC.
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(Exact Name of Registrant as Specified in its Charter)
Delaware 95-4607830
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(State or Other Jurisdiction of (IRS Employer Identification
Incorporation or Organization) Number)
9410 Owensmouth Avenue, Chatsworth, CA 91311
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(Address of Principal Executive Offices)(Zip Code)
(818) 772-2700
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(Registrant's Telephone Number, Including Area Code)
(No Change)
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(Former Name, Former Address and Former Fiscal Year,
if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes ..X.. No .....
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS:
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Sections 12, 13 or 15 (d) of the Securities
Page 1 of 46
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Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes ..... No ..... Not Applicable ..X..
APPLICABLE ONLY TO CORPORATE ISSUERS:
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
Class Outstanding at November 12, 1999
----- --------------------------------
Common Stock, $.001 par value 6,910,158 shares
Exhibit Index on page 23
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ORA ELECTRONICS, INC.
Form 10-Q
September 30, 1999
TABLE OF CONTENTS
Page
----
PART I - Financial Information. 4
Item 1. Financial Statements 4
Balance Sheets as of September 30, 1999 and
March 31, 1999 4
Statements of Operations and Retained Deficit
for the three and six month periods ended
September 30, 1999 and 1998 6
Statements of Cash Flows for the six month
periods ended September 30, 1999 and 1998 7
Notes to Financial Statements 8
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations. 12
PART II - Other Information. 19
Item 4. Submission of Matters to a Vote of Security Holders. 19
Item 6. Exhibits and Reports on Form 8-K. 20
Signatures 22
Exhibit Index 23
Exhibits 24-25
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PART I -FINANCIAL INFORMATION.
ITEM 1. FINANCIAL STATEMENTS.
ORA ELECTRONICS, INC.
Balance Sheets
September 30, March 31,
1999 1999
(Unaudited) (Audited)
----------- ---------
ASSETS
Current assets:
Cash and cash equivalents $ 706,260 $ 407,694
Trade accounts receivable, less
allowance for sales returns and
doubtful accounts of $232,977
($1,022,043 at March 31, 1999) 599,260 3,112,292
Inventories 2,519,611 4,627,251
Prepaid expenses 26,294 74,276
------------ ------------
Total current assets 3,851,425 8,221,513
Property and equipment, net 5,954,161 6,231,494
Other assets:
Loan receivable, officer 625,357 579,833
Deferred expenses 291,157 304,875
------------ ------------
Total assets $ 10,722,100 $ 15,337,715
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current maturities of long-term debt $ 418,535 $ 488,604
Notes payable - 1,355,847
Trade payables 2,425,116 2,925,677
Accrued interest 41,412 101,648
Other accounts payable and accrued
expenses 2,048,021 2,218,582
------------ ------------
Total current liabilities 4,933,084 7,090,358
Long-term debt 5,694,449 6,105,477
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Total liabilities 10,627,533 13,195,835
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See accompanying notes to financial statements.
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Stockholders' equity:
Preferred stock, $.001 par value,
5,000,000 shares authorized,
none issued - -
Common stock, par value $.001 per share,
authorized 30,000,000 shares, issued
and outstanding 6,910,132 shares at
September 30, 1999 and 6,908,722
shares at March 31, 1999 6,910 6,910
Additional paid in capital 6,125,379 6,125,379
Retained (deficit) (6,037,722) (3,990,409)
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Total stockholders' equity 94,567 2,141,880
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Total liabilities and stockholders'
equity $ 10,722,100 $ 15,337,715
============ ============
See accompanying notes to financial statements.
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<TABLE>
ORA ELECTRONICS, INC.
Statements of Operations and Retained Deficit
For the Three Month and Six Month Periods
Ended September 30, 1999 and 1998
(Unaudited)
<CAPTION>
Three months Six months
1999 1998 1999 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales $ 846,138 $ 4,086,412 $ 1,823,287 $ 7,543,417
Cost of goods sold 432,436 2,053,293 1,118,668 4,290,735
----------- ----------- ----------- -----------
Gross profit 413,702 2,033,119 704,619 3,252,682
----------- ----------- ----------- -----------
Operating expenses:
Selling and shipping 441,328 604,228 879,979 1,236,878
Administrative and general 791,352 1,083,451 1,688,367 2,373,128
----------- ----------- ----------- -----------
Total operating expenses 1,232,680 1,687,679 2,568,346 3,610,006
----------- ----------- ----------- -----------
Operating profit (loss) (818,978) 345,440 (1,863,727) (357,324)
Interest (expense) (158,482) (172,170) (307,722) (367,268)
Other income (Note 7) 46,747 54,391 81,193 1,740,264
----------- ----------- ----------- -----------
Income (loss) before income taxes (930,713) 227,661 (2,090,256) 1,015,672
Provision for income taxes - - - -
----------- ----------- ----------- -----------
Net profit (loss) (930,713) 227,661 (2,090,256) 1,015,672
Retained deficit, beginning
of period (5,107,009) (3,202,398) (3,947,466) (3,990,409)
----------- ----------- ----------- -----------
Retained deficit, end
of period $(6,037,722) $(2,974,737) $(6,037,722) $(2,974,737)
=========== =========== =========== ===========
Per common share information:
Net earnings (loss) $ (930,713) $ 227,661 $(2,090,256) $ 1,015,672
=========== =========== =========== ===========
Earnings (loss) per share:
Basic and diluted $ (0.13) $ 0.03 $ (0.30) $ 0.15
=========== =========== =========== ===========
Weighted average shares outstanding
used in the per share calculation:
Basic and diluted 6,910,098 6,908,956 6,910,055 6,908,875
=========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
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ORA ELECTRONICS, INC.
Statements of Cash Flows
For the Six Month Periods Ended September 30, 1999 and 1998
(Unaudited)
Six Months Ended September 30,
1999 1998
---- ----
Cash flows from operating activities:
Net income (loss) $(2,090,256) $ 1,015,672
Adjustments to reconcile net income (loss)
to net cash provided by (used in) operating
activities:
Depreciation and amortization 121,848 118,486
Provision for losses and sales returns (165,089) (84,507)
Changes in assets and liabilities:
Trade accounts receivable 1,607,589 1,545,492
Inventories 46,062 1,418,037
Prepaid expenses 76,820 (102,008)
Trade payables 459,013 (2,047,704)
Accrued interest 8,295 (11,481)
Other accounts payable and
accrued expenses (84,382) 520,758
----------- -----------
Net cash provided by (used in) operating
activities (20,100) 2,372,745
----------- -----------
Cash flows from investing activities:
Capital expenditures (23,650) (42,036)
Loan receivable, officer (15,555) (14,796)
Security deposits 33,580 -
----------- -----------
Net cash (used in) investing activities (5,625) (56,832)
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Cash flows from financing activities:
Repayment of line of credit (933,888) (1,355,847)
Borrowing (repayment) of long-term debt (142,067) (70,820)
----------- -----------
Net cash provided by (used in) financing activities (1,075,955) (1,426,667)
----------- -----------
Net increase (decrease) in cash and cash
equivalents (1,101,680) 889,246
Cash and cash equivalents, beginning of period 1,807,940 407,694
----------- -----------
Cash and cash equivalents, at end of period $ 706,260 $ 1,296,940
=========== ===========
Supplemental disclosure of cash flow information:
Interest paid $ 256,458 $ 333,376
=========== ===========
Income taxes paid $ - $ -
=========== ===========
See accompanying notes to financial statements.
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ORA ELECTRONICS, INC.
Notes to Financial Statements
(Unaudited)
NOTE 1 - DESCRIPTION OF BUSINESS
ORA Electronics, Inc. (the "Company" or the "Registrant") is a developer
and supplier of interface, connectivity solutions and peripheral accessories for
wireless communication devices. The Company's products supplement the
effectiveness of cellular telephones, personal communications systems ("PCS"),
pagers, computing devices and the intelligent transportation systems industry.
The Company currently carries over 900 products which are sold to over 500
customers in the United States, and throughout North, Central and South America.
Among the Company's customers are major national and regional retailers, service
providers and wireless carriers, original equipment manufacturers ("OEMs"), auto
manufacturers, regional distributors and dealers.
NOTE 2 - FINANCIAL RESULTS AND LIQUIDITY
The Company has incurred operating losses of $1,032,025, $1,886,183 and
$1,840,455 in the fiscal years ended March 31, 1999, 1998 and 1997, and is
reporting an operating loss for the six months ended September 30, 1999 of
$1,863,727. For several years the company's major competitors, many with greater
resources, have aggressively lowered their selling prices in an attempt to
increase market share. Although the company has benefited from its own internal
cost reduction programs, the effects of lower pricing by major competitors has
more than offset the company's cost reductions.
The Company has been developing a broad operational and financial
restructuring plan. The plan, which is designed to leverage the company's brand,
distribution and technology strengths, includes reducing costs, disposition of
certain assets, focusing on development of alternative channels of distribution
and capitalizing on the company's patented technologies. Restructuring costs
must be incurred to implement the plan.
Going forward, significant cash flow will be needed to pay the
restructuring costs to implement the proposed business plan and to fund losses
until the company has returned to profitability. While there is no assurance
that funding will be available to execute the plan, the company is continuing to
seek financing to support its turnaround efforts and is exploring a number of
alternatives in this regard.
The company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the March 31,
1999 financial statements. The paragraph states that the company's recurring
losses and its inability to secure working capital financing raise substantial
doubt about the company's ability to continue as a going concern and cautions
that the financial statements do not include adjustments that might result from
the outcome of this uncertainty. The financial statements at, and for the three
month and six month periods ended, September 30, 1999, similarly do not include
adjustments that might result from the outcome of this uncertainty.
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On July 27, 1999, the Company obtained a $1,200,000 revolving credit
facility from Celtic Capital Corporation, to be used for general working capital
purposes. The credit agreement allows the Company to borrow funds at Citibank
N.A.'s reference rate plus 2.5%, based on an 80% advance rate on eligible trade
accounts receivable. There is a monthly collateral monitoring fee of .25% based
on the average trade accounts receivable during the month. On September 27,
1999, Celtic Capital withdrew the credit facility, citing the significant
deterioration in the Company's business. No borrowings were made from the credit
facility. The Company is attempting to find a replacement credit facility, but
no assurances can be given that the Company will be able to do so.
The Company believes that available cash, cash flow from operations and any
borrowings that might be made available through a yet to be obtained replacement
credit facility, may not to be sufficient to cover liquidity requirements after
November 30, 1999, and the Company is currently facing the prospect of not
having adequate funds to operate its business. There can be no assurance that
any long-term restructuring alternative can be successfully initiated or
implemented by November 30, 1999, in which case the Company may be compelled to
pursue a bankruptcy filing in the absence of a proposed or pre-approved
financial restructuring.
Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has under development a business plan that, if
successfully funded and executed as part of a financial restructuring, can
significantly improve operating results. The support of the company's vendors,
customers, potential lenders, stockholders and employees will continue to be key
to the company's future success.
NOTE 3 - BASIS OF INTERIM PRESENTATION
Interim financial statements and information are unaudited; however, in the
opinion of management all adjustments necessary for a fair presentation of the
interim results have been made. All such adjustments were of a normal recurring
nature. The results for the three and six months ended September 30, 1999 are
not necessarily an indication of results to be expected for the entire fiscal
year. The accompanying financial statements have been prepared in accordance
with the instructions to Form 10-Q and do not include all of the information and
the footnotes required by generally accepted accounting principles for complete
statements. All information reported in this Form 10-Q should be read in
conjunction with the Company's annual financial statements and notes thereto for
the fiscal year ended March 31, 1999 filed with the Securities and Exchange
Commission on June 29, 1999.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
For comparative purposes, certain amounts in the financial statements from
the prior periods ended March 31, 1999 and September 30, 1998 have been
reclassified.
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NOTE 4 - LEGAL PROCEEDINGS
The Company was involved in a lawsuit titled ALLIANCE RESEARCH CORPORATION
V. TELULAR CORPORATION; including the counterclaim entitled TELULAR CORPORATION
V. ALLIANCE RESEARCH CORPORATION, United States District Court for the Central
District of California, Case No. CV 94-1065-JSL.
The Company and Telular Corporation ("Telular") settled the lawsuit
pursuant to a Settlement Agreement and Mutual General Release dated March 2,
1998. According to the terms of the settlement, Telular Corporation will receive
from the Company cash payments totaling $1,500,000 over a two year period and
300,000 shares of the Company's common stock and may receive additional shares
of common stock on February 1, 2000, if necessary to ensure that the total
shares of common stock received by Telular have a market value of $1,500,000 as
of such date. Pursuant to the settlement, the lawsuit was dismissed with
prejudice, although the Company is enjoined from selling its CDL line of
products. The Company has had no sales of such product line since before April
1, 1996.
The Company has estimated the current value of the final settlement at
$1,685,797, all of which has been recognized and included in Administrative and
General expenses in periods prior to fiscal year 1999.
The Company is involved in other legal proceedings, many of which arise in
the ordinary course of its business. While any litigation contains an element of
uncertainty, management believes that the outcome of such proceedings will not
have a material adverse effect on the Company's results of operations.
NOTE 5 - RECENT ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") 128, Earnings per Share,
("SFAS 128") which is effective for financial statements for both interim and
annual periods ending after December 15, 1997. The Company adopted SFAS 128 in
the third fiscal quarter of 1998. SFAS 128 replaces the presentation of primary
and fully diluted earnings per share with basic and diluted earnings per share.
The Company's adoption of SFAS 128 required no change in the Company's
previously reported earnings (loss) per share.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income"
("SFAS 130") effective for fiscal years beginning after December 15, 1997. The
new rules establish standards for the reporting of comprehensive income and its
components in financial statements. Comprehensive income consists of net income
and other gains and losses affecting stockholders' equity that, under generally
accepted accounting principles, are excluded from net income, such as unrealized
gains and losses on investments available for sale, foreign currency translation
gains and losses and minimum pension liability. The Company has adopted the
provisions of SFAS 130 as of April 1, 1998. For all periods presented in this
Quarterly Report, there was no comprehensive income.
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In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS 131") effective for fiscal years
beginning after December 15, 1997. The new rules establish revised standards for
public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements. SFAS 131 is
effective for the Company in fiscal 1999. The Company currently evaluates its
operations as one segment.
NOTE 6 - YEAR 2000 ISSUE
Many computer systems and other equipment with embedded chips or processors
in use today were designed and developed using two digits, rather than four, to
specify the year. As a result, such systems will recognize the Year 2000 as "00"
and may assume that the year is 1900 rather than 2000. This is commonly known as
the Year 2000 issue, which could potentially result in a system failure or in
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in other
similar normal business activities. The Company has been informed that the
portion of the Company's computer software systems relating to the general
ledger, payroll and other employee records is presently Year 2000 compliant. The
Company is in the process of evaluating the potential cost to it in addressing
the Year 2000 issue with respect to its other software and the potential
consequences of an incomplete or untimely resolution of the Year 2000 issue. The
Company has been given estimates in the $100,000 to $150,000 range to purchase
and implement new Year 2000 compliant software for those systems that the
Company is aware require such replacement. Although the Company believes that it
will not incur significant costs above these estimates to become completely Year
2000 compliant, no assurance can be given that the Company will not incur
significant costs in addressing the Year 2000 issue or that the failure to
adequately address the Year 2000 issue will not have a material adverse effect
upon the Company.
The Company is contacting its major suppliers, major customers, financial
institutions and others with whom it conducts business to determine that they
will be able to resolve the Year 2000 issue in matters affecting the Company.
The Company at this time cannot make any predictions as to the degree of
compliance by such third parties or the consequences of their noncompliance.
However, if those third parties with whom the Company conducts business are
unsuccessful in implementing timely solutions, the Year 2000 issue could have a
material adverse effect on the Company's business, financial condition and
results of operations.
NOTE 7 - SALE OF CERTAIN TRADEMARKS
In April, 1998, pursuant to the terms of a Second Deed of Amendment, the
Company granted ORA Electronics (UK) Limited ("ORA UK") an exclusive
royalty-free right to use certain of the Company's trademarks, including,
without limitation, the "ORA" name, in perpetuity worldwide except for North,
Central and South America. The total consideration paid by ORA UK to the
Company for such perpetual right was 1,000,000 GRP, or approximately
$1,675,000, which is included in Other Income on the Statement of Operations and
Retained Deficit for the six months ended September 30, 1998. Gershon N.
Cooper, President and Chief Executive Officer of the Company at the time of the
transaction, is a former member of the Board of Directors of ORA UK.
Page 11 of 46
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS.
Management's discussion and analysis should be read in conjunction with the
Company's financial statements and the notes thereto.
The following table sets forth, for the periods indicated, certain
statements of operations and retained deficit data for the Company expressed as
a percentage of net sales:
Three months Six months
ended September 30, ended September 30,
1999 1998 1999 1998
---- ---- ---- ----
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 51.1 50.2 61.4 56.9
Gross profit 49.9 49.8 38.6 43.1
Selling and shipping expenses 52.2 14.8 48.3 16.4
Administrative and general expenses 93.5 26.5 92.6 31.4
Income (loss) from operations (96.8) 8.5 (102.2) (4.7)
Interest expense (18.7) (4.2) (16.9) (4.9)
Other income and expense 5.5 1.3 4.5 23.1
Net Income(loss)before income taxes (110.0)% 5.6% (114.6)% 13.5%
RESULTS OF OPERATIONS COMPARISON OF THREE MONTHS ENDED SEPTEMBER 30, 1999 TO
THREE MONTHS ENDED SEPTEMBER 30, 1998
Net Sales. Net sales decreased by $3,240,274, or 79.3%, to $846,138 for the
second quarter of fiscal 2000 compared to $4,086,412 for the same period of the
prior year. Approximately $2,100,000 of this decrease is attributable to the
loss of business from Circuit City, which had previously been the Company's
largest customer. Net sales to Circuit City during the second quarter of fiscal
2000 were approximately $85,000, or 10.0% of the total quarterly net sales of
$846,138. Net sales to Circuit City during the first quarter of fiscal 1999 were
approximately $2,185,000, or 53.5% of the total quarterly net sales of
$4,086,412. The remaining decrease primarily reflects a continuation of a trend
of lower orders being received by consumer electronics retailers who have
reported same store sales decreases and reductions in wireless telephone
activations as compared with the prior year. Retailers have reported that their
wireless telephone activations are lower as a result of reduced financial
incentives offered to them by wireless telephone carriers. The Company is
actively exploring ways to replace this reduction in net sales, including
alternative channels of distribution, however, no assurance can be given that
the Company will be able to do so.
Gross Profit. Gross profit decreased by $1,619,417, or 79.7%, to $413,702
for the second quarter of fiscal 2000 compared with $2,033,119 for same period
of the prior year, while gross profit as a percentage of net sales decreased to
48.9% from 49.8%. The decreases in gross profit and gross profit as a percentage
of net sales are primarily attributable to the decline in net sales described
above.
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Selling and Shipping Expense. Selling and shipping expense decreased by
$162,900, or 27.0%, to $441,328 for the second quarter of fiscal 2000 compared
with $604,228 in the same period of the prior year. The decrease in selling and
shipping expense is primarily attributable to lower costs of shipping,
warehousing, freight and sales commissions resulting from lower sales volume.
Administrative and General Expense. Administrative and general expense
decreased by $292,099, or 27.0%, to $791,352 for the second quarter of fiscal
2000 compared with $1,083,451 in the same period of the prior year. The decrease
is primarily attributed to a reduction in personnel and salaries of existing
personnel during the quarterly period ended September 30, 1999 as part of the
Company's efforts to reduce expenses.
Interest Expense. Interest expense for the second quarter of fiscal 2000
was $158,482 compared with $172,170 in the same period of the prior year. This
reduction is primarily a result of the Company not borrowing from its line of
credit during the quarter ended September 30, 1999.
Other Income and Expense. Other income for the second quarter of fiscal
2000 was $46,747 compared with $54,391 in the same period of the prior year. The
decrease of $7,644, or 14.1% is primarily attributed to a partial refund of
property taxes received in the quarter ended September 30, 1998.
Income Taxes. The Company has made no provision for income taxes as it has
a history of net losses, which has resulted in tax loss carryforwards. At
September 30, 1999, the Company had available federal net operating loss
carryforwards of approximately $4,263,000, which expire in 2012 through 2013,
and state net operating loss carryforwards of approximately $2,597,000, which
expire in 2002 through 2003.
COMPARISON OF SIX MONTHS ENDED SEPTEMBER 30, 1999 TO SIX MONTHS ENDED
SEPTEMBER 30, 1998
Net Sales. Net sales decreased by $5,720,130, or 75.8%, to $1,823,287 for
the six months of fiscal 2000 ended September 30, 1999, compared with $7,543,417
for the same period of the prior year. Approximately $1,550,000 of this decrease
is attributable to the loss of business from Circuit City, which had previously
been the Company's largest customer. Net sales to Circuit City during the first
six months of fiscal 2000 were approximately $270,000, or 14.8% of the total net
sales of $1,823,287. Net sales to Circuit City during the first six months of
fiscal 1999 were approximately $3,920,000, or 52.0% of the total net sales of
$7,543,417. The remaining decrease primarily reflects a continuation of a trend
of lower orders being received by consumer electronics retailers who have
reported same store sales decreases and reductions in wireless telephone
activations as compared with the prior year. Retailers have reported that their
wireless telephone activations are lower as a result of reduced financial
incentives offered to them by wireless telephone carriers. The Company is
actively exploring ways to replace this reduction in net sales, including
alternative channels of distribution, however, no assurance can be given that
the Company will be able to do so.
Gross Profit. Gross profit decreased by $2,548,063, or 78.3%, to $704,619
for the six months of fiscal 2000 ended September 30, 1999 compared with
$3,252,682 for the same period of the prior year, while gross profit as a
Page 13 of 46
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percentage of net sales decreased to 38.6% from 43.1%. The decreases in gross
profit and gross profit as a percentage of net sales are primarily attributable
to the decline in net sales described above.
Selling and Shipping Expense. Selling and shipping expense decreased by
$356,979, or 28.9%, to $879,979 for the six months of fiscal 2000 ended
September 30, 1999 compared with $1,236,878 in the same period of the prior
year. The decrease in selling and shipping expenses is primarily attributable to
lower costs of shipping, warehousing, freight and sales commissions as result of
decreased sales volume.
Administrative and General Expense. Administrative and general expense
decreased by $684,761, or 28.9%, to $1,688,367 for the six months of fiscal 2000
ended September 30, 1999 compared with $2,373,128 for the same period of the
prior year. The decrease is primarily attributable to a reduction in personnel
and salaries of existing personnel during the six month period ended September
30, 1999 as part of the Company's efforts to reduce expenses.
Interest Expense. Interest expense for the six months of fiscal 2000 ended
September 30, 1999 was $307,722 compared with $367,268 in the same period of the
prior year. This reduction is primarily a result of decreased borrowings under
the Company's line of credit.
Other Income and Expense. Other income for the six months of fiscal 2000
was $81,193 compared with Other income of $1,740,264 in the same period of the
prior year. The difference is primarily attributable to approximately $1,675,000
in royalty income received in the quarter ended June 30, 1998 as a result of the
Company granting to ORA Electronics (UK) Limited, an unaffiliated company, an
exclusive royalty-free right to use certain of the Company's trademarks,
including the "ORA" name, in perpetuity worldwide, excepting North, Central and
South America.
Income Taxes. The Company has made no provision for income taxes as it has
a history of net losses, which has resulted in tax loss carryforwards. At
September 30, 1999, the Company had available federal net operating loss
carryforwards of approximately $4,263,000, which expire in 2012 through 2013,
and state net operating loss carryforwards of approximately $,597,000, which
expire in 2002 through 2003.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are to fund working capital needs,
primarily accounts receivable and inventories. Historically, the Company has
satisfied these working capital requirements principally through cash flow from
operations and bank borrowings.
On September 20, 1999, the Company announced that Gershon N. Cooper had
relinquished his duties as Chief Executive Officer and President of the Company
due to medical reasons, and that Martin Pichinson was appointed as the interim
Chief Executive Officer and President as of that date. Pursuant to the terms of
Mr. Cooper's employment agreement with the Company, Mr. Cooper is entitled to
draw his full salary of $330,000 per year for a period of six months following
a medical disability of this nature. As interim Chief Executive Officer and
President, Mr. Pichinson is entitled to a base salary of $360,000 per year, in
addition to certain incentive-based compensation.
Page 14 of 46
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At September 30, 1999, the Registrant had $706,260 in cash and cash
equivalents with a working capital deficiency of $1,081,659, contrasted to
$1,807,940 in cash and cash equivalents with a working capital surplus of
$894,758 at March 31, 1999. Net cash used in operating activities was $20,100
for the six months ended September 30, 1999, compared with net cash provided by
operating activities of $2,372,745 for the six months ended September 30, 1998.
Working capital may vary from time to time as a result of seasonality, new
product introductions, capital expenditures and changes in inventory levels.
To supplement cash flow from operations, if necessary, the Company obtained
a $1,200,000 revolving credit facility on July 27, 1999, from Celtic Capital
Corporation, to be used for general working capital purposes. The credit
agreement allowed the Company to borrow funds at Citibank N.A.'s reference rate
plus 2.5%, based on an 80% advance rate on eligible trade accounts receivable.
There was a monthly collateral monitoring fee of .25% based on the average trade
accounts receivable during the month. On September 27, 1999, Celtic Capital
withdrew the credit facility, citing the significant deterioration in the
Company's business. No borrowings were made from the credit facility. The
Company is attempting to find a replacement credit facility, but no assurances
can be given that the Company will be able to do so.
The Company believes that available cash, cash flow from operations and any
borrowings that might be made available through a yet to be obtained replacement
credit facility, may not be sufficient to meet operating needs and capital
expenditure requirements in the immediate future.
The Company has incurred operating losses of $1,032,025, $1,886,183 and
$1,840,455 in the fiscal years ended March 31, 1999, 1998 and 1997, and is
reporting an operating loss for the six months ended September 30, 1999 of
$1,863,727. For several years the Company's major competitors, many with greater
resources, have aggressively lowered their selling prices in an attempt to
increase market share. Although the Company has benefited from its own internal
cost reduction programs, the effects of lower pricing by major competitors has
more than offset the Company's cost reductions. In addition, the Company has
experienced a significant reduction in its business with Circuit City,
previously its largest customer. See Management's Discussion and Analysis of
Financial Condition and Results of Operations for the Three Months and Six
Months ended September 30, 1999 compared to the Three Months and Six Months
ended September 30, 1998.
The Company has been developing a broad operational and financial
restructuring plan. The plan, which is designed to leverage the Company's brand,
distribution and technology strengths, includes reducing costs, disposition of
certain assets, focusing on development of alternative channels of distribution
and capitalizing on the Company's patented technologies. Restructuring costs
must be incurred to implement the plan.
Going forward, significant cash flow will be needed to pay the
restructuring costs to implement the proposed business plan and to fund losses
until the Company has returned to profitability. While there is no assurance
that funding will be available to execute the plan, the Company is continuing to
seek financing to support its turnaround efforts and is exploring a number of
alternatives in this regard.
Page 15 of 46
<PAGE>
The Company's independent public accountants have included a "going
concern" emphasis paragraph in their audit report accompanying the March 31,
1999 financial statements. The paragraph states that the Company's recurring
losses and its inability to secure working capital financing raise substantial
doubt about the Company's ability to continue as a going concern and cautions
that the financial statements do not include adjustments that might result from
the outcome of this uncertainty. Similarly, the unaudited financial statements
presented for the periods ending September 30, 1999, do not include any
adjustments that might be necessary if the Company were not able to continue as
a going concern.
Existing cash flow is not expected to be sufficient to cover liquidity
requirements after November 30, 1999, and the Company is currently facing the
prospect of not having adequate funds to operate its business. There can be no
assurance that any long-term restructuring alternative can be successfully
initiated or implemented by November 30, 1999, in which case the Company may be
compelled to pursue a bankruptcy filing in the absence of a proposed or
pre-approved financial restructuring.
On December 23, 1996, the Company obtained a $1,000,000 loan from an
unrelated third party which was used to pay the initial required $1,000,000
reduction on its then existing credit facility. Such $1,000,000 loan bears
interest at 8% per annum and all principal and interest is due and payable upon
maturity on December 31, 2001.
A loan from the Aid Association for Lutherans ("AAL") obtained by the
Company to purchase its headquarters and distribution facility in Chatsworth,
California is, by its terms, callable by AAL upon six months notice. As of
September 30, 1999, the outstanding principal balance of such loan was
$4,494,286. Such loan bears interest at 9.875% per year, is payable in monthly
installments of $43,418, representing both principal and interest, matures in
February 2019 and is secured by the real property on which the facility is
located.
Net cash used in investing activities was $5,625 for the first six months
of fiscal 2000, compared with net cash used in investing activities of $56,832
for the first six months of fiscal 1999. The increase in net cash used is
primarily attributable to capital expenditures for new computer equipment
incurred during the six month period ended September 30, 1998.
Cash flows used in financing activities were $1,075,955 for the first six
months of fiscal 2000, compared with cash flows used in financing activities of
$1,426,667 for the first six months of fiscal 1999. The decrease in cash flows
used in financing activities is primarily attributable to lower net repayments
of short-term and long-term debt during the six month period ended September 30,
2000.
The Company is currently evaluating its management information systems as
part of its strategy and growth expectations for the future. The likely result
of this evaluation will be a systems conversion for the Company's core business
processes. Although the ultimate cost of a systems conversion has not yet been
determined, the Company believes that it would incur between $100,000 and
$150,000 related to this project in fiscal 2000, which will include the purchase
of all required hardware, software, and implementation.
Page 16 of 46
<PAGE>
Management believes that, despite the financial hurdles and funding
uncertainties going forward, it has under development a business plan that, if
successfully funded and executed as part of a financial restructuring, can
significantly improve operating results. The support of the Company's vendors,
customers, potential lenders, stockholders and employees will continue to be key
to the Company's future success.
RECENT ACCOUNTING PRONOUNCEMENTS
During February 1997, the Financial Accounting Standards Board ("FASB")
issued Statement of Financial Accounting Standards ("SFAS") 128, Earnings per
Share," ("SFAS 128")which is effective for financial statements for both interim
and annual periods ending after December 15, 1997. The Company adopted SFAS 128
in the third fiscal quarter of 1998. SFAS 128 replaces the presentation of
primary and fully diluted earnings per share with basic and diluted earnings per
share. The Company's adoption of SFAS 128 required no change in the Company's
previously reported earnings per share.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive Income"
("SFAS 130") effective for fiscal years beginning after December 15, 1997. The
new rules establish standards for the reporting of comprehensive income and its
components in financial statements. Comprehensive income consists of net income
and other gains and losses affecting stockholders' equity that, under generally
accepted accounting principles, are excluded from net income, such as unrealized
gains and losses on investments available for sale, foreign currency translation
gains and losses and minimum pension liability. The Company has adopted the
provisions of SFAS 130 as of April 1, 1998. For all periods presented in this
Quarterly Report, there was no comprehensive income.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information", ("SFAS 131") effective for fiscal years
beginning after December 15, 1997. The new rules establish revised standards for
public companies relating to the reporting of financial and descriptive
information about their operating segments in financial statements. SFAS 131 is
effective for the Company in fiscal 1999. The Company currently evaluates its
operations as one segment.
YEAR 2000 ISSUE UPDATE
Many computer systems and other equipment with embedded chips or processors
in use today were designed and developed using two digits, rather than four, to
specify the year. As a result, such systems will recognize the Year 2000 as "00"
and may assume that the year is 1900 rather than 2000. This is commonly known as
the Year 2000 issue, which could potentially result in a system failure or in
miscalculations causing disruptions of operations, including among other things,
a temporary inability to process transactions, send invoices or engage in other
similar normal business activities. The Company has been informed that the
portion of the Company's computer software systems relating to the general
ledger, payroll and other employee records is presently Year 2000 compliant. The
Company is in the process of evaluating the potential cost to it in addressing
the Year 2000 issue with respect to its other software and the potential
consequences of an incomplete or untimely resolution of the Year 2000 issue. The
Company has been given estimates in the $100,000 to $150,000 range to purchase
and implement new Year 2000 compliant software for those systems that the
Company is aware require such replacement. Full implementation and final testing
of new software in targeted for completion by November, 1999. Although the
Company believes that it will not incur significant costs above these estimates
Page 17 of 46
<PAGE>
to become completely Year 2000 compliant, no assurance can be given that the
Company will not incur significant costs in addressing the Year 2000 issue or
that the failure to adequately address the Year 2000 issue will not have a
material adverse effect upon the Company.
The Company is contacting its major suppliers, major customers, financial
institutions and others with whom it conducts business to determine that they
will be able to resolve the Year 2000 issue in matters affecting the Company.
The Company at this time cannot make any predictions as to the degree of
compliance by such third parties or the consequences of their noncompliance.
However, if those third parties with whom the Company conducts business are
unsuccessful in implementing timely solutions, the Year 2000 issue could have a
material adverse effect on the Company's business, financial condition and
results of operations.
The Company is currently assessing its mechanical systems (e.g. telephones,
HVAC, etc.) which employ embedded chip technology. Based on initial information
gathered, the Company does not estimate a significant expense will be incurred
to make any non-compliant systems Year 2000 compliant.
The Company plans to test and validate its internal operations, complete
the third party surveys, and finalize and implement any contingency plans
necessary by November 30, 1999.
FORWARD LOOKING INFORMATION
This Quarterly Report on Form 10-Q contains forward-looking statements
within the meaning of that term in the Private Securities Litigation Reform Act
of 1995 (Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934). Additional written or oral forward-looking
statements may be made by the Company from time to time, in filings with the
Securities Exchange Commission or otherwise. Statements contained herein that
are not historical facts are forward-looking statements made pursuant to the
safe harbor provisions referenced above. The matters discussed herein with
respect to the anticipated growth of the wireless telephone industry and the
development of new wireless communications technologies, the introduction of new
products by the Company, the Company's ability to penetrate new distribution
channels, the Company's ability to restructure its existing business, the
Company's ability to replace business from lost customers, future sales levels,
costs associated with the Company's new management information system,
compliance with financial covenants in loan agreements, and the potential
outcome of any pending litigation involving the Company, among others, are
forward looking statements. In addition, when used in this discussion, the words
"anticipates," "expects," "intends," "plans" and variations thereof and similar
expressions are intended to identify forward-looking statements.
Forward-looking statements are inherently subject to risks and
uncertainties, some of which cannot be predicted or quantified based on current
expectations. Consequently, future events and actual results could differ
materially from those set forth in, contemplated by, or underlying the
forward-looking statements contained in this Quarterly Report. Statements in
this Quarterly Report, particularly in the Notes to Financial Statements, and
"Part 1, Item 2, Management's Discussion and Analysis of Financial Condition and
Results of Operations," describe certain factors, among others, that could
contribute to or cause such differences. Other factors that could contribute to
Page 18 of 46
<PAGE>
or cause such differences include, but are not limited to, unanticipated
developments in any one or more of the following areas: the receptivity of
consumers to new consumer electronics technologies, the rate and consumer
acceptance of new product introductions, competition, the number and nature of
customers and their product orders, timely replacement of lost customers,
pricing, foreign manufacturing, sourcing and sales (including foreign government
regulation, trade and importation concerns and fluctuation in exchange rates),
borrowing costs, the receptivity in the market place of the Company's
restructuring efforts, changes in taxes due to changes in the mix of U.S. and
non U.S. revenue, pending or threatened litigation, the availability of key
personnel and other risk factors which may be detailed from time to time in the
Company's Securities and Exchange Commission filings.
Readers are cautioned not to place undue reliance on any forward-looking
statements contained herein, which speak only as of the date hereof. The Company
undertakes no obligation to publicly release the result of any revisions to
these forward-looking statements that may be made to reflect events or
circumstances after the date hereof or to reflect the occurrence of unexpected
events.
PART II -- OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On September 21, 1999, the Company held its Annual Meeting of Stockholders.
The number of votes is based on the voting rights of the Common Stock.
The following individuals were elected as directors:
Votes Votes Broker
Name For Withheld Non-Votes
Gershon N. Cooper 6,502,884 4,252 394,277
John M. Burris 6,502,884 4,252 394,277
Matthew F. Jodziewicz 6,502,884 4,252 394,277
Ruth Cooper 6,502,884 4,252 394,277
The following proposal was approved as follows:
Votes Broker
Proposal Votes For Against Abstain Non-Votes
Approval of the appointment
of Richard & Hedrick as the
Company's independent
certifying accountants 6,505,863 304 969 394,277
Page 19 of 46
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits.
Exhibit No. Description
----------- -----------
2.1 Plan of Reorganization of North American Energy of Delaware,
Inc. (1)
2.2 Agreement and Plan of Merger between ORA Electronics, Inc., a
Delaware corporation, and North American Energy of Delaware,
Inc., a Delaware corporation. (2)
3.1 Restated Certificate of Incorporation of ORA Electronics, Inc.
(2)
3.2 Bylaws of ORA Electronics, Inc. (2)
4.1 Specimen Common Stock Certificate of ORA Electronics, Inc. (2)
4.2 Specimen Class A Warrant Certificate. (2)
4.3 Specimen Class B Warrant Certificate. (2)
4.4 Specimen Class C Warrant Certificate. (2)
4.5 Specimen Class D Warrant Certificate. (2)
4.6 Warrant Agreement between the Company and Continental Stock
Transfer & Trust Company (the "Warrant Agent"), dated as of
December 20, 1996. (2)
4.7 Letter Agreement, dated June 10, 1997, from Sheppard, Mullin,
Richter & Hampton LLP to the Warrant Agent. (4)
10.1 Loan and Security Agreement, dated April 4, 1997, by and between
the Company and FINOVA Capital Corporation ("FINOVA").
(4)
10.2 Amendment to Loan Agreement, dated April 4, 1997, between the
Company and FINOVA. (4)
10.3 Collateral Assignment, Patent Mortgage and Security Agreement,
dated as of April 4, 1997, by and between the Company and
FINOVA. (4)
10.4 Waiver and Second Amendment to Loan Agreement, dated June 26,
1997, between the Company and FINOVA. (4)
10.5 Waiver and Third Amendment to Loan Agreement, dated
November 13, 1997 between the Company and FINOVA. (5)
Page 20 of 46
<PAGE>
10.6 Waiver and Fourth Amendment to Loan Agreement, dated
February 11, 1998 between the Company and FINOVA. (6)
10.7 Waiver and Fifth Amendment to Loan Agreement, dated
March 27, 1998, between the Company and FINOVA. (7)
10.8 Second Deed of Amendment, by and between the Company
and ORA Electronics (UK) Limited ("ORA UK"), dated
as of April 1, 1998. (6)
10.9 Distribution Agreement, by and between Alliance Research
Corporation (predecessor to the Registrant) and Contactace
Limited (doing business as ORA UK), dated as of 1990. (6)
10.10 ORA Electronics, Inc. 1996 Stock Plan. (3)
10.11 Loan and Security Agreement, dated July 27, 1999, by and
between the Company and Celtic Capital Corporation ("Celtic").
11 Statement re: Computation of Earnings Per Share.
27 Financial Data Schedule.
- ---------------
(1) Incorporated by reference from the Form 8-K/A filed on December 20,
1996, by North American Energy of Delaware, Inc., predecessor to the
Registrant.
(2) Incorporated by reference from the Registrant's Form 8-K filed on
December 20, 1996.
(3) Incorporated by reference from the Registrant's Form 10-Q filed on
February 14, 1997.
(4) Incorporated by reference from the Registrant's Form 10-K filed on
June 30, 1997.
(5) Incorporated by reference from the Registrant's Form 10-Q filed on
February 14, 1998.
(6) Incorporated by reference from the Registrant's Form 8-K filed on
April 17, 1998.
(7) Incorporated by reference from the Registrant's Form 10-K filed on
June 29, 1998.
(b) Reports on Form 8-K.
--------------------
No reports on Form 8-K were filed by the Company during the fiscal
quarter ended September 30, 1999.
Page 21 of 46
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ORA ELECTRONICS, INC.
(Registrant)
Dated: November 15, 1999 By: /s/ John M. Burris
---------------------------------
John M. Burris, Duly Authorized
Representative and Chief Financial
Officer
Page 22 of 46
<PAGE>
EXHIBIT INDEX
Exhibit No. Description Page
- --------------------------------------------------------------------------------
10.11 Loan and Security Agreement, dated July 27, 1999,
by and between the Company and Celtic Capital
Corporation ("Celtic") 24
11 Statement Re: Computation Of Earnings
Per Share 45
27 Financial Data Schedule 46
Page 23 of 46
<PAGE>
EXHIBIT 10.11
-------------
LOAN AND SECURITY AGREEMENT
NOTICE - CONTAINS WAIVER OF TRIAL BY JURY
THIS LOAN AND SECURITY AGREEMENT is entered into as of July 27, 1999, by
and between ORA ELECTRONICS, INC., a Delaware corporation ("Borrower"), and
CELTIC CAPITAL CORPORATION ("Lender").
1. Certain Rules of Construction; Certain Definitions. Unless
otherwise specified herein, all accounting terms used herein shall be
interpreted, all accounting determinations hereunder shall be made, and all
financial statements required to be delivered hereunder shall be prepared in
accordance with generally accepted accounting principles and practices
consistently applied. All references herein to the singular or plural shall also
mean the plural or singular, respectively. All terms used herein which are
defined in the California Uniform Commercial Code (as amended from time to time)
shall have the meanings ascribed thereto therein unless otherwise defined in
this Agreement. As used herein, the following terms shall have the following
meanings:
1.1 "Account Debtor" - the obligor on any Account.
1.2 "Account" - an account receivable arising in the ordinary
course of Borrower's business.
1.3 "Advances" - A/R Advances and/or Inventory Advances, as
applicable.
1.4 "Agreement" - this Loan and Security Agreement, together
with all exhibits and schedules hereto, as the same may be amended from time to
time in accordance with the terms hereof.
1.5 "Allowable Amount" - the A/R Allowable Amount or the
Inventory Allowable Amount, as applicable.
1.6 "Anniversary Date" - the date which is two years from the
date of the first Credit Accommodation hereunder.
1.7 "A/R Advances" - advances made pursuant to the first
sentence in subsection 2.1.1.
1.8 "A/R Allowable Amount" - the lesser of the A/R Borrowing
Base and the A/R Maximum Commitment.
1.9 "A/R Borrowing Base" - eighty percent (80%) of the Net Face
Amount of Eligible Accounts.
1.10 "A/R Collateral Management Fee" - one quarter of one percent
(.25%) per month, of the average monthly balance of gross face amount of the
Accounts outstanding.
1
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1.11 "A/R Maximum Commitment" - $1,200,000.00.
1.12 "Availability Reserves" - shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and revise
in good faith reducing the amount of Advances which would otherwise be available
to Borrower hereunder: (a) to reflect events, conditions, contingencies or risks
which, as determined by Lender in good faith, do or may affect either (i) the
Collateral or any other property which is security for the Obligations or its
value, (ii) the assets, business or prospects of Borrower or any Obligor, or
(iii) the security interest and other rights of Lender in the Collateral
(including the enforceability, perfection and priority thereof), or (b) to
reflect Lender's good faith belief that any Collateral report or financial
information furnished by or on behalf of Borrower or any Obligor to Lender is or
may have been incomplete, inaccurate or misleading in any material respect, or
(c) in respect of any state of facts which Lender determines in good faith
constitutes an Event of Default or may, with notice or passage of time or both,
constitute an Event of Default.
1.13 "Borrower's Account" - the deposit account of Borrower,
account number 3030145037 maintained by Borrower with Union Bank of California
at its office located at 5855 Topanga Canyon Blvd., Suite 200, Woodland Hills,
CA 91367.
1.14 "Borrowing Base" - the A/R Borrowing Base or the
Inventory Borrowing Base, as applicable.
1.15 "Closing Date" - the date of this Agreement.
1.16 "Collateral" -
1.16.1 all of the following present and future assets of
Borrower, together with all collateral now or hereafter described in any form
UCC-1 filed against Borrower naming Lender as the secured party:
1.16.1.1 Accounts, returned, reclaimed or
repossessed goods with respect thereto and rights as an unpaid vendor; contract
rights; chattel paper; general intangibles (including, but not limited to, tax
and duty refunds, registered and unregistered patents, trademarks, service
marks, copyrights, trade names, and applications for the foregoing, trade
secrets, goodwill, processes, drawings, blueprints, customer lists, licenses,
whether as licensor or licensee, choses in action and other claims, and existing
and future leasehold interests in equipment, and fixtures); documents;
instruments; letters of credit, deposits accounts;
1.16.1.2 goods, including, but not limited to:
1.16.1.2.1 inventory, wherever located,
including raw materials, work-in-process, finished goods, and all names or marks
affixed to or to be affixed thereto for purposes of selling same by the seller,
manufacturer, lessor or licensor thereof;
2
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1.16.1.2.2 equipment and fixtures,
including, without limitation, all motor vehicles, furniture, and any and all
additions, substitutions, replacements (including spare parts), and accessions
thereof and thereto (the foregoing items described in this subsection 1.11.1.2.2
only shall be referred to collectively as "Equipment");
1.16.2 any goods in Borrower's possession, custody, or
control;
1.16.3 books and records relating to any of the above
including, without limitation, all computer programs, printed output and
computer readable data in the possession or control of the Borrower, any
computer service bureau or other third party;
1.16.4 products and proceeds of the foregoing in whatever
form and wherever located, including, without limitation, all insurance
proceeds, all claims against third parties for loss or destruction of or damage
to any of the foregoing, and all income from the lease or rental of any of the
foregoing.
1.16.5 any claim of Borrower on any policy of insurance,
including claims for premium refund under any workmen's compensation policy, or
claims under any business interruption or similar coverage.
1.16.6 all investment property.
1.17 "Collateral Management Fee" - collectively, the A/R
Collateral Management Fee and the Inventory Collateral Management Fee.
1.18 "Credit Accommodation" - any advance or other extension
of credit by Lender to or on behalf of Borrower hereunder or under any Evidence
of Special Credit Accommodation.
1.19 "Default Rate" - five percentage points (5.0%) per annum
in excess of the Interest Rate. To the extent the Default Rate is calculated
with reference to the Prime Rate, any change in the Default Rate shall be
effective as of the date of any change in Prime Rate.
1.20 "Delinquent Accounts" - Accounts which remain uncollected
more than ninety days from invoice date.
1.21 "Documents" - this Agreement, the Term Note, any riders,
supplements and amendments thereto, and all other documents, instruments or
agreements now or hereafter executed and/or delivered in connection with this
Agreement, including but not limited to any Evidences of Special Credit
Accommodations, mortgages, Security Agreements, assignments, pledges,
Subordination Agreements, and Guaranties.
1.22 "Eligible Account" - an Account, excluding the following:
1.22.1 A Delinquent Account;
3
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<PAGE>
1.22.2 An Account due from an Account Debtor which has
suffered a business failure or the termination of its existence, or as to which
a dissolution, insolvency or bankruptcy proceeding has been commenced, any
assignment for the benefit of creditors has been made, or a trustee, receiver or
conservator has been appointed for all or any part of the assets of such Account
Debtor;
1.22.3 An Account due from an Account Debtor affiliated
with Borrower in any manner, including, without limitation, as stockholder,
owner, officer, director, agent or employee;
1.22.4 An Account with respect to which payment is or may
be conditional;
1.22.5 An Account due from an Account Debtor who is not a
resident or citizen of, located in, or subject to service of process in, the
United States of America;
1.22.6 An Account due from an Account Debtor who is any
national government including, without limitation, any instrumentality,
division, agency, body or department thereof except if the Account Debtor is the
United States of America ("USA") and the USA, Lender and Borrower all enter into
an assignment of claims agreement in form and substance satisfactory to Lender;
1.22.7 An Account arising from progress billings or
retainages or "bill and hold" sales or any other similar arrangements;
1.22.8 An Account due from an Account Debtor as to which
twenty-five percent or more of the aggregate dollar amount of all outstanding
Accounts owing from such Account Debtor are Delinquent Accounts;
1.22.9 That portion of an Account due from an Account
Debtor which is in excess of fifteen percent of Borrower's aggregate dollar
amount of all outstanding Accounts;
1.22.10 An Account as to which Borrower is or may become
liable to the Account Debtor for any reason;
1.22.11 An Account which is not free of all liens,
encumbrances, charges, rights and interest of any kind;
1.22.12 An Account which is supported or represented by a
promissory note, post- dated check or letter of credit unless such instrument is
actually delivered to Lender;
1.22.13 An Account which is unsuitable for purposes of
determining the Borrowing Base, as determined by Lender in its sole discretion.
1.23 "Eligible Inventory" - means Inventory which:
1.23.1 is free of all liens, encumbrances, charges,
rights and interest of any kind (other than those in favor of Lender);
4
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<PAGE>
1.23.2 is permanently located at locations at which
Borrower conducts business in the State of California (or such other states as
to which Lender shall give its advance consent in writing), and is not covered
by a negotiable document of title or warehouse receipt (unless such document has
been delivered to Lender and Lender has given its advance consent in writing
thereto);
1.23.3 in Lender's opinion, is not obsolete, unsalable,
damaged, or unfit for further processing;
1.23.4 does not consist of miscellaneous supplies, display
items, packing and shipping materials, discontinued or slow-moving items, or
finished goods of substandard quality;
1.23.5 is not placed by Borrower on consignment;
1.23.6 is of a type held for sale in the ordinary course of
Borrower's business; and
1.23.7 is otherwise suitable for purposes of determining
the Inventory Borrowing Base, as determined by Lender in its sole discretion.
1.24 "Events of Default" - see Section 10.1 hereof.
1.25 "Evidence of Special Credit Accommodation" - see Section
2.1.3 hereof.
1.26 "Guarantors" - all entities now or hereafter guaranteeing
the Obligations.
1.27 "Guaranty" - a continuing guaranty in form and substance
acceptable to Lender by which a Guarantor guarantees the Obligations.
1.28 "Interest Rate" - the greater of: (a) two and one half
percent (2.5%), per annum, in excess of the Prime Rate; and (b) nine and
one-half percent (9.50%) per annum. To the extent the Interest Rate is
calculated with reference to the Prime Rate, any change in the Interest Rate
shall be effective as of the first day of the month following the date of any
change in Prime Rate.
1.29 "Inventory Advances" - advances made pursuant to the second
sentence of subsection 2.1.2.
1.30 "Inventory Borrowing Base" - zero percent (0%) of Eligible
Inventory.
1.31 "Inventory Collateral Management Fee" - zero percent (0%)
per month of the average monthly Inventory of Borrower, as determined by Lender
in its sole discretion.
1.32 "Inventory Maximum Commitment" - $0.
1.33 "Key Employees" - Gershon N. Cooper and John M. Burris.
1.34 "Lending Office" - Lender's office described in Section 21.1
hereof.
5
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1.35 "Lien" - any lien, mortgage, security interest, pledge,
encumbrance, or charge of any kind, including, but not limited to, any
conditional sale or other title retention arrangement or similar preferential
arrangement.
1.36 "Loan Fee" - $12,000.00.
1.37 "Maximum Commitment" - the A/R Maximum Commitment or the
Inventory Maximum Commitment, as applicable.
1.38 "Minimum Monthly Charge" - $4,000.00.
1.39 Misdirected Payment Fee - Fifteen percent (15%) percent of
the amount of any payment on an account where said payment has been received by
Borrower and not delivered in kind by Borrower to Lender within three (3)
business days of receipt thereof.
1.40 "Monetary Collateral" - cash, checks or other proceeds of
Collateral in tangible form.
1.41 "Negotiable Collateral" - see Section 5.6.1 hereof.
1.42 "Net Face Amount" - with respect to an Account, the gross
face amount of such Account less all trade discounts or other deductions to
which the Account Debtor is entitled.
1.43 "Obligated Party" - see Section 5.2 hereof.
1.44 "Obligations" - all present and future obligations owing by
Borrower to Lender whether or not for the payment of money, whether or not
evidenced by any note or other instrument, whether direct or indirect, absolute
or contingent, due or to become due, joint or several, primary or secondary,
liquidated or unliquidated, secured or unsecured, original or renewed or
extended, whether arising before, during or after the commencement of any case
with respect to Borrower under the United States Bankruptcy Code or any similar
statute, including but not limited to: the Revolving Credit Facility, the Term
Loan, the Term Note, any obligations arising pursuant to letters of credit or
acceptance transactions or any other financial accommodations; and all
principal, interest, fees, charges, expenses, attorneys' fees and accountants'
fees chargeable to Borrower or incurred by Lender in connection with this
Agreement and/or the transaction(s) related thereto.
1.45 "Obligors" - Borrower and all Guarantors.
1.46 "Prime Rate" - at any time any determination thereof is to
be made, the "prime rate", base rate or reference rate announced by Wells Fargo
Bank, N.A. at its head office in San Francisco, California.
1.47 "Revolving Credit Facility" - see Section 2.1 hereof.
1.48 "Security Agreement" - any security agreement which grants
or purports to grant Lender a security interest in the Collateral.
1.49 "Special Credit Accommodation" - see Section 2.1.3 hereof.
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1.50 "Special Credit Accommodation Fee" - three percent (3%) of
the original amount of any Special Credit Accommodation.
1.51 "Standard Fee Schedule" - the schedule of Lender's standard
fees for services. 1.52 "Subordinating Creditor" - none.
1.53 "Subordination Agreement" - a subordination agreement in
form and substance acceptable to Lender whereby a subordinating creditor
subordinates in favor of Lender obligations owed to it by Borrower.
1.54 "Termination Charges" - the greater of:
1.54.1 the monthly average of all interest and fees paid by
Borrower to Lender hereunder for the 180 days (or portion thereof if obligations
have not been outstanding for at least 180 days) preceding the date which this
calculation is to be made, for the period from the date on which this
determination is to be made to the next Anniversary Date; or
1.54.2 the Minimum Monthly Charge for the period from the
date on which this determination is to be made to the next Anniversary Date.
2. Credit Facilities.
2.1 Revolving Credit Facility. Subject to the terms and
conditions of this Agreement, from the date on which this Agreement becomes
effective and until termination pursuant to the terms hereof:
2.1.1 Advances. Lender shall, from time to time make A/R
Advances to Borrower, less any Availability Reserves, so long as, before and
after such A/R Advance, the Obligations relating only to the A/R Advances do not
exceed the A/R Allowable Amount. In addition, Lender shall, from time to time
make Inventory Advances to Borrower, less any Availability Reserves, so long as,
before and after such Inventory Advances, the Obligations relating only to the
Inventory Advances do not exceed the Inventory Allowable Amount; provided,
however, that the aggregate advances and other extensions of credit by Lender to
Borrower for the purpose of financing inventory may not exceed 0% of the
aggregate advances and other extensions of credit by Lender to Borrower for the
purpose of financing accounts receivable.
2.1.2 Reduction of Borrowing Base. Lender may, in its
discretion, from time to time, upon not less than five (5) days prior notice to
Borrower, reduce the A/R Borrowing Base to the extent that Lender determines in
good faith that: (a) the dilution with respect to the Accounts for any period
(based on the ratio of (i) the aggregate amount of reductions in Accounts other
than as a result of payments in cash to (ii) the aggregate amount of total
sales) has increased in any material respect or may be reasonably anticipated to
increase in any material respect above historical levels, or (b) the general
creditworthiness of Account Debtors has declined. In determining whether to
reduce the A/R Borrowing Base, Lender may consider events, conditions,
contingencies or risks which are also considered in determining Eligible
Accounts or in establishing Availability Reserves.
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2.1.3 Special Credit Accommodations. Lender may in its sole
and absolute discretion, from time to time, extend Credit Accommodations to
Borrower in excess of the Allowable Amount (any Credit Accommodation extended to
Borrower pursuant to this Section being a "Special Credit Accommodation"). Each
Special Credit Accommodation shall be evidenced by a writing in form and
substance satisfactory to Lender in its sole discretion (any such writing, an
"Evidence of Special Credit Accommodation"). Notwithstanding the terms and
provisions of any Evidence of Special Credit Accommodation, each Special Credit
Accommodation shall be payable upon demand unless otherwise agreed by Borrower
and Lender.
2.1.4 General Provisions Relating to Revolving Credit
Facility.
2.1.4.1 Crediting of Borrower's Account. All Advances
by Lender may be made by deposits or transfers to Borrower's Account.
2.1.4.2 Authorization for Credit Accommodations.
Subject to the terms and conditions of this Agreement, Lender is authorized to
make Credit Accommodations:
2.1.4.2.1 upon telephonic, facsimile or other
instructions received from anyone purporting to be an officer, employee or
representative of Borrower; or
2.1.4.2.2 at the sole discretion of Lender,
and notwithstanding any other provision in this Agreement, if necessary to meet
any Obligations, including but not limited to any interest not paid when due.
2.1.5 Conditions of Lender's Obligations. All conditions
of Lender's obligation to make Advances hereunder are imposed solely and
exclusively for the benefit of Lender and may be freely waived or modified in
whole or in part by Lender at any time.
3. Payments by Borrower.
3.1 In General.
3.1.5 Place of Payments. All payments hereunder shall be
made by Borrower to Lender at the Lending Office, or at such other place as
Lender may designate in writing.
3.1.6 Crediting of Payments.
3.1.6.1 Interest Calculations. Any payments
received by Lender from Account Debtors shall, for the purpose of computation of
interest on the A/R Advances under the Revolving Credit Facility, be credited to
the A/R Advances under the Revolving Credit Facility on the fifth (5th) business
day after receipt by Lender.
3.1.6.2 Generally. No payments received by Lender
purportedly in satisfaction of any of the Obligations shall constitute payment
thereof unless and until final payment thereof.
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3.1.7 Prepayments; Application of Payments. Borrower shall
have the right to make payments at any time in reduction of the Revolving Credit
Facility, in whole or in part, provided, however, that Lender may apply any
payments received to the Revolving Credit Facility in any manner and in any
order as Lender may determine in its sole discretion, notwithstanding contrary
instructions.
3.2 Interest and Fees.
3.2.1 Loan Fee. Borrower shall pay the Loan Fee to Lender
on an annual basis without offset, deduction, demand or proration (i)
concurrently with the first Credit Accommodation hereunder ("Loan Fee Date") and
(ii) on each anniversary of such Loan Fee Date. Any portion not paid when due
shall accrue interest at the applicable interest rate set forth herein.
3.2.2 Basic Interest. Subject to Section 3.2.3 hereof,
interest on the Obligations shall be payable monthly, in arrears, shall be
computed at the Interest Rate for the Revolving Credit Facility, and shall be
due on the first day of each month following the accrual thereof.
3.2.3 Default Interest. In lieu of Basic Interest,
immediately upon the occurrence of an Event of Default, unless waived by Lender,
Borrower shall pay Lender, monthly, until the first Anniversary Date on which
all Obligations have been fully paid, the greater of:
3.2.3.1 interest, before as well as after judgment,
at the Default Rate; or
3.2.3.2 the greater of:
3.2.3.2.1 the monthly average of all
interest and fees paid by Borrower to Lender hereunder for the preceding 180
days (or portion thereof if Obligations have not been outstanding for at least
180 days): or
3.2.3.2.2 the Minimum Monthly Charge.
3.2.4 Calculation of Interest. All interest charged
hereunder shall be computed on the basis of a three hundred sixty (360) day year
for the actual number of days elapsed. Notwithstanding anything to the contrary
contained herein, any interest rate calculated hereunder shall be rounded to the
closest 1/4 of 1%, with no adjustment made for rate changes of less than 1/4 of
1%.
3.2.5 Collateral Management Fee. Borrower shall pay Lender
the Collateral Management Fee monthly, in arrears, on the first day of each
month following the accrual thereof.
3.2.6 Special Credit Accommodation Fee. Simultaneously
with the making of a Special Credit Accommodation, Borrower shall pay to Lender
the Special Credit Accommodation Fee.
3.2.7 Additional Fees. Borrower shall pay Lender fees for
such services as Lender customarily charges fees, as set forth in Lender
Standard Fee Schedule, a copy of which will be provided to Borrower on demand.
Lender shall have the right to change all or any of such fees upon ten (10) days
notice to Borrower.
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3.1.7 Prepayments; Application of Payments. Borrower shall
have the right to make payments at any time in reduction of the Revolving Credit
Facility, in whole or in part, provided, however, that Lender may apply any
payments received to the Revolving Credit Facility in any manner and in any
order as Lender may determine in its sole discretion, notwithstanding contrary
instructions.
3.2 Interest and Fees.
3.2.1 Loan Fee. Borrower shall pay the Loan Fee to Lender
on an annual basis without offset, deduction, demand or proration (i)
concurrently with the first Credit Accommodation hereunder ("Loan Fee Date") and
(ii) on each anniversary of such Loan Fee Date. Any portion not paid when due
shall accrue interest at the applicable interest rate set forth herein.
3.2.2 Basic Interest. Subject to Section 3.2.3 hereof,
interest on the Obligations shall be payable monthly, in arrears, shall be
computed at the Interest Rate for the Revolving Credit Facility, and shall be
due on the first day of each month following the accrual thereof.
3.2.3 Default Interest. In lieu of Basic Interest,
immediately upon the occurrence of an Event of Default, unless waived by Lender,
Borrower shall pay Lender, monthly, until the first Anniversary Date on which
all Obligations have been fully paid, the greater of:
3.3 Payments Upon Termination. Upon the Termination Date, the
unpaid balance of the Obligations shall be due and payable without demand or
notice.
4. Grant of Security Interest. To secure the payment and performance
in full of all of the Obligations, Borrower hereby grants to Lender a continuing
security interest in the Collateral.
5. Collection and Administration of Accounts.
5.1 Collection.
5.1.1 Monetary Collateral. Borrower is authorized to
collect Monetary Collateral on behalf of and in trust for Lender, at Borrower's
expense, but such authority shall automatically terminate upon an Event of
Default. Lender may modify or terminate such authority at any time irrespective
of whether an Event of Default has occurred and directly collect any of the
Monetary Collateral. Borrower shall, at Borrower's expense and in the manner
requested by Lender from time to time, direct that Monetary Collateral be (or,
if received by Borrower, shall cause same to be) (a) sent to a post office box
designated by and/or in the name of Lender, or in the name of Borrower, but as
to which access is limited solely to Lender and/or (b) deposited into a bank
account maintained in the name of Lender and/or a blocked bank account under
arrangements with the depository bank under which all funds deposited to such
blocked bank account are required to be transferred to Lender. In connection
therewith, Borrower shall execute such post office box and/or blocked bank
account agreements as Lender shall specify.
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5.1.2 Electronic Proceeds of Collateral. In the event
Borrower receives proceeds of Collateral in the form of wire transfer or other
intangible funds transfer mechanism, Borrower shall immediately pay such
proceeds to Lender.
5.2 Notifications, etc. Lender may, at any time, irrespective of
whether an Event of Default has occurred, without notice to or the assent of
Borrower, (a) notify any entity obligated with respect to any Monetary
Collateral (an "Obligated Party"), by means of the letter attached as Exhibit A,
to the form and substance of which Borrower hereby consents, that the underlying
Monetary Collateral has been assigned to Lender by Borrower and that payment
thereof is to be made to the order of and directly and solely to Lender, (b)
send, or cause to be sent by its designee, requests (which may identify the
sender by a pseudonym) for verification of any Monetary Collateral directly to
the appropriate Obligated Party or any bailee with respect thereto, and (c)
demand, collect or enforce payment of any Collateral, but without any duty to do
so, and Lender shall not be liable for any failure to collect or enforce payment
thereof. At Lender's request, all invoices and statements sent to any Obligated
Party or any bailee, shall state that the relevant Monetary Collateral has been
assigned to Lender and that any payments in respect thereof are payable directly
and solely to Lender.
5.3 Lender's Powers. Borrower hereby authorizes Lender and any
designee of Lender, at Borrower's sole expense, to exercise at any time in
Lender's or such designee's discretion all or any of the following powers, which
powers are irrevocable until all of the Obligations have been paid in full: (a)
receive, take, endorse, assign, deliver, accept and deposit, in the name of
Lender or Borrower, any and all cash, checks, commercial paper, drafts,
remittances and other instruments and documents relating to the Collateral or
the proceeds thereof, (b) transmit to any Obligated Party or any bailee notice
of the interest of Lender in the Collateral or request from any such entity, at
any time, in the name of Borrower or Lender or any designee of Lender,
information concerning the Monetary Collateral and any amounts owing with
respect thereto, (c) notify any Obligated Party to make payment directly and
solely to Lender, or notify bailees as to the disposition of Collateral, (d)
take or bring, in the name of Lender or Borrower, all steps, actions, suits or
proceedings deemed by Lender necessary or desirable to effect collection of or
other realization upon any Collateral, (e) after an Event of Default, change the
address for delivery of mail to Borrower and to receive and open mail addressed
to Borrower, (f) after an Event of Default, upon any terms and conditions,
extend the time of payment of, compromise, or settle for cash, credit, return of
merchandise, any and all Monetary Collateral and discharge or release any
Obligated Party without affecting any of the Obligations, (g) execute in the
name of Borrower and file against Borrower in favor of Lender financing
statements or amendments with respect to any or all of the Collateral, and (h)
execute in the name of Borrower and file on behalf of Borrower with such
governmental authorities as are appropriate such documents (including, without
limitation, applications and certificates) as may be required for purposes of
having Borrower qualified to transact business in a particular state or
geographic location.
5.4 Release. Borrower hereby releases and exculpates Lender, its
officers, employees, agents, designees, attorneys, and accountants from any
liability arising from any acts under this Agreement or in furtherance thereof,
whether of omission or commission, and whether based upon any error of judgment
or mistake of law or fact, except for gross negligence or willful misconduct. In
no event shall Lender have any liability to Borrower for lost profits or other
special or consequential damages.
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5.5 No Amendments. After written notice by Lender to Borrower,
and automatically, without notice, after an Event of Default, Borrower shall
not, without the prior written consent of Lender in each instance, (a) grant any
extension of time for payment of any Monetary Collateral, (b) compromise or
settle any Monetary Collateral for less than the full amount thereof, (c)
release in whole or in part any Obligated Party, or (d) grant any credits,
discounts, allowances, deductions, return authorizations or the like with
respect to any Monetary Collateral.
5.6 Delivery of Collateral. At such times as Lender may request
and in the manner specified by Lender, Borrower shall deliver to Lender or
Lender's representative original invoices, agreements, proof of rendition of
services and delivery of goods and other documents evidencing or relating to the
transactions which gave rise to any of the Collateral, together with customer
statements, schedules describing the Monetary Collateral and/or statements of
account and confirmatory assignments to Lender of the Monetary Collateral, in
form and substance satisfactory to Lender and duly executed by Borrower. Without
limiting the provisions of any other section of this Agreement, Borrower will
promptly notify Lender, in writing, of Borrower's granting of credits,
discounts, allowances, deductions, return authorizations or the like with
respect to any Monetary Collateral other than in the ordinary course of
Borrower's business. In no event shall any such schedule or confirmatory
assignment (or the absence thereof or omission of any Monetary Collateral
therefrom) limit or in any way be construed as a waiver, limitation, or
modification of the Liens or rights of Lender or the warranties,
representations, and covenants of Borrower under this Agreement.
5.6.1 In addition, in the event that any Collateral,
including proceeds, is evidenced by or consists of a contract, letter of credit,
advice of credit, instrument, money, negotiable documents, chattel paper, or
similar property (collectively, the "Negotiable Collateral"), Borrower shall,
immediately upon written request therefor from Lender, endorse and assign such
Negotiable Collateral over to Lender and deliver actual physical possession of
the Negotiable Collateral to Lender.
5.7 Inspection. From time to time as requested by Lender, at the
sole expense of Borrower, Lender or its designee shall have access, during
reasonable business hours if prior to an Event of Default and at any time if on
or after an Event of Default, to all premises where Collateral is located for
the purposes of inspecting (and removing, if after the occurrence of an Event of
Default) any of the Collateral, including Borrower's books and records, and
Borrower shall permit Lender or its designee to make copies of such books and
records or extracts therefrom as Lender may request. Without expense to Lender,
Lender may use any of Borrower's personnel, equipment, including computer
equipment, programs, printed output and computer readable media, supplies and
premises for the collection of accounts and realization on other Collateral as
Lender, in its sole discretion, deems appropriate. Borrower hereby irrevocably
authorizes all accountants and third parties, in the form attached hereto as
Exhibit B, to disclose and deliver to Lender at Borrower's expense all financial
information, books and records, work papers, management reports and other
information in their possession relating to Borrower. In addition to the
foregoing, Borrower hereby authorizes Lender at any time to access
electronically information concerning any accounts maintained by Borrower with
any bank or other financial institution so long as such access is in furtherance
of, or to monitor compliance with, the terms of this Agreement.
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6. Conditions Precedent to All Credit Accommodations. Subject to the
other terms and conditions contained herein, Lender's obligation to make any
Credit Accommodation or Term Loan avail able to Borrower is subject to the
satisfaction of, or waiver of, immediately prior to or concurrently with the
making of such Credit Accommodation, the following conditions precedent:
6.1 Executions. This Agreement and all other Documents required
by Lender shall be executed by Borrower and all other Obligors.
6.2 Representations and Warranties. All representations and
warranties of Borrower to Lender set forth herein or in any of the Documents
shall be true and accurate and complete in all respects;
6.3 No Event of Default. There shall not exist an Event of
Default or an event which with the giving of notice or the passage of time, or
both, would be or become an Event of Default; and
6.4 Payment of All Fees. Borrower shall have paid to Lender all
accrued and unpaid fees and other amounts due and payable hereunder and pursuant
to the terms hereof including, without limitation, all of Lender's attorneys'
fees.
7. Representations and Warranties of Borrower. Borrower represents
and warrants to Lender as follows, the truth and accuracy of which, and
compliance with which, shall be continuing conditions of the making of any
Credit Accommodations:
7.1 Priority Interest. No entity other than Lender has (or, in
the case of after-acquired Collateral, will have, at the time Borrower acquires
rights therein) any interest in the Collateral, including but not limited to any
security interest or other lien or charge.
7.2 Accounts. As to each Account, except as disclosed in writing
to Lender at the time such Account Receivable arises: (a) each is valid and
legally enforceable and represents an undisputed bona fide indebtedness incurred
by the account debtor for the sum reported to Lender; (b) each arises from an
absolute and unconditional sale of goods, without any right of return or
consignment, or from a completed rendition of services; (c) each is not, at the
time such Account arises, subject to any defense, offset, dispute, contra
relationship, counterclaim, or any given or claimed credit, allowance or
discount; and (d) all statements made and all unpaid balances and other
information appearing in the invoices, agreements, proofs of rendition of
services and delivery of goods and other documentation relating to the Accounts
Receivable, and all confirmatory assignments, schedules, statements of account
and books and records with respect thereto, are true and correct and in all
respects what they purport to be.
7.3 Condition of Equipment. With respect to Borrower's equipment,
Borrower shall keep the Equipment in good order and repair, and in running and
marketable condition, ordinary wear and tear excepted.
8. Borrower's Affirmative Covenants. Until payment in full of the
Obligations, Borrower agrees to:
8.1 Financial Statements, Reports and Certifications. Furnish to
Lender, in form and substance satisfactory to Lender:
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8.1.1 Annual Financial Statements. As soon as possible
after the end of each fiscal year of Borrower, and in any event within ninety
(90) days thereafter: (a) a complete copy of Borrower's financial statements,
including but not limited to (i) the management letter, if any, (ii) the balance
sheet as of the close of the fiscal year, and (iii) the income statement for
such year, together with a statement of cash flows, reviewed by certified public
accountants selected by Borrower and satisfactory to Lender; and (b) a statement
certified by the chief financial officer or president of Borrower that Borrower
is in compliance with all the terms, conditions, covenants and warranties of
this Agreement; and
8.1.2 Other Financial Statements. No later than sixty (60)
days after the close of each fiscal quarter (an "Accounting Period"), Borrower's
balance sheet as of the close of such Accounting Period and its income statement
for that portion of the then current fiscal year through the end of such
Accounting Period certified by Borrower's chief financial officer or president
as being complete, correct, and fairly representing its financial condition and
results of operations.
8.1.3 Inventory Reports. On or before (I) the fifteenth day
of each month and (ii) the last day of each month, a statement describing all
Inventory of Borrower as of such date, including the composition thereof, which
statement shall be in form and substance satisfactory to Lender.
8.2 Expenses.
8.2.1 Generally. Pay all out-of-pocket expenses of Lender
(including, but not limited to, fees and disbursements of Lender's counsel)
incident to (whether by judicial proceedings or otherwise, and whether any
resulting dispute resolution procedure involving tort, contract or other
claims):
8.2.1.1 the preparation, negotiation, execution,
administration and enforcement of the Documents, any amendments, extensions and
renewals thereof, and any other documents prepared in connection with any
transactions between Borrower and Lender, whether or not executed;
8.2.1.2 any expenses incurred by Lender (whether or
not for the benefit of Borrower) under this Agreement, including, without
limitation, all expenses for postage relating to the mailing of statements,
invoices, and verifications, and all expenses relating to any audits of all or
any portion of the Collateral;
8.2.1.3 the protection of Lender's rights under the
Documents;
8.2.1.4 defending against any and all claims against
Lender relating to any of its acts of commission or omission directly or
indirectly relating to the Documents;
8.2.1.5 or in any way arising out of a bankruptcy
proceeding commenced by or against Borrower, including but not limited to
expenses incurred in enforcing or defending Lender's claims against Borrower or
the Collateral, defending any avoidance actions, and expenses related to the
administration of said proceeding;
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8.2.2 Indemnification. Indemnify and save Lender harmless
from any and all liability with respect to any stamp or other taxes (other than
transfer or income taxes) which may be determined to be payable in connection
with the execution of the Documents or any action of Lender with respect to the
Collateral, including, without limitation, the transfer of the Collateral to
Lender's name or that of Lender's nominee or any purchaser at a foreclosure
sale.
8.3 Costs and Expenses - Enforcement of Judgments. Reimburse
Lender for all costs and expenses, including attorneys' fees, which Lender
incurs in enforcing any judgment rendered in connection with this Agreement.
This provision is severable from all other provisions hereof and shall survive,
and not be deemed merged into, any such judgment.
8.4 Taxes and Expenses Regarding Borrower's Assets. Make timely
payment or deposit of all taxes, assessments or contributions required of
Borrower. If Borrower fails to make any such payment or deposit or furnish the
required proof, Lender may, in its sole discretion and without notice to
Borrower, (a) make payment of the same or any part thereof, or (b) set up such
reserves against the Obligations as Lender deems necessary to satisfy the
liability therefore, or both. Lender may conclusively rely on statements of the
amount owing or other official statements issued by the appropriate governmental
agency. Any payment made by Lender shall constitute neither (i) an agreement by
Lender to make similar payments in the future, nor (ii) a waiver by Lender of
any default under the Documents. Lender need not inquire into, nor contest the
validity of, any expense, tax, security interest, encumbrance or lien, and the
receipt of the usual official notice requiring the payment thereof shall be
conclusive evidence that the same was validly due and owing.
8.5 Location of Collateral. Give Lender written notice
immediately upon forming an intention to change the location of its chief place
of business or any of the Collateral.
8.6 Change in Name. Give Lender written notice immediately upon
forming an intention to change its name or form of business organization.
8.7 Insurance. At all times maintain, with financially sound and
reputable insurers, casualty insurance with respect to the Collateral and other
assets. All such insurance policies shall be in such form, substance, amounts
and coverage as may be satisfactory to Lender and shall provide for thirty (30)
days prior written notice to Lender of cancellation or reduction of coverage.
Borrower hereby irrevocably authorizes Lender and any designee of Lender to
obtain at Borrower's expense, and, after an Event of Default, to adjust or
settle any claim or other matter under or arising pursuant to such insurance or
to amend or cancel such insurance. Borrower shall deliver to Lender evidence of
such insurance and a Lender's loss payable endorsement naming Lender as loss
payee as to all existing and future insurance policies relating to the
Collateral. Borrower shall deliver to Lender, in kind, all instruments
representing proceeds of insurance received by Borrower. Lender may apply any
and all insurance proceeds received at any time to the cost of repairs to or
replacement of any portion of the Collateral and/or, at Lender's option, to the
payment of or as security for any of the Obligations, whether or not due, in any
order or manner as Lender determines.
9. Borrower's Negative Covenant. Until payment in full of the
Obligations, Borrower shall not suffer to exist any Lien upon any of its assets,
except that Borrower may acquire new equipment encumbered with purchase money
security interests.
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10. Events of Default and Remedies.
10.1 Events of Default. Each of the following events or
conditions shall constitute an "Event of Default":
10.1.1 Borrower defaults in the payment of any Obligations
when due, whether at maturity, upon acceleration, or otherwise;
10.1.2 Borrower and/or any Guarantor is in default with
respect to the Documents and/or any other document, instrument, agreement or
indebtedness entered into by and between Lender and any Obligor;
10.1.3 The Obligations at any time exceed the Allowable
Amount;
10.1.4 Borrower or any Guarantor fails to pay any loan
when due;
10.1.5 Borrower or any Guarantor fails to pay any payroll
tax obligation when due;
10.1.6 An order for relief is entered against any Obligor
by any United States Bankruptcy Court; or Borrower or any Guarantor does not
generally pay its debts as they become due (within the meaning of 11 U.S.C.
303(h) as at any time amended, or any successor statute thereto); or makes an
assignment for the benefit of creditors; or any Obligor applies for or consents
to the appointment of a custodian, receiver, trustee, or similar officer for it
or for all or any substantial part of its assets, or such custodian, receiver,
trustee, or similar officer is appointed without the application or consent of
any Obligor; or any Obligor institutes (by petition, application, answer,
consent, or otherwise) any bankruptcy, insolvency, reorganization, moratorium,
arrangement, readjustment of debt, dissolution, liquidation or similar
proceeding relating to it under the laws of any jurisdiction; or any such
proceeding shall be instituted (by petition, application, or otherwise) against
any Obligor; or any judgment, writ, warrant of attachment, execution, or similar
process shall be issued or levied against a substantial portion of the assets of
any Obligor; or
10.1.7 An adverse change occurs with respect to the
financial condition or operations of Borrower which results in a material
impairment of the prospect of repayment of the Obligations;
10.1.8 A sale, hypothecation or other disposition is made
of the beneficial interest in any class of voting stock of Borrower which
results in a change in control of Borrower's business;
10.1.9 Any Guarantor fails to perform or observe any of
such Guarantor's obligations under any Guaranty, or shall notify Lender of its
intention to rescind, modify, terminate or revoke the Guaranty with respect to
future transactions, or the Guaranty shall cease to be in full force and effect
for any reason whatever;
10.1.10 Any Subordinating Creditor fails to perform or
observe any of such Subordinating Creditor's obligations under any Subordination
Agreement, or notifies Lender of the Subordinating Creditor's intention to
rescind, modify, terminate or revoke the Subordination Agreement with respect to
future transactions, or the Subordination Agreement ceases to be in full force
and effect for any reason whatsoever;
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<PAGE>
10.1.11 Any of the Key Employees fails to devote 100% of
their efforts in furtherance of the business affairs of Borrower for any one
month, or ceases to be employed by Borrower.
10.2 Remedies.
10.2.1 Upon the occurrence of any Event of Default (other
than an Event of Default arising under Section 10.1.6 hereof), at Lender's
option:
10.2.1.1 Lender may declare this Agreement and all
of Lender's obligations hereunder terminated;
10.2.1.2 Lender may declare all Obligations to be
immediately due and payable, without presentment, demand, protest, or notice of
any kind, all of which are hereby expressly waived by Borrower;
10.2.1.3 all Obligations shall accrue interest at
the Default Rate; and
10.2.1.4 Lender may, immediately and without
expiration of any period of grace, enforce payment of all Obligations and
exercise any and all other remedies granted to it under the Documents, at law,
in equity, or otherwise.
10.2.2 Upon the occurrence of any Event of Default arising
under Section 10.1.6 hereof:
10.2.2.1 this Agreement and all of Lender's
obligations hereunder shall automatically terminate;
10.2.2.2 all Obligations shall be immediately due
and payable, without presentment, demand, protest, or notice of any kind, all of
which are hereby expressly waived by Borrower;
10.2.2.3 all Obligations shall accrue interest at
the Default Rate; and
10.2.2.4 Lender may, immediately and without
expiration of any period of grace, enforce payment of all Obligations and
exercise any and all other remedies granted to it under the Documents, at law,
in equity, or otherwise.
10.3 Liquidation Success Premium. To induce Lender to collect,
sell or otherwise dispose of the Collateral (the ?Liquidation?) in accordance
with standards higher than that which may be commercially reasonable (but
without obligating Lender to exercise such higher standards), Borrower agrees
that if it shall essentially cease operating as a going concern, and the
proceeds from the Liquidation after the occurrence of an Event of Default (the
?Default?) are in excess of the Obligations at the time of Default, Borrower
shall pay to Lender a liquidation success premium of ten (10%) percent of the
amount of such excess.
11. Termination. The Revolving Credit Facility shall continue in
effect until the next Anniversary Date, and shall thereafter be automatically
renewed from year to year thereafter, subject to the terms of this Agreement,
unless:
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<PAGE>
11.1 Lender gives Borrower notice of termination, in which event
the Revolving Credit Facility shall terminate sixty (60) days from the date of
such notice; or
11.2 Borrower gives Lender notice of non-renewal, in which event
the Revolving Credit Facility shall terminate on the Anniversary Date which is
at least sixty (60) days from the date on which such notice of termination is
actually received by Lender.
12. Revocation of Borrower's Right To Sell Inventory Free and Clear
of Lender's Security Interest. Lender may, upon the occurrence of an Event of
Default, (a) revoke Borrower's right to sell inventory free and clear of
Lender's security interest therein and (b) notify Borrower's account debtors, or
any other party(ies), of such revocation by means of language substantially
equivalent to that contained in Exhibit A attached hereto.
13. No Lien Termination Without Release. In recognition of Lender's
right to have all its attorneys' fees and other expenses incurred in connection
with this Agreement secured by the Collateral, notwithstanding payment in full
of all Obligations by Borrower, Lender shall not be required to record any
terminations or satisfactions of any of its liens on the Collateral unless and
until Borrower and all Guarantors have executed and delivered to Lender general
releases which conform to California Civil Code Sections 1541-2.
14. Disclaimer for Negligence. Lender shall not be liable for any
claims, demands, losses or damages made, claimed or suffered by Borrower, except
such as may arise through or could be caused by Lender's gross negligence or
willful misconduct.
15. Limitation of Consequential Damage. Lender shall not be
responsible for any lost profits of Borrower arising from any breach of
contract, tort (excluding the Lender's gross negligence or willful misconduct),
or any other wrong arising from the establishment, administration or collection
of the Obligations.
16. Account Stated. Lender shall render to Borrower a statement
setting forth the transactions arising hereunder. Each statement shall be
considered correct and binding upon Borrower as an account stated, except to the
extent that Lender receives, within thirty (30) days after the mailing of such
statement, written notice from Borrower of any specific exceptions by Borrower
to that statement.
17. Retention of Records. Lender shall retain any documents,
schedules, invoices or other papers delivered by Borrower only for such period
as Lender, at its sole discretion, may determine necessary, after which time
Lender may destroy such records without notice to or consent from Borrower.
18. Notices to Third Parties. Upon the occurrence of an Event of
Default as described in Section 10.1 hereof, Lender shall have the right to give
any Guarantor or Subordinating Creditor notice of any fact or event relating to
this Agreement, as Lender may deem necessary or desirable in Lender's sole
discretion, including, without limitation, Borrower's financial condition.
Borrower shall provide to each Guarantor and Subordinating Creditor a copy of
each notice, statement or report required to be given to Lender under any of the
paragraphs of this section.
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<PAGE>
19. Information to Participants. Lender may furnish any financial or
other information concerning Borrower, or any of its subsidiaries, heretofore or
hereafter provided by Borrower to Lender, pursuant to this Agreement or
otherwise, to any prospective or actual purchaser of any participation or other
interest in any loans made by Lender to Borrower (whether under this Agreement
or otherwise), or to any prospective purchaser of any securities issued or to be
issued by Lender.
20. Entire Agreement. This Agreement supersedes all prior agreements
and understandings relating to the subject matter hereof. No course of prior
dealings between the parties, no usage of the trade, and no parol or extrinsic
evidence of any nature, shall be used or be relevant to supplement, explain or
modify any term used herein. In the event of any conflict between a term or
condition of this Agreement and a term or condition of any document(s) executed
in connection herewith, the term or condition of this Agreement shall govern.
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against Lender or Borrower under any rule of construction or
otherwise.
21. Miscellaneous.
21.1 Notices. All notices required to be given to any entity
other than Lender shall be deemed given upon the first to occur of (a) deposit
thereof in a receptacle under the control of the United States Postal Service,
(b) transmittal by electronic means to a receiver under the control of such
entity, or (c) actual receipt by such party or an employee or agent of such
entity. All notices required to be given to Lender hereunder shall be deemed
given upon actual receipt by a responsible officer of Lender. For the purposes
hereof, notices hereunder shall be sent to the following addresses, or to such
other addresses as each such entity may in writing hereafter indicate:
BORROWER
--------
ADDRESS: ORA ELECTRONICS, INC.
9410 Owensmouth Ave.
Chatsworth, CA 91311
Telephone Number: (818) 772-2700
Telefacsimile Number: (818) 718-8626
Attention: Gershon N. Cooper
LENDER
------
(Lending Office)
ADDRESS: CELTIC CAPITAL CORPORATION
2951 28th Street
Suite 2030
Santa Monica, CA 90405
Telephone Number: (310) 314-7333
Telefacsimile Number: (310) 314-7338
Attention: Mark Hafner, President
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<PAGE>
21.2 Survival. All representations, warranties and agreements
herein contained on the part of Borrower shall survive the making of Advances
hereunder, and all such representations, warranties and agreements shall be
effective so long as any obligations owed to Lender by Borrower remain
unsatisfied or for such longer periods as may be expressly stated.
21.3 Amendment and Waiver. Neither this Agreement nor any
provisions hereof may be changed, waived, discharged or terminated orally, but
only by an instrument in writing signed by the party against whom enforcement of
the change, waiver, discharge or termination is sought.
21.4 No Waiver. No failure to exercise and no delay in exercising
any right, power, or remedy hereunder shall impair any right, power, or remedy
which Lender may have, nor shall any such delay be construed to be a waiver of
any of such rights, powers, or remedies, or any acquiescence in any breach or
default hereunder; nor shall any waiver of any breach or default of Borrower
hereunder be deemed a waiver of any default or breach subsequently occurring.
All rights and remedies granted to Lender hereunder shall remain in full force
and effect notwithstanding any single or partial exercise of, or any
discontinuance of action begun to enforce, any such right or remedy. The rights
and remedies specified herein are cumulative and not exclusive of each other or
of any rights or remedies which Lender would otherwise have. Any waiver, permit,
consent or approval by Lender of any breach or default hereunder must be in
writing and shall be effective only to the extent set forth in such writing and
only as to that specific instance.
21.5 Choice of Law. All issues arising in connection herewith
shall be governed by and construed in accordance with the internal laws of the
State of California.
21.6 Waiver of Statute of Limitations. Borrower waives the
pleading of any statute of limitations with respect to any and all actions in
connection herewith.
21.7 Venue. Borrower irrevocably agrees that, subject to Lender's
sole discretion, all actions and proceedings in any way, manner or respect,
arising in connection herewith (collectively, the "Actions") shall be litigated
in courts having situs within the County of Los Angeles, State of California,
and Borrower hereby consents and submits to the jurisdiction of any local, state
or federal court located within said County and State. Borrower hereby waives
any right it may have to transfer or change the venue of any litigation brought
against Borrower by Lender in accordance with this paragraph.
21.8 Waiver Of Trial By Jury. In recognition of the higher costs
and delay which may result from a jury trial, the parties hereto waive any right
to trial by jury of any claim, demand, action or cause of action (a) arising
hereunder, or (b) in any way connected with or related or incidental to the
dealings of the parties hereto or any of them with respect hereto, in each case
whether now existing or hereafter arising, and whether sounding in contract or
tort or otherwise; and each party hereby agrees and consents that any such
20
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<PAGE>
claim, demand, action or cause of action shall be decided by court trial without
a jury, and that any party hereto may file an original counterpart or a copy of
this section with any court as written evidence of the consent of the parties
hereto to the waiver of their right to trial by jury.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement
to be executed as of the day and year first written above.
ORA ELECTRONICS, INC.
/s/ Gershon N. Cooper
------------------------------
Gershon N. Cooper
Title: President
CELTIC CAPITAL CORPORATION
/s/ Mark Hafner
------------------------------
Mark Hafner
Title: President
21
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<PAGE>
EXHIBIT 11
----------
STATEMENT RE: COMPUTATION OF EARNINGS PER SHARE
Three Months Ended September 30,
1999 1998
---- ----
Basic and diluted weighted average
number of shares of common stock
outstanding 6,910,098 6,908,956
=========== ===========
Net earnings (loss) per share $ (930,713) $ 227,661
=========== ===========
Basic and diluted earnings (loss)
per share $ (0.13) $ 0.03
=========== ===========
Six Months Ended September 30,
1999 1998
---- ----
Basic and diluted weighted average
number of shares of common stock
outstanding 6,910,055 6,908,875
=========== ===========
Net earnings (loss) per share $(2,090,256) $ 1,015,672
=========== ===========
Basic and diluted earnings (loss) $ (0.30) $ 0.15
per share =========== ===========
Page 45 of 46
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS
<FISCAL-YEAR-END> MAR-31-1999 MAR-31-1999
<PERIOD-END> SEP-30-1998 SEP-30-1998
<CASH> 706,260 706,260
<SECURITIES> 0 0
<RECEIVABLES> 832,237 832,237
<ALLOWANCES> 232,977 232,977
<INVENTORY> 2,519,611 2,519,611
<CURRENT-ASSETS> 3,851,425 3,851,425
<PP&E> 8,786,559 8,786,559
<DEPRECIATION> 2,832,398 2,832,398
<TOTAL-ASSETS> 10,722,100 10,722,100
<CURRENT-LIABILITIES> 4,933,084 4,933,084
<BONDS> 0 0
0 0
0 0
<COMMON> 6,610 6,610
<OTHER-SE> 87,657 87,657
<TOTAL-LIABILITY-AND-EQUITY> 10,722,100 10,722,100
<SALES> 846,138 1,823,287
<TOTAL-REVENUES> 846,138 1,823,287
<CGS> 432,436 1,118,668
<TOTAL-COSTS> 1,232,680 2,568,346
<OTHER-EXPENSES> (46,747) (81,193)
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 158,482 307,722
<INCOME-PRETAX> (930,713) (2,090,256)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (930,713) (2,090,256)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (930,713) (2,090,256)
<EPS-BASIC> (0.13) (0.30)
<EPS-DILUTED> (0.13) (0.30)
</TABLE>
