U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
(MARK ONE)
|X| Quarterly Report Pursuant to Section 13 or 15(d) of Securities
Exchange Act of 1934
For the quarterly period ended September 30, 1999
|_| Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934
(No Fee Required)
For the transition period from _______ to _______.
Commission File No. 333-44393
EUROPEAN MICRO HOLDINGS, INC.
----------------------------
(Name of Registrant as Specified in Its Charter)
<TABLE>
<CAPTION>
NEVADA 65-0803752
- ------ ----------
<S> <C>
(State or Other Jurisdiction of Incorporation (I.R.S. Employer Identification No.)
or Organization)
6073 N.W. 167TH STREET, UNIT C-25, MIAMI, FLORIDA 33015
- ------------------------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
</TABLE>
(305) 825-2458
--------------
(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months, and (2) has been
subject to such filing requirements for the past 90 days. Yes |X| No |_|
There were 4,933,900 shares of Common Stock, par value $0.01 per share,
outstanding as of November 12, 1999.
<PAGE>
PART I
FINANCIAL INFORMATION
- ---------------------
ITEM 1. FINANCIAL STATEMENTS.
--------------------
INDEX TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
Consolidated Condensed Balance Sheets as of September 30, 1999 and
June 30, 1999................................................................3
Consolidated Condensed Statements of Operations for the three
months ended September 30, 1999 and 1998.....................................4
Consolidated Statement of Changes in Shareholders' Equity
for the three months ended September 30, 1999................................5
Consolidated Condensed Statements of Cash Flows for the three months
ended September 30, 1999 and 1998............................................6
Notes to Consolidated Condensed Financial Statements.........................8
2
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED BALANCE SHEETS
(In thousands, except share data)
(UNAUDITED)
SEPTEMBER 30, JUNE 30, 1999
1999
--------------------------------
ASSETS
CURRENT ASSETS:
Cash $5,675 $3,168
Restricted Cash 397 379
Trade receivables, net 14,317 14,938
Due from related parties - 1,128
Inventories, net 7,409 7,232
Prepaid expenses 502 402
Other current assets 569 562
----------- ------------
TOTAL CURRENT ASSETS 28,869 27,809
Property and equipment, net 3,852 612
Goodwill, net 2,423 1,675
Investments in and advances to 507 503
unconsolidated subsidiaries ----------- ------------
TOTAL ASSETS $35,651 $30,599
--------- ---------
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Short-term borrowings $9,090 $8,614
Trade payables 5,027 3,484
Accrued expenses and other current
liabilities 2,140 2,851
Due to related parties 928 633
Income taxes payable 677 383
------------ ------------
TOTAL CURRENT LIABILITIES 17,862 15,965
Long-term borrowings 2,434 23
Other liabilities 280 268
------------ ------------
TOTAL LIABILITIES 20,576 16,256
---------- ----------
SHAREHOLDERS' EQUITY:
Preferred stock $0.01 par value shares:
1,000,000 authorized, no shares issued
and outstanding - -
Common stock $0.01 par value shares:
20,000,000 authorized, Shares issued and
outstanding 4,933,900 49 49
Additional paid-in capital 9,149 8,979
Accumulated other comprehensive income (loss) 43 (312)
Retained earnings 5,834 5,627
------------ ------------
TOTAL SHAREHOLDERS' EQUITY 15,075 14,343
----------- -----------
COMMITMENTS, CONTINGENCIES AND SUBSEQUENT
EVENTS - -
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $35,651 $30,599
=========== ===========
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENT OF OPERATIONS
(In thousands, except per share data)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------
1999 1998
---- ----
SALES:
Net sales $31,745 $27,781
Net sales to related parties 1,019 1,516
------- ------
Total net sales 32,764 29,297
------- ------
COST OF GOODS SOLD:
Cost of goods sold (28,076) (24,854)
Cost of goods sold to related parties (991) (1,498)
------- --------
Total cost of goods sold (29,067) (26,352)
------- --------
GROSS PROFIT 3,697 2,945
OPERATING EXPENSES:
Selling, general and administrative
expenses (3,066) (1,717)
------- --------
Total operating expenses (3,066) (1,717)
------- --------
INCOME FROM OPERATIONS 631 1,228
Interest income 39 36
Interest expense (219) (82)
Equity in net loss of unconsolidated
subsidiaries (2) (28)
------- --------
INCOME BEFORE INCOME TAXES 449 1,154
Income tax expense (242) (432)
------- --------
NET INCOME $207 $722
======= ========
Net income per share - basic $0.04 $0.15
======= ========
Net income per share - diluted $0.04 $0.15
======= ========
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(In thousands, except share data)
(Unaudited)
<TABLE>
<CAPTION>
EUROPEAN MICRO HOLDINGS, INC.
<S> <C> <C> <C> <C> <C> <C>
ACCUMULATED
ADDITIONAL OTHER TOTAL
PAID-IN COMPREHENSIVE RETAINED SHAREHOLDERS'
COMMON STOCK CAPITAL INCOME (LOSS) EARNINGS EQUITY
---------------------------------------------------------------------------------------------
SHARES AMOUNT
------ ------
Balance at June 30, 1999 4,933,900 $49 $8,979 $ (312) $5,627 $14,343
Comprehensive Income:
Net income - - - - 207 207
Other comprehensive
income, foreign
currency
translation
adjustment - - - 355 - 355
------- ------- -------
Total comprehensive
income - - - 355 207 562
Adjustment to accrued
offering costs - - 156 - - 156
Compensation charge in
relation to share
options issued to
non-employees - - 14 - - 14
------------------------------------------------------------------------------------------
Balance at September
30, 1999 4,933,900 $49 $9,149 $43 $5,834 $15,075
==========================================================================================
See accompanying notes to consolidated condensed financial statements.
</TABLE>
5
<PAGE>
<TABLE>
<CAPTION>
EUROPEAN MICRO HOLDINGS, INC.
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
THREE MONTHS ENDED SEPTEMBER 30,
------------------------------------
<S> <C> <C>
1999 1998
---- ----
OPERATING ACTIVITIES:
Net income $207 $722
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY (USED IN) OPERATING ACTIVITIES
Depreciation and amortization 134 65
Amortization of expense related to
contingent earn-out provisions 47 -
Deferred income taxes (7) (6)
Equity in net loss of unconsolidated
subsidiaries 2 28
Compensation charge for non-employee stock
options 14 41
CHANGES IN ASSETS AND LIABILITIES, NET OF
EFFECTS FROM ACQUISITIONS
Trade receivables 1,341 (1,706)
Due from related parties 1,128 (442)
Inventories 1,740 (3,732)
Prepaid expenses and other current assets 157 2,134
Trade payables 397 899
Due to related parties 295 (229)
Income taxes payable 294 (59)
Accrued expenses and other current
liabilities (622) 341
------ ------
NET CASH PROVIDED BY (USED IN) OPERATING 5,127 (1,944)
ACTIVITIES ------- -------
INVESTING ACTIVITIES:
Purchase of fixed assets (2,998) (54)
Sale of fixed assets 21 -
Payment for acquisition, net of cash acquired (1,220) -
------- -------
NET CASH USED IN INVESTING ACTIVITIES (4,197) (54)
------- -------
FINANCING ACTIVITIES:
Short-term borrowings, net (1,073) 468
Proceeds from long-term borrowings 2,429 -
Issuance of common stock, net - (25)
Repayment of capital leases, net (20) (18)
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,336 425
------- -------
Exchange rate changes 241 140
------- -------
NET INCREASE (DECREASE) IN CASH: 2,507 (1,433)
Cash at beginning of period 3,168 5,012
------- -------
CASH AT END OF PERIOD $5,675 $3,579
====== ======
</TABLE>
6
<PAGE>
EUROPEAN MICROHOLDINGS, INC.
<TABLE>
<CAPTION>
<S> <C> <C>
Non-cash investing and financing activities:
Fair value of assets acquired 3,314 -
Goodwill 804 -
Fair value of liabilities assumed (2,817) -
-------- ------
Cash paid for acquisitions 1,301 -
Less cash acquired (81) -
-------- ------
Net cash paid for acquisitions $1,220 -
======== ======
Interest paid $219 $65
======== ======
Taxes paid $5 $391
======== ======
See accompanying notes to consolidated condensed financial statements.
</TABLE>
7
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
1 INTERIM FINANCIAL STATEMENTS
The accompanying unaudited interim financial statements have been prepared
pursuant to the rules and regulations for reporting on Form 10-Q. Accordingly,
certain information and notes required by generally accepted accounting
principles for complete financial statements are not included herein. The
interim statements should be read in conjunction with the Company's financial
statements and notes thereto included in the Company's 1999 Annual Report on
Form 10-K.
In the Company's opinion, all adjustments necessary for a fair presentation of
these interim statements have been included and are of a normal and recurring
nature.
2 INVENTORY
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ -------------
<S> <C> <C>
Finished goods and goods for resale $7,470 $7,348
Less: Allowance for inventory obsolescence (61) (116)
------- -------
$7,409 $7,232
======= ======
A roll forward of allowance for obsolescence is as follows (in thousands):
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ -------------
Balance at beginning of period $116 $9
Foreign currency translation adjustment 3 -
Provision for obsolescence 53 602
Amounts written off (111) (495)
------- -------
Balance at end of period $61 $116
======= =======
3 PROPERTY AND EQUIPMENT
Property and equipment consists of the following (in thousands):
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ -------------
Buildings and leasehold improvements $2,899 $-
Furniture, fixtures and equipment 1,455 994
Vehicles and other 430 416
------- --------
4,784 1,410
Less: accumulated depreciation (932) (798)
------- --------
$3,852 $612
======= ========
</TABLE>
8
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO BE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
3 PROPERTY AND EQUIPMENT (CONTINUED)
On July 16, 1999, European Micro Plc, a wholly-owned subsidiary of the Company
("EUROPEAN MICRO UK"), purchased the office building in which it had previously
leased space for a purchase price of 1,705,000 pounds sterling ($2,815,000 at
September 30, 1999). The purchase price was financed in part by a loan in the
amount of 1,312,000 pounds sterling ($2,166,000 at September 30, 1999) at an
annual interest rate equal to the one-month London Interbank Offering Rate
("LIBOR") plus one percentage point (1.0%), payable over ten years. LIBOR at
September 30, 1999 was 5.4%.
Depreciation and amortization expense was $101,000 and $65,000 for the periods
ended September 30, 1999 and September 30, 1998, respectively.
4 GOODWILL
On October 26, 1998, European Micro UK acquired all of the outstanding shares of
capital stock of Sunbelt (UK) Limited ("SUNBELT"). The Sunbelt purchase price
(to be settled in pounds sterling) is comprised of a guaranteed portion and two
contingent earn-out payments. The guaranteed portion of the purchase price,
which was based upon Sunbelt's net book value at closing and a multiple of its
fiscal year 1998 pre-tax earnings, was 940,000 pounds sterling (approximately
$1,550,000 at exchange rate on September 30, 1999). Of this guaranteed amount,
approximately 360,000 pounds sterling (approximately $594,000 at exchange rate
on September 30, 1999) was paid in cash at closing. The unpaid balance of the
guaranteed consideration includes a note payable to the former 40% Sunbelt
shareholder in the amount of 240,163 pounds sterling ($397,000 at exchange rate
on September 30, 1999) to be repaid in November 2005, subject to early repayment
at the option of the note holder at any time after June 1, 1999. Such note
payable is secured by a cash account of equal amount at September 30, 1999. The
note payable and the cash balances are reflected on the accompanying
consolidated condensed balance sheet at September 30, 1999, in accrued expenses
and other current liabilities and restricted cash, respectively. The Company has
the option of paying all future amounts due to the former Sunbelt shareholders
in common stock of European Micro Holdings, Inc. The Company also entered into
employment agreements with the two former shareholders of Sunbelt.
The remainder of the unpaid guaranteed consideration of approximately 339,614
pounds sterling ($560,000 at exchange rate on September 30, 1999), plus accrued
interest, is to be paid in equal installments within nineteen (19) days of the
end of the first and second contingent earn-out periods as discussed below. The
unpaid balance of the guaranteed purchase price is reflected in accrued expenses
and other current liabilities and other liabilities on the accompanying
consolidated condensed balance sheet at September 30, 1999.
The maximum contingent earn-out payments in the aggregate are two times
Sunbelt's fiscal year 1998 pre-tax earnings of 849,036 pounds sterling
($1,400,000 at exchange rate on September 30, 1999). The first contingent
payment of up to 424,518 pounds sterling ($701,000 at exchange rate on September
30, 1999) will be made if certain financial parameters are attained during the
first contingent earn-out period which runs from November 1, 1998 to October 31,
1999, and if certain of the Sunbelt executives are still employed with the
Company at the end of the first earn-out period. The second contingent payment
of up to 424,518 pounds sterling ($701,000 at exchange rate on September 30,
1999) will be made if certain financial parameters are attained during the
second contingent earn-out period which runs from November 1, 1999 to October
31, 2000. That portion of the first contingent earn-out payment related to
employee retention, approximately 106,130 pounds sterling ($175,000 at exchange
rate on September 30, 1999), is being recognized by the Company over the course
of the first contingent earn-out period as compensation expense. That portion of
the first contingent earn-out payment related to the volume of purchases from
the Far East has been met. This portion of approximately 106,130 pounds sterling
($175,000 at exchange rate on September 30, 1999), has been recognized by the
Company, and is reflected in goodwill, net and accrued expenses and other
current liabilities. The remaining criteria for the first contingent earn-out
was not met, therefore, the additional consideration of approximately 212,260
pounds sterling ($350,000 at exchange rate on September 30, 1999) was not
accrued or paid. The second contingent earn-out payment have not been recognized
in the accompanying consolidated condensed financial statements as the payment
of such amounts are not, in the opinion of management, determinable beyond a
reasonable doubt.
9
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO BE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4 GOODWILL (CONTINUED)
The acquisition of Sunbelt was accounted for as a purchase. The purchase price,
subject to adjustment as described above and inclusive of transaction costs, of
approximately 1,011,000 pounds sterling plus the earned portion of the
contingent earn-out of approximately 106,000 pounds sterling for a total of
1,117,000 pounds sterling ($1,844,000 at exchange rate on September 30, 1999)
exceeded the estimated fair market value of net assets acquired by approximately
$1,716,000, which is being amortized on a straight-line basis over 20 years. The
results of operations of Sunbelt have been included in the accompanying
financial statements. Purchase accounting adjustments are preliminary as actual
1998 pre-tax earnings have not been finalized.
On November 12, 1998, European Micro UK acquired the assets of H&B Trading
International BV ("H&B"). The acquisition of H&B was accounted for as a
purchase. The base purchase price, subject to adjustment, of approximately
125,000 Dutch guilders ($61,000 at exchange rate on September 30, 1999) exceeded
the estimated value of net assets acquired by approximately 85,000 Dutch
guilders ($41,000 at exchange rate on September 30, 1999), which is being
amortized on a straight-line basis over 20 years. If certain financial
performance criteria are met for the fiscal years ended June 30, 1999 and 2000,
additional consideration of approximately 50,000 Dutch guilders ($24,000 at
exchange rate on September 30, 1999) and 75,000 Dutch guilders ($35,000 at
exchange rate on September 30, 1999), respectively, will be paid. The financial
criteria for the period ended June 30, 1999 was not met, therefore, the
additional consideration was not accrued or paid. Also, the year 2000 contingent
consideration has not been reflected in the accompanying consolidated condensed
financial statements either. The results of operations of H&B have been included
in the accompanying financial statements from the date of acquisition.
On February 2, 1999, the Company's Board of Directors formed a special committee
consisting solely of independent directors to evaluate and determine whether the
Company should acquire American Surgical Supply Corp. of Florida d/b/a American
Micro Computer Center ("AMCC") and, if so, on what terms. John B. Gallagher, who
is a significant shareholder, Co-Chairman and Co-President of the Company, was
the President and a Director of AMCC and owned fifty percent of its outstanding
capital stock. Frank Cruz, who is Chief Operating Officer of the Company, was an
employee of AMCC since 1994. He is currently an employee of the newly-formed,
wholly-owned subsidiary of the Company formed to acquire AMCC. The committee's
charter authorized it to take any action it deemed necessary to properly
evaluate and determine whether the Company should acquire AMCC, including hiring
independent advisors and ensuring that any such transaction was entirely fair to
the Company and its shareholders. The committee hired independent legal counsel
and an independent financial advisor. Prior to consummating this transaction,
the Company received an opinion from the independent financial advisor that the
consideration paid in connection with the transaction was fair from a financial
point of view to the Company's shareholders. The Company acquired AMCC in a
merger on July 1, 1999.
The transaction was structured as a merger of AMCC with and into the
newly-formed, wholly-owned subsidiary of the Company. Upon consummation of the
merger, the subsidiary's name was changed to American Micro Computer Center,
Inc. ("AMERICAN MICRO"). The purchase price for AMCC was equal to $1,131,000,
plus an earn-out amount payable in cash or shares of the Company's common stock
(at the Company's discretion) equal to two times the after-tax earnings of
American Micro in calendar year 1999 and two times the after-tax earnings of
American Micro in calendar year 2000. The portion of the purchase price paid at
closing was funded through the Company's working capital. In addition, the
Company assumed all outstanding indebtedness of AMCC, including a shareholder
loan in the approximate amount of $289,000. This loan is owed to the father of
John B. Gallagher. If the Company elects to pay any portion of the purchase
price in shares of the Company's common stock, then AMCC's shareholders have
fifteen days to make arrangements to sell such shares over the next forty
trading days. If the sale of such shares results in net proceeds of less than
the purchase price, then the Company will pay the difference in cash to AMCC's
shareholders.
The acquisition of AMCC was accounted for as a purchase. The purchase price,
inclusive of transaction costs, of approximately $1,301,000 exceeded the
estimated fair market value of net assets acquired by approximately $804,000,
which constitutes goodwill and which is being amortized on a straight-line basis
over 20 years. The results of operations of American Micro have been included in
the accompanying financial statements. The contingent earn-out payments have not
been recognized in the accompanying consolidated condensed financial statements
as the payment of such amounts are not determinable at this point in time.
Purchase accounting adjustments have not been finalized.
10
<PAGE>
EUROPEAN MICRO HOLDINGS,INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
4 GOODWILL (CONTINUED)
The following summarized unaudited pro forma financial information assumes the
acquisitions of Sunbelt and AMCC occurred on July 1, 1998 (in thousands, except
share data):
PERIOD ENDED SEPTEMBER 30,
--------------------------
1999 1998
Total net sales $32,764 $43,222
Net income $207 $732
Earnings per share:
Basic $0.04 $0.15
Diluted $0.04 $0.15
The pro forma financial information is based on certain assumptions and
estimates, and do not reflect any benefits from economies which might be
achieved from the combined operations. The pro forma results do not necessarily
represent results which would have occurred if the acquisition had taken place
on the basis assumed above, nor are they indicative of the results of future
operations.
A roll forward of goodwill is as follows (in thousands):
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ -------------
Balance at beginning of period $1,675 $-
Foreign currency translation 78 -
adjustment
Purchase accounting adjustments (101) -
Additions 804 1,731
Amortization (33) (56)
------- -------
Balance at end of period $2,423 $1,675
======= =======
5 SHORT-TERM BORROWINGS
Short-term borrowings consists of the following (in thousands):
SEPTEMBER 30, 1999 JUNE 30, 1999
Bank line of credit $- $1,581
Receivable financing 8,003 7,033
Other short-term borrowings 1,087 -
------- -------
Total short-term borrowings $9,090 $8,614
======= =======
The bank line of credit is secured by a mortgage debenture on all the assets of
European Micro UK and is subordinate to the receivable financing and the capital
leases. The bank line of credit is subject to review in July each year. The
facility available to the Company at September 30, 1999 was 1.2 million pounds
sterling ($1.98 million at September 30, 1999). The facility has been renewed to
July 2000. Interest is charged on the bank line of credit at 1.25% over the bank
borrowing rate of 5.25% at September 30, 1999 and 5% at June 30, 1999.
European Micro UK also had a revolving credit agreement, secured against
inventory. The facility allowed European Micro UK to borrow up to 3.5 million
pounds sterling ($5.8 million at September 30, 1999) to assist in the purchase
of inventory. To date, no borrowings have been drawn down on this line. This
revolving credit agreement has expired and European Micro UK is currently
negotiating a renewal and modification of this revolving credit agreement.
11
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
5 SHORT-TERM BORROWINGS (CONTINUED)
Receivable financing represents the amount borrowed, which is secured by various
trade receivables totaling $9.4 million at September 30, 1999 and $8.3 million
at June 30, 1999. Trade receivables can be financed up to the lower of 85% of
the value of the trade receivables balance or 6.2 million pounds sterling at
September 30, 1999 ($10.2 million at September 30, 1999). This trade receivables
financing increased from a maximum of $5.5 million pounds sterling at June 30,
1999 ($8.7 million at June 30, 1999). The facility is reviewed annually in
November of each year. This facility can be terminated by either party giving
three months' notice. The finance company which provides the receivable
financing facility has full recourse to European Micro UK with respect to any
doubtful or unrecovered amounts. Interest is charged on the receivable financing
balance at 1.25% above the bank borrowing rate of 5.25% at September 30, 1999,
and 5% at June 30, 1999.
Other short-term borrowings represent various notes payable of American Micro.
The maturity dates of the notes range from on demand to June 30, 2000. The
interest rates range from 1.0% over the prime interest rate to 15%. See "Note 9
(Subsequent Events) to the Consolidated Condensed Financial Statements."
6 LONG-TERM BORROWINGS
Long-term borrowings consists of the following (in thousands):
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ -------------
Mortgage loan note $2,149 $-
Note payable 273 -
Other long-term borrowings 12 23
------- ------
Total long-term borrowings $2,434 $23
======= ======
The mortgage loan note is secured by a mortgage on the office building of
European Micro UK. The note calls for quarterly payments of principal and
interest in the amount of 46,763 pounds sterling ($77,207 at September 30, 1999)
and matures in July 2009. The mortgage loan note bears interest at the one-month
LIBOR plus one percentage point (1.0%). LIBOR at September 30, 1999 was 5.4%.
The note payable is payable to John P. Gallagher the father of John B.
Gallagher, who is a significant shareholder, Co-Chairman and Co-President of
the Company. This note was assumed in the purchase of AMCC. The note
matures in August 2003 and bears interest at 10%. See "Note 9 (Subsequent
Events) to the Consolidated Condensed Financial Statements."
12
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
7 EARNINGS PER SHARE
The calculation of earnings per share are detailed in the table below:
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
EARNINGS
Net income (in thousands) $207 $722
------- -------
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,933,900 4,933,900
Contingently issuable shares 85,107 -
------- -------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 5,019,007 4,933,900
Effect of dilutive stock options and other
contingent shares 995 -
------- -------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 5,020,002 4,933,900
========= =========
Basic earnings per share $0.04 $0.15
========= =========
Diluted earning per share $0.04 $0.15
========= =========
During the three-month period ended September 30, 1999, the Company issued
options to purchase 7,500 shares of its common stock at an exercise price of
$7.50. The above dilutive earnings per share calculations for the three-month
period ended September 30, 1999 and 1998, exclude the effect of options to
purchase 339,000 and 294,000, respectively, shares of common stock at exercise
prices ranging from $9.1875 to $12.00 per share, due to the fact they were
anti-dilutive. Also see "Note 4 (Goodwill) to the Consolidated Condensed
Financial Statements" related to contingently issuable shares related to
acquisitions. The effect of contingent shares related to the guaranteed earn-out
amount not paid at the closing of the Sunbelt acquisition and the effect of
satisfactory completion of part of the first contingent earn-out has been
included in the above basic earnings per share calculations. However, the
remainder of the first contingent earn-out and all of the second contingent
earn-out are not included, as the conditions necessary for such contingent
shares to be issued have not been met as of September 30, 1999. The effect of
contingent shares related to the first and second earnouts of AMCC are not
included, as determination of the amount of such contingent shares to be issued
are not determinable.
8 RELATED PARTY TRANSACTIONS
European Micro Holdings, Inc. belongs to a group of related companies (the
"GROUP"). The Group is comprised of Technology Express, Inc. located in
Nashville, Tennessee ("TECHNOLOGY EXPRESS"), and, until July 1, 1999, American
Surgical Supply Corp. d/b/a American Micro Computer Center located in Miami,
Florida ("AMERICAN MICRO COMPUTER CENTER") which was purchased by European Micro
Holdings, Inc. See "Note 4 (Goodwill) to the Consolidated Condensed Financial
Statements." Technology Express is owned and controlled by Harry D. Shields, who
is Co-President and Co-Chairman of the Company. Until July 1, 1999, AMCC was
controlled by John B. Gallagher, who is a Co-President and Co-Chairman of the
Company. The Company acquired AMCC on July 1, 1999.
The rates charged on related party sales are lower than they would be in
arms-length transactions. The Company has a bulk buying arrangements with the
remaining related party, Technology Express, which gives the Company the benefit
of buying large job-lots at more competitive prices than it would otherwise be
possible to do and then immediately sell part of the purchase to the related
party. In practical terms, the sales to the related party are to the
distributors in a similar trade to the Company and this party would not buy at
higher prices.
13
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EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
8 RELATED PARTY TRANSACTIONS (CONTINUED)
Related party transactions are summarized as follows (in thousands):
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
---- ----
SALES TO:
AMCC N/A $13
Technology Express $1,019 1,503
------- -------
$1,019 $1,516
======= =======
PURCHASES FROM:
AMCC N/A $-
Technology Express $1,768 12,439
------- -------
$1,768 $12,439
======= =======
Due from related parties comprised the following balances (in thousands):
<TABLE>
<CAPTION>
SEPTEMBER 30, 1999 JUNE 30, 1999
------------------ -------------
<S> <C> <C>
AMCC N/A $974
Technology Express $- 154
------- -------
$- $1,128
======= =======
Due to related parties comprised of following balances (in thousands):
SEPTEMBER 30,1999 JUNE 30, 1999
----------------- -------------
AMCC N/A $3
Technology Express $928 630
------- ----
$928 $633
======= ====
The entities listed above are related to the Company in the following manner:
</TABLE>
AMCC
AMCC is a distributor of computer hardware based in Miami, Florida. John B.
Gallagher who is Co-Chairman, Co-President, a Director and shareholder (owning
39% of the outstanding shares) of European Micro Holdings, Inc., was until July
1, 1999 the president of AMCC and owned 50% of the outstanding shares of capital
stock in that company. See "Note 4 (Goodwill) to the Consolidated Condensed
Financial Statements" regarding the acquisition of AMCC. Frank Cruz, who is
Chief Operating Officer of European Micro Holdings, Inc., has been an employee
of AMCC since 1994.
14
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EUROPEAN MICRO HOLDINGS, INC.
NOTES TO THE CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
8 RELATED PARTY TRANSACTIONS (CONTINUED)
TECHNOLOGY EXPRESS
Until 1996, Technology Express was a full service authorized reseller of
computers and related products based in Nashville, Tennessee, selling primarily
to end-users. Technology Express was sold to Inacom Computers in 1996.
Concurrently with the sale, Mr. Shields founded a new computer company with the
name Technology Express. This company is a distributor of computer products and
does not sell to end-users. Harry D. Shields, who is Co-Chairman, Co-President,
a Director and shareholder (owning 32% of the outstanding shares) of European
Micro Holdings, Inc., is president of Technology Express and owns 100% of the
outstanding shares of capital stock of that company. Jay Nash, who is Chief
Financial Officer, Treasurer and Secretary of European Micro Holdings, Inc., has
been an employee of Technology Express since 1992.
9 SUBSEQUENT EVENT
On October 29, 1999, the Company obtained financing for its operations based in
the United States. American Micro and Nor'Easter each obtained a $1,500,000 line
of credit, secured by accounts receivable and inventory. Each of these lines of
credit matures on October 29, 2000, and each bears interest at a rate equal to
the lender's base rate plus one-half percentage point (1/2%). Also on October
29, 1999, the Company obtained a term loan in the amount of $1,500,000. The term
loan is to be repaid with quarterly payments of $125,000 over three years. The
term loan bears interest at the one-month LIBOR plus two and one-quarter
percentage points (2.25%). The term loan is secured by substantially all of the
assets of the Company.
As partial security for these loans, Messrs. Gallagher and Shields pledged to
the lender a portion of their shares of common stock of the Company. In the
event the Company defaults on one or more of these loans, the lender may
foreclose on all or a portion of the pledged securities. Such an event may cause
a change of control in the Company because Messrs. Gallagher and Shields
together own 71% of the Company's outstanding common stock.
European Micro UK and the Company have each notified Big Blue Europe that they
intend to make a demand for payment for loans made in the amounts of $150,000
and $350,000, respectively. Big Blue Europe is currently under a court order
prohibiting payment of these loans. According to a press release issued on
November 12, 1999, the 50% shareholders of Big Blue Europe, its principles, Jeff
and Marie Alnwick, and Big Blue Europe, derivatively, have filed a lawsuit
against the Company, European Micro UK, John B. Gallagher and Harry D. Shields
for fraud, aiding and abetting fraud, misappropriation of trade secrets, breach
of fiduciary duty, aiding and abetting breach of fiduciary duty, breach of
contract and tortious interference with contract. The press release was issued
by the law firm representing the plaintiffs. The press release states that the
plaintiffs are seeking $10 million or more in damages. The suit was filed in the
United States District Court for the Eastern District of New York. The factual
allegations underlying the lawsuit stem from European Micro UK's joint venture
interest in Big Blue Europe. The Company has not received a copy of the
complaint. The Company, in connection with its legal counsel, will carefully
review the allegations in the complaint when a copy is received. However, the
Company believes that the allegations specified in the law firm's press release
are without merit and intends to vigorously defend the suit.
15
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
---------------------
INTRODUCTORY STATEMENTS
FORWARD-LOOKING STATEMENTS AND ASSOCIATED RISKS. THIS QUARTERLY REPORT CONTAINS
FORWARD-LOOKING STATEMENTS, INCLUDING STATEMENTS REGARDING, AMONG OTHER THINGS,
(A) EUROPEAN MICRO HOLDINGS, INC.'S ("EUROPEAN MICRO" OR THE "COMPANY")
PROJECTED SALES AND PROFITABILITY, (B) THE COMPANY'S GROWTH STRATEGIES, (C)
ANTICIPATED TRENDS IN THE COMPANY'S INDUSTRY, (D) THE COMPANY'S FUTURE FINANCING
PLANS, AND (E) THE COMPANY'S ANTICIPATED NEEDS FOR WORKING CAPITAL. IN ADDITION,
WHEN USED IN THIS QUARTERLY REPORT, THE WORDS "BELIEVES," "ANTICIPATES,"
"INTENDS," "IN ANTICIPATION OF," "EXPECTS," AND SIMILAR WORDS ARE INTENDED TO
IDENTIFY CERTAIN FORWARD-LOOKING STATEMENTS. THESE FORWARD-LOOKING STATEMENTS
ARE BASED LARGELY ON THE COMPANY'S EXPECTATIONS AND ARE SUBJECT TO A NUMBER OF
RISKS AND UNCERTAINTIES, MANY OF WHICH ARE BEYOND THE COMPANY'S CONTROL. ACTUAL
RESULTS COULD DIFFER MATERIALLY FROM THESE FORWARD-LOOKING STATEMENTS AS A
RESULT OF CHANGES IN TRENDS IN THE ECONOMY AND THE COMPANY'S INDUSTRY,
REDUCTIONS IN THE AVAILABILITY OF FINANCING AND AVAILABILITY OF COMPUTER
PRODUCTS ON TERMS AS FAVORABLE AS EXPERIENCED BY THE COMPANY IN PRIOR PERIODS
AND OTHER FACTORS. IN LIGHT OF THESE RISKS AND UNCERTAINTIES, THERE CAN BE NO
ASSURANCE THAT THE FORWARD-LOOKING STATEMENTS CONTAINED IN THIS QUARTERLY REPORT
WILL IN FACT OCCUR. THE COMPANY DOES NOT UNDERTAKE ANY OBLIGATION TO PUBLICLY
RELEASE THE RESULTS OF ANY REVISIONS TO THESE FORWARD-LOOKING STATEMENTS TO
REFLECT ANY FUTURE EVENTS OR CIRCUMSTANCES.
UNLESS THE CONTEXT OTHERWISE REQUIRES AND EXCEPT AS OTHERWISE SPECIFIED,
REFERENCES HEREIN TO "EUROPEAN MICRO" OR THE "COMPANY" INCLUDE EUROPEAN MICRO
HOLDINGS, INC. AND ITS FOUR WHOLLY-OWNED SUBSIDIARIES, EUROPEAN MICRO PLC, A
COMPANY ORGANIZED UNDER THE LAWS OF THE UNITED KINGDOM ("EUROPEAN MICRO UK"),
NOR'EASTER MICRO, INC., A NEVADA CORPORATION ("NOR'EASTER"), COLCHESTER
ENTERPRISE PTE. LTD. A COMPANY ORGANIZED UNDER THE LAWS OF SINGAPORE
("COLCHESTER"), AND AMERICAN MICRO COMPUTER CENTER, INC. ("AMERICAN MICRO"), A
FLORIDA CORPORATION (COLLECTIVELY, THE FOUR WHOLLY-OWNED SUBSIDIARIES ARE
REFERRED TO AS THE "SUBSIDIARIES").
OVERVIEW
The Company is an independent distributor of microcomputer products, including
personal computers, memory modules, disc drives and networking products, to
customers mainly in Western Europe and to customers and to a related party in
the United States. The Company's customers consist of more than 480 value-added
resellers, corporate resellers, retailers, direct marketers and distributors.
The Company does not sell to end-users. Substantially all of the products sold
by the Company are manufactured by well-recognized manufacturers such as IBM,
Compaq and Hewlett-Packard, although the Company generally does not obtain its
inventory directly from such manufacturers. The Company monitors the geographic
pricing strategies related to such products, currency fluctuations and product
availability in order to obtain inventory at favorable prices from other
distributors, resellers and wholesalers.
The Company considers itself to be a focused distributor, as opposed to a
broadline distributor, dealing with a limited and select group of products from
a limited and select group of leading manufacturers. The Company believes that
being a focused distributor enables it to respond more quickly to customer
requests and gives it greater availability of products, access to products and
improved pricing. The Company believes that as a focused distributor it has been
able to develop greater expertise in the products which it sells. The Company
places significant emphasis on market awareness and planning and actively shares
this knowledge with its customers in order to further enhance trading relations.
The Company strives to monitor and react quickly to market trends in order to
enable its multilingual sales team to maintain the highest levels of customer
service.
European Micro Holdings, Inc. was organized under the laws of the State of
Nevada in December 1997 and is the parent of European Micro UK, Nor'Easter and
Colchester. European Micro Holdings, Inc. is also the parent of American Micro
which was formed on June 24, 1999 to acquire AMCC. This transaction was
structured as a merger of American Surgical Supply Co. of Florida d/b/a American
Micro Computer Center ("AMCC") with and into American Micro, a newly-formed,
wholly-owned subsidiary of the Company. This transaction was consummated on July
1, 1999. American Micro is an independent distributor of microcomputer products
in the United States. A detailed discussion of the acquisition of AMCC is
contained in the section entitled "Related Party Transactions." European Micro
16
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
UK was organized under the laws of the United Kingdom in 1991 to serve as an
independent distributor of microcomputer products to customers mainly in Western
Europe and to related parties in the United States. Nor'Easter was organized
under the laws of the State of Nevada on December 26, 1997 to serve as an
independent distributor of microcomputer products in the United States.
Colchester was organized under the laws of Singapore in November 1998 to serve
as an independent distributor of microcomputer products in Asia.
European Micro UK is the parent of European Micro GmbH ("EUROPEAN MICRO
GERMANY"), Sunbelt and European Micro B.V. ("EUROPEAN MICRO HOLLAND") and has a
50% joint venture interest in Big Blue Europe, B.V. ("BIG BLUE EUROPE").
European Micro Germany was organized under the laws of Germany in 1993 and
operates as a sales office in Dusseldorf, Germany. All products sold by European
Micro Germany are procured and shipped from the facilities of European Micro UK.
On October 26, 1998, European Micro UK completed its acquisition of all of the
outstanding shares of capital stock of Sunbelt. Sunbelt is a company registered
in England and Wales which was established in 1992 and is based in Wimbledon,
England. Sunbelt operates as a distributor of microcomputer products to dealers,
value-added resellers and mass merchants throughout Western Europe. Except for
the distribution of its Nova brand products, Sunbelt's distribution operations
were integrated with and into the operations of European Micro UK. Sunbelt
continues to distribute its Nova line of products in accordance with past
practice. European Micro Holland was formed in 1995 and acquired the assets of
H&B. European Micro UK acquired these assets on November 12, 1998. Big Blue
Europe was organized under the laws of Holland in January 1997 and is a computer
parts distributor with offices located near Amsterdam, Holland. Big Blue Europe
has no affiliation with International Business Machines Corporation.
European Micro Holding's headquarters are located at 6073 N.W. 167th Street,
Unit C-25, Miami, Florida 33015, and its telephone number is (305) 825-2458.
17
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
RESULTS OF OPERATIONS
The following table sets forth, for the periods presented, the percentage of net
sales represented by certain items in the Company's Consolidated Condensed
Statements of Operations:
PERCENTAGE OF NET SALES
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
---- ----
Net sales to third parties 96.9% 94.8%
Net sales to related parties 3.1% 5.2%
------- -------
Total net sales 100.0% 100.0%
------- -------
Cost of goods sold to third
parties (85.7%) (84.8%)
Cost of goods sold to
related parties (3.0%) (5.1%)
------- -------
Total cost of goods sold (88.7%) (89.9%)
------- -------
Total gross profit 11.3% 10.1%
Total operating expenses (9.4%) (5.9%)
------- -------
Operating profit 1.9% 4.2%
Interest income 0.1% 0.3%
Interest expense (0.7%) (0.5%)
Equity in loss of
unconsolidated affiliate - (0.1%)
------- -------
Income before income taxes 1.3% 3.9%
Income taxes (0.7%) (1.5%)
------- -------
Net income 0.6% 2.5%
======= =======
THREE-MONTH PERIOD ENDED SEPTEMBER 30, 1999 AND 1998
TOTAL NET SALES. Total net sales increased $3.5 million, or 11.9%, from $29.3
million in the three-month period ended September 30, 1998 to $32.8 million in
the comparable period in 1999. Excluding net sales to related parties, net sales
increased $3.9 million, or 14.4%, from $27.8 million in the three-month period
ended September 30, 1998 to $31.7 million in the comparable period in 1999. This
increase was attributable to the addition of Sunbelt's trading sales (accounting
for approximately $2.3 million), the additional sales from Sunbelt's Nova line
of products (accounting for approximately $700,000), the growth of the Premier
Dealers Club (accounting for approximately $1.0 million), the increase in sales
by Colchester (accounting for approximately $600,000), and the addition of
American Micro's sales (accounting for approximately $4.9 million). This
increase was offset by a reduction of $4.2 million in European Micro UK's
trading sales (excluding Sunbelt's trading sales) and a reduction of $1.3
million in Nor'Easter's sales.
Net sales to related parties decreased $497,000, or 32.8% in the three-month
period ended September 30, 1999 from the comparable period in 1998. This
decrease is primarily attributable to the acquisition of AMCC on July 1, 1999,
and therefore, net sales to American Micro are excluded from net sales to
related party. Until July 1, 1999, the related parties consisted of a group of
entities in which an ownership interest was held by either of the two primary
18
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
shareholders of the Company, John B. Gallagher or Harry D. Shields. See "Note 8
(Related party transactions) to the Consolidated Condensed Financial
Statements." In order to facilitate fast and efficient international
transactions, each member of the group has acted as a supplier for, and
purchaser from, the other members of the group. The group has attempted to price
inter-group sales at one percent above the selling group member's cost, although
the group has made numerous exceptions in times of short supply, to cover
assembly costs and to reward certain group members for exceptional low-cost
purchases. None of the members of the group are under any legal obligation to
continue to act as a supplier for, or purchaser from, the other members of the
group. If the Company is unable to sell product to the other members of the
group, the Company's revenues will be significantly reduced and its business,
financial condition and results of operations will be materially adversely
effected, as the Company would not be able to handle large volume purchases at
favorable prices, if they could not rely on related parties to purchase a
portion of the product and sell through their distribution channels. Likewise,
the Company's business and results of operations will be materially adversely
effected if the Company is unable to purchase product from the other members of
the group when such product could be purchased from these group members at
prices lower than available from other sources.
There can be no assurance that the Company will be able to maintain the level of
sales or sales growth achieved in this period or past periods because of
seasonal variations in the demand for the products and services offered by the
Company, the introduction of new hardware and software technologies and products
offering improved features and functionality, the introduction of new products
and services by the Company and its competitors, the loss or consolidation of a
significant supplier or customer, changes in the level of operating expenses,
inventory adjustments, product supply constraints and competitive conditions,
including pricing, interest rate fluctuations, the impact of acquisitions,
currency fluctuations and general economic conditions.
GROSS PROFIT. Gross profit increased $752,000, or 25.5%, from $2.9 million in
the three-month period ended September 30, 1998 to $3.7 million in the
comparable period in 1999. Gross profit excluding related party transactions
increased $742,000, or 25.4%, from $2.9 million in the three-month period ended
September 30, 1998 to $3.7 million the comparable period in 1999. This increase
is primarily due to the addition of American Micro with $500,000 in gross profit
and an increase at European Micro UK of $450,000. This increase in gross profit
was partially offset by a reduction in gross profit at Nor'Easter of $200,000.
Gross profit attributable to related party sales was $28,000 in the three-month
period ended September 30, 1999. As discussed above, the mark-up on sales to
related parties is typically one percent over cost. Therefore, the gross profit
on sales to third parties is typically higher than the gross profit earned on
sales to related parties. This represents a gross margin of approximately 1.2%.
Gross margins increased by 120 basis points from 10.1% in the three-month period
ended September 30, 1998 to 11.3% in the comparable period in 1999. Excluding
related party transactions, gross margin increased from 10.5% in the three-month
period ended September 30, 1998 to 11.6% in the comparable period in 1999. This
change is related to the normal fluctuations in purchasing opportunities and
sales demand from quarter to quarter.
Foreign exchange gains and losses, net, increased from a loss of $132,000 in the
three-month period ended September 30, 1998 to a loss of $242,000 in the
comparable period in 1999. This adverse movement was attributable to the
weakening of the Euro relative to the British pound sterling, devaluing sales
made in European currencies.
OPERATING EXPENSES. Operating expenses as a percentage of total net sales
increased from 5.9% in the three-month period ended September 30, 1998 to 9.4%
in the comparable period in 1999. This increase in operating expenses was caused
by higher commissions and bonus payments to employees which are tied to the
Company's gross profit and gross margin. This increase was also the result of
start-up expenses incurred by Colchester in connection with its operations and
which has been so far responsible for purchasing inventory for the other
Subsidiaries. Moreover, AMCC's operating expenses, which were included in the
Company's consolidated financial statements for the first time in this period,
had a higher level of operating expenses relative to sales than that of the
Company.
INTEREST EXPENSE. Interest expense increased by $137,000 from $82,000 in
three-month period ended September 30, 1998 to $219,000 in the comparable period
in 1999. This was attributable to increased borrowings during the period because
of increased average accounts receivable and inventory balances, for the
purchase of the office building and for the acquisitions of Sunbelt and AMCC.
INCOME TAXES. Income taxes as a percentage of income before income taxes
increased from 37.4% in the three-month period ended September 30, 1998 to 53.9%
in the comparable period in 1999. For the period ended September 30, 1998, the
19
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
Company had accrued a tax benefit based on the estimate that the Company would
have consolidated U.S. taxable income. However, for the fiscal year ended June
30, 1999, the Company had a U.S. consolidated loss. The Company has not accrued
a U.S. tax benefit for the three-month period ended September 30, 1999, thus
increasing the effective income tax rate for the Company.
INTEREST IN JOINT VENTURE. The Company's share of loss from Big Blue decreased
from a loss of $28,000 in the three-month period ended September 30, 1998 to a
loss of $2,000 in the comparable period in 1999.
SEASONALITY
The Company typically experiences variability in its total net sales and net
income on a quarterly basis as a result of many factors. These include, but are
not limited to, seasonal variations in demand for the products and services
offered by the Company, the introduction of new hardware and software
technologies and products offering improved features and functionality, the
introduction of new products and services by the Company and its competitors,
the loss or consolidation of a significant supplier or customer, changes in the
level of operating expenses, inventory adjustments, product supply constraints
and competitive conditions, including pricing, interest rate fluctuations, the
impact of acquisitions, currency fluctuations and general economic conditions.
Historical operating results have reflected a reduction in demand in Europe
during the summer months.
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary cash requirements are for operating expenses, funding
accounts receivable and for the purchase of inventory to support growth, to take
greater advantage of available cash discounts offered by certain of the
Company's suppliers for early payment and to make acquisitions. The Company has
historically funded these cash requirements through a combination of loans,
internally generated cash flow and the net proceeds of its initial public
offering.
Short-term working capital requirements of European Micro UK are funded by a
combination of line of credit facilities together with accounts receivable
financing. Both of these facilities are set and reviewed annually. In both
cases, the amounts drawn down accrue the same rate of interest based on a markup
over the bank borrowing rate in the United Kingdom. The bank line of credit was
1.2 million pounds sterling ($1.98 million) at September 30, 1999. The accounts
receivable financing provides for a borrowing base of 85% of accounts
receivable, with a limit of 6.2 million pounds sterling ($10.2 million on
September 30, 1999). The limit on trade receivables financing increased from a
maximum of $5.5 million pounds sterling at June 30, 1999 ($8.7 million at June
30, 1999). European Micro UK also had a revolving credit agreement, secured
against inventory. The facility allowed European Micro UK to borrow up to 3.5
million pounds sterling ($5.8 million at September 30, 1999) to assist in the
purchase of inventory. To date, no borrowings have been drawn down on this line.
This revolving credit agreement has expired and European Micro UK is currently
negotiating an extension of this revolving credit agreement.
In addition, in June 1998, the Company received $9.3 million in gross proceeds
from its initial public offering of 933,900 shares of common stock. The Company
incurred total expenses in connection with the offering of $2.0 million. The
Company has used the proceeds to fund operations and provide working capital to
European Micro UK, Nor'Easter and Colchester. Also, funds have been used to
acquire Sunbelt.
Long-term funding is supplied to the Company in the form of capital lease
agreements and term loans. The lease agreements are secured by vehicles owned by
the Company. The agreements are usually for 36 months from the date of purchase
and are typically for 80% of the purchase value of the vehicle. All but two of
the agreements are subject to variable rate interest. As of September 30, 1999,
the borrowings were $68,000, of which $12,000 was due after more than one year.
On July 1, 1999, the Company acquired AMCC for a purchase price of $1,131,00
plus an earn-out. See "Related Party Transactions." The portion of the purchase
price paid at closing was funded through the Company's working capital. The
earn-out portion of the purchase price is expected to be funded through the
Company's working capital, additional borrowings, or the issuance of shares of
common stock.
On July 16, 1999, European Micro UK purchased the office building in which it
had previously been leasing space for 1,705,000 pounds sterling ($2,815,000 at
September 30, 1999). The purchase price was financed in part by a loan in the
amount of 1,312,000 pounds sterling ($2,166,000 at September 30, 1999). This
note bears interest at the one-month LIBOR rate plus one percentage point (1%).
LIBOR at September 30, 1999 was 5.4%.
20
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
Net cash provided by operating activities during the three-month period to
September 30, 1999 amounted to $5.1 million. Significant factors providing cash
were net income in the period of $207,000, a decrease in trade receivables, net
of effects from acquisitions of $1.3 million, a decrease in inventory, net of
effects from acquisitions, of $1.7 million and a decrease in due from related
parties, net of effects from acquisitions, of $1.1 million. The amount of cash
provided by the Company's operations was partially offset by a reduction in
accrued expenses and other current liabilities, net of the effects from
acquisitions, of $622,000.
Cash used in investing activities amounted to $4.2 million. This primarily
consisted of expenditures on fixed assets of $3.0 million, largely the purchase
of European Micro UK's office building and the acquisition of AMCC of $1.2
million.
Cash provided by financing activities amounted to $1.3 million. This primarily
consisted of $2.4 million provided by proceeds from the mortgage loan secured by
European Micro UK's office building reduced by $1.1 million used to pay down
short-term borrowings.
Overall, the Company experienced a net increase in cash of $2.5 million for the
three-month period ended September 30, 1999.
ASSET MANAGEMENT
INVENTORY. European Micro's goal is to achieve high inventory turns and to
maintain a low level of inventory on hand and thereby reduce the Company's
working capital requirements. The Company's strategy to achieve this goal is to
both effectively manage its inventory and achieve high order fill rates.
Inventory levels may vary from period to period, due to many factors, including
increases or decreases in sales levels, the Company's practice of making
large-volume purchases when it deems such purchases to be attractive, new
products and changes in the Company's product mix.
ACCOUNTS RECEIVABLE. The Company sells its products and services to a customer
base of more than 480 value-added resellers, corporate resellers, retailers and
direct marketers. The Company offers credit terms to qualifying customers and
also sells on a pre-pay and cash-on-delivery basis. With respect to credit
sales, the Company attempts to control its bad debt exposure by monitoring
customers' creditworthiness and, where practicable, through participation in
credit associations that provide customer credit rating information for certain
accounts. Also, substantially all of European Micro UK's accounts receivables
are insured. Nor'Easter, Colchester and American Micro generally do not insure
their accounts receivable.
CURRENCY RISK MANAGEMENT
REPORTING CURRENCY. European Micro Holding's, Nor'Easter's and American Micro's
reporting and functional currency, as defined by Statement of Financial
Accounting Standards No. 52, is the U.S. dollar. The functional currency of
European Micro UK is the U.K. pound sterling and Colchester is the Singapore
dollar. European Micro UK and Colchester translate into the reporting currency
by measuring assets and liabilities using the exchange rates in effect at the
balance sheet date and results of operations using the average exchange rates
prevailing during the period.
HEDGING AND CURRENCY MANAGEMENT ACTIVITIES. The Company occasionally hedges to
guard against currency fluctuations between the U.K. pound sterling and the U.S.
dollar. Because the functional currency of the Company's main operating
subsidiary, European Micro UK, is the U.K. pound sterling, currency fluctuations
of the pound sterling relative to the U.S. dollar may have a material adverse
affect on the Company's business, financial condition and results of operations.
The Company may engage in hedging activities in the future, although no
assurances can be given that it will engage in such activities and if it does so
that such activities will be successful.
Generally, the Company's policy is not to hedge specifically against individual
daily transactions. Instead, the exposure to a currency is determined every two
to three days. This is done by comparing the bank account balances and account
receivables with accounts payable, all in the same currency to create a
"natural" hedge. Thereafter, to the extent that a bank balance and the account
receivable are not totally offset by the accounts payable, there would be a need
to cover the residual credit balance with a forward currency contract. The
Company tends to concentrate its currency management into six currencies: U.K.
pound sterling, U.S. dollar, Dutch guilder, Canadian dollar, Singapore dollar
and German Mark. It normally deems the exposure in other currencies to be
minimal. However, when the Company buys products in other currencies, the
Company may, in conjunction with current market advice, book a forward contract
to cover current and some anticipated future purchases.
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EUROPEAN MICRO HOLDINGS, INC.
ECONOMIC AND MONETARY UNION. On January 1, 1999, eleven of the fifteen member
countries of the European Union established fixed conversion rates between their
existing sovereign currencies and a new currency called the "Euro." These
countries adopted the Euro as their common legal currency on that date. The Euro
is trading on currency exchanges and is available for non-cash transactions.
Until January 1, 2002, the existing sovereign currencies will remain legal
tender in these countries. On January 1, 2002, the Euro is scheduled to replace
the sovereign legal currencies of these countries. Through the operations of
European Micro UK, the Company has significant operations within the European
Union, including many of the countries which adopted the Euro. The Company
continues to evaluate the impact that the Euro is having on its continuing
business operations and no assurances can be given that the Euro will not have a
material adverse affect on the Company's business, financial condition and
results of operations. However, the Company does not expect the Euro to have a
material affect on its competitive position as a result of price transparency
within the European Union because the Company does not rely on currency
imbalances in purchasing inventory from within the European Union. On an ongoing
basis, the Company cannot accurately predict the impact the Euro will have on
currency exchange rates or the Company's currency exchange rate risk. The
Internal Revenue Service ("IRS") has requested comments on various tax issues
raised by the Euro conversion. The IRS is expected to publish guidelines on this
issue soon and, until such time, the Company cannot predict whether the IRS
guidelines will have any tax consequences on the Company.
YEAR 2000 ISSUES
Many existing computer programs use only two digits to identify a year in the
date field. These programs were designed and developed without considering the
impact of the upcoming change in the Year 2000. If not corrected in the computer
applications of the Company or its suppliers and customers, this problem may
cause computer applications to fail or to create erroneous results by or at the
Year 2000. In 1998, the Company initiated a plan ("Plan") to identify, assess
and remediate Year 2000 issues within each of its significant computer programs
and certain equipment which contain micro-processors. The Company has divided
the Plan into five major phases assessment, planning, conversion, implementation
and testing. The Company completed the assessment and planning phases in fiscal
1998. During fiscal 1999, the Company has addressed the conversion,
implementation and testing phases. The Plan addressed each subsidiary
differently. All computer equipment, software and other non-information
technology equipment owned by Nor'Easter and Colchester were Year 2000 compliant
when purchased and therefore the costs of conversion and remediation were
minimal. European Micro UK, Sunbelt and American Micro have obtained assurances
from manufacturers of all of its computer equipment, software and other
non-information technology equipment as to whether they are Year 2000 compliant.
The Company believes that all non-compliant software and hardware have been
upgraded or replaced. The Company budgeted an aggregate of $60,000 to cover
these costs. The actual costs were with-in this budget. The Company does not
generally sell software products and therefore the Company does not expect its
products to be affected by the Year 2000 problem.
The Company has evaluated the impact the Year 2000 problem will have on its
suppliers, customers, financial institutions, freight carriers and general
economic infrastructure. The Company is not highly dependent upon any single
supplier (except Technology Express) or customer and therefore does not expect
the failure of the Company's suppliers and customers to correct the Year 2000
problem to have a material adverse effect on the Company's business, financial
condition and results of operations. The Company believes that Technology
Express is Year 2000 complaint. The Company is dependent upon financial
institutions, freight carriers and general economic infrastructure. The Company
has received varying information from these outside parties regarding their
state of readiness for the Year 2000 problem. The Company has formulated
contingency plans to implement in the event these parties fail to address the
Year 2000 problem.
The Company's failure to correct a material Year 2000 problem could result in an
interruption in, or a failure of, certain normal business activities or
operations. Such failures could materially and adversely affect the Company's
operations, liquidity and financial condition. The Company's ability to insulate
itself from the Year 2000 problem is limited due to the Company's inability to
accurately gauge the readiness of its suppliers, customers, financial
institutions, freight carriers and general economic infrastructure. Accordingly,
the Company cannot accurately anticipate or quantify the impact of the Year 2000
problem or determine whether the failure to correct the Year 2000 problem will
have a material adverse effect on the Company's operations, liquidity or
financial condition.
RELATED PARTY TRANSACTIONS
In order to achieve attractive prices from suppliers, the Company must commit to
purchasing large quantities of product. To accomplish this, the Company polls
all the subsidiaries and Technology Express for informal commitments to help
distribute that product. Thereafter, the purchasing entity, would obtain the
22
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
product, examine the product for damage and authenticity, and then supervise the
shipping to the other subsidiaries and the related party. In such capacity, the
purchasing entity acts as a "purchasing agent" for the other subsidiaries and
the related party. In the three month period ended September 30, 1999 and
September 30, 1998, the Company benefited from low mark-up purchases from the
other members of the group totaling $1.8 million and $12.4 million,
respectively. During the same periods, the Company's sales to the related
parties were $1.0 million, and $1.5 million. These fluctuations are primarily
due to currency fluctuations, product availability and changes in geographic
pricing strategies of manufacturers and suppliers of the Company's products.
On February 2, 1999, the Company's Board of Directors formed a special committee
consisting solely of independent directors to evaluate and determine whether the
Company should acquire AMCC and, if so, on what terms. The members of the
committee were Kyle R. Saxon and Barrett Sutton. John B. Gallagher, who is a
significant shareholder, Co-Chairman and Co-President of the Company, was the
President and a Director of AMCC and owned fifty percent of its outstanding
capital stock. Frank Cruz, who is Chief Operating Officer of the Company, was an
employee of AMCC since 1994. He is currently an employee of the newly-formed,
wholly-owned subsidiary of the Company formed to acquire AMCC. The committee's
charter authorized it to take any action it deemed necessary to properly
evaluate and determine whether the Company should acquire AMCC, including hiring
independent advisors and ensuring that any such transaction was entirely fair to
the Company and its shareholders. The committee hired independent legal counsel
and an independent financial advisor. Prior to consummating this transaction,
the Company received an opinion from the independent financial advisor that the
consideration paid in connection with the transaction was fair from a financial
point of view to the Company's shareholders. The Company acquired AMCC on July
1, 1999.
The transaction was structured as a merger of AMCC with and into the
newly-formed, wholly-owned subsidiary of the Company. Upon consummation of the
merger, the subsidiary's name was changed to American Micro Computer Center,
Inc. ("AMERICAN MICRO"). The purchase price for AMCC was equal to $1,131,000,
plus an earn-out amount payable in cash or shares of the Company's common stock
(at the Company's discretion) equal to two times the after-tax earnings of
American Micro in calendar year 1999 and two times the after-tax earnings of
American Micro in calendar year 2000. The portion of the purchase price paid at
closing was funded through the Company's working capital. The earn-out portion
of the purchase price is expected to be funded through the Company's working
capital, additional borrowings or the issuance of shares of common stock. In
addition, the Company assumed all outstanding indebtedness of AMCC, including a
shareholder loan in the approximate amount of $289,000. This loan is owed to the
father of John B. Gallagher. If the Company elects to pay any portion of the
purchase price in shares of the Company's common stock, then AMCC's shareholders
have fifteen days to make arrangements to sell such shares over the next forty
trading days. If the sale of such shares results in net proceeds of less than
the purchase price, then the Company will pay the difference in cash to AMCC's
shareholders.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
----------------------------------------------------------
The Company utilizes derivative financial instruments in the form of forward
exchange contracts for the purpose of economic hedges of anticipated sale and
purchase transactions. In addition, the Company enters into economic hedges for
the purpose of hedging foreign currency market exposures of underlying assets,
liabilities and other obligations which exist as part of its ongoing business
operations. See "Currency Risk Management."
Where the foreign currency exposure is covered by a forward foreign exchange
contract, the asset, liability or other obligation is recorded at the contracted
rate each month end and the resultant mark-to-market gains and losses are
recognized as cost of sales in the current period, generally consistent with the
period in which the gain or loss of the underlying transaction is recognized.
Cash flows associated with derivative transactions are classified in the
statement of cash flows in a manner consistent with those of the exposure being
hedged.
23
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
EXCHANGE RATE SENSITIVITY
The table below summarizes information on foreign currency forward exchange
agreements. The table presents the notional amounts and weighted average
exchange rates by expected (contractual) maturity dates. The fair value has been
determined by applying the mid-price of the spread on the buy or sell rates, as
appropriate, of the relevant foreign currency at the balance sheet date. The
mid-price used is that quoted by the Financial Times.
EXPECTED
MATURITY OR
TRANSACTION DATE FAIR VALUE
---------------- ------------
FOREIGN CURRENCY EXCHANGE CONTRACTS
SEPTEMBER 30, 1999
(Receive $US/Pay (pound)) October 12, 1999
Contract amount $2,405,000 $2,472,080
Average contractual exchange rate
$1.6062/(pound)1
(Receive $US/Pay (pound)) October 12, 1999
Contract amount $612,000 $620,830
Average contractual exchange rate
$1.6222/(pound)1
Foreign currency losses, net were $242,000 at September 30, 1999, and $132,000
for the comparable period in 1998. See "Management's Discussion and Analysis -
Quarter Ended September 30, 1999 and 1998" for discussion on the changes.
24
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
PART II
ITEM 1. LEGAL PROCEEDINGS.
-----------------
According to a press release issued on November 12, 1999, the 50% shareholders
of Big Blue Europe, its principles, Jeff and Marie Alnwick, and Big Blue Europe,
derivatively, have filed a lawsuit against the Company, European Micro UK, John
B. Gallagher and Harry D. Shields for fraud, aiding and abetting fraud,
misappropriation of trade secrets, breach of fiduciary duty, aiding and abetting
breach of fiduciary duty, breach of contract and tortious interference with
contract. The press release was issued by the law firm representing the
plaintiffs. The press release states that the plaintiffs are seeking $10 million
or more in damages. The suit was filed in the United States District Court for
the Eastern District of New York. The factual allegations underlying the lawsuit
stem from European Micro UK's joint venture interest in Big Blue Europe. The
Company has not received a copy of the complaint. The Company, in connection
with its legal counsel, will carefully review the allegations in the complaint
when a copy is received. However, the Company believes that the allegations
specified in the law firm's press release are without merit and intends to
vigorously defend the suit.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
-----------------------------------------
(a), (b), (c) and (d). None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
-------------------------------
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
---------------------------------------------------
None.
ITEM 5. OTHER INFORMATION.
-----------------
On October 29, 1999, the Company obtained financing for its operations based in
the United States. American Micro and Nor'Easter each obtained a $1,500,000 line
of credit, secured by accounts receivable and inventory. The maturity date on
the loans is October 29, 2000. The loans bear interest at a rate equal to the
lender's base rate plus one-half percentage point (1/2%). Also on October 29,
1999, the Company obtained a term loan in the amount of $1,500,000. The term
loan is to be repaid with quarterly payment of $125,000 over three years. The
term loan bears interest at the one-month London Interbank Offering Rate (LIBOR)
plus two and one-quarter percentage points (2.25%).
As partial security for these loans, Messrs. Gallagher and Shields pledged to
the lender a portion of their shares of common stock of the Company. In the
event the Company defaults on one or more of these loans, the lender may
foreclose on all or a portion of the pledged securities. Such an event may cause
a change of control in the Company because Messrs. Gallagher and Shields
together own 71% of the Company's outstanding common stock.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
--------------------------------
(a) Exhibits.
EXHIBIT
NO. DESCRIPTION LOCATION
- -- ----------- --------
2.01 Agreement for the Acquisition of Incorporated by reference to
Sunbelt (UK) Limited by European Exhibit 2.01 to Registrant's
Micro PLc dated October 26, 1998 Form 10-Q for the quarter ended
ended September 30, 1998.
2.02 Merger Agreement re: AMCC dated Incorporated by reference to
June 29, 1999 Exhibit 2.02 to Registrant's
From 10-K for the year ended
June 30, 1999.
2.03 Plan of 1999 Merger re: AMCC dated Incorporated by reference to
June 29, 1999 Exhibit 2.03 to Registrant's
From 10-K for the year ended
June 30, 1999.
2.04 Articles of Merger re: AMCC dated Incorporated by reference to
June 29, 1999 Exhibit 2.04 to Registrant's
Form 10-K for the year ended
June 30, 1999.
25
<PAGE>
EXHIBIT
NO. DESCRIPTION LOCATION
- -- ----------- --------
3.01 Articles of Incorporation Incorporated by reference to
Exhibit No. 3.01 to
Registrant's Registration
Statement (the "Registration
Statement") on Form S-1
(Registration Number
333-44393).
3.02 Certificate of Amendment of Incorporated by reference to
Articles of Incorporation Exhibit 3.02 to Registrant's
Form 10-Q for the quarter
ended March 31, 1998.
3.03 Bylaws Incorporated by reference to
Exhibit No. 3.02 to the
Registration Statement.
4.01 Form of Stock Certificate Incorporated by reference to
Exhibit No. 4.01 to the
Registration Statement.
4.02 1998 Stock Incentive Plan Incorporated by reference to
Exhibit No. 4.02 to the
Registration Statement.
4.03 1998 Stock Employee Stock Purchase Incorporated by reference to
Plan Exhibit No. 4.03 to the
Registration Statement.
4.04 Form of Lock-up Agreement Incorporated by reference to
Exhibit No. 4.04 to the
Registration Statement.
10.01 Form of Advice of Borrowing Terms Incorporated by reference to
with National Westminster Bank Plc Exhibit No. 10.01 to the
Registration Statement.
10.02 Invoice Discounting Agreement with Incorporated by reference to
Lombard NatWest Discounting Exhibit No. 10.02 to the
Limited, dated November 21, 1996 Registration Statement.
10.03 Commercial Credit Insurance, Incorporated by reference to
policy number 60322, with Hermes Exhibit No. 10.03 to the
Kreditversicherungs-AG dated Registration Statement.
August 1, 1995
10.04 Commercial Credit Insurance, Incorporated by reference to
policy number 82692, with Hermes Exhibit No. 10.04 to the
Kreditversicherungs-AG dated Registration Statement.
August 1, 1995
10.05 Consignment Agreement with Incorporated by reference to
European Micro Computer B.V., Exhibit No. 10.05 to the
dated January 1996 Registration Statement.
10.06 Shareholders' Cross-Purchase Incorporated by reference to
Agreement by and between Jeffrey Exhibit No. 10.07 to the
Gerard Alnwick, Marie Alnwick, Registration Statement.
European Micro Plc and Big Blue
Europe, B.V. dated August 21, 1997
10.07 Trusteed Shareholders Incorporated by reference to
Cross-Purchase Agreement by and Exhibit No. 10.08 to the
between John B. Gallagher, Harry Registration Statement.
D. Shields, Thomas H. Minkoff,
Trustee of the Gallagher Family
Trust, Robert H. True and Stuart
S. Southard, Trustees of the Henry
Daniel Shields 1997 Irrevocable
Educational Trust, European Micro
Holdings, Inc. and SunTrust Bank,
Nashville, N.A., as Trustee dated
January 31, 1998
10.08 Executive Employment Agreement Incorporated by reference to
between John B. Gallagher and Exhibit No. 10.09 to the
European Micro Holdings, Inc. Registration Statement.
effective as of January 1, 1998
26
<PAGE>
EXHIBIT
NO. DESCRIPTION LOCATION
- -- ----------- --------
10.09 Executive Employment Agreement Incorporated by reference to
between Harry D. Shields and Exhibit No. 10.10 to the
European Micro Holdings, Inc. Registration Statement.
effective as of January 1, 1998
10.10 Contract of Employment Agreement Incorporated by reference to
between Laurence Gilbert and Exhibit No. 10.11 to the
European Micro UK dated March 14, Registration Statement.
1998
10.11 Contract of Employment between Incorporated by reference to
Bernadette Spofforth and European Exhibit No. 10.12 to the
Micro UK dated April 30, 1996 Registration Statement.
10.12 Subscription Agreement by and Incorporated by reference to
between John B. Gallagher, Harry Exhibit No. 10.13 to the
D. Shields, Thomas H. Minkoff, Registration Statement.
Trustee of the Gallagher Family
Trust, Robert H. True and Stuart
S. Southard, Trustees of the Henry
Daniel Shields 1997 Irrevocable
Educational Trust, European Micro
Holdings, Inc. effective as of
January 31, 1998
10.13 Administrative Services Contract Incorporated by reference to
by and between European Micro Exhibit No. 10.14 to the
Holdings, Inc. and European Micro Registration Statement.
Plc effective as of January 1,
1998
10.14 Escrow Agreement between European Incorporated by reference to
Micro Holdings, Inc., Tarpon Exhibit No. 10.15 to the
Scurry Investments, Inc. and The Registration Statement.
Chase Manhattan dated as of March
24, 1998
10.15 Form of Indemnification Agreements Incorporated by reference to
with officers and directors Exhibit No. 10.16 to the
Registration Statement.
10.16 Form of Transfer Agent Agreement Incorporated by reference to
with Chase Mellon Shareholder Exhibit No. 10.17 to the
Services, L.L.C. Registration Statement.
10.17 Form of Credit Agreement by and Incorporated by reference to
between European Micro UK and Exhibit No. 10.17 to the
National Westminster Bank Plc Annual Report on Form 10-K
for the fiscal year ended June 30,
1998 filed with the Commission on
September 28, 1998.
10.18 Consulting Contract dated Incorporated by reference to
September 10, 1998 by and between Exhibit 10.19 to Registrant's Form
European Micro Holdings, Inc. and 10-Q for the quarter ended
The Equity Group September 30, 1998.
10.19 Service Agreement dated October Incorporated by reference to
28, 1998 by and between European Exhibit 10.20 to
Micro Holdings, Inc. and Michael Registrant's Form 10-Q for
Gesner the quarter ended
September 30, 1998.
10.20 Service Agreement dated October Incorporated by reference to
28, 1998 by and between European Exhibit 10.21 to Registrant's Form
Micro Plc and Gerard O'Rourke 10-Q for the quarter ended
September 30, 1998.
10.21 Employment Agreement dated July 1, Incorporated by reference to
1999 between John B. Gallagher Exhibit 10.21 to Registrant's
American Micro Form 10-K for the year ended
June 30, 1999.
27
<PAGE>
EXHIBIT
NO. DESCRIPTION LOCATION
- -- ----------- --------
10.22 Loan and Security Agreement dated Provided herewith.
October 29, 1999 among American
Micro, the Company, Nor'Easter and
SouthTrust Bank, N.A. re: Line of
Credit to American Micro
10.23 Loan Agreement dated October 29, Provided herewith.
1999 among the Company, American
Micro, Nor'Easter and SouthTrust
Bank, N.A. re: Term Loan to the
Company
10.24 Loan Agreement dated October 29, Provided herewith
1999 among Nor'Easter, the
Company, American Micro and
SouthTrust Bank, N.A. re: Line of
Credit to Nor'Easter
11.01 Statement re: Computation of Provided herewith.
Earnings
15.01 Letter re: Unaudited Financial Not applicable.
Information
18.01 Letter re Change in Accounting Not applicable.
Principles
19.01 Report Furnished to Security Not applicable.
Holders
22.01 Published Report Regarding Matters Not applicable.
Submitted to Vote of Security
Holders
23.01 Consents of experts and counsel Not applicable.
24.01 Power of Attorney Not applicable.
27.01 Financial Data Schedule Provided herewith.
(b) Reports on Form 8-K.
None.
28
<PAGE>
EUROPEAN MICRO HOLDINGS, INC.
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
Dated: November 12, 1999 EUROPEAN MICRO HOLDINGS, INC.
By: /s/ John B. Gallagher
---------------------
John B. Gallagher, Co-President
29
EXHIBIT 10.22
-------------
LOAN AND SECURITY AGREEMENT
---------------------------
THIS LOAN AND SECURITY AGREEMENT ("Agreement"), dated as of the 29th day
of October, 1999, is made and entered into on the terms and conditions
hereinafter set forth, by and among AMERICAN MICRO COMPUTER CENTER, INC., a
Florida corporation with principal offices at 6073 N.W. 167th Street, Unite
C-25, Miami, Florida 33015 ("Borrower"), EUROPEAN MICRO HOLDINGS, INC., a Nevada
corporation ("European Micro"), NOR'EASTER MICRO, INC., a Nevada corporation
("Nor'easter"; European Micro and Nor'easter are sometimes hereinafter
collectively referred to as "Guarantors"), and SOUTHTRUST BANK, NATIONAL
ASSOCIATION, a national banking association with offices in Nashville, Tennessee
("Lender").
WHEREAS, Borrower has requested that Lender make available to Borrower a
line of credit in the original principal amount not exceeding $1,500,000 (the
"Loan") on the terms and conditions hereinafter set forth, and for the
purpose(s) hereinafter set forth; and
WHEREAS, in order to induce Lender to make the Loan to Borrower, Borrower
and Guarantors have made certain representations to Lender; and
WHEREAS, Lender, in reliance upon the representations and inducements of
Borrower and Guarantors, has agreed to make the Loan upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Borrower, Guarantors and Lender hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
As used in this Agreement, the following terms shall have the indicated
meanings:
"Base Rate" shall mean per annum the rate of interest periodically
designated by Lender as its Base Rate. Base Rate does not necessarily represent
the lowest rate charged by Lender. Any rate of interest calculated using the
Base Rate as a reference shall change to reflect any change in the Base Rate, as
and when the Base Rate changes.
"Borrowing Base" shall mean an aggregate amount equal to the sum of (a)
eighty-five percent (85%) of Eligible Receivables, plus (b) fifty percent (50%)
of Eligible Inventory.
"Compliance Certificate" shall have the meaning assigned to such term in
SUBSECTION 5.4(A) of this Agreement.
"Eligible Receivables" shall mean Receivables arising out of the sale or
other disposition of Borrower's Inventory or the rendering of services to
<PAGE>
Borrower's customers, excluding (a) all Receivables that have been outstanding
for more than ninety (90) days after the dates of the corresponding invoices,
(b) all Receivables owing from any account debtor if more than 50% of the
Receivables owed to Borrower by such account debtor have been outstanding for
more than ninety (90) days after the dates of the corresponding invoices, (c)
the amount by which Receivables from any account debtor (or its affiliates)
exceed twenty-five percent (25%) of Borrower's total Receivables, (d) all
returns, allowances, discounts, credits and contra items, (e) all amounts owed
from employees, officers, shareholders, directors or affiliates and all
intra-company items, (f) any Receivables evidenced by instruments or chattel
paper that have not been endorsed and delivered to Lender by Borrower, and (g)
all other items which Lender in its sole discretion determines to be ineligible.
"Eligible Inventory" shall mean Borrower's Inventory, valued at the lesser
of cost or market, with such adjustments thereto as Lender in its sole
discretion determines to be appropriate.
"Event of Default" shall have the meaning assigned to such term in SECTION
7.1 of this Agreement.
"Guaranties" shall mean, collectively, one or more Continuing Guaranties
of even date herewith, executed in favor of Lender by Guarantors.
"Inventory" shall have the meaning assigned to such term in the Uniform
Commercial Code.
"Line of Credit Borrowing Limit" shall mean $1,500,000.
"Line of Credit Interest Rate" shall mean an annual rate equal to the
lesser of (a) the maximum contract rate of interest permitted to be charged
under applicable law or (b) the Base Rate plus one-half percentage point (1/2%),
computed on the basis of a 360-day year, actual number of days elapsed, adjusted
daily as the Base Rate changes.
"Line of Credit Termination Date" shall mean October __, 2000.
"Loan Documents" shall mean, collectively, the Security Instruments,
together with the Note and any other instruments and documents now or hereafter
evidencing, securing or in any way related to the indebtednesses evidenced by
the Note.
"Note" shall mean that certain Master Secured Promissory Note of even date
herewith, in the principal amount not exceeding the Line of Credit Borrowing
Limit, made and executed by Borrower, payable to the order of Lender, evidencing
the indebtedness of Borrower to Lender in connection with the Loan, together
with any and all extensions, modifications, renewals, restatements and/or
replacements thereof.
"Pledge Agreements" shall mean those two (2) certain Pledge and Security
Agreements of even date herewith, executed by John B. Gallagher and Harry D.
Shields, in favor of Lender.
"Receivables" shall mean accounts, general intangibles, instruments and
chattel paper, as such terms are defined in the Uniform Commercial Code.
2
<PAGE>
"Secured Obligations" shall have the meaning assigned such term in SECTION
3.2 of this Agreement.
"Security Instruments" shall mean, collectively, this Agreement, the
Guaranties, and any other instruments, documents or agreements now or hereafter
securing the Secured Obligations, whether by specific or general reference.
"Uniform Commercial Code" means the Uniform Commercial Code as in effect
in the State of Tennessee from time to time.
ARTICLE II
THE LOAN
--------
II.1 ADVANCES. Prior to the Line of Credit Termination Date and so long as
no Event of Default (or event that with the giving of notice or the passage of
time or both would constitute an Event of Default) has occurred and is in
existence hereunder, Lender shall advance proceeds under the Loan to Borrower
upon Borrower's request in an aggregate amount outstanding at any one time not
to exceed the lesser of (a) the Borrowing Base in effect from time to time, or
(b) the Line of Credit Borrowing Limit, although Lender may in its sole and
absolute discretion permit advances to exceed such amount. Any such excess
advances shall be secured by, and subject to the terms and conditions of, this
Agreement. In the absence of an Event of Default, Borrower may repay and
reborrow amounts under the Loan in accordance with the terms, conditions and
provisions of this Agreement.
II.2 REPAYMENT. The indebtedness of Borrower to Lender in connection with
the Loan shall be evidenced by, and payable in accordance with the terms of, the
Note. Amounts outstanding under the Loan shall bear interest at the Line of
Credit Interest Rate. In addition, Borrower covenants and agrees to maintain
Eligible Receivables and Eligible Inventory in an aggregate amount sufficient to
keep the aggregate outstanding principal balance of the advances made in respect
of the Loan within the limits specified in SECTION 2.1 of this Agreement. If at
any time such limits are exceeded, Borrower shall immediately pay to Lender an
amount sufficient to reduce the aggregate outstanding principal balance of the
Loan to an amount that is within such limits.
II.3 LETTERS OF CREDIT. If and to the extent that Lender has issued or
from time to time hereafter shall issue letters of credit for the account of
Borrower pursuant to applications submitted to Lender by Borrower, it is
understood and agreed that:
(a) the credit availability under the Loan shall be reduced by
the aggregate undrawn amount from time to time available under
outstanding letters of credit,
(b) any amounts paid by Lender under any such letters of
credit shall be deemed to be advances against the Note, and the
indebtedness of Borrower to Lender in connection therewith shall
constitute a part of the Secured Obligations and shall be secured as
hereinafter set forth in the same manner as all other advances made
by Lender against the Note.
3
<PAGE>
Borrower acknowledges and agrees that Lender has made no commitment to Borrower
with respect to the issuance of any such letters of credit.
II.4 COMMITMENT FEE. Upon execution of this Agreement, Borrower shall
pay to Lender a non-refundable commitment fee in the amount of $3,750.00.
II.5 PURPOSE. The purpose of the Loan shall be to provide working capital
to Borrower on a revolving basis.
ARTICLE III
SECURITY
--------
III.1 SECURITY. The Secured Obligations are and shall continue to be
secured by the following:
(a) PERSONAL PROPERTY. Borrower hereby grants to Lender a security
interest in the following described property and interests in property,
together with all proceeds (including but not limited to insurance
proceeds) and products thereof and all accessions thereto, as applicable:
(i) EQUIPMENT. All equipment of Borrower of every kind and
description, whether now owned or hereafter acquired and wherever
located, together with all parts, accessories and attachments and
all replacements thereof and additions thereto;
(ii) INVENTORY, ACCOUNTS, LP CHATTEL PAPER, INSTRUMENTS,
DOCUMENTS AND GENERAL INTANGIBLES. All of Borrower's inventory,
whether held for lease, sale or for furnishing under contracts of
service, all agreements for lease of same and rentals therefrom, and
all of Borrower's accounts, accounts receivable, chattel paper,
instruments, documents and general intangibles (including but not
limited to trade marks, copyrights and patents), whether now in
existence or owned or hereafter acquired, entered into, created or
arising, and wherever located; and
(iii) BOOKS AND RECORDS. All of Borrower's right, title and
interest to all of the books, records, files and all other data and
documents of Borrower of all kinds in whatever form, whether
computerized or otherwise and including but not limited to computer
disks, tapes and printouts, relating to the above-described
collateral.
(b) OTHER SECURITY INSTRUMENTS. The Guaranties, the Pledge
Agreements and the other Security Instruments.
III.2 SECURED OBLIGATIONs. Without limiting any of the provisions
thereof, the Security Instruments shall secure:
4
<PAGE>
(a) The full and timely payment of the indebtednesses evidenced by
the Note, together with interest thereon, and any extensions,
modifications and/or renewals thereof and any notes given in payment
thereof,
(b) The full and prompt performance of all of the obligations of
Borrower to Lender under the Loan Documents,
(c) The full and prompt payment of all expenses and costs of
whatever kind incident to the collection of the indebtednesses evidenced
by the Note, the perfection, enforcement or protection of the security
interests of the Security Instruments or the exercise by Lender of any
rights or remedies of Lender with respect to the indebtednesses evidenced
by the Note, including but not limited to reasonable attorney's fees and
expenses incurred by Lender, all of which Borrower agrees to pay to Lender
upon demand,
(d) The full and prompt payment of the indebtednesses and
obligations of Guarantors to Lender evidenced and/or secured by (i) that
certain Loan Agreement of even date herewith, by and among Lender,
Borrower and Guarantors, entered into in connection with that certain term
loan from Lender to European Micro in the original principal amount of
$1,500,000, and (ii) that certain Loan and Security Agreement of even date
herewith, by and among Lender, Borrower and Guarantors, entered into in
connection with that certain line of credit from Lender to Nor'easter, in
the maximum principal amount of $1,500,000, together with any and all
renewals, amendments and modifications thereof; and
(e) The full and prompt payment and performance of any and all other
indebtednesses and other obligations of Borrower or either Guarantor to
Lender, direct or contingent (including but not limited to obligations
incurred as indorser, guarantor or surety), however evidenced or
denominated, and however and whenever incurred, including but not limited
to indebtednesses incurred pursuant to any present or future commitment of
Lender to Borrower or either Guarantor, together with interest thereon,
and any extensions, modifications and/or renewals thereof and any notes
given in payment thereof.
All of the foregoing indebtedness and other obligations are herein collectively
referred to as the "Secured Obligations".
ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower and Guarantors hereby represent and warrant to Lender as follows:
IV.1 CORPORATE STATUS. Borrower is a corporation duly organized, validly
existing and in good standing under the laws of the State of Florida. Each
Guarantor is a corporation duly organized, validly existing and in good standing
under the laws of the State of Nevada. Borrower and each Guarantor has the
corporate power to own and operate its properties, to carry on its business as
now conducted and to enter into and to perform its obligations under this
Agreement and the other Loan Documents to which it is a party. Borrower and each
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Guarantor is duly qualified to do business and in good standing in each state in
which a failure to be so qualified would have a material adverse effect on its
financial position or its ability to conduct its business in the manner now
conducted.
IV.2 AUTHORIZATION. Borrower and each Guarantor has full legal right,
power and authority to conduct its business and affairs in the manner
contemplated by the Loan Documents, and to enter into and perform its
obligations thereunder, without the consent or approval of any other person,
firm, governmental agency or other legal entity. The execution and delivery of
this Agreement, the borrowing hereunder, the execution and delivery of each Loan
Document to which Borrower or either Guarantor is a party, and the performance
by Borrower and each Guarantor of its obligations thereunder are within the
corporate powers of Borrower or Guarantors and have been duly and properly
authorized by all necessary corporate action, have received all necessary
governmental approvals, if any were required, and do not and will not contravene
or conflict with any provision of law, any applicable judgment, ordinance,
regulation or order of any court or governmental agency, the charters or by-laws
of Borrower or Guarantors, or any agreement binding upon Borrower, Guarantors or
their properties. The officer(s) executing this Agreement and all of the other
Loan Documents to which Borrower and Guarantors are a party are duly authorized
to act on behalf of Borrower and Guarantors.
IV.3 VALIDITY AND BINDING EFFECT. This Agreement and the other Loan
Documents are the legal, valid and binding obligations of the parties thereto,
enforceable in accordance with their respective terms.
IV.4 OTHER TRANSACTIONS. Except as specifically set forth in this
Agreement and the other Loan Documents, there are no prior loans, liens,
security interests, agreements or other financings upon which Borrower is
obligated or by which Borrower is bound that will in any way permit any third
person to have or obtain priority over Lender as to any of the security
interests or liens granted to Lender pursuant to this Agreement and the other
Security Instruments. Consummation of the transactions hereby contemplated and
the performance of the obligations of Borrower and Guarantors under and by
virtue of the Loan Documents will not result in any breach of, or constitute a
default under, any mortgage, security deed or agreement, deed of trust, lease,
bank loan or credit agreement, corporate charter or by-laws, agreement or
certificate of limited partnership, partnership agreement, license, franchise or
any other instrument or agreement to which Borrower or either Guarantor is a
party or by which Borrower, Guarantors or their properties may be bound or
affected.
IV.5 PLACES OF BUSINESS. The records with respect to all intangible
personal property constituting a part of the collateral security for the Secured
Obligations are maintained at Borrower's chief place of business and chief
executive office, which has the address of 6073 N.W. 167th Street, Unite C-25,
Miami, Florida 33015. All tangible personal property constituting a part of the
collateral security for the Secured Obligations is or will be located at
Borrower's chief place of business and chief executive office and/or at any
specific locations set forth in attached SCHEDULE 4.5.
IV.6 LITIGATION. There are no actions, suits or proceedings pending, or,
to the knowledge of Borrower or either Guarantor, threatened, against or
affecting Borrower or either Guarantor or involving the validity or
enforceability of any of the Loan Documents or the priority of the liens
thereof, at law or in equity, or before any governmental or administrative
agency, except actions, suits and proceedings that are fully covered by
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insurance and that, if adversely determined, would not impair the ability of
Borrower or Guarantors to perform each and every one of their respective
obligations under and by virtue of the Loan Documents; and to the knowledge of
Borrower and Guarantors, neither Borrower nor either Guarantor is in default
with respect to any order, writ, injunction, decree or demand of any court or
any governmental authority.
IV.7 FINANCIAL STATEMENTS. The financial statement(s) of Borrower and
Guarantors heretofore delivered to Lender are true and correct in all respects,
have been prepared in accordance with generally accepted accounting principles
consistently applied, and fairly present the financial condition of the subjects
thereof as of the date(s) thereof. No material adverse change has occurred in
the financial condition of Borrower or either Guarantor since the date(s)
thereof, and no additional borrowings have been made by Borrower or either
Guarantor since the date(s) thereof.
IV.8 NO DEFAULTS. No default or event of default by Borrower or Guarantors
exists under this Agreement or any of the other Loan Documents, or under any
other instrument or agreement to which Borrower or either Guarantor is a party
or by which Borrower, Guarantors or their properties may be bound or affected,
and no event has occurred and is existing that with notice or the passage of
time or both would constitute a default or event of default thereunder.
IV.9 COMPLIANCE WITH LAW. Borrower and Guarantors have obtained all
necessary licenses, permits and governmental approvals and authorizations
necessary or proper in order to conduct their business and affairs as heretofore
conducted and as intended to be conducted hereafter. To the knowledge of
Borrower and Guarantors, Borrower and Guarantors are in compliance with all
laws, regulations, decrees and orders applicable to them (including but not
limited to laws, regulations, decrees and orders relating to occupational and
health standards and controls, antitrust, monopoly, restraint of trade or unfair
competition). Neither Borrower nor either Guarantor has received, nor expects to
receive, any order or notice of any violation or claim of violation of any law,
regulation, decree, rule, judgment or order of any governmental authority or
agency relating to the ownership and/or operation of its properties, as to which
the cost of compliance is or might be material and the consequences of
noncompliance would or might be materially adverse to its business, operations,
property or financial condition, or which would or might impair its ability to
perform its obligations under the Loan Documents to which it is a party.
IV.10 ENVIRONMENTAL MATTERS.
(a) As used in this SECTION 4.10 and in SECTION 5.12 hereof, the
following terms shall have the indicated meanings:
"BUSINESS" means all of Borrower's and Guarantors' assets, both real
and personal, tangible and intangible, now existing or hereafter acquired
and wherever located, and all of Borrower's and Guarantors' current and
future business operations at all locations and in all jurisdictions.
"ENVIRONMENTAL AUTHORITIES" means all federal, state and local
governmental bodies, authorities or agencies and all public corporations
created and/or empowered to administer, regulate and/or enforce
Environmental Laws, including without limitation the U.S.
Environmental Protection Agency.
"ENVIRONMENTAL LAWS" means any and all federal, state, regional,
county or local laws, statutes, rules, regulations or ordinances relating
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to the generation, recycling, use, reuse, sale, storage, handling,
transport, treatment or disposal of Hazardous Materials, including without
limitation the Comprehensive Environmental Response Compensation Liability
Act of 1980, as amended by the Superfund Amendments and Reauthorization
Act of 1986, 42 U.S.C. ss.ss.9601 ET seq. ("CERCLA"), the Resource
Conservation and Recovery Act of 1976, as amended by the Solid and
Hazardous Waste Amendments of 1984, 42 U.S.C. ss.ss.6901 ET seq. ("RCRA"),
the Tennessee Hazardous Waste Management Act, T.C.A. ss.ss.68-46-101 ET
seq., and any rules, regulations and guidance documents promulgated or
published thereunder, and any state, regional, county or local statute,
law, rule, regulation or ordinance relating to public health, safety or
the discharge, emission or disposal of Hazardous Materials or Hazardous
Wastes in or to air, water, land or groundwater, to the withdrawal or use
of groundwater, to the use, handling or disposal of asbestos,
polychlorinated biphenyls, petroleum, petroleum derivatives or
by-products, other hydrocarbons or urea formaldehyde, to the treatment,
storage, disposal or management of Hazardous Materials, to exposure to
Hazardous Materials, to the transportation, storage, disposal, management
or release of gaseous or liquid substances, and any regulation, order,
injunction, judgment, declaration, notice or demand issued thereunder.
"HAZARDOUS MATERIALS" means any hazardous, toxic or dangerous
materials, substances, chemicals, waste or pollutants that from time to
time are defined by or pursuant to or are regulated under any
Environmental Laws, including without limitation asbestos, polychlorinated
biphenyls, petroleum, petroleum derivatives or by-products, other
hydrocarbons, urea formaldehyde and any material, substance, pollutant or
waste that is defined as a hazardous waste under RCRA or defined as a
hazardous substance under CERCLA.
"HAZARDOUS WASTES" means Hazardous Materials that are or become
"wastes" or "solid wastes" as such terms are used in RCRA.
"PROPERTY" means all real property now or hereafter constituting a
part of, or otherwise used or operated by Borrower or Guarantors in
connection with, the Business.
(b) Borrower and Guarantors represent and warrant to Lender as
follows:
(i) The Property is being operated by Borrower and Guarantors
in full compliance with Environmental Laws, and Borrower and
Guarantors have obtained, maintained and is in good standing under
all approvals, consents, certificates, licenses and permits required
by Environmental Laws with respect to the Property.
(ii) To the knowledge of Borrower and Guarantors, the Property
is free of all Hazardous Wastes and is free of all Hazardous
Materials other than those maintained therein or thereon in full
compliance with Environmental Laws. Borrower and Guarantors have not
caused or permitted the Property to be used to generate,
manufacture, refine, transport, treat, store, handle, dispose,
transfer, produce or process Hazardous Materials except in full
compliance with Environmental Laws.
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(iii) Neither Borrower nor either Guarantor has received
notice, nor has knowledge, of any noncompliance with or violation of
any Environmental Laws with respect to the Property or the Business.
IV.11 NO BURDENSOME RESTRICTIONS. No instrument, document or agreement to
which Borrower or either Guarantor is a party or by which it or its properties
may be bound or affected materially adversely affects, or may reasonably be
expected so to affect, its business, operations, property or financial
condition.
IV.12 TAXES. Borrower and each Guarantor has filed or caused to be filed
all tax returns that to its knowledge are required to be filed (except for
returns that are not yet due), and has paid all taxes shown to be due and
payable on said returns and all other taxes, impositions, assessments, fees or
other charges imposed on it by any governmental authority, agency or
instrumentality, prior to any delinquency with respect thereto (other than
taxes, impositions, assessments, fees and charges currently being contested in
good faith by appropriate proceedings, for which appropriate amounts have been
reserved). No tax liens have been filed against Borrower, Guarantors or any of
their property.
IV.13 EQUIPMENT. The equipment constituting a part of the collateral for
the Secured Obligations is owned solely by Borrower, and Borrower has full
right, power and authority to grant to Lender a valid and enforceable security
interest therein. Lender's security interest in such equipment constitutes a
first and prior lien upon and security interest in such equipment, and no other
person or entity has any right, title, interest, security interest, claim or
lien with respect thereto.
IV.14 INVENTORY. The Inventory constituting a part of the collateral for
the Secured Obligations is owned solely by Borrower, and Borrower has all
necessary right, power and authority to grant to Lender a valid and enforceable
security interest therein. Lender's security interest in such Inventory
constitutes a first and prior lien upon and security interest in such Inventory,
and no other person or entity has any right, title, interest, security interest,
claim or lien with respect thereto.
IV.15 RECEIVABLES, ETC. With respect to the Receivables, (a) each
Receivable is a valid and bona fide existing obligation created by or arising
out of the sale and delivery or other disposition of Borrower's Inventory or the
rendition by Borrower of services to Borrower's customers in the ordinary course
of business, (b) the Receivables are owned solely by Borrower and Borrower has
all necessary right, power and authority to grant to Lender a valid and
enforceable security interest therein, (c) Lender's security interest in such
Receivables constitutes a first and prior lien upon and security interest in
such Receivables, and no other person or entity has any right, title, interest,
security interest, claim or lien with respect thereto; (d) each Receivable
constituting an Eligible Receivable will at all times be unconditionally owed to
Borrower and enforceable against the obligor(s) with respect thereto without
dispute of any kind, and (e) each Receivable constituting an Eligible Receivable
is an "account" as defined in the Uniform Commercial Code and is not evidenced
by any instrument or document (except as specifically disclosed to Lender and
accepted by Lender as an Eligible Receivable) that would in any way change or
alter its character as an account.
IV.16 EFFECT OF REQUEST FOR ADVANCE. Each request by Borrower for an
advance of proceeds of the Loan shall constitute an affirmation by Borrower and
Guarantors that the representations and warranties of this ARTICLE IV remain
true and correct on and as of the date of such request.
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ARTICLE V
COVENANTS AND AGREEMENTS
------------------------
Borrower and Guarantors covenant and agree that during the term of this
Agreement:
V.1 PAYMENT OF SECURED OBLIGATIONS. Borrower shall pay the indebtednesses
evidenced by the Note according to the terms thereof, and shall timely pay or
perform, as the case may be, all of the other Secured Obligations.
V.2 SALES OF AND ENCUMBRANCES ON COLLATERAL. Borrower will not sell,
exchange, lease, negotiate, pledge, assign or grant any security interest in or
otherwise dispose of the collateral described in the Security Instruments to
anyone other than Lender, nor permit any other lien of any kind to attach
thereto, nor permit same to be attached to or commingled with other goods or
property, without Lender's prior written consent; provided, however, that prior
to the occurrence of an Event of Default hereunder, Borrower shall have the
right to process and sell its Inventory in the ordinary course of business as
herein provided.
V.3 FURTHER ASSURANCES. Borrower will take all actions requested by Lender
to create and maintain in Lender's favor valid liens upon, security titles to
and/or perfected security interests in any collateral described in the Security
Instruments and all other collateral for the Secured Obligations now or
hereafter held by or for Lender. Without limiting the foregoing, Borrower agrees
to execute such further instruments (including financing statements and
continuation statements) as may be required or permitted by any law relating to
notices of, or affidavits in connection with, the perfection of Lender's
security interests or liens, to cooperate with Lender in the filing or recording
and renewal thereof, and, upon Lender's request, to immediately place notations
upon its books of account to disclose Lender's security interest in all
Receivables granted in this Agreement.
V.4 FINANCIAL STATEMENTS AND REPORTS. Borrower and Guarantors shall
furnish to Lender such financial data as Lender may reasonably request. Without
limiting the foregoing, Borrower and Guarantors shall furnish to Lender (or
cause to be furnished to Lender) the following:
(a) as soon as practicable and in any event within ninety (90) days
after the end of each fiscal year of Borrower and Guarantors, consolidated
and consolidating balance sheets of Borrower and Guarantors as of the
close of such fiscal year, consolidated and consolidating statements of
earnings and retained earnings of Borrower and Guarantors as of the close
of such fiscal year, and consolidated and consolidating statements of cash
flows for Borrower and Guarantors for such fiscal year, all in reasonable
detail, prepared in accordance with generally accepted accounting
principles consistently applied, audited in accordance with generally
accepted auditing standards by independent certified public accountants
satisfactory to Lender in its reasonable judgment, and accompanied by the
unqualified favorable opinion of such accountants and a certificate of the
chief executive or chief financial officers of Borrower and Guarantors,
stating that, to the best of the knowledge of such officers, Borrower and
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Guarantors have kept, observed, performed and fulfilled each covenant,
term and condition of this Agreement and the other Loan Documents during
such fiscal year and that no Event of Default hereunder has occurred and
is continuing (or if an Event of Default has occurred and is continuing,
specifying the nature of same, the period of existence of same and the
action Borrower and Guarantors propose to take in connection therewith),
and setting forth calculations of the financial covenants set forth in
ARTICLE VI of this Agreement (a "Compliance Certificate");
(b) within forty-five (45) days of the end of the first three (3)
quarters of each fiscal year of Borrower and Guarantors, consolidated and
consolidating balance sheets of Borrower and Guarantors as of the close of
such quarter and consolidated and consolidating statements of earnings and
retained earnings of Borrower and Guarantors as of the close of such
quarter, all in reasonable detail, and prepared substantially in
accordance with generally accepted accounting principles consistently
applied, certified by the chief executive or chief financial officers of
Borrower and Guarantors as being true and correct, and accompanied by a
Compliance Certificate;
(c) within thirty (30) days of the end of each calendar month,
non-consolidated balance sheets of Borrower and each Guarantor as of the
close of such month, and non-consolidated statements of earnings and
retained earnings of Borrower and each Guarantor as of the close of such
month, all in reasonable detail, and prepared substantially in accordance
with generally accepted accounting principles consistently applied,
certified by the chief executive or chief financial officers of Borrower
and Guarantors as being true and correct, and accompanied by a Compliance
Certificate;
(d) within fifteen (15) days of the end of each calendar month,
accounts receivable and accounts payable listings of Borrower, with
agings, and a certification of inventory of Borrower, all as of the close
of such month and all in form satisfactory to Lender, and accompanied by a
certificate in form satisfactory to Lender setting forth a calculation of
the Borrowing Base as of the close of such month; and
(e) promptly upon receipt thereof, copies of all accountants'
reports and accompanying financial reports submitted to Borrower or either
Guarantor by independent accountants in connection with each annual
examination of Borrower and Guarantors.
V.5 MAINTENANCE OF BOOKS AND RECORDS; INSPECTION. Borrower and Guarantors
shall maintain their books, accounts and records in accordance with generally
accepted accounting principles consistently applied, and permit Lender, its
officers and employees and any professionals designated by Lender in writing, at
any time to visit and inspect any of their properties (including but not limited
to the collateral security described in the Security Instruments), corporate
books and financial records, and to discuss their accounts, affairs and finances
with any employee, officer or director thereof.
V.6 INSURANCE. Without limiting any of the requirements of any of the
other Loan Documents, Borrower shall maintain, in amounts satisfactory to Lender
(a) public liability insurance, (b) worker's compensation insurance (or maintain
a legally sufficient amount of self insurance against worker's compensation
liabilities, with adequate reserves, under a plan approved by Lender), (c) fire
and "all risk" casualty insurance on its properties (including but not limited
to the collateral security now or hereafter securing payment and performance of
the Secured Obligations), against such hazards and in at least such amounts as
are customary in the type of business in which Borrower is engaged, and (d) rent
or business interruption insurance against loss of income arising out of damage
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or destruction by such hazards as presently are included in so called "all risk
coverage". At the request of Lender, Borrower will deliver forthwith a
certificate, executed by a duly authorized representative of the insurer(s),
specifying the details of such insurance in effect.
All policies of insurance shall provide that at least thirty (30) days'
prior written notice of cancellation or modification of the policy shall be
given to Lender by the insurer, and all policies of casualty insurance covering
any tangible security for the Secured Obligations shall be payable to Borrower
and Lender as their respective interests may appear. Borrower agrees that there
shall be no recourse against Lender for the payment of premiums, commissions,
assessments or advances in respect of any such policy, and at Lender's request
shall provide Lender with the agreement of the insurer(s) to this effect.
At the request of Lender, all policies of casualty insurance covering any
tangible security for the Secured Obligations shall be delivered to and held by
Lender. Borrower shall act expeditiously in the adjustment and settlement of
claims under such policies in order to preserve the greatest possible value
reasonably obtainable in respect of such claims. Following the occurrence of an
Event of Default, Lender may, at its option, act as attorney in fact for
Borrower in adjusting and settling claims under such insurance and endorsing any
drafts with respect thereto, and this power, being coupled with an interest,
shall be irrevocable prior to payment in full of the indebtednesses evidenced by
the Note and performance of all of the obligations of Borrower to Lender in
connection therewith, and any insurer is hereby instructed to rely upon Lender's
representation that an Event of Default has occurred hereunder without further
inquiry or investigation.
V.7 TAXES AND ASSESSMENTS; TAX INDEMNITY. Borrower and each Guarantor
shall (a) file all tax returns and appropriate schedules thereto that are
required to be filed under applicable law, prior to the date of delinquency, (b)
pay and discharge all taxes, assessments and governmental charges or levies
imposed upon Borrower or either Guarantor, upon its income and profits or upon
any properties belonging to it, prior to the date on which penalties attach
thereto, and (c) pay all taxes, assessments and governmental charges or levies
that, if unpaid, might become a lien or charge upon any of its properties;
provided, however, that Borrower and Guarantors in good faith may contest any
such tax, assessment, governmental charge or levy described in the foregoing
clauses (b) and (c) so long as appropriate reserves are maintained with respect
thereto. If any tax is or may be imposed by any governmental entity in respect
of sales of Borrower's Inventory or the merchandise that is the subject of such
sales, or as a result of any other transaction of Borrower, which tax Lender is
or may be required to withhold or pay, Borrower agrees to indemnify and hold
harmless Lender in connection with such taxes (including penalties and
interest), and Borrower shall immediately reimburse Lender for any such amounts
paid by Lender, and such amounts shall be added to the Secured Obligations
pursuant to the terms hereof.
V.8 CORPORATE EXISTENCE. Borrower and each Guarantor shall maintain its
corporate existence and good standing in the state of its incorporation, and its
qualification and good standing as a foreign corporation in each jurisdiction in
which such qualification is necessary pursuant to applicable law.
V.9 COMPLIANCE WITH LAW AND OTHER AGREEMENTS. Borrower and each Guarantor
shall maintain its business operations and property owned or used in connection
therewith in compliance with (a) all applicable federal, state and local laws,
regulations and ordinances governing such business operations and the use and
ownership of such property, and (b) all agreements, licenses, franchises,
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indentures and mortgages to which Borrower or either Guarantor is a party or by
which Borrower, either Guarantor or any of their properties is bound. Without
limiting the foregoing, Borrower and each Guarantor shall pay all of its
indebtedness promptly in accordance with the terms thereof.
V.10 NOTICE OF DEFAULT. Borrower and Guarantors shall give written notice
to Lender of the occurrence of any default, event of default or Event of Default
under this Agreement or any other Loan Document promptly upon the occurrence
thereof.
V.11 NOTICE OF LITIGATION. Borrower and Guarantors shall give notice, in
writing, to Lender of (a) any actions, suits or proceedings wherein the amount
at issue is in excess of $250,000, instituted by any persons against Borrower or
either Guarantor, or affecting any of the assets of Borrower or either
Guarantor, and (b) any dispute, not resolved within sixty (60) days of the
commencement thereof, between Borrower or either Guarantor on the one hand and
any governmental or regulatory body on the other hand, which might reasonably be
expected to have a material adverse effect on the business operations or
financial condition or Borrower or either Guarantor.
V.12 ENVIRONMENTAL MATTERS.
(a) Borrower and Guarantors will cause the Property to remain free
of all Hazardous Wastes, and to remain free of all Hazardous Materials
other than those maintained therein or thereon in full compliance with
Environmental Laws. Neither Borrower nor either Guarantor will cause or
permit the Property to be used to generate, manufacture, refine,
transport, treat, store, handle, dispose, transfer, produce or process
Hazardous Materials except in full compliance with Environmental Laws.
(b) Borrower and Guarantors will notify Lender immediately if they
receive any notice or obtain knowledge of any noncompliance with or
violation of any Environmental Laws with respect to the Property or the
Business.
(c) In the event that Hazardous Materials unrelated to the Business,
or Hazardous Wastes, are discovered on or are brought onto the Property,
Borrower and Guarantors will cause such Hazardous Materials or Hazardous
Wastes to be removed and disposed of promptly and in full compliance with
Environmental Laws. Borrower and Guarantors will provide Lender prior
written notice of such removal and disposal actions.
(d) Borrower and Guarantors will comply with all Environmental Laws
in all jurisdictions in which Borrower or either Guarantor operates, now
or in the future, and will comply with all Environmental Laws that in the
future become applicable to the Property or the Business.
V.13 MERGERS, CONSOLIDATIONS, ACQUISITIONS AND SALES. Without the prior
express written consent of Lender, neither Borrower nor either Guarantor shall
(a) be a party to any merger, consolidation or corporate reorganization, (b)
purchase or otherwise acquire all or substantially all of the assets or stock
of, or any partnership or joint venture interest in, any other person, firm or
entity, (c) sell, transfer, convey, grant a security interest in or lease all or
any substantial part of its assets, nor (d) create any subsidiaries nor convey
any of its assets to any subsidiary; provided, however, Borrower or either
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Guarantor may make acquisitions of all or substantially all of the stock or
assets of other entities, so long as (i) no Event of Default exists hereunder,
(ii) the purchase price payable in connection with each such acquisition,
including the fair market value of any non-cash consideration, does not exceed
$5,000,000, and (iii) any subsidiary of Borrower or either Corporate Guarantor
created or acquired in connection with any such acquisition shall guarantee the
indebtedness of Borrower to Lender and grant Lender a security interest in all
of its assets to secure its obligations and the obligations of Borrower to
Lender, all pursuant to documentation in form and substance satisfactory to
Lender in all respects.
V.14 MANAGEMENT, OWNERSHIP. Neither Borrower nor either Guarantor shall
permit any significant change in its ownership, executive staff or management
without the prior written consent of Lender. The ownership, executive staff and
management of Borrower and Guarantors are material factors in Lender's
willingness to institute and maintain a lending relationship with Borrower.
V.15 DIVIDENDS, ETC. Neither Borrower nor either Guarantor shall declare
or pay any dividend of any kind, in cash or in property, on any class of its
capital stock, nor purchase, redeem, retire or otherwise acquire for value any
shares of such stock, nor make any distribution of any kind in respect thereof,
nor make any return of capital to shareholders, nor make any payments in respect
of any pension, profit sharing, retirement, stock option, stock bonus, incentive
compensation or similar plan (except as required or permitted hereunder),
without the prior written consent of Lender. Without limiting the foregoing, not
less than seventy-five percent (75%) of the net proceeds of any equity offering
by Borrower or either Guarantor shall be retained and shall not be paid out as
dividends or otherwise distributed to shareholders.
V.16 GUARANTIES; LOANS. Neither Borrower nor either Guarantor shall
guarantee nor be liable in any manner, whether directly or indirectly, or become
contingently liable after the date of this Agreement in connection with the
obligations or indebtedness of any person or persons, except for the indorsement
of negotiable instruments payable to Borrower or Guarantors for deposit or
collection in the ordinary course of business. Neither Borrower nor either
Guarantor shall make any loan, advance or extension of credit to any person
other than in the normal course of its business.
V.17 DEBT. Neither Borrower nor either Guarantor shall create, incur,
assume or suffer to exist indebtedness of any description whatsoever in an
aggregate amount in excess of $250,000 (excluding the indebtedness evidenced by
the Note, trade accounts payable and accrued expenses incurred in the ordinary
course of business and the indorsement of negotiable instruments payable to
Borrower or Guarantors for deposit or collection in the ordinary course of
business).
V.18 CONDUCT OF BUSINESS. Borrower and Guarantors will continue to
engage, in an efficient and economical manner, in a business of the same general
type as conducted by them on the date of this Agreement.
V.19 MAINTENANCE OF COLLATERAL. Borrower will maintain all tangible
personal property constituting any part of the collateral described in the
Security Instruments in good condition and repair and will pay all costs and
expenses incurred in the maintenance of same, and will not permit any act or
occurrence that may impair the value thereof. Prior to the occurrence of an
Event of Default, Borrower shall be entitled to possession of such tangible
collateral and to use same in any lawful manner permitted hereunder, provided
that such use does not cause excessive wear and tear to such collateral, nor
cause it to decline in value at an excessive rate, nor violate the terms of any
policy of insurance thereon.
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V.20 SALE OF INVENTORY. Borrower will not sell, lease, exchange or
otherwise dispose of any of that portion of the collateral that consists of
Inventory, nor remove the same from its place(s) of business as described
herein, without the prior written consent of Lender, except in the ordinary
course of business for cash or on open account or on terms of payment ordinarily
extended to its customers. Upon the sale, exchange or other disposition of said
Inventory, the security interest and lien created and provided for herein,
without break in continuity and without further formality or act, shall continue
in and attach to any proceeds thereof, including but not limited to accounts,
chattel paper, contract rights, shipping documents, documents of title and cash
or non-cash proceeds, and in the event of any unauthorized sale, shall also
continue in said Inventory itself. All chattel paper shall be delivered to
Lender promptly upon receipt.
V.21 SPECIAL AGREEMENTS OF BORROWER WITH RESPECT TO RECEIVABLES AND
INVENTORY.
(a) By the execution of this Agreement, Lender shall not be
obligated to do or perform any of the acts or things to be done or
performed by Borrower pursuant to any contracts in which Lender has a
security interest, but Lender may, at its election, perform some or all of
the obligations provided in said contracts to be performed by Borrower,
and if Lender incurs any liability or expenses by reason thereof, same
shall be payable by Borrower upon demand and same shall also be secured by
this Agreement and the other Loan Documents. Lender shall be subrogated to
all guaranties and security now or hereafter in Borrower's possession or
favor.
(b) If requested by Lender following the occurrence of an Event of
Default, Borrower shall immediately notify all account debtors to direct
payments to Lender or to a lockbox in accordance with a Lockbox Service
Agreement to be entered into between Borrower and Lender at Lender's
request. Borrower will forthwith on receipt of all checks, drafts, cash
and other remittances in payment of inventory sold, or in payment on
account of Borrower's Receivables, deposit the same in a special bank
account maintained with Lender over which Lender alone has power of
withdrawal. Said proceeds shall be deposited in precisely the form
received, except for the indorsement of Borrower where necessary to permit
collection of items, which indorsement Borrower agrees to make, and which
Lender is also hereby authorized to make on Borrower's behalf. Pending
such deposit, Borrower agrees that it will not commingle any such checks,
drafts, cash or other remittances with any of Borrower's other funds or
property, but will hold them separate and apart therefrom and in trust for
Lender until deposit thereof is made in the special account. The funds in
said account and any funds collected by Lender under a Lockbox Service
Agreement shall be held by Lender as additional security for the Secured
Obligations. Lender may on a daily basis apply the whole or any part of
the collected funds on deposit in the special account and from the lockbox
against the Secured Obligations, and the amount, order and method of such
application shall be in the discretion of Lender; provided, however, that
so long as no Event of Default (or event that with the giving of notice or
the passage of time or both would constitute an Event of Default) has
occurred and is existing, said collected funds will be applied first to
the outstanding principal balance of, and accrued and unpaid interest on,
the Loan, in such order of priority as Lender shall determine. Any portion
of said funds on deposit in the special account and from the lockbox that
Lender elects not to so apply may be paid over by Lender to Borrower.
(c) Without limiting the provisions of SUBSECTION 5.21(B) hereof,
Borrower acknowledges and agrees that, upon the occurrences of an Event of
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Default, Lender shall have the right to notify the account debtors
obligated on any or all of Borrower's Receivables to make payment thereof
direct to Lender, and to take control of all proceeds of any such
Receivables, and charge the collection costs and expenses to Borrower.
Until Lender gives Borrower other instructions, Borrower shall continue to
make collections of all Receivables for Lender. All payments on account of
Receivables, or as proceeds of any collateral, whether such payments are
made by check, draft, cash, money order, wire transfer, or otherwise,
shall be the specific property of Lender. Borrower shall receive such
payments as trustee for Lender and shall immediately deliver them to
Lender in their original form as received.
(d) Lender shall be privileged to enjoy all the rights and remedies
of Borrower as to the Receivables and shall be and become subrogated to
all guaranties and securities possessed by Borrower or due to come into
Borrower's hands, but Lender shall not be liable in any manner for
exercising or refusing to exercise any rights thereby bestowed.
(e) Borrower shall notify Lender promptly of all returns and
recoveries of merchandise and of all disputes and claims where the amount
at issue exceeds $25,000 in the aggregate, and Borrower shall settle or
adjust disputes and claims directly with customers for amounts and upon
terms it considers advisable and dispose of merchandise returns as it sees
fit, unless Lender directs Borrower to make such settlements, adjustments
and disposals subject to Lender's approval. In all cases Lender will
credit the Loan with only the net amounts received by Borrower in payment
of Receivables.
(f) Borrower hereby appoints the officers of Lender and/or any other
person whom Lender may designate as Borrower's attorney(s)-in-fact with
full power to endorse Borrower's name on any checks, notes, acceptances,
money orders, drafts or other forms of payment or security that may come
in Lender's possession; to sign Borrower's name on any invoice or bill of
lading relating to any Receivable, on drafts against customers, on
schedules of assignments of Receivables, on notices of assignment, on
financing statements, applications for noting of liens on certificates of
title and other public records or documents of any kind as necessary or
desirable to insure perfection or enforceability of Lender's security
interests in or liens on property of Borrower granted hereunder or
otherwise, on verification of accounts and on notices to customers; to
notify the post office authorities to change the address for delivery of
Borrower's mail to an address designated by Lender; to receive, open and
dispose of all mail addressed to Borrower; to send requests for
verifications of accounts to customers; and to do all other things Lender
deems necessary to carry out this Agreement. Borrower hereby ratifies and
approves all acts of the attorney(s) and neither Lender nor the
attorney(s) for Lender will be liable for any acts of commission or
omission, nor for any error of judgment or mistake of fact or law. This
power, being coupled with an interest, is irrevocable so long as any money
remains owing to Lender from Borrower.
(g) Lender will be entitled to hold all sums at any time standing to
Borrower's credit on Lender's books and all of Borrower's property at any
time in Lender's possession, or upon or in which Lender at any time has a
lien or security interest, as security for all of Borrower's obligations
at any time owing to Lender, its parent corporation, subsidiary,
co-subsidiary or affiliate, whether such obligations are direct or
indirect, absolute or contingent, under this Agreement or otherwise. Such
obligations shall include, without limitation, all loans, advances, debts,
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liabilities, obligations for purchases made by Borrower from other clients
factored or financed by Lender or from any such parent, subsidiary,
co-subsidiary or affiliate, whether such obligations are absolute or
contingent, or under this Agreement or otherwise, no matter how or when
arising and whether due or to become due, and further including all
interest, fees, charges, expenses and attorney's fees chargeable to
Borrower's loan account or incurred in connection with Borrower's loan
account whether provided for herein or in any other agreement between
Borrower and Lender, and Lender shall have the right to charge to
Borrower's loan account the amounts of all such obligations and pay over
such amounts to such parent, subsidiary, co-subsidiary or affiliate.
V.22 PLACES OF BUSINESS; MOBILE GOODS. Borrower will not change the
location of its chief place of business, chief executive office or any place of
business disclosed to Lender pursuant to SECTION 4.5 hereof, nor will Borrower
move any of the tangible personal property constituting a part of the collateral
for the Secured Obligations to any other location(s) (except during temporary
periods in the normal and customary use thereof), nor will Borrower change the
location at which it maintains its records concerning the intangible collateral
for the Secured Obligations, without thirty (30) days' prior written notice to
Lender in each instance. If any of the tangible collateral for the Secured
Obligations constitutes goods of a type normally used in more than one state
(whether or not actually so used), Borrower will contemporaneously with the
execution hereof furnish to Lender a list of all states in which such goods are
or will be used, and hereafter will notify Lender in writing of any other
state(s) in which such goods are or will be so used.
V.23 ERISA PLAN. If Borrower has in effect, or hereafter institutes (with
Lender's consent, as hereinafter provided), a pension plan that is subject to
the requirements of Title IV of the Employee Retirement Income Security Act of
1974, Pub. L. No. 93 406, September 2, 1974, 88 Stat. 829, 29 U.S.C.A. ss. 1001
ET Seq. (1975), as amended from time to time ("ERISA"), then the following
warranty and covenants shall be applicable during such period as any such plan
(the "Plan") shall be in effect: (a) Borrower hereby warrants that no fact that
might constitute grounds for the involuntary termination of the Plan, or for the
appointment by the appropriate United States District Court of a trustee to
administer the Plan, exists at the time of execution of this Agreement, (b)
Borrower hereby covenants that throughout the existence of the Plan, Borrower's
contributions under the Plan will meet the minimum funding standards required by
ERISA and Borrower will not institute a distress termination of the Plan, (c)
Borrower hereby covenants that the Plan's annual financial and actuarial
statements and the Plan's annual Form 5500 information return will be filed with
Lender within thirty (30) days of the preparation thereof, and (d) Borrower
covenants that it will send to Lender a copy of any notice of a reportable event
(as defined in ERISA) required by ERISA to be filed with the Labor Department or
the Pension Benefit Guaranty Corporation, at the time that such notice is so
filed.
No Plan shall be instituted by Borrower unless Lender shall have given its
written consent thereto.
ARTICLE VI
FINANCIAL COVENANTS
-------------------
VI.1 NET WORTH REQUIREMENTS. Borrower and Guarantors shall at all times
maintain a minimum tangible net worth of $12,000,000, calculated on a
consolidated basis. For purposes of this covenant, "tangible net worth" shall
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refer to the excess of Borrower's and Guarantors' total assets above the sum of
their intangible assets plus total liabilities (exclusive of any debt
subordinated to indebtedness of Borrower or Guarantors to Lender), all
determined in accordance with generally accepted accounting principles
consistently applied.
VI.2 DEBT TO WORTH RATIO. Borrower and Guarantors shall at all times
maintain a ratio of total liabilities (exclusive of any debt subordinated to
indebtedness of Borrower or Guarantors to Lender) to tangible net worth of not
more than 2.0 to 1.0, calculated on a consolidated basis. For purposes of this
covenant, "tangible net worth" shall have the meaning set forth in SECTION 6.1
hereof.
VI.3 INTEREST COVERAGE RATIO. Borrower and Guarantors shall maintain a
ratio of earnings before interest and taxes to interest expense, all determined
in accordance with generally accepted accounting principles consistently
applied, calculated on a consolidated basis as of the last day of each
September, December, March and June, for the then-previous twelve-month period
(beginning September 30, 1999), of not less than 4.0 to 1.0.
ARTICLE VII
DEFAULT AND REMEDIES
--------------------
VII.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default hereunder:
(a) Failure to make payment of the principal of or interest on the
indebtedness evidenced by the Note within five (5) days of when due;
(b) Any misrepresentation by Borrower or either Guarantor as to any
material matter hereunder or under any of the other Loan Documents, or
delivery by Borrower or either Guarantor of any schedule, statement,
resolution, report, certificate, notice or writing to Lender that is
untrue in any material respect on the date as of which the facts set forth
therein are stated or certified;
(c) Failure of Borrower or any Guarantor to perform any of its
obligations under SECTIONS 5.7, 5.9 or 5.12 of this Agreement within
fifteen (15) days after the earlier of (i) written notice from Lender to
Borrower of such failure to perform, or (ii) the date Borrower becomes
aware of such failure to perform;
(d) Failure of Borrower or either Guarantor to perform any other of
its obligations under this Agreement, the Note, any of the Security
Instruments or any of the other Loan Documents;
(e) Borrower or either Guarantor (i) shall generally not pay or
shall be unable to pay its debts as such debts become due; or (ii) shall
make an assignment for the benefit of creditors or petition or apply to
any court or tribunal for the appointment of a custodian, receiver or
trustee for it or a substantial part of its assets; or (iii) shall
commence any proceeding or case under any bankruptcy, reorganization,
arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, whether now or hereafter in effect; or (iv)
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shall have had any such petition or application filed or any such
proceeding or case commenced against it in which an order for relief is
entered or an adjudication or appointment is made; or (v) shall indicate,
by any act or omission, its consent to, approval of or acquiescence in any
such petition, application, case, proceeding or order for relief or the
appointment of a custodian, receiver or trustee for it or a substantial
part of its assets; or (vi) shall suffer any such custodianship,
receivership or trusteeship to continue undischarged for a period of
thirty (30) days or more;
(f) Borrower or either Guarantor shall be liquidated, dissolved,
partitioned or terminated, or the charter or certificate of authority
thereof shall expire or be revoked;
(g) A default or event of default shall occur under any of the other
Loan Documents;
(h) Borrower or either Guarantor shall default in the timely payment
or performance of any obligation now or hereafter owed to Lender in
connection with any other indebtedness of Borrower or either Guarantor now
or hereafter owed to Lender;
(i) Lender shall reasonably suspect the occurrence of one or more of
the aforesaid events of default and Borrower, upon the written request of
Lender, shall fail to provide evidence reasonably satisfactory to Lender
that such event or events of default have not in fact occurred; or
(j) Lender in good faith shall deem itself insecure.
VII.2 ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of any Event
of Default described in SUBSECTION 7.1(D) hereof as it relates to Borrower, the
indebtednesses evidenced by the Note as well as any and all other indebtedness
of Borrower to Lender shall be immediately due and payable in full; and upon the
occurrence of any other Event of Default described above (including but not
limited to SUBSECTION 7.1(D) hereof as it relates to any Guarantor), Lender at
any time thereafter may at its option accelerate the maturity of the
indebtednesses evidenced by the Note as well as any and all other indebtedness
of Borrower to Lender; all without notice of any kind. Upon the occurrence of
any such Event of Default and the acceleration of the maturity of the
indebtednesses evidenced by the Note:
(a) any obligation of Lender to advance any proceeds under the Loan
shall immediately cease and be of no further force nor effect, and Lender
shall be immediately entitled to exercise any and all rights and remedies
possessed by Lender pursuant to the terms of the Security Instruments and
all of the other Loan Documents;
(b) Lender shall have all of the rights and remedies of a secured
party under the Uniform Commercial Code; and
(c) Lender shall have any and all other rights and remedies that
Lender may now or hereafter possess at law, in equity or by statute.
VII.3 RIGHT OF SETOFF. Without limitation of the foregoing, upon the
occurrence and during the continuance of any Event of Default, Lender is hereby
authorized at any time and from time to time, without notice to Borrower or
Guarantors (any such notice being expressly waived by Borrower and Guarantors),
to set off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held by Lender or any of its affiliates, and
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any other indebtedness at any time owing by Lender or its affiliates to or for
the credit or the account of Borrower or Guarantors, against any and all of the
Secured Obligations, irrespective of whether Lender shall have made any demand
under this Agreement or the Note or any other Loan Document and although such
obligations may be unmatured. Lender agrees to notify Borrower or Guarantors (as
applicable) within a reasonable time after any such setoff and application;
provided that the failure to give such notice shall not affect the validity of
such setoff and application. The rights of Lender under this SECTION 7.3 are in
addition to any other rights and remedies (including, without limitation, other
rights of setoff) that Lender may have.
VII.4 REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy conferred
upon or reserved to Lender by this Agreement or any of the other Loan Documents
is intended to be exclusive of any other right, power or remedy, but each and
every such right, power and remedy shall be cumulative and concurrent and shall
be in addition to any other right, power and remedy given hereunder, under any
of the other Loan Documents or now or hereafter existing at law, in equity or by
statute. No delay or omission by Lender to exercise any right, power or remedy
accruing upon the occurrence of any Event of Default shall exhaust or impair any
such right, power or remedy or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein, and every right, power and remedy
given by this Agreement and the other Loan Documents to Lender may be exercised
from time to time and as often as may be deemed necessary by Lender.
VII.5 PROCEEDS OF REMEDIES. Any or all proceeds resulting from the
exercise of any or all of the foregoing remedies shall be applied as set forth
in the Loan Document(s) providing the remedy or remedies exercised; if none is
specified, or if the remedy is provided by this Agreement, then as follows:
First, to the costs and expenses, including reasonable attorney's
fees and expenses, incurred by Lender in connection with the exercise of
its remedies;
Second, to the expenses of curing the default that has occurred, in
the event that Lender elects, in its sole discretion, to cure the default
that has occurred;
Third, to the payment of the Secured Obligations, including but not
limited to the payment of the principal of and interest on the
indebtednesses evidenced by the Note, in such order of priority as Lender
shall determine in its sole discretion; and
Fourth, the remainder, if any, to Borrower or to any other person
lawfully thereunto entitled.
ARTICLE VIII
MISCELLANEOUS
-------------
VIII.1 INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or otherwise would be within the limitations of, another covenant shall not
avoid the occurrence of an Event of Default if such action is taken or condition
exists.
VIII.2 PERFORMANCE BY LENDER.
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(a) Lender may file one or more financing statements disclosing
Lender's security interests under this Agreement and the other Loan
Documents without the signature of Borrower appearing thereon, and
Borrower shall pay the costs of, or incidental to, any recording or filing
of any financing statements concerning the collateral security described
in the Security Instruments. Borrower agrees that a carbon, photographic,
photostatic or other reproduction of this Agreement or any other Security
Instrument or of a financing statement is sufficient as a financing
statement.
(b) If Borrower or Guarantors shall default in the payment,
performance or observance of any covenant, term or condition of this
Agreement, Lender may, at its option, pay, perform or observe the same,
and all payments made or costs or expenses incurred by Lender in
connection therewith (including but not limited to reasonable attorney's
fees and expenses), with interest thereon at the default rate provided in
the Note (if none, then at the maximum rate from time to time allowed by
applicable law), shall be immediately repaid to Lender by Borrower and
Guarantors and shall constitute a part of the Secured Obligations and be
secured hereby until fully repaid. Lender shall determine at its sole
discretion the necessity for any such actions and of the amounts to be
paid.
VIII.3 COSTS AND EXPENSES. Borrower agrees to pay all costs and expenses
incurred by Lender in connection with the making of the Loan, including but not
limited to filing fees, recording taxes and reasonable attorney's fees and
expenses, promptly upon demand of Lender. Borrower further agrees to pay all
premiums for insurance required to be maintained pursuant to the terms of the
Loan Documents and all of the out-of-pocket costs and expenses incurred by
Lender in connection with the administration, servicing and/or collection of the
Loan, including but not limited to reasonable attorney's fees and expenses,
promptly upon demand of Lender.
VIII.4 ASSIGNMENT. The Note, this Agreement and the other Loan Documents
may be endorsed, assigned and/or transferred in whole or in part by Lender, and
any such holder and/or assignee of the same shall succeed to and be possessed of
the rights and powers of Lender under all of the same to the extent transferred
and assigned. Lender may grant participations in all or any portion of its
interest in the indebtednesses evidenced by the Note. Borrower shall not assign
any of its rights nor delegate any of its duties hereunder or under any of the
other Loan Documents without the prior express written consent of Lender.
VIII.5 SUCCESSORS AND ASSIGNS INCLUDED IN PARTIES. Subject to the
provisions of SECTION 8.4 hereof, whenever in this Agreement one of the parties
hereto is named or referred to, the heirs, legal representatives, successors,
successors-in-title and assigns of such parties shall be included, and all
covenants and agreements contained in this Agreement by or on behalf of Borrower
or by or on behalf of Lender shall bind and inure to the benefit of their
respective heirs, legal representatives, successors-in-title and assigns,
whether so expressed or not.
VIII.6 THIRD PARTY BENEFICIARIES. This Agreement and the other Loan
Documents are intended for the sole and exclusive benefit of the parties hereto
and their respective successors and permitted assigns, and shall not serve to
confer any rights or benefits in favor of any person not a party hereto. No
other person shall have any right to rely on this Agreement or the other Loan
Documents, or to derive any benefit herefrom.
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VIII.7 TIME OF THE ESSENCE. Time is of the essence with respect to each
and every covenant, agreement and obligation of Borrower and Guarantors
hereunder and under all of the other Loan Documents.
VIII.8 SEVERABILITY. If any provision(s) of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
VIII.9 INTEREST AND LOAN CHARGES NOT TO EXCEED MAXIMUM ALLOWED BY LAW.
Anything in this Agreement, the Note, the Security Instruments or any of the
other Loan Documents to the contrary notwithstanding, in no event whatsoever,
whether by reason of advancement of proceeds of the Loan, acceleration of the
maturity of the unpaid balance of the Loan or otherwise, shall the interest and
loan charges agreed to be paid to Lender for the use of the money advanced or to
be advanced hereunder exceed the maximum amounts collectible under applicable
laws in effect from time to time. It is understood and agreed by the parties
that, if for any reason whatsoever the interest or loan charges paid or
contracted to be paid by Borrower in respect of the indebtednesses evidenced by
the Note shall exceed the maximum amounts collectible under applicable laws in
effect from time to time, then IPSO facto, the obligation to pay such interest
and/or loan charges shall be reduced to the maximum amounts collectible under
applicable laws in effect from time to time, and any amounts collected by Lender
that exceed such maximum amounts shall be applied to the reduction of the
principal balance(s) of the indebtednesses evidenced by the Note and/or refunded
to Borrower so that at no time shall the interest or loan charges paid or
payable in respect of the indebtednesses evidenced by the Note exceed the
maximum amounts permitted from time to time by applicable law.
VIII.10 ARTICLE AND SECTION HEADINGS; DEFINED TERMS. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
VIII.11 NOTICES. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing and shall be
delivered personally, telecopied or sent by certified mail or nationally
recognized courier service (such as Federal Express), to the other party at the
address set forth below, or at such other address as may be supplied in writing
by the party whose address is being changed and of which receipt has been
acknowledged in writing. The date of personal delivery or telecopy or the date
of mailing (or delivery to such courier service), as the case may be, shall be
the date of such notice, election or demand. For the purposes of this Agreement:
The address of Lender is:
SouthTrust Bank, National Association
230 Fourth Avenue North
8th Floor
Nashville, Tennessee 37219
Attention: Marci Osesek
Telecopy Number: 615/880-4004
with a copy to:
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Bass, Berry & Sims PLC
2700 First American Center
Nashville, Tennessee 37238
Attention: Felix R. Dowsley, III
Telecopy Number: 615/742-2728
The address of Borrower is:
American Micro Computer Center, Inc.
6073 N.W. 167th Street, Unit C-25
Miami, Florida 33015
Attention: Frank Cruz
Telecopy Number: 305/825-7774
with a copy to:
Kirkpatrick & Lockhart LLP
Miami Center, 20th Floor
201 South Biscayne Boulevard
Miami, Florida 33131-2399
Attention: Clayton R. Parker, Esq.
Telecopy Number: 305/358-7095
The addresses of Guarantors are:
European Micro Holdings, Inc.
6073 N.W. 167th Street, Unit C-25
Miami, Florida 33015
Attention: Frank Cruz
Telecopy Number: 305/825-7774
Nor'easter Micro, Inc.
803 Third Avenue North
Nashville, TN 37210
Attention: Jay Nash
Telecopy Number: 615/254-9318
VIII.12 INTEGRATION. This Agreement and the Loan Documents contain the
entire agreement between the parties relating to the subject matter hereof and
supersede all oral statements and prior writings with respect thereto.
VIII.13 INDEMNITY. Borrower and Guarantors hereby agree to defend,
indemnify, and hold Lender harmless from and against any and all claims,
damages, judgments, penalties, costs and expenses (including reasonable
attorney's fees and expenses and court costs now or hereafter arising from the
aforesaid enforcement of this clause) arising directly or indirectly from the
activities of Borrower or Guarantors, their predecessors in interests, or third
parties with whom they have a contractual relationship, or arising directly or
indirectly from the violation of any law, whether such claims are asserted by
any governmental agency or any other person. This indemnity shall survive the
termination of this Agreement.
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VIII.14 JURY TRIAL WAIVER. BORROWER, GUARANTORS AND LENDER HEREBY WAIVE
TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTER-CLAIM, WHETHER IN
CONTRACT IN TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATED TO
THIS AGREEMENT OR THE LOAN DOCUMENTS.
VIII.15 VENUE. All actions or proceedings in any way, manner or respect
arising out of or from or related to this Agreement shall be litigated in courts
having situs within the City of Nashville, State of Tennessee. Borrower and
Guarantors hereby consent and submit to the jurisdiction of any local, state or
federal courts located within said city and state.
VIII.16 MISCELLANEOUS. This Agreement shall be construed and enforced
under the laws of the State of Tennessee. No amendment, modification,
termination or waiver of any provision of any Loan Document to which Borrower or
either Guarantor is a party, nor consent to any departure by Borrower or either
Guarantor from compliance with the terms of any Loan Document to which it is a
party, shall be effective unless the same shall be in writing and signed on
behalf of Lender by a duly authorized officer of Lender, and then such waiver or
consent shall be effective only in the specific instance and for the specific
purpose for which given.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized officers, as
of the day and year first above written.
LENDER:
SOUTHTRUST BANK, NATIONAL ASSOCIATION
By:_____________________________
Title:_______________________
BORROWER:
AMERICAN MICRO COMPUTER CENTER, INC.
By:_____________________________
Title:_______________________
GUARANTORS:
EUROPEAN MICRO HOLDINGS, INC.
By:_____________________________
Title:_______________________
NOR'EASTER MICRO, INC.
By:_____________________________
Title:_______________________
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EXHIBIT 10.23
-------------
LOAN AGREEMENT
--------------
THIS LOAN AGREEMENT ("Agreement"), dated as of the 29th day of October,
1999, is made and entered into on the terms and conditions hereinafter set
forth, by and among EUROPEAN MICRO HOLDINGS, INC., a Nevada corporation with
principal offices at 6073 N.W. 167th Street, Unit C-25, Miami, Florida 33015
("Borrower"), AMERICAN MICRO COMPUTER CENTER, INC., a Florida corporation
("American Micro"), NOR'EASTER MICRO, INC., a Nevada corporation ("Nor'easter";
American Micro and Nor'easter are sometimes hereinafter collectively referred to
as " Corporate Guarantors"), and SOUTHTRUST BANK, NATIONAL ASSOCIATION, a
national banking association with offices in Nashville, Tennessee ("Lender").
WHEREAS, Borrower has requested that Lender make available to Borrower a
term loan in the original principal amount of $1,500,000 (the "Loan") on the
terms and conditions hereinafter set forth, and for the purpose(s) hereinafter
set forth; and
WHEREAS, in order to induce Lender to make the Loan to Borrower, Borrower
and Corporate Guarantors have made certain representations to Lender; and
WHEREAS, Lender, in reliance upon the representations and inducements of
Borrower and Corporate Guarantors, has agreed to make the Loan upon the terms
and conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual covenants
and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Borrower, Corporate Guarantors and Lender hereby agree as follows:
ARTICLE I
DEFINITIONS
-----------
As used in this Agreement, the following terms shall have the indicated
meanings:
"Compliance Certificate" shall have the meaning assigned to such term in
SUBSECTION 5.3(A) of this Agreement.
"Event of Default" shall have the meaning assigned to such term in SECTION
7.1 of this Agreement.
"Guaranties" shall mean, collectively, one or more Continuing Guaranties
of even date herewith, executed in favor of Lender by Guarantors.
"Guarantors" shall mean, collectively, Corporate Guarantors and
Individual Guarantors.
"Individual Guarantors" shall mean, collectively, John B. Gallagher and
Harry D. Shields.
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"Loan Documents" shall mean, collectively, the Security Instruments,
together with the Note and any other instruments and documents now or hereafter
evidencing, securing or in any way related to the indebtednesses evidenced by
the Note.
"Note" shall mean that certain Secured Promissory Note of even date
herewith, in the principal amount of $1,500,000, made and executed by Borrower,
payable to the order of Lender, evidencing the indebtedness of Borrower to
Lender in connection with the Loan, together with any and all extensions,
modifications, renewals, restatements and/or replacements thereof.
"Pledge Agreements" shall mean those two (2) certain Pledge and Security
Agreements of even date herewith, executed by Individual Guarantors, in favor of
Lender.
"Pledge Securities" shall mean the securities pledged to Lender pursuant
to the Pledge Agreements.
"Secured Obligations" shall have the meaning assigned such term in SECTION
3.3 of this Agreement.
"Security Instruments" shall mean, collectively, this Agreement, the
Guaranties, and any other instruments, documents or agreements now or hereafter
securing the Secured Obligations, whether by specific or general reference.
ARTICLE II
THE LOAN
--------
II.1 REPAYMENT. The indebtedness of Borrower to Lender in connection with
the Loan shall be evidenced by, and payable in accordance with the terms of, the
Note.
II.2 COMMITMENT FEE. Upon execution of this Agreement, Borrower shall
pay to Lender a non-refundable commitment fee in the amount of $7,500.00.
II.3 PURPOSE. The purpose of the Loan shall be to finance Borrower's
additional working capital needs resulting from its purchase of one hundred
percent (100%) of the issued and outstanding stock of American Micro.
ARTICLE III
SECURITY
--------
III.1 SECURITY. The Secured Obligations are and shall continue to be
secured by the Guaranties, the Pledge Agreements and the other Security
Instruments.
III.2 VALUE OF PLEDGED SECURITIES. As of the date hereof, the Pledged
Securities shall have an aggregate market value of not less than $3,000,000, as
determined by Lender. If, at any time, the market value of the Pledged
Securities (as determined by Lender from time to time) is less than $3,000,000,
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Borrower shall cause Individual Guarantors to promptly (and in any event not
later than three (3) days after written notice from Lender to Individual
Guarantors) pledge to Lender additional stock in Borrower (or other marketable
securities acceptable to Lender) in an amount necessary to cause the market
value of the Pledged Securities and such additional stock pledged to Lender to
be not less than $3,000,000.
III.3 SECURED OBLIGATIONs. Without limiting any of the provisions
thereof, the Security Instruments shall secure:
(a) The full and timely payment of the indebtednesses evidenced by
the Note, together with interest thereon, and any extensions,
modifications and/or renewals thereof and any notes given in payment
thereof,
(b) The full and prompt performance of all of the obligations of
Borrower to Lender under the Loan Documents,
(c) The full and prompt payment of all expenses and costs of
whatever kind incident to the collection of the indebtednesses evidenced
by the Note, the perfection, enforcement or protection of the security
interests of the Security Instruments or the exercise by Lender of any
rights or remedies of Lender with respect to the indebtednesses evidenced
by the Note, including but not limited to reasonable attorney's fees and
expenses incurred by Lender, all of which Borrower agrees to pay to Lender
upon demand,
(d) The full and prompt payment of the indebtednesses and
obligations of Corporate Guarantors to Lender evidenced and/or secured by
(i) that certain Loan and Security Agreement of even date herewith, by and
among Lender, Borrower and Corporate Guarantors, entered into in
connection with that certain line of credit from Lender to American Micro
in the original principal amount of $1,500,000, and (ii) that certain Loan
and Security Agreement of even date herewith, by and among Lender,
Borrower and Corporate Guarantors, entered into in connection with that
certain line of credit from Lender to Nor'easter, in the maximum principal
amount of $1,500,000, together with any and all renewals, amendments and
modifications thereof, and
(e) The full and prompt payment and performance of any and all other
indebtednesses and other obligations of Borrower or either Corporate
Guarantor to Lender, direct or contingent (including but not limited to
obligations incurred as indorser, guarantor or surety), however evidenced
or denominated, and however and whenever incurred, including but not
limited to indebtednesses incurred pursuant to any present or future
commitment of Lender to Borrower or either Corporate Guarantor, together
with interest thereon, and any extensions, modifications and/or renewals
thereof and any notes given in payment thereof.
All of the foregoing indebtedness and other obligations are herein collectively
referred to as the "Secured Obligations".
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ARTICLE IV
REPRESENTATIONS AND WARRANTIES
------------------------------
Borrower and Corporate Guarantors hereby represent and warrant to Lender
as follows:
IV.1 CORPORATE STATUS. Borrower and Nor'easter are corporations duly
organized, validly existing and in good standing under the laws of the State of
Nevada. American Micro is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida. Borrower and each
Corporate Guarantor has the corporate power to own and operate its properties,
to carry on its business as now conducted and to enter into and to perform its
obligations under this Agreement and the other Loan Documents to which it is a
party. Borrower and each Corporate Guarantor is duly qualified to do business
and in good standing in each state in which a failure to be so qualified would
have a material adverse effect on its financial position or its ability to
conduct its business in the manner now conducted.
IV.2 AUTHORIZATION. Borrower and each Corporate Guarantor has full legal
right, power and authority to conduct its business and affairs in the manner
contemplated by the Loan Documents, and to enter into and perform its
obligations thereunder, without the consent or approval of any other person,
firm, governmental agency or other legal entity. The execution and delivery of
this Agreement, the borrowing hereunder, the execution and delivery of each Loan
Document to which Borrower or either Corporate Guarantor is a party, and the
performance by Borrower and each Corporate Guarantor of its obligations
thereunder are within the corporate powers of Borrower or Corporate Guarantors
and have been duly and properly authorized by all necessary corporate action,
have received all necessary governmental approvals, if any were required, and do
not and will not contravene or conflict with any provision of law, any
applicable judgment, ordinance, regulation or order of any court or governmental
agency, the charters or by-laws of Borrower or Corporate Guarantors, or any
agreement binding upon Borrower, Corporate Guarantors or their properties. The
officer(s) executing this Agreement and all of the other Loan Documents to which
Borrower and Corporate Guarantors are a party are duly authorized to act on
behalf of Borrower and Corporate Guarantors.
IV.3 VALIDITY AND BINDING EFFECT. This Agreement and the other Loan
Documents are the legal, valid and binding obligations of the parties thereto,
enforceable in accordance with their respective terms.
IV.4 OTHER TRANSACTIONS. Consummation of the transactions hereby
contemplated and the performance of the obligations of Borrower and Corporate
Guarantors under and by virtue of the Loan Documents will not result in any
breach of, or constitute a default under, any mortgage, security deed or
agreement, deed of trust, lease, bank loan or credit agreement, corporate
charter or by-laws, agreement or certificate of limited partnership, partnership
agreement, license, franchise or any other instrument or agreement to which
Borrower or either Corporate Guarantor is a party or by which Borrower,
Corporate Guarantors or their properties may be bound or affected.
IV.5 PLACES OF BUSINESS. Borrower's chief place of business and chief
executive office has the address of 6073 N.W. 167th Street, Miami, Florida
33015. Borrower's additional business locations are set forth in attached
SCHEDULE 4.5.
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IV.6 LITIGATION. There are no actions, suits or proceedings pending, or,
to the knowledge of Borrower or either Corporate Guarantor, threatened, against
or affecting Borrower or any Guarantor or involving the validity or
enforceability of any of the Loan Documents or the priority of the liens
thereof, at law or in equity, or before any governmental or administrative
agency, except actions, suits and proceedings that are fully covered by
insurance and that, if adversely determined, would not impair the ability of
Borrower or Guarantors to perform each and every one of their respective
obligations under and by virtue of the Loan Documents; and to the knowledge of
Borrower and Corporate Guarantors, neither Borrower nor any Guarantor is in
default with respect to any order, writ, injunction, decree or demand of any
court or any governmental authority.
IV.7 FINANCIAL STATEMENTS. The financial statement(s) of Borrower and
Guarantors heretofore delivered to Lender are true and correct in all respects,
have been prepared in accordance with generally accepted accounting principles
consistently applied, and fairly present the financial condition of the subjects
thereof as of the date(s) thereof. No material adverse change has occurred in
the financial condition of Borrower or any Guarantor since the date(s) thereof,
and no additional borrowings have been made by Borrower or any Guarantor since
the date(s) thereof.
IV.8 NO DEFAULTS. No default or event of default by Borrower or
Guarantors exists under this Agreement or any of the other Loan Documents, or
under any other instrument or agreement to which Borrower or any Guarantor is a
party or by which Borrower, Guarantors or their properties may be bound or
affected, and no event has occurred and is existing that with notice or the
passage of time or both would constitute a default or event of default
thereunder.
IV.9 COMPLIANCE WITH LAW. Borrower and Corporate Guarantors have obtained
all necessary licenses, permits and governmental approvals and authorizations
necessary or proper in order to conduct their business and affairs as heretofore
conducted and as intended to be conducted hereafter. To the knowledge of
Borrower and Corporate Guarantors, Borrower and Corporate Guarantors are in
compliance with all laws, regulations, decrees and orders applicable to them
(including but not limited to laws, regulations, decrees and orders relating to
occupational and health standards and controls, antitrust, monopoly, restraint
of trade or unfair competition). Neither Borrower nor either Corporate Guarantor
has received, nor expects to receive, any order or notice of any violation or
claim of violation of any law, regulation, decree, rule, judgment or order of
any governmental authority or agency relating to the ownership and/or operation
of its properties, as to which the cost of compliance is or might be material
and the consequences of noncompliance would or might be materially adverse to
its business, operations, property or financial condition, or which would or
might impair its ability to perform its obligations under the Loan Documents to
which it is a party.
IV.10 ENVIRONMENTAL MATTERS.
(a) As used in this SECTION 4.10 and in SECTION 5.11 hereof, the
following terms shall have the indicated meanings:
"BUSINESS" means all of Borrower's and Corporate Guarantors' assets,
both real and personal, tangible and intangible, now existing or hereafter
acquired and wherever located, and all of Borrower's and Corporate
Guarantors' current and future business operations at all locations and in
all jurisdictions.
5
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"ENVIRONMENTAL AUTHORITIES" means all federal, state and local
governmental bodies, authorities or agencies and all public corporations
created and/or empowered to administer, regulate and/or enforce
Environmental Laws, including without limitation the U.S.
Environmental Protection Agency.
"ENVIRONMENTAL LAWS" means any and all federal, state, regional,
county or local laws, statutes, rules, regulations or ordinances relating
to the generation, recycling, use, reuse, sale, storage, handling,
transport, treatment or disposal of Hazardous Materials, including without
limitation the Comprehensive Environmental Response Compensation Liability
Act of 1980, as amended by the Superfund Amendments and Reauthorization
Act of 1986, 42 U.S.C. ss.ss.9601 ET seq. ("CERCLA"), the Resource
Conservation and Recovery Act of 1976, as amended by the Solid and
Hazardous Waste Amendments of 1984, 42 U.S.C. ss.ss.6901 ET seq. ("RCRA"),
the Tennessee Hazardous Waste Management Act, T.C.A. ss.ss.68-46-101 ET
seq., and any rules, regulations and guidance documents promulgated or
published thereunder, and any state, regional, county or local statute,
law, rule, regulation or ordinance relating to public health, safety or
the discharge, emission or disposal of Hazardous Materials or Hazardous
Wastes in or to air, water, land or groundwater, to the withdrawal or use
of groundwater, to the use, handling or disposal of asbestos,
polychlorinated biphenyls, petroleum, petroleum derivatives or
by-products, other hydrocarbons or urea formaldehyde, to the treatment,
storage, disposal or management of Hazardous Materials, to exposure to
Hazardous Materials, to the transportation, storage, disposal, management
or release of gaseous or liquid substances, and any regulation, order,
injunction, judgment, declaration, notice or demand issued thereunder.
"HAZARDOUS MATERIALS" means any hazardous, toxic or dangerous
materials, substances, chemicals, waste or pollutants that from time to
time are defined by or pursuant to or are regulated under any
Environmental Laws, including without limitation asbestos, polychlorinated
biphenyls, petroleum, petroleum derivatives or by-products, other
hydrocarbons, urea formaldehyde and any material, substance, pollutant or
waste that is defined as a hazardous waste under RCRA or defined as a
hazardous substance under CERCLA.
"HAZARDOUS WASTES" means Hazardous Materials that are or become
"wastes" or "solid wastes" as such terms are used in RCRA.
"PROPERTY" means all real property now or hereafter constituting a
part of, or otherwise used or operated by Borrower or Corporate Guarantors
in connection with, the Business.
(b) Borrower and Corporate Guarantors represent and warrant to
Lender as follows:
(i) The Property is being operated by Borrower and
Corporate Guarantors in full compliance with Environmental Laws, and
Borrower and Corporate Guarantors have obtained, maintained and is
in good standing under all approvals, consents, certificates,
licenses and permits required by Environmental Laws with respect to
the Property.
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(ii) To the knowledge of Borrower and Corporate Guarantors,
the Property is free of all Hazardous Wastes and is free of all
Hazardous Materials other than those maintained therein or thereon
in full compliance with Environmental Laws. Borrower and Corporate
Guarantors have not caused or permitted the Property to be used to
generate, manufacture, refine, transport, treat, store, handle,
dispose, transfer, produce or process Hazardous Materials except in
full compliance with Environmental Laws.
(iii) Neither Borrower nor either Corporate Guarantor has
received notice, nor has knowledge, of any noncompliance with or
violation of any Environmental Laws with respect to the Property or
the Business.
IV.11 NO BURDENSOME RESTRICTIONS. No instrument, document or agreement to
which Borrower or any Guarantor is a party or by which it or its properties may
be bound or affected materially adversely affects, or may reasonably be expected
so to affect, its business, operations, property or financial condition.
IV.12 TAXES. Borrower and each Guarantor has filed or caused to be filed
all tax returns that to its knowledge are required to be filed (except for
returns that are not yet due), and has paid all taxes shown to be due and
payable on said returns and all other taxes, impositions, assessments, fees or
other charges imposed on it by any governmental authority, agency or
instrumentality, prior to any delinquency with respect thereto (other than
taxes, impositions, assessments, fees and charges currently being contested in
good faith by appropriate proceedings, for which appropriate amounts have been
reserved). No tax liens have been filed against Borrower, Guarantors or any of
their property.
ARTICLE V
COVENANTS AND AGREEMENTS
------------------------
Borrower and Corporate Guarantors covenant and agree that during the term
of this Agreement:
V.1 PAYMENT OF SECURED OBLIGATIONS. Borrower shall pay the indebtednesses
evidenced by the Note according to the terms thereof, and shall timely pay or
perform, as the case may be, all of the other Secured Obligations.
V.2 FURTHER ASSURANCES. Borrower will take all actions (or cause all
actions to be taken) requested by Lender to create and maintain in Lender's
favor valid liens upon, security titles to and/or perfected security interests
in any collateral described in the Security Instruments and all other collateral
for the Secured Obligations now or hereafter held by or for Lender.
V.3 FINANCIAL STATEMENTS AND REPORTS. Borrower and Corporate Guarantors
shall furnish to Lender such financial data as Lender may reasonably request.
Without limiting the foregoing, Borrower and Corporate Guarantors shall furnish
to Lender (or cause to be furnished to Lender) the following:
(a) as soon as practicable and in any event within ninety (90) days
after the end of each fiscal year of Borrower and Corporate Guarantors,
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consolidated and consolidating balance sheets of Borrower and Corporate
Guarantors as of the close of such fiscal year, consolidated and
consolidating statements of earnings and retained earnings of Borrower and
Corporate Guarantors as of the close of such fiscal year, and consolidated
and consolidating statements of cash flows for Borrower and Corporate
Guarantors for such fiscal year, all in reasonable detail, prepared in
accordance with generally accepted accounting principles consistently
applied, audited in accordance with generally accepted auditing standards
by independent certified public accountants satisfactory to Lender in its
reasonable judgment, and accompanied by the unqualified favorable opinion
of such accountants and a certificate of the chief executive or chief
financial officers of Borrower and Corporate Guarantors, stating that, to
the best of the knowledge of such officers, Borrower and Corporate
Guarantors have kept, observed, performed and fulfilled each covenant,
term and condition of this Agreement and the other Loan Documents during
such fiscal year and that no Event of Default hereunder has occurred and
is continuing (or if an Event of Default has occurred and is continuing,
specifying the nature of same, the period of existence of same and the
action Borrower and Corporate Guarantors propose to take in connection
therewith), and setting forth calculations of the financial covenants set
forth in ARTICLE VI of this Agreement (a "Compliance Certificate");
(b) within forty-five (45) days of the end of the first three (3)
fiscal quarters of each fiscal year of Borrower and Corporate Guarantors,
consolidated and consolidating balance sheets of Borrower and Corporate
Guarantors as of the close of such quarter and consolidated and
consolidating statements of earnings and retained earnings of Borrower and
Corporate Guarantors as of the close of such quarter, all in reasonable
detail, and prepared substantially in accordance with generally accepted
accounting principles consistently applied, certified by the chief
executive or chief financial officers of Borrower and Corporate Guarantors
as being true and correct, and accompanied by a Compliance Certificate;
(c) within thirty (30) days of the end of each calendar month,
non-consolidated balance sheets of Borrower and each Corporate Guarantor
as of the close of such month, and non-consolidated statements of earnings
and retained earnings of Borrower and each Corporate Guarantor as of the
close of such month, all in reasonable detail, and prepared substantially
in accordance with generally accepted accounting principles consistently
applied, certified by the chief executive or chief financial officers of
Borrower and Corporate Guarantors as being true and correct, and
accompanied by a Compliance Certificate;
(d) promptly upon receipt thereof, copies of all accountants'
reports and accompanying financial reports submitted to Borrower or either
Corporate Guarantor by independent accountants in connection with each
annual examination of Borrower and Corporate Guarantors; and
(e) from time to time, personal financial statements of each
Individual Guarantor, in form satisfactory to Lender, such that at all
times Lender shall have personal financial statements of each Individual
Guarantor on file that are not more than one (1) year old.
V.4 MAINTENANCE OF BOOKS AND RECORDS; INSPECTION. Borrower and Corporate
Guarantors shall maintain their books, accounts and records in accordance with
generally accepted accounting principles consistently applied, and permit
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Lender, its officers and employees and any professionals designated by Lender in
writing, at any time to visit and inspect any of their properties (including but
not limited to the collateral security described in the Security Instruments),
corporate books and financial records, and to discuss their accounts, affairs
and finances with any employee, officer or director thereof.
V.5 INSURANCE. Without limiting any of the requirements of any of the
other Loan Documents, Borrower shall maintain, in amounts satisfactory to Lender
(a) public liability insurance, (b) worker's compensation insurance (or maintain
a legally sufficient amount of self insurance against worker's compensation
liabilities, with adequate reserves, under a plan approved by Lender), (c) fire
and "all risk" casualty insurance on its properties (including but not limited
to the collateral security now or hereafter securing payment and performance of
the Secured Obligations), against such hazards and in at least such amounts as
are customary in the type of business in which Borrower is engaged, and (d) rent
or business interruption insurance against loss of income arising out of damage
or destruction by such hazards as presently are included in so called "all risk
coverage". At the request of Lender, Borrower will deliver forthwith a
certificate, executed by a duly authorized representative of the insurer(s),
specifying the details of such insurance in effect.
All policies of insurance shall provide that at least thirty (30) days'
prior written notice of cancellation or modification of the policy shall be
given to Lender by the insurer, and all policies of casualty insurance covering
any tangible security for the Secured Obligations shall be payable to Borrower
and Lender as their respective interests may appear. Borrower agrees that there
shall be no recourse against Lender for the payment of premiums, commissions,
assessments or advances in respect of any such policy, and at Lender's request
shall provide Lender with the agreement of the insurer(s) to this effect.
At the request of Lender, all policies of casualty insurance covering any
tangible security for the Secured Obligations shall be delivered to and held by
Lender. Borrower shall act expeditiously in the adjustment and settlement of
claims under such policies in order to preserve the greatest possible value
reasonably obtainable in respect of such claims. Following the occurrence of an
Event of Default, Lender may, at its option, act as attorney in fact for
Borrower in adjusting and settling claims under such insurance and endorsing any
drafts with respect thereto, and this power, being coupled with an interest,
shall be irrevocable prior to payment in full of the indebtednesses evidenced by
the Note and performance of all of the obligations of Borrower to Lender in
connection therewith, and any insurer is hereby instructed to rely upon Lender's
representation that an Event of Default has occurred hereunder without further
inquiry or investigation.
V.6 TAXES AND ASSESSMENTS; TAX INDEMNITY. Borrower and each Corporate
Guarantor shall (a) file all tax returns and appropriate schedules thereto that
are required to be filed under applicable law, prior to the date of delinquency,
(b) pay and discharge all taxes, assessments and governmental charges or levies
imposed upon Borrower or either Corporate Guarantor, upon its income and profits
or upon any properties belonging to it, prior to the date on which penalties
attach thereto, and (c) pay all taxes, assessments and governmental charges or
levies that, if unpaid, might become a lien or charge upon any of its
properties; provided, however, that Borrower and Corporate Guarantors in good
faith may contest any such tax, assessment, governmental charge or levy
described in the foregoing clauses (b) and (c) so long as appropriate reserves
are maintained with respect thereto.
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V.7 CORPORATE EXISTENCE. Borrower and each Corporate Guarantor shall
maintain its corporate existence and good standing in the state of its
incorporation, and its qualification and good standing as a foreign corporation
in each jurisdiction in which such qualification is necessary pursuant to
applicable law.
V.8 COMPLIANCE WITH LAW AND OTHER AGREEMENTS. Borrower and each Corporate
Guarantor shall maintain its business operations and property owned or used in
connection therewith in compliance with (a) all applicable federal, state and
local laws, regulations and ordinances governing such business operations and
the use and ownership of such property, and (b) all agreements, licenses,
franchises, indentures and mortgages to which Borrower or either Corporate
Guarantor is a party or by which Borrower, either Corporate Guarantor or any of
their properties is bound. Without limiting the foregoing, Borrower and each
Corporate Guarantor shall pay all of its indebtedness promptly in accordance
with the terms thereof.
V.9 NOTICE OF DEFAULT. Borrower and Corporate Guarantors shall give
written notice to Lender of the occurrence of any default, event of default or
Event of Default under this Agreement or any other Loan Document promptly upon
the occurrence thereof.
V.10 NOTICE OF LITIGATION. Borrower and Corporate Guarantors shall give
notice, in writing, to Lender of (a) any actions, suits or proceedings wherein
the amount at issue is in excess of $250,000, instituted by any persons against
Borrower or any Guarantor, or affecting any of the assets of Borrower or any
Guarantor, and (b) any dispute, not resolved within sixty (60) days of the
commencement thereof, between Borrower or any Guarantor on the one hand and any
governmental or regulatory body on the other hand, which might reasonably be
expected to have a material adverse effect on the business operations or
financial condition of Borrower or either Corporate Guarantor.
V.11 ENVIRONMENTAL MATTERS.
(a) Borrower and Corporate Guarantors will cause the Property to
remain free of all Hazardous Wastes, and to remain free of all Hazardous
Materials other than those maintained therein or thereon in full
compliance with Environmental Laws. Neither Borrower nor either Corporate
Guarantor will cause or permit the Property to be used to generate,
manufacture, refine, transport, treat, store, handle, dispose, transfer,
produce or process Hazardous Materials except in full compliance with
Environmental Laws.
(b) Borrower and Corporate Guarantors will notify Lender immediately
if they receive any notice or obtain knowledge of any noncompliance with
or violation of any Environmental Laws with respect to the Property or the
Business.
(c) In the event that Hazardous Materials unrelated to the Business,
or Hazardous Wastes, are discovered on or are brought onto the Property,
Borrower and Corporate Guarantors will cause such Hazardous Materials or
Hazardous Wastes to be removed and disposed of promptly and in full
compliance with Environmental Laws. Borrower and Corporate Guarantors will
provide Lender prior written notice of such removal and disposal actions.
(d) Borrower and Corporate Guarantors will comply with all
Environmental Laws in all jurisdictions in which Borrower or either
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Corporate Guarantor operates, now or in the future, and will comply with
all Environmental Laws that in the future become applicable to the
Property or the Business.
V.12 MERGERS, CONSOLIDATIONS, ACQUISITIONS AND SALES. Without the prior
express written consent of Lender, neither Borrower nor either Corporate
Guarantor shall (a) be a party to any merger, consolidation or corporate
reorganization, (b) purchase or otherwise acquire all or substantially all of
the assets or stock of, or any partnership or joint venture interest in, any
other person, firm or entity, (c) sell, transfer, convey, grant a security
interest in or lease all or any substantial part of its assets, nor (d) create
any subsidiaries nor convey any of its assets to any subsidiary; provided,
however, Borrower or either Corporate Guarantor may make acquisitions of all or
substantially all of the stock or assets of other entities, so long as (i) no
Event of Default exists hereunder, (ii) the purchase price payable in connection
with each such acquisition, including the fair market value of any non-cash
consideration, does not exceed $5,000,000, and (iii) any subsidiary of Borrower
or either Corporate Guarantor created or acquired in connection with any such
acquisition shall guarantee the indebtedness of Borrower to Lender and grant
Lender a security interest in all of its assets to secure its obligations and
the obligations of Borrower to Lender, all pursuant to documentation in form and
substance satisfactory to Lender in all respects.
V.13 MANAGEMENT, OWNERSHIP. Neither Borrower nor either Corporate
Guarantor shall permit any significant change in its ownership, executive staff
or management without the prior written consent of Lender. The ownership,
executive staff and management of Borrower and Corporate Guarantors are material
factors in Lender's willingness to institute and maintain a lending relationship
with Borrower.
V.14 DIVIDENDS, ETC. Neither Borrower nor either Corporate Guarantor shall
declare or pay any dividend of any kind, in cash or in property, on any class of
its capital stock, nor purchase, redeem, retire or otherwise acquire for value
any shares of such stock, nor make any distribution of any kind in respect
thereof, nor make any return of capital to shareholders, nor make any payments
in respect of any pension, profit sharing, retirement, stock option, stock
bonus, incentive compensation or similar plan (except as required or permitted
hereunder), without the prior written consent of Lender. Without limiting the
foregoing, not less than seventy-five percent (75%) of the net proceeds of any
equity offering by Borrower or either Corporate Guarantor shall be retained and
shall not be paid out as dividends or otherwise distributed to shareholders.
V.15 GUARANTIES; LOANS. Neither Borrower nor either Corporate Guarantor
shall guarantee nor be liable in any manner, whether directly or indirectly, or
become contingently liable after the date of this Agreement in connection with
the obligations or indebtedness of any person or persons, except for the
indorsement of negotiable instruments payable to Borrower or Corporate
Guarantors for deposit or collection in the ordinary course of business. Neither
Borrower nor either Corporate Guarantor shall make any loan, advance or
extension of credit to any person other than in the normal course of its
business.
V.16 DEBT. Neither Borrower nor either Corporate Guarantor shall create,
incur, assume or suffer to exist indebtedness of any description whatsoever in
an aggregate amount in excess of $250,000 (excluding any indebtedness of
Borrower or either Corporate Guarantor to Lender, trade accounts payable and
accrued expenses incurred in the ordinary course of business and the indorsement
of negotiable instruments payable to Borrower or Corporate Guarantors for
deposit or collection in the ordinary course of business).
V.17 CONDUCT OF BUSINESS. Borrower and Corporate Guarantors will continue
to engage, in an efficient and economical manner, in a business of the same
general type as conducted by them on the date of this Agreement.
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V.18 PLACES OF BUSINESS. Borrower will not change the location of its
chief place of business, chief executive office or any place of business
disclosed to Lender pursuant to SECTION 4.5 hereof, without thirty (30) days'
prior written notice to Lender in each instance.
V.19 ERISA PLAN. If Borrower has in effect, or hereafter institutes (with
Lender's consent, as hereinafter provided), a pension plan that is subject to
the requirements of Title IV of the Employee Retirement Income Security Act of
1974, Pub. L. No. 93 406, September 2, 1974, 88 Stat. 829, 29 U.S.C.A. ss. 1001
ET Seq. (1975), as amended from time to time ("ERISA"), then the following
warranty and covenants shall be applicable during such period as any such plan
(the "Plan") shall be in effect: (a) Borrower hereby warrants that no fact that
might constitute grounds for the involuntary termination of the Plan, or for the
appointment by the appropriate United States District Court of a trustee to
administer the Plan, exists at the time of execution of this Agreement, (b)
Borrower hereby covenants that throughout the existence of the Plan, Borrower's
contributions under the Plan will meet the minimum funding standards required by
ERISA and Borrower will not institute a distress termination of the Plan, (c)
Borrower hereby covenants that the Plan's annual financial and actuarial
statements and the Plan's annual Form 5500 information return will be filed with
Lender within thirty (30) days of the preparation thereof, and (d) Borrower
covenants that it will send to Lender a copy of any notice of a reportable event
(as defined in ERISA) required by ERISA to be filed with the Labor Department or
the Pension Benefit Guaranty Corporation, at the time that such notice is so
filed.
No Plan shall be instituted by Borrower unless Lender shall have given its
written consent thereto.
ARTICLE VI
FINANCIAL COVENANTS
-------------------
VI.1 NET WORTH REQUIREMENTS. Borrower and Corporate Guarantors shall at
all times maintain a minimum tangible net worth of $12,000,000, calculated on a
consolidated basis. For purposes of this covenant, "tangible net worth" shall
refer to the excess of Borrower's and Corporate Guarantors' total assets above
the sum of their intangible assets plus total liabilities (exclusive of any debt
subordinated to indebtedness of Borrower or Corporate Guarantors to Lender), all
determined in accordance with generally accepted accounting principles
consistently applied.
VI.2 DEBT TO WORTH RATIO. Borrower and Corporate Guarantors shall at all
times maintain a ratio of total liabilities (exclusive of any debt subordinated
to indebtedness of Borrower or Corporate Guarantor to Lender) to tangible net
worth of not more than 2.0 to 1.0, calculated on a consolidated basis. For
purposes of this covenant, "tangible net worth" shall have the meaning set forth
in SECTION 6.1 hereof.
VI.3 INTEREST COVERAGE RATIO. Borrower and Corporate Guarantors shall
maintain a ratio of earnings before interest and taxes to interest expense, all
determined in accordance with generally accepted accounting principles
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consistently applied, calculated on a consolidated basis as of the last day of
each September, December, March and June, for the then-previous twelve-month
period (beginning September 30, 1999), of not less than 4.0 to 1.0.
ARTICLE VII
DEFAULT AND REMEDIES
--------------------
VII.1 EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default hereunder:
(a) Failure to make payment of the principal of or interest on the
indebtedness evidenced by the Note within five (5) days of when due;
(b) Any misrepresentation by Borrower or any Guarantor as to any
material matter hereunder or under any of the other Loan Documents, or
delivery by Borrower or any Guarantor of any schedule, statement,
resolution, report, certificate, notice or writing to Lender that is
untrue in any material respect on the date as of which the facts set forth
therein are stated or certified;
(c) Failure of Borrower or any Guarantor to perform any of its
obligations under SECTIONS 5.6, 5.8 or 5.11 of this Agreement within
fifteen (15) days after the earlier of (i) written notice from Lender to
Borrower of such failure to perform, or (ii) the date Borrower becomes
aware of such failure to perform;
(d) Failure of Borrower or any Guarantor to perform any other of its
obligations under this Agreement, the Note, any of the Security
Instruments or any of the other Loan Documents;
(e) Borrower or any Guarantor (i) shall generally not pay or shall
be unable to pay its debts as such debts become due; or (ii) shall make an
assignment for the benefit of creditors or petition or apply to any court
or tribunal for the appointment of a custodian, receiver or trustee for it
or a substantial part of its assets; or (iii) shall commence any
proceeding or case under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether now or hereafter in effect; or (iv) shall have had
any such petition or application filed or any such proceeding or case
commenced against it in which an order for relief is entered or an
adjudication or appointment is made; or (v) shall indicate, by any act or
omission, its consent to, approval of or acquiescence in any such
petition, application, case, proceeding or order for relief or the
appointment of a custodian, receiver or trustee for it or a substantial
part of its assets; or (vi) shall suffer any such custodianship,
receivership or trusteeship to continue undischarged for a period of
thirty (30) days or more;
(f) Borrower or any Guarantor shall die, be liquidated, dissolved,
partitioned or terminated, or the charter or certificate of authority
thereof shall expire or be revoked;
(g) A default or event of default shall occur under any of the other
Loan Documents;
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(h) Borrower or any Guarantor shall default in the timely payment or
performance of any obligation now or hereafter owed to Lender in
connection with any other indebtedness of Borrower or any Guarantor now or
hereafter owed to Lender;
(i) Lender shall reasonably suspect the occurrence of one or more of
the aforesaid events of default and Borrower, upon the written request of
Lender, shall fail to provide evidence reasonably satisfactory to Lender
that such event or events of default have not in fact occurred; or
(j) Lender in good faith shall deem itself insecure.
VII.2 ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of any Event
of Default described in SUBSECTION 7.1(D) hereof as it relates to Borrower, the
indebtednesses evidenced by the Note as well as any and all other indebtedness
of Borrower to Lender shall be immediately due and payable in full; and upon the
occurrence of any other Event of Default described above (including but not
limited to SUBSECTION 7.1(D) hereof as it relates to any Guarantor), Lender at
any time thereafter may at its option accelerate the maturity of the
indebtednesses evidenced by the Note as well as any and all other indebtedness
of Borrower to Lender; all without notice of any kind. Upon the occurrence of
any such Event of Default and the acceleration of the maturity of the
indebtednesses evidenced by the Note:
(a) Lender shall be immediately entitled to exercise any and all
rights and remedies possessed by Lender pursuant to the terms of the
Security Instruments and all of the other Loan Documents;
(b) Lender shall have all of the rights and remedies of a secured
party under the Uniform Commercial Code; and
(c) Lender shall have any and all other rights and remedies that
Lender may now or hereafter possess at law, in equity or by statute.
VII.3 RIGHT OF SETOFF. Without limitation of the foregoing, upon the
occurrence and during the continuance of any Event of Default, Lender is hereby
authorized at any time and from time to time, without notice to Borrower or
Guarantors (any such notice being expressly waived by Borrower and Guarantors),
to set off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held by Lender or any of its affiliates, and
any other indebtedness at any time owing by Lender or its affiliates to or for
the credit or the account of Borrower or Guarantors, against any and all of the
Secured Obligations, irrespective of whether Lender shall have made any demand
under this Agreement or the Note or any other Loan Document and although such
obligations may be unmatured. Lender agrees to notify Borrower or Guarantors (as
applicable) within a reasonable time after any such setoff and application;
provided that the failure to give such notice shall not affect the validity of
such setoff and application. The rights of Lender under this SECTION 7.3 are in
addition to any other rights and remedies (including, without limitation, other
rights of setoff) that Lender may have.
VII.4 REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy conferred
upon or reserved to Lender by this Agreement or any of the other Loan Documents
is intended to be exclusive of any other right, power or remedy, but each and
every such right, power and remedy shall be cumulative and concurrent and shall
be in addition to any other right, power and remedy given hereunder, under any
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of the other Loan Documents or now or hereafter existing at law, in equity or by
statute. No delay or omission by Lender to exercise any right, power or remedy
accruing upon the occurrence of any Event of Default shall exhaust or impair any
such right, power or remedy or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein, and every right, power and remedy
given by this Agreement and the other Loan Documents to Lender may be exercised
from time to time and as often as may be deemed necessary by Lender.
VII.5 PROCEEDS OF REMEDIES. Any or all proceeds resulting from the
exercise of any or all of the foregoing remedies shall be applied as set forth
in the Loan Document(s) providing the remedy or remedies exercised; if none is
specified, or if the remedy is provided by this Agreement, then as follows:
First, to the costs and expenses, including reasonable attorney's
fees and expenses, incurred by Lender in connection with the exercise of
its remedies;
Second, to the expenses of curing the default that has occurred, in
the event that Lender elects, in its sole discretion, to cure the default
that has occurred;
Third, to the payment of the Secured Obligations, including but not
limited to the payment of the principal of and interest on the
indebtednesses evidenced by the Note, in such order of priority as Lender
shall determine in its sole discretion; and
Fourth, the remainder, if any, to Borrower or to any other person
lawfully thereunto entitled.
ARTICLE VIII
MISCELLANEOUS
-------------
VIII.1 INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or otherwise would be within the limitations of, another covenant shall not
avoid the occurrence of an Event of Default if such action is taken or condition
exists.
VIII.2 PERFORMANCE BY LENDER. If Borrower or Corporate Guarantors shall
default in the payment, performance or observance of any covenant, term or
condition of this Agreement, Lender may, at its option, pay, perform or observe
the same, and all payments made or costs or expenses incurred by Lender in
connection therewith (including but not limited to reasonable attorney's fees
and expenses), with interest thereon at the default rate provided in the Note
(if none, then at the maximum rate from time to time allowed by applicable law),
shall be immediately repaid to Lender by Borrower and Corporate Guarantors and
shall constitute a part of the Secured Obligations and be secured hereby until
fully repaid. Lender shall determine at its sole discretion the necessity for
any such actions and of the amounts to be paid.
VIII.3 COSTS AND EXPENSES. Borrower agrees to pay all costs and expenses
incurred by Lender in connection with the making of the Loan, including but not
limited to filing fees, recording taxes and reasonable attorney's fees and
expenses, promptly upon demand of Lender. Borrower further agrees to pay all
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premiums for insurance required to be maintained pursuant to the terms of the
Loan Documents and all of the out-of-pocket costs and expenses incurred by
Lender in connection with the administration, servicing and/or collection of the
Loan, including but not limited to reasonable attorney's fees and expenses,
promptly upon demand of Lender.
VIII.4 ASSIGNMENT. The Note, this Agreement and the other Loan Documents
may be endorsed, assigned and/or transferred in whole or in part by Lender, and
any such holder and/or assignee of the same shall succeed to and be possessed of
the rights and powers of Lender under all of the same to the extent transferred
and assigned. Lender may grant participations in all or any portion of its
interest in the indebtednesses evidenced by the Note. Borrower shall not assign
any of its rights nor delegate any of its duties hereunder or under any of the
other Loan Documents without the prior express written consent of Lender.
VIII.5 SUCCESSORS AND ASSIGNS INCLUDED IN PARTIES. Subject to the
provisions of SECTION 8.4 hereof, whenever in this Agreement one of the parties
hereto is named or referred to, the heirs, legal representatives, successors,
successors-in-title and assigns of such parties shall be included, and all
covenants and agreements contained in this Agreement by or on behalf of Borrower
or by or on behalf of Lender shall bind and inure to the benefit of their
respective heirs, legal representatives, successors-in-title and assigns,
whether so expressed or not.
VIII.6 THIRD PARTY BENEFICIARIES. This Agreement and the other Loan
Documents are intended for the sole and exclusive benefit of the parties hereto
and their respective successors and permitted assigns, and shall not serve to
confer any rights or benefits in favor of any person not a party hereto. No
other person shall have any right to rely on this Agreement or the other Loan
Documents, or to derive any benefit herefrom.
VIII.7 TIME OF THE ESSENCE. Time is of the essence with respect to each
and every covenant, agreement and obligation of Borrower and Guarantors
hereunder and under all of the other Loan Documents.
VIII.8 SEVERABILITY. If any provision(s) of this Agreement or the
application thereof to any person or circumstance shall be invalid or
unenforceable to any extent, the remainder of this Agreement and the application
of such provisions to other persons or circumstances shall not be affected
thereby and shall be enforced to the greatest extent permitted by law.
VIII.9 INTEREST AND LOAN CHARGES NOT TO EXCEED MAXIMUM ALLOWED BY LAW.
Anything in this Agreement, the Note, the Security Instruments or any of the
other Loan Documents to the contrary notwithstanding, in no event whatsoever,
whether by reason of advancement of proceeds of the Loan, acceleration of the
maturity of the unpaid balance of the Loan or otherwise, shall the interest and
loan charges agreed to be paid to Lender for the use of the money advanced or to
be advanced hereunder exceed the maximum amounts collectible under applicable
laws in effect from time to time. It is understood and agreed by the parties
that, if for any reason whatsoever the interest or loan charges paid or
contracted to be paid by Borrower in respect of the indebtednesses evidenced by
the Note shall exceed the maximum amounts collectible under applicable laws in
effect from time to time, then IPSO facto, the obligation to pay such interest
and/or loan charges shall be reduced to the maximum amounts collectible under
applicable laws in effect from time to time, and any amounts collected by Lender
that exceed such maximum amounts shall be applied to the reduction of the
principal balance(s) of the indebtednesses evidenced by the Note and/or refunded
to Borrower so that at no time shall the interest or loan charges paid or
payable in respect of the indebtednesses evidenced by the Note exceed the
maximum amounts permitted from time to time by applicable law.
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VIII.10 ARTICLE AND SECTION HEADINGS; DEFINED TERMS. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
VIII.11 NOTICES. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing and shall be
delivered personally, telecopied or sent by certified mail or nationally
recognized courier service (such as Federal Express), to the other party at the
address set forth below, or at such other address as may be supplied in writing
by the party whose address is being changed and of which receipt has been
acknowledged in writing. The date of personal delivery or telecopy or the date
of mailing (or delivery to such courier service), as the case may be, shall be
the date of such notice, election or demand. For the purposes of this Agreement:
The address of Lender is:
SouthTrust Bank, National Association
230 Fourth Avenue North
8th Floor
Nashville, Tennessee 37219
Attention: Marci Osesek
Telecopy Number: 615/880-4004
with copy to:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, Tennessee 37238
Attention: Felix R. Dowsley, III
Telecopy Number: 615/742-2728
The address of Borrower is:
European Micro Holdings, Inc.
6073 N.W. 167th Street, Unit C-25
Miami, Florida 33015
Attention: Frank Cruz
Telecopy Number: 305/825-7774
with copy to:
Kirkpatrick & Lockhart LLP
Miami Center, 20th Floor
201 South Biscayne Boulevard
Miami, Florida 33131-2399
Attention: Clayton E. Parker, Esq.
Telecopy Number: 305/358-7095
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The addresses of Corporate Guarantors are:
American Micro Computer Center, Inc.
6073 N.W. 167th Street, Unit C-25
Miami, Florida 33015
Attention: Frank Cruz
Telecopy Number: 305/825-7774
Nor'easter Micro, Inc.
808 Third Avenue South
Nashville, TN 37210
Attention: Jay Nash
Telecopy Number: 615/254-9318
VIII.12 INTEGRATION. This Agreement and the Loan Documents contain the
entire agreement between the parties relating to the subject matter hereof and
supersede all oral statements and prior writings with respect thereto.
VIII.13 INDEMNITY. Borrower and Corporate Guarantors hereby agree to
defend, indemnify, and hold Lender harmless from and against any and all claims,
damages, judgments, penalties, costs and expenses (including reasonable
attorney's fees and expenses and court costs now or hereafter arising from the
aforesaid enforcement of this clause) arising directly or indirectly from the
activities of Borrower or Corporate Guarantors, their predecessors in interests,
or third parties with whom they have a contractual relationship, or arising
directly or indirectly from the violation of any law, whether such claims are
asserted by any governmental agency or any other person. This indemnity shall
survive the termination of this Agreement.
VIII.14 JURY TRIAL WAIVER. BORROWER, CORPORATE GUARANTORS AND LENDER
HEREBY WAIVE TRIAL BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTER-CLAIM,
WHETHER IN CONTRACT IN TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY
RELATED TO THIS AGREEMENT OR THE LOAN DOCUMENTS.
VIII.15 VENUE. All actions or proceedings in any way, manner or respect
arising out of or from or related to this Agreement shall be litigated in courts
having situs within the City of Nashville, State of Tennessee. Borrower and
Corporate Guarantors hereby consent and submit to the jurisdiction of any local,
state or federal courts located within said city and state.
VIII.16 MISCELLANEOUS. This Agreement shall be construed and enforced
under the laws of the State of Tennessee. No amendment, modification,
termination or waiver of any provision of any Loan Document to which Borrower or
either Corporate Guarantor is a party, nor consent to any departure by Borrower
or either Corporate Guarantor from compliance with the terms of any Loan
Document to which it is a party, shall be effective unless the same shall be in
writing and signed on behalf of Lender by a duly authorized officer of Lender,
and then such waiver or consent shall be effective only in the specific instance
and for the specific purpose for which given.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized officers, as
of the day and year first above written.
LENDER:
SOUTHTRUST BANK, NATIONAL ASSOCIATION
By:_____________________________
Title:_______________________
BORROWER:
EUROPEAN MICRO HOLDINGS, INC.
By:_____________________________
Title:_______________________
CORPORATE GUARANTORS:
AMERICAN MICRO COMPUTER CENTER, INC.
By:_____________________________
Title:_______________________
NOR'EASTER MICRO, INC.
By:_____________________________
Title:_______________________
19
EXHIBIT 10.24
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement"), dated as of the 29th
day of October, 1999, is made and entered into on the terms and conditions
hereinafter set forth, by and among NOR'EASTER MICRO, INC., a Nevada corporation
with principal offices at 193 Walton Road, Seabrook, New Hampshire 03874
("Borrower"), EUROPEAN MICRO HOLDINGS, INC., a Nevada corporation ("European
Micro"), AMERICAN MICRO COMPUTER CENTER, INC., a Florida corporation ("American
Micro"; European Micro and American Micro are sometimes hereinafter collectively
referred to as "Guarantors"), and SOUTHTRUST BANK, NATIONAL ASSOCIATION, a
national banking association with offices in Nashville, Tennessee ("Lender").
WHEREAS, Borrower has requested that Lender make available to Borrower
a line of credit in the original principal amount not exceeding $1,500,000 (the
"Loan") on the terms and conditions hereinafter set forth, and for the
purpose(s) hereinafter set forth; and
WHEREAS, in order to induce Lender to make the Loan to Borrower,
Borrower and Guarantors have made certain representations to Lender; and
WHEREAS, Lender, in reliance upon the representations and inducements
of Borrower and Guarantors, has agreed to make the Loan upon the terms and
conditions hereinafter set forth;
NOW, THEREFORE, in consideration of the foregoing and the mutual
covenants and agreements hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged,
Borrower, Guarantors and Lender hereby agree as follows:
ARTICLE
DEFINITIONS
As used in this Agreement, the following terms shall have the indicated
meanings:
"Base Rate" shall mean per annum the rate of interest periodically
designated by Lender as its Base Rate. Base Rate does not necessarily represent
the lowest rate charged by Lender. Any rate of interest calculated using the
Base Rate as a reference shall change to reflect any change in the Base Rate, as
and when the Base Rate changes.
"Borrowing Base" shall mean an aggregate amount equal to the sum of (a)
eighty-five percent (85%) of Eligible Receivables, plus (b) fifty percent (50%)
of Eligible Inventory.
<PAGE>
"Compliance Certificate" shall have the meaning assigned to such term
in subsection 5.4(a) of this Agreement.
"Eligible Receivables" shall mean Receivables arising out of the sale
or other disposition of Borrower's Inventory or the rendering of services to
Borrower's customers, excluding (a) all Receivables that have been outstanding
for more than ninety (90) days after the dates of the corresponding invoices,
(b) all Receivables owing from any account debtor if more than 50% of the
Receivables owed to Borrower by such account debtor have been outstanding for
more than ninety (90) days after the dates of the corresponding invoices, (c)
the amount by which Receivables from any account debtor (or its affiliates)
exceed twenty-five percent (25%) of Borrower's total Receivables, (d) all
returns, allowances, discounts, credits and contra items, (e) all amounts owed
from employees, officers, shareholders, directors or affiliates and all
intra-company items, (f) any Receivables evidenced by instruments or chattel
paper that have not been endorsed and delivered to Lender by Borrower, and (g)
all other items which Lender in its sole discretion determines to be ineligible.
"Eligible Inventory" shall mean Borrower's Inventory, valued at the
lesser of cost or market, with such adjustments thereto as Lender in its sole
discretion determines to be appropriate.
"Event of Default" shall have the meaning assigned to such term in
Section 7.1 of this Agreement.
"Guaranties" shall mean, collectively, one or more Continuing
Guaranties of even date herewith, executed in favor of Lender by Guarantors.
"Inventory" shall have the meaning assigned to such term in the Uniform
Commercial Code.
"Line of Credit Borrowing Limit" shall mean $1,500,000.
"Line of Credit Interest Rate" shall mean an annual rate equal to the
lesser of (a) the maximum contract rate of interest permitted to be charged
under applicable law or (b) the Base Rate plus one-half percentage point (1/2%),
computed on the basis of a 360-day year, actual number of days elapsed, adjusted
daily as the Base Rate changes.
"Line of Credit Termination Date" shall mean October __, 2000.
"Loan Documents" shall mean, collectively, the Security Instruments,
together with the Note and any other instruments and documents now or hereafter
evidencing, securing or in any way related to the indebtednesses evidenced by
the Note.
"Note" shall mean that certain Master Secured Promissory Note of even
date herewith, in the principal amount not exceeding the Line of Credit
Borrowing Limit, made and executed by Borrower, payable to the order of Lender,
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evidencing the indebtedness of Borrower to Lender in connection with the Loan,
together with any and all extensions, modifications, renewals, restatements
and/or replacements thereof.
"Pledge Agreements" shall mean those two (2) certain Pledge and
Security Agreements of even date herewith, executed by John B. Gallagher and
Harry D. Shields, in favor of Lender.
"Receivables" shall mean accounts, general intangibles, instruments and
chattel paper, as such terms are defined in the Uniform Commercial Code.
"Secured Obligations" shall have the meaning assigned such term in
Section 3.2 of this Agreement.
"Security Instruments" shall mean, collectively, this Agreement, the
Guaranties, and any other instruments, documents or agreements now or hereafter
securing the Secured Obligations, whether by specific or general reference.
"Uniform Commercial Code" means the Uniform Commercial Code as in
effect in the State of Tennessee from time to time.
ARTICLE
THE LOAN
ADVANCES. Prior to the Line of Credit Termination Date and so long as
no Event of Default (or event that with the giving of notice or the passage of
time or both would constitute an Event of Default) has occurred and is in
existence hereunder, Lender shall advance proceeds under the Loan to Borrower
upon Borrower's request in an aggregate amount outstanding at any one time not
to exceed the lesser of (a) the Borrowing Base in effect from time to time, or
(b) the Line of Credit Borrowing Limit, although Lender may in its sole and
absolute discretion permit advances to exceed such amount. Any such excess
advances shall be secured by, and subject to the terms and conditions of, this
Agreement. In the absence of an Event of Default, Borrower may repay and
reborrow amounts under the Loan in accordance with the terms, conditions and
provisions of this Agreement.
REPAYMENT. The indebtedness of Borrower to Lender in connection with
the Loan shall be evidenced by, and payable in accordance with the terms of, the
Note. Amounts outstanding under the Loan shall bear interest at the Line of
Credit Interest Rate. In addition, Borrower covenants and agrees to maintain
Eligible Receivables and Eligible Inventory in an aggregate amount sufficient to
keep the aggregate outstanding principal balance of the advances made in respect
of the Loan within the limits specified in Section 2.1 of this Agreement. If at
any time such limits are exceeded, Borrower shall immediately pay to Lender an
amount sufficient to reduce the aggregate outstanding principal balance of the
Loan to an amount that is within such limits.
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LETTERS OF CREDIT. If and to the extent that Lender has issued or from
time to time hereafter shall issue letters of credit for the account of Borrower
pursuant to applications submitted to Lender by Borrower, it is understood and
agreed that:
() the credit availability under the Loan shall be reduced by the
aggregate undrawn amount from time to time available under outstanding
letters of credit,
() any amounts paid by Lender under any such letters of credit
shall be deemed to be advances against the Note, and the indebtedness
of Borrower to Lender in connection therewith shall constitute a part
of the Secured Obligations and shall be secured as hereinafter set
forth in the same manner as all other advances made by Lender against
the Note.
Borrower acknowledges and agrees that Lender has made no commitment to Borrower
with respect to the issuance of any such letters of credit.
COMMITMENT FEE. Upon execution of this Agreement, Borrower shall pay
to Lender a non-refundable commitment fee in the amount of $3,750.00.
PURPOSE. The purpose of the Loan shall be to provide working capital to
Borrower on a revolving basis.
ARTICLE
SECURITY
SECURITY. The Secured Obligations are and shall continue to be secured
by the following:
() Personal Property. Borrower hereby grants to Lender a security
interest in the following described property and interests in property,
together with all proceeds (including but not limited to insurance
proceeds) and products thereof and all accessions thereto, as applicable:
() Equipment. All equipment of Borrower of every kind and
description, whether now owned or hereafter acquired and wherever
located, together with all parts, accessories and attachments and all
replacements thereof and additions thereto;
() Inventory, Accounts, Chattel Paper, Instruments, Documents and
General Intangibles. All of Borrower's inventory, whether held for
lease, sale or for furnishing under contracts of service, all
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agreements for lease of same and rentals therefrom, and all of
Borrower's accounts, accounts receivable, chattel paper, instruments,
documents and general intangibles (including but not limited to trade
marks, copyrights and patents), whether now in existence or owned or
hereafter acquired, entered into, created or arising, and wherever
located; and
() Books and Records. All of Borrower's right, title and interest
to all of the books, records, files and all other data and documents of
Borrower of all kinds in whatever form, whether computerized or
otherwise and including but not limited to computer disks, tapes and
printouts, relating to the above-described collateral.
() Other Security Instruments. The Guaranties, the Pledge
Agreements and the other Security Instruments.
SECURED OBLIGATIONS. Without limiting any of the provisions thereof,
the Security Instruments shall secure:
() The full and timely payment of the indebtednesses evidenced by
the Note, together with interest thereon, and any extensions,
modifications and/or renewals thereof and any notes given in payment
thereof,
() The full and prompt performance of all of the obligations of
Borrower to Lender under the Loan Documents,
() The full and prompt payment of all expenses and costs of
whatever kind incident to the collection of the indebtednesses
evidenced by the Note, the perfection, enforcement or protection of the
security interests of the Security Instruments or the exercise by
Lender of any rights or remedies of Lender with respect to the
indebtednesses evidenced by the Note, including but not limited to
reasonable attorney's fees and expenses incurred by Lender, all of
which Borrower agrees to pay to Lender upon demand,
() The full and prompt payment of the indebtednesses and
obligations of Guarantors to Lender evidenced and/or secured by (i)
that certain Loan Agreement of even date herewith, by and among Lender,
Borrower and Guarantors, entered into in connection with that certain
term loan from Lender to European Micro in the original principal
amount of $1,500,000, and (ii) that certain Loan and Security Agreement
of even date herewith, by and among Lender, Borrower and Guarantors,
entered into in connection with that certain line of credit from Lender
to American Micro, in the maximum principal amount of $1,500,000,
together with any and all renewals, amendments and modifications
thereof; and
() The full and prompt payment and performance of any and all
other indebtednesses and other obligations of Borrower or either
Guarantor to Lender, direct or contingent (including but not limited to
obligations incurred as indorser, guarantor or surety), however
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evidenced or denominated, and however and whenever incurred, including
but not limited to indebtednesses incurred pursuant to any present or
future commitment of Lender to Borrower or either Guarantor, together
with interest thereon, and any extensions, modifications and/or
renewals thereof and any notes given in payment thereof.
All of the foregoing indebtedness and other obligations are herein collectively
referred to as the "Secured Obligations".
ARTICLE
REPRESENTATIONS AND WARRANTIES
Borrower and Guarantors hereby represent and warrant to Lender as
follows:
CORPORATE STATUS. Borrower and European Micro are corporations duly
organized, validly existing and in good standing under the laws of the State of
Nevada. American Micro is a corporation duly organized, validly existing and in
good standing under the laws of the State of Florida. Borrower and each
Guarantor has the corporate power to own and operate its properties, to carry on
its business as now conducted and to enter into and to perform its obligations
under this Agreement and the other Loan Documents to which it is a party.
Borrower and each Guarantor is duly qualified to do business and in good
standing in each state in which a failure to be so qualified would have a
material adverse effect on its financial position or its ability to conduct its
business in the manner now conducted.
AUTHORIZATION. Borrower and each Guarantor has full legal right, power
and authority to conduct its business and affairs in the manner contemplated by
the Loan Documents, and to enter into and perform its obligations thereunder,
without the consent or approval of any other person, firm, governmental agency
or other legal entity. The execution and delivery of this Agreement, the
borrowing hereunder, the execution and delivery of each Loan Document to which
Borrower or either Guarantor is a party, and the performance by Borrower and
each Guarantor of its obligations thereunder are within the corporate powers of
Borrower or Guarantors and have been duly and properly authorized by all
necessary corporate action, have received all necessary governmental approvals,
if any were required, and do not and will not contravene or conflict with any
provision of law, any applicable judgment, ordinance, regulation or order of any
court or governmental agency, the charters or by-laws of Borrower or Guarantors,
or any agreement binding upon Borrower, Guarantors or their properties. The
officer(s) executing this Agreement and all of the other Loan Documents to which
Borrower and Guarantors are a party are duly authorized to act on behalf of
Borrower and Guarantors.
VALIDITY AND BINDING EFFECT. This Agreement and the other Loan
Documents are the legal, valid and binding obligations of the parties thereto,
enforceable in accordance with their respective terms.
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OTHER TRANSACTIONS. Except as specifically set forth in this Agreement
and the other Loan Documents, there are no prior loans, liens, security
interests, agreements or other financings upon which Borrower is obligated or by
which Borrower is bound that will in any way permit any third person to have or
obtain priority over Lender as to any of the security interests or liens granted
to Lender pursuant to this Agreement and the other Security Instruments.
Consummation of the transactions hereby contemplated and the performance of the
obligations of Borrower and Guarantors under and by virtue of the Loan Documents
will not result in any breach of, or constitute a default under, any mortgage,
security deed or agreement, deed of trust, lease, bank loan or credit agreement,
corporate charter or by-laws, agreement or certificate of limited partnership,
partnership agreement, license, franchise or any other instrument or agreement
to which Borrower or either Guarantor is a party or by which Borrower,
Guarantors or their properties may be bound or affected.
PLACES OF BUSINESS. The records with respect to all intangible personal
property constituting a part of the collateral security for the Secured
Obligations are maintained at Borrower's chief place of business and chief
executive office, which has the address of 193 Walton Road, Seabrook, New
Hampshire 03874. All tangible personal property constituting a part of the
collateral security for the Secured Obligations is or will be located at
Borrower's chief place of business and chief executive office and/or at any
specific locations set forth in attached Schedule 4.5.
LITIGATION. There are no actions, suits or proceedings pending, or, to
the knowledge of Borrower or either Guarantor, threatened, against or affecting
Borrower or either Guarantor or involving the validity or enforceability of any
of the Loan Documents or the priority of the liens thereof, at law or in equity,
or before any governmental or administrative agency, except actions, suits and
proceedings that are fully covered by insurance and that, if adversely
determined, would not impair the ability of Borrower or Guarantors to perform
each and every one of their respective obligations under and by virtue of the
Loan Documents; and to the knowledge of Borrower and Guarantors, neither
Borrower nor either Guarantor is in default with respect to any order, writ,
injunction, decree or demand of any court or any governmental authority.
FINANCIAL STATEMENTS. The financial statement(s) of Borrower and
Guarantors heretofore delivered to Lender are true and correct in all respects,
have been prepared in accordance with generally accepted accounting principles
consistently applied, and fairly present the financial condition of the subjects
thereof as of the date(s) thereof. No material adverse change has occurred in
the financial condition of Borrower or either Guarantor since the date(s)
thereof, and no additional borrowings have been made by Borrower or either
Guarantor since the date(s) thereof.
NO DEFAULTS. No default or event of default by Borrower or Guarantors
exists under this Agreement or any of the other Loan Documents, or under any
other instrument or agreement to which Borrower or either Guarantor is a party
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or by which Borrower, Guarantors or their properties may be bound or affected,
and no event has occurred and is existing that with notice or the passage of
time or both would constitute a default or event of default thereunder.
COMPLIANCE WITH LAW. Borrower and Guarantors have obtained all
necessary licenses, permits and governmental approvals and authorizations
necessary or proper in order to conduct their business and affairs as heretofore
conducted and as intended to be conducted hereafter. To the knowledge of
Borrower and Guarantors, Borrower and Guarantors are in compliance with all
laws, regulations, decrees and orders applicable to them (including but not
limited to laws, regulations, decrees and orders relating to occupational and
health standards and controls, antitrust, monopoly, restraint of trade or unfair
competition). Neither Borrower nor either Guarantor has received, nor expects to
receive, any order or notice of any violation or claim of violation of any law,
regulation, decree, rule, judgment or order of any governmental authority or
agency relating to the ownership and/or operation of its properties, as to which
the cost of compliance is or might be material and the consequences of
noncompliance would or might be materially adverse to its business, operations,
property or financial condition, or which would or might impair its ability to
perform its obligations under the Loan Documents to which it is a party.
ENVIRONMENTAL MATTERS.
() As used in this Section 4.10 and in Section 5.12 hereof, the
following terms shall have the indicated meanings:
"BUSINESS" means all of Borrower's and Guarantors' assets, both
real and personal, tangible and intangible, now existing or hereafter
acquired and wherever located, and all of Borrower's and Guarantors'
current and future business operations at all locations and in all
jurisdictions.
"ENVIRONMENTAL AUTHORITIES" means all federal, state and local
governmental bodies, authorities or agencies and all public
corporations created and/or empowered to administer, regulate and/or
enforce Environmental Laws, including without limitation the U.S.
Environmental Protection Agency.
"ENVIRONMENTAL LAWS" means any and all federal, state, regional,
county or local laws, statutes, rules, regulations or ordinances
relating to the generation, recycling, use, reuse, sale, storage,
handling, transport, treatment or disposal of Hazardous Materials,
including without limitation the Comprehensive Environmental Response
Compensation Liability Act of 1980, as amended by the Superfund
Amendments and Reauthorization Act of 1986, 42 U.S.C. ss.ss.9601 et
seq. ("CERCLA"), the Resource Conservation and Recovery Act of 1976, as
amended by the Solid and Hazardous Waste Amendments of 1984, 42 U.S.C.
ss.ss.6901 et seq. ("RCRA"), the Tennessee Hazardous Waste Management
Act, T.C.A. ss.ss.68-46-101 et seq., and any rules, regulations and
guidance documents promulgated or published thereunder, and any state,
regional, county or local statute, law, rule, regulation or ordinance
relating to public health, safety or the discharge, emission or
disposal of Hazardous Materials or Hazardous Wastes in or to air,
water, land or groundwater, to the withdrawal or use of groundwater, to
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the use, handling or disposal of asbestos, polychlorinated biphenyls,
petroleum, petroleum derivatives or by-products, other hydrocarbons or
urea formaldehyde, to the treatment, storage, disposal or management of
Hazardous Materials, to exposure to Hazardous Materials, to the
transportation, storage, disposal, management or release of gaseous or
liquid substances, and any regulation, order, injunction, judgment,
declaration, notice or demand issued thereunder.
"HAZARDOUS MATERIALS" means any hazardous, toxic or dangerous
materials, substances, chemicals, waste or pollutants that from time to
time are defined by or pursuant to or are regulated under any
Environmental Laws, including without limitation asbestos,
polychlorinated biphenyls, petroleum, petroleum derivatives or
by-products, other hydrocarbons, urea formaldehyde and any material,
substance, pollutant or waste that is defined as a hazardous waste
under RCRA or defined as a hazardous substance under CERCLA.
"HAZARDOUS WASTES" means Hazardous Materials that are or become
"wastes" or "solid wastes" as such terms are used in RCRA.
"PROPERTY" means all real property now or hereafter constituting
a part of, or otherwise used or operated by Borrower or Guarantors in
connection with, the Business.
() Borrower and Guarantors represent and warrant to Lender as
follows:
() The Property is being operated by Borrower and Guarantors
in full compliance with Environmental Laws, and Borrower and
Guarantors have obtained, maintained and is in good standing
under all approvals, consents, certificates, licenses and permits
required by Environmental Laws with respect to the Property.
() To the knowledge of Borrower and Guarantors, the Property
is free of all Hazardous Wastes and is free of all Hazardous
Materials other than those maintained therein or thereon in full
compliance with Environmental Laws. Borrower and Guarantors have
not caused or permitted the Property to be used to generate,
manufacture, refine, transport, treat, store, handle, dispose,
transfer, produce or process Hazardous Materials except in full
compliance with Environmental Laws.
() Neither Borrower nor either Guarantor has received
notice, nor has knowledge, of any noncompliance with or violation
of any Environmental Laws with respect to the Property or the
Business.
NO BURDENSOME RESTRICTIONS. No instrument, document or agreement to
which Borrower or either Guarantor is a party or by which it or its properties
may be bound or affected materially adversely affects, or may reasonably be
expected so to affect, its business, operations, property or financial
condition.
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TAXES. Borrower and each Guarantor has filed or caused to be filed all
tax returns that to its knowledge are required to be filed (except for returns
that are not yet due), and has paid all taxes shown to be due and payable on
said returns and all other taxes, impositions, assessments, fees or other
charges imposed on it by any governmental authority, agency or instrumentality,
prior to any delinquency with respect thereto (other than taxes, impositions,
assessments, fees and charges currently being contested in good faith by
appropriate proceedings, for which appropriate amounts have been reserved). No
tax liens have been filed against Borrower, Guarantors or any of their property.
EQUIPMENT. The equipment constituting a part of the collateral for the
Secured Obligations is owned solely by Borrower, and Borrower has full right,
power and authority to grant to Lender a valid and enforceable security interest
therein. Lender's security interest in such equipment constitutes a first and
prior lien upon and security interest in such equipment, and no other person or
entity has any right, title, interest, security interest, claim or lien with
respect thereto.
INVENTORY. The Inventory constituting a part of the collateral for the
Secured Obligations is owned solely by Borrower, and Borrower has all necessary
right, power and authority to grant to Lender a valid and enforceable security
interest therein. Lender's security interest in such Inventory constitutes a
first and prior lien upon and security interest in such Inventory, and no other
person or entity has any right, title, interest, security interest, claim or
lien with respect thereto.
RECEIVABLES, ETC. With respect to the Receivables, (a) each Receivable
is a valid and bona fide existing obligation created by or arising out of the
sale and delivery or other disposition of Borrower's Inventory or the rendition
by Borrower of services to Borrower's customers in the ordinary course of
business, (b) the Receivables are owned solely by Borrower and Borrower has all
necessary right, power and authority to grant to Lender a valid and enforceable
security interest therein, (c) Lender's security interest in such Receivables
constitutes a first and prior lien upon and security interest in such
Receivables, and no other person or entity has any right, title, interest,
security interest, claim or lien with respect thereto; (d) each Receivable
constituting an Eligible Receivable will at all times be unconditionally owed to
Borrower and enforceable against the obligor(s) with respect thereto without
dispute of any kind, and (e) each Receivable constituting an Eligible Receivable
is an "account" as defined in the Uniform Commercial Code and is not evidenced
by any instrument or document (except as specifically disclosed to Lender and
accepted by Lender as an Eligible Receivable) that would in any way change or
alter its character as an account.
EFFECT OF REQUEST FOR ADVANCE. Each request by Borrower for an advance
of proceeds of the Loan shall constitute an affirmation by Borrower and
Guarantors that the representations and warranties of this Article IV remain
true and correct on and as of the date of such request.
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ARTICLE
COVENANTS AND AGREEMENTS
Borrower and Guarantors covenant and agree that during the term of this
Agreement:
PAYMENT OF SECURED OBLIGATIONS. Borrower shall pay the indebtednesses
evidenced by the Note according to the terms thereof, and shall timely pay or
perform, as the case may be, all of the other Secured Obligations.
SALES OF AND ENCUMBRANCES ON COLLATERAL. Borrower will not sell,
exchange, lease, negotiate, pledge, assign or grant any security interest in or
otherwise dispose of the collateral described in the Security Instruments to
anyone other than Lender, nor permit any other lien of any kind to attach
thereto, nor permit same to be attached to or commingled with other goods or
property, without Lender's prior written consent; provided, however, that prior
to the occurrence of an Event of Default hereunder, Borrower shall have the
right to process and sell its Inventory in the ordinary course of business as
herein provided.
FURTHER ASSURANCES. Borrower will take all actions requested by Lender
to create and maintain in Lender's favor valid liens upon, security titles to
and/or perfected security interests in any collateral described in the Security
Instruments and all other collateral for the Secured Obligations now or
hereafter held by or for Lender. Without limiting the foregoing, Borrower agrees
to execute such further instruments (including financing statements and
continuation statements) as may be required or permitted by any law relating to
notices of, or affidavits in connection with, the perfection of Lender's
security interests or liens, to cooperate with Lender in the filing or recording
and renewal thereof, and, upon Lender's request, to immediately place notations
upon its books of account to disclose Lender's security interest in all
Receivables granted in this Agreement.
FINANCIAL STATEMENTS AND REPORTS. Borrower and Guarantors shall furnish
to Lender such financial data as Lender may reasonably request. Without limiting
the foregoing, Borrower and Guarantors shall furnish to Lender (or cause to be
furnished to Lender) the following:
() as soon as practicable and in any event within ninety (90)
days after the end of each fiscal year of Borrower and Guarantors,
consolidated and consolidating balance sheets of Borrower and
Guarantors as of the close of such fiscal year, consolidated and
consolidating statements of earnings and retained earnings of Borrower
and Guarantors as of the close of such fiscal year, and consolidated
and consolidating statements of cash flows for Borrower and Guarantors
for such fiscal year, all in reasonable detail, prepared in accordance
with generally accepted accounting principles consistently applied,
audited in accordance with generally accepted auditing standards by
independent certified public accountants satisfactory to Lender in its
reasonable judgment, and accompanied by the unqualified favorable
opinion of such accountants and a certificate of the chief executive or
chief financial officers of Borrower and Guarantors, stating that, to
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the best of the knowledge of such officers, Borrower and Guarantors
have kept, observed, performed and fulfilled each covenant, term and
condition of this Agreement and the other Loan Documents during such
fiscal year and that no Event of Default hereunder has occurred and is
continuing (or if an Event of Default has occurred and is continuing,
specifying the nature of same, the period of existence of same and the
action Borrower and Guarantors propose to take in connection
therewith), and setting forth calculations of the financial covenants
set forth in Article VI of this Agreement (a "Compliance Certificate");
() within forty-five (45) days of the end of the first three
(3) fiscal quarters of each fiscal year of Borrower and Guarantors,
consolidated and consolidating balance sheets of Borrower and
Guarantors as of the close of such quarter and consolidated and
consolidating statements of earnings and retained earnings of Borrower
and Guarantors as of the close of such quarter, all in reasonable
detail, and prepared substantially in accordance with generally
accepted accounting principles consistently applied, certified by the
chief executive or chief financial officers of Borrower and Guarantors
as being true and correct, and accompanied by a Compliance Certificate;
() within thirty (30) days of the end of each calendar month,
non- consolidated balance sheets of Borrower and each Guarantor as of
the close of such month, and non-consolidated statements of earnings
and retained earnings of Borrower and each Guarantor as of the close of
such month, all in reasonable detail, and prepared substantially in
accordance with generally accepted accounting principles consistently
applied, certified by the chief executive or chief financial officers
of Borrower and Guarantors as being true and correct, and accompanied
by a Compliance Certificate;
() within fifteen (15) days of the end of each calendar month,
accounts receivable and accounts payable listings of Borrower, with
agings, and a certification of inventory of Borrower, all as of the
close of such month and all in form satisfactory to Lender, and
accompanied by a certificate in form satisfactory to Lender setting
forth a calculation of the Borrowing Base as of the close of such
month; and
() promptly upon receipt thereof, copies of all accountants'
reports and accompanying financial reports submitted to Borrower or
either Guarantor by independent accountants in connection with each
annual examination of Borrower and Guarantors.
Maintenance of Books and Records; Inspection. Borrower and Guarantors
shall maintain their books, accounts and records in accordance with generally
accepted accounting principles consistently applied, and permit Lender, its
officers and employees and any professionals designated by Lender in writing, at
any time to visit and inspect any of their properties (including but not limited
to the collateral security described in the Security Instruments), corporate
books and financial records, and to discuss their accounts, affairs and finances
with any employee, officer or director thereof.
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INSURANCE. Without limiting any of the requirements of any of the other
Loan Documents, Borrower shall maintain, in amounts satisfactory to Lender (a)
public liability insurance, (b) worker's compensation insurance (or maintain a
legally sufficient amount of self insurance against worker's compensation
liabilities, with adequate reserves, under a plan approved by Lender), (c) fire
and "all risk" casualty insurance on its properties (including but not limited
to the collateral security now or hereafter securing payment and performance of
the Secured Obligations), against such hazards and in at least such amounts as
are customary in the type of business in which Borrower is engaged, and (d) rent
or business interruption insurance against loss of income arising out of damage
or destruction by such hazards as presently are included in so called "all risk
coverage". At the request of Lender, Borrower will deliver forthwith a
certificate, executed by a duly authorized representative of the insurer(s),
specifying the details of such insurance in effect.
All policies of insurance shall provide that at least thirty (30) days'
prior written notice of cancellation or modification of the policy shall be
given to Lender by the insurer, and all policies of casualty insurance covering
any tangible security for the Secured Obligations shall be payable to Borrower
and Lender as their respective interests may appear. Borrower agrees that there
shall be no recourse against Lender for the payment of premiums, commissions,
assessments or advances in respect of any such policy, and at Lender's request
shall provide Lender with the agreement of the insurer(s) to this effect.
At the request of Lender, all policies of casualty insurance covering
any tangible security for the Secured Obligations shall be delivered to and held
by Lender. Borrower shall act expeditiously in the adjustment and settlement of
claims under such policies in order to preserve the greatest possible value
reasonably obtainable in respect of such claims. Following the occurrence of an
Event of Default, Lender may, at its option, act as attorney in fact for
Borrower in adjusting and settling claims under such insurance and endorsing any
drafts with respect thereto, and this power, being coupled with an interest,
shall be irrevocable prior to payment in full of the indebtednesses evidenced by
the Note and performance of all of the obligations of Borrower to Lender in
connection therewith, and any insurer is hereby instructed to rely upon Lender's
representation that an Event of Default has occurred hereunder without further
inquiry or investigation.
TAXES AND ASSESSMENTS; TAX INDEMNITY. Borrower and each Guarantor shall
(a) file all tax returns and appropriate schedules thereto that are required to
be filed under applicable law, prior to the date of delinquency, (b) pay and
discharge all taxes, assessments and governmental charges or levies imposed upon
Borrower or either Guarantor, upon its income and profits or upon any properties
belonging to it, prior to the date on which penalties attach thereto, and (c)
pay all taxes, assessments and governmental charges or levies that, if unpaid,
might become a lien or charge upon any of its properties; provided, however,
that Borrower and Guarantors in good faith may contest any such tax, assessment,
governmental charge or levy described in the foregoing clauses (b) and (c) so
long as appropriate reserves are maintained with respect thereto. If any tax is
or may be imposed by any governmental entity in respect of sales of Borrower's
Inventory or the merchandise that is the subject of such sales, or as a result
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of any other transaction of Borrower, which tax Lender is or may be required to
withhold or pay, Borrower agrees to indemnify and hold harmless Lender in
connection with such taxes (including penalties and interest), and Borrower
shall immediately reimburse Lender for any such amounts paid by Lender, and such
amounts shall be added to the Secured Obligations pursuant to the terms hereof.
CORPORATE EXISTENCE. Borrower and each Guarantor shall maintain its
corporate existence and good standing in the state of its incorporation, and its
qualification and good standing as a foreign corporation in each jurisdiction in
which such qualification is necessary pursuant to applicable law.
COMPLIANCE WITH LAW AND OTHER AGREEMENTS. Borrower and each Guarantor
shall maintain its business operations and property owned or used in connection
therewith in compliance with (a) all applicable federal, state and local laws,
regulations and ordinances governing such business operations and the use and
ownership of such property, and (b) all agreements, licenses, franchises,
indentures and mortgages to which Borrower or either Guarantor is a party or by
which Borrower, either Guarantor or any of their properties is bound. Without
limiting the foregoing, Borrower and each Guarantor shall pay all of its
indebtedness promptly in accordance with the terms thereof.
NOTICE OF DEFAULT. Borrower and Guarantors shall give written notice to
Lender of the occurrence of any default, event of default or Event of Default
under this Agreement or any other Loan Document promptly upon the occurrence
thereof.
NOTICE OF LITIGATION. Borrower and Guarantors shall give notice, in
writing, to Lender of (a) any actions, suits or proceedings wherein the amount
at issue is in excess of $250,000, instituted by any persons against Borrower or
either Guarantor, or affecting any of the assets of Borrower or either
Guarantor, and (b) any dispute, not resolved within sixty (60) days of the
commencement thereof, between Borrower or either Guarantor on the one hand and
any governmental or regulatory body on the other hand, which might reasonably be
expected to have a material adverse effect on the business operations or
financial condition of Borrower or either Guarantor.
ENVIRONMENTAL MATTERS.
() Borrower and Guarantors will cause the Property to remain free
of all Hazardous Wastes, and to remain free of all Hazardous Materials
other than those maintained therein or thereon in full compliance with
Environmental Laws. Neither Borrower nor either Guarantor will cause or
permit the Property to be used to generate, manufacture, refine,
transport, treat, store, handle, dispose, transfer, produce or process
Hazardous Materials except in full compliance with Environmental Laws.
() Borrower and Guarantors will notify Lender immediately if they
receive any notice or obtain knowledge of any noncompliance with or
violation of any Environmental Laws with respect to the Property or the
Business.
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() In the event that Hazardous Materials unrelated to the
Business, or Hazardous Wastes, are discovered on or are brought onto
the Property, Borrower and Guarantors will cause such Hazardous
Materials or Hazardous Wastes to be removed and disposed of promptly
and in full compliance with Environmental Laws. Borrower and Guarantors
will provide Lender prior written notice of such removal and disposal
actions.
() Borrower and Guarantors will comply with all Environmental
Laws in all jurisdictions in which Borrower or either Guarantor
operates, now or in the future, and will comply with all Environmental
Laws that in the future become applicable to the Property or the
Business.
MERGERS, CONSOLIDATIONS, ACQUISITIONS AND SALES. Without the prior
express written consent of Lender, neither Borrower nor either Guarantor shall
(a) be a party to any merger, consolidation or corporate reorganization, (b)
purchase or otherwise acquire all or substantially all of the assets or stock
of, or any partnership or joint venture interest in, any other person, firm or
entity, (c) sell, transfer, convey, grant a security interest in or lease all or
any substantial part of its assets, nor (d) create any subsidiaries nor convey
any of its assets to any subsidiary; provided, however, Borrower or either
Guarantor may make acquisitions of all or substantially all of the stock or
assets of other entities, so long as (i) no Event of Default exists hereunder,
(ii) the purchase price payable in connection with each such acquisition,
including the fair market value of any non-cash consideration, does not exceed
$5,000,000, and (iii) any subsidiary of Borrower or either Corporate Guarantor
created or acquired in connection with any such acquisition shall guarantee the
indebtedness of Borrower to Lender and grant Lender a security interest in all
of its assets to secure its obligations and the obligations of Borrower to
Lender, all pursuant to documentation in form and substance satisfactory to
Lender in all respects.
MANAGEMENT, OWNERSHIP. Neither Borrower nor either Guarantor shall
permit any significant change in its ownership, executive staff or management
without the prior written consent of Lender. The ownership, executive staff and
management of Borrower and Guarantors are material factors in Lender's
willingness to institute and maintain a lending relationship with Borrower.
DIVIDENDS, ETC. Neither Borrower nor either Guarantor shall declare or
pay any dividend of any kind, in cash or in property, on any class of its
capital stock, nor purchase, redeem, retire or otherwise acquire for value any
shares of such stock, nor make any distribution of any kind in respect thereof,
nor make any return of capital to shareholders, nor make any payments in respect
of any pension, profit sharing, retirement, stock option, stock bonus, incentive
compensation or similar plan (except as required or permitted hereunder),
without the prior written consent of Lender. Without limiting the foregoing, not
less than seventy-five percent (75%) of the net proceeds of any equity offering
by Borrower or either Guarantor shall be retained and shall not be paid out as
dividends or otherwise distributed to shareholders.
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GUARANTIES; LOANS. Neither Borrower nor either Guarantor shall
guarantee nor be liable in any manner, whether directly or indirectly, or become
contingently liable after the date of this Agreement in connection with the
obligations or indebtedness of any person or persons, except for the indorsement
of negotiable instruments payable to Borrower or Guarantors for deposit or
collection in the ordinary course of business. Neither Borrower nor either
Guarantor shall make any loan, advance or extension of credit to any person
other than in the normal course of its business.
DEBT. Neither Borrower nor either Guarantor shall create, incur, assume
or suffer to exist indebtedness of any description whatsoever in an aggregate
amount in excess of $250,000 (excluding the indebtedness evidenced by the Note,
trade accounts payable and accrued expenses incurred in the ordinary course of
business and the indorsement of negotiable instruments payable to Borrower or
Guarantors for deposit or collection in the ordinary course of business).
CONDUCT OF BUSINESS. Borrower and Guarantors will continue to engage,
in an efficient and economical manner, in a business of the same general type as
conducted by them on the date of this Agreement.
MAINTENANCE OF COLLATERAL. Borrower will maintain all tangible personal
property constituting any part of the collateral described in the Security
Instruments in good condition and repair and will pay all costs and expenses
incurred in the maintenance of same, and will not permit any act or occurrence
that may impair the value thereof. Prior to the occurrence of an Event of
Default, Borrower shall be entitled to possession of such tangible collateral
and to use same in any lawful manner permitted hereunder, provided that such use
does not cause excessive wear and tear to such collateral, nor cause it to
decline in value at an excessive rate, nor violate the terms of any policy of
insurance thereon.
SALE OF INVENTORY. Borrower will not sell, lease, exchange or otherwise
dispose of any of that portion of the collateral that consists of Inventory, nor
remove the same from its place(s) of business as described herein, without the
prior written consent of Lender, except in the ordinary course of business for
cash or on open account or on terms of payment ordinarily extended to its
customers. Upon the sale, exchange or other disposition of said Inventory, the
security interest and lien created and provided for herein, without break in
continuity and without further formality or act, shall continue in and attach to
any proceeds thereof, including but not limited to accounts, chattel paper,
contract rights, shipping documents, documents of title and cash or non-cash
proceeds, and in the event of any unauthorized sale, shall also continue in said
Inventory itself. All chattel paper shall be delivered to Lender promptly upon
receipt.
SPECIAL AGREEMENTS OF BORROWER WITH RESPECT TO RECEIVABLES AND
INVENTORY.
() By the execution of this Agreement, Lender shall not be
obligated to do or perform any of the acts or things to be done or
performed by Borrower pursuant to any contracts in which Lender has a
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security interest, but Lender may, at its election, perform some or all
of the obligations provided in said contracts to be performed by
Borrower, and if Lender incurs any liability or expenses by reason
thereof, same shall be payable by Borrower upon demand and same shall
also be secured by this Agreement and the other Loan Documents. Lender
shall be subrogated to all guaranties and security now or hereafter in
Borrower's possession or favor.
() If requested by Lender following the occurrence of an Event
of Default, Borrower shall immediately notify all account debtors to
direct payments to Lender or to a lockbox in accordance with a Lockbox
Service Agreement to be entered into between Borrower and Lender at
Lender's request. Borrower will forthwith on receipt of all checks,
drafts, cash and other remittances in payment of inventory sold, or in
payment on account of Borrower's Receivables, deposit the same in a
special bank account maintained with Lender over which Lender alone has
power of withdrawal. Said proceeds shall be deposited in precisely the
form received, except for the indorsement of Borrower where necessary
to permit collection of items, which indorsement Borrower agrees to
make, and which Lender is also hereby authorized to make on Borrower's
behalf. Pending such deposit, Borrower agrees that it will not
commingle any such checks, drafts, cash or other remittances with any
of Borrower's other funds or property, but will hold them separate and
apart therefrom and in trust for Lender until deposit thereof is made
in the special account. The funds in said account and any funds
collected by Lender under a Lockbox Service Agreement shall be held by
Lender as additional security for the Secured Obligations. Lender may
on a daily basis apply the whole or any part of the collected funds on
deposit in the special account and from the lockbox against the Secured
Obligations, and the amount, order and method of such application shall
be in the discretion of Lender; provided, however, that so long as no
Event of Default (or event that with the giving of notice or the
passage of time or both would constitute an Event of Default) has
occurred and is existing, said collected funds will be applied first to
the outstanding principal balance of, and accrued and unpaid interest
on, the Loan, in such order of priority as Lender shall determine. Any
portion of said funds on deposit in the special account and from the
lockbox that Lender elects not to so apply may be paid over by Lender
to Borrower.
() Without limiting the provisions of subsection 5.21(b)
hereof, Borrower acknowledges and agrees that, upon the occurrences of
an Event of Default, Lender shall have the right to notify the account
debtors obligated on any or all of Borrower's Receivables to make
payment thereof direct to Lender, and to take control of all proceeds
of any such Receivables, and charge the collection costs and expenses
to Borrower. Until Lender gives Borrower other instructions, Borrower
shall continue to make collections of all Receivables for Lender. All
payments on account of Receivables, or as proceeds of any collateral,
whether such payments are made by check, draft, cash, money order, wire
transfer, or otherwise, shall be the specific property of Lender.
Borrower shall receive such payments as trustee for Lender and shall
immediately deliver them to Lender in their original form as received.
() Lender shall be privileged to enjoy all the rights and
remedies of Borrower as to the Receivables and shall be and become
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subrogated to all guaranties and securities possessed by Borrower or
due to come into Borrower's hands, but Lender shall not be liable in
any manner for exercising or refusing to exercise any rights thereby
bestowed.
() Borrower shall notify Lender promptly of all returns and
recoveries of merchandise and of all disputes and claims where the
amount at issue exceeds $25,000 in the aggregate, and Borrower shall
settle or adjust disputes and claims directly with customers for
amounts and upon terms it considers advisable and dispose of
merchandise returns as it sees fit, unless Lender directs Borrower to
make such settlements, adjustments and disposals subject to Lender's
approval. In all cases Lender will credit the Loan with only the net
amounts received by Borrower in payment of Receivables.
() Borrower hereby appoints the officers of Lender and/or any
other person whom Lender may designate as Borrower's
attorney(s)-in-fact with full power to endorse Borrower's name on any
checks, notes, acceptances, money orders, drafts or other forms of
payment or security that may come in Lender's possession; to sign
Borrower's name on any invoice or bill of lading relating to any
Receivable, on drafts against customers, on schedules of assignments of
Receivables, on notices of assignment, on financing statements,
applications for noting of liens on certificates of title and other
public records or documents of any kind as necessary or desirable to
insure perfection or enforceability of Lender's security interests in
or liens on property of Borrower granted hereunder or otherwise, on
verification of accounts and on notices to customers; to notify the
post office authorities to change the address for delivery of
Borrower's mail to an address designated by Lender; to receive, open
and dispose of all mail addressed to Borrower; to send requests for
verifications of accounts to customers; and to do all other things
Lender deems necessary to carry out this Agreement. Borrower hereby
ratifies and approves all acts of the attorney(s) and neither Lender
nor the attorney(s) for Lender will be liable for any acts of
commission or omission, nor for any error of judgment or mistake of
fact or law. This power, being coupled with an interest, is irrevocable
so long as any money remains owing to Lender from Borrower.
() Lender will be entitled to hold all sums at any time
standing to Borrower's credit on Lender's books and all of Borrower's
property at any time in Lender's possession, or upon or in which Lender
at any time has a lien or security interest, as security for all of
Borrower's obligations at any time owing to Lender, its parent
corporation, subsidiary, co-subsidiary or affiliate, whether such
obligations are direct or indirect, absolute or contingent, under this
Agreement or otherwise. Such obligations shall include, without
limitation, all loans, advances, debts, liabilities, obligations for
purchases made by Borrower from other clients factored or financed by
Lender or from any such parent, subsidiary, co-subsidiary or affiliate,
whether such obligations are absolute or contingent, or under this
Agreement or otherwise, no matter how or when arising and whether due
or to become due, and further including all interest, fees, charges,
expenses and attorney's fees chargeable to Borrower's loan account or
incurred in connection with Borrower's loan account whether provided
for herein or in any other agreement between Borrower and Lender, and
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Lender shall have the right to charge to Borrower's loan account the
amounts of all such obligations and pay over such amounts to such
parent, subsidiary, co-subsidiary or affiliate.
PLACES OF BUSINESS; MOBILE GOODS. Borrower will not change the location
of its chief place of business, chief executive office or any place of business
disclosed to Lender pursuant to Section 4.5 hereof, nor will Borrower move any
of the tangible personal property constituting a part of the collateral for the
Secured Obligations to any other location(s) (except during temporary periods in
the normal and customary use thereof), nor will Borrower change the location at
which it maintains its records concerning the intangible collateral for the
Secured Obligations, without thirty (30) days' prior written notice to Lender in
each instance. If any of the tangible collateral for the Secured Obligations
constitutes goods of a type normally used in more than one state (whether or not
actually so used), Borrower will contemporaneously with the execution hereof
furnish to Lender a list of all states in which such goods are or will be used,
and hereafter will notify Lender in writing of any other state(s) in which such
goods are or will be so used.
ERISA PLAN. If Borrower has in effect, or hereafter institutes (with
Lender's consent, as hereinafter provided), a pension plan that is subject to
the requirements of Title IV of the Employee Retirement Income Security Act of
1974, Pub. L. No. 93 406, September 2, 1974, 88 Stat. 829, 29 U.S.C.A. ss. 1001
et seq. (1975), as amended from time to time ("ERISA"), then the following
warranty and covenants shall be applicable during such period as any such plan
(the "Plan") shall be in effect: (a) Borrower hereby warrants that no fact that
might constitute grounds for the involuntary termination of the Plan, or for the
appointment by the appropriate United States District Court of a trustee to
administer the Plan, exists at the time of execution of this Agreement, (b)
Borrower hereby covenants that throughout the existence of the Plan, Borrower's
contributions under the Plan will meet the minimum funding standards required by
ERISA and Borrower will not institute a distress termination of the Plan, (c)
Borrower hereby covenants that the Plan's annual financial and actuarial
statements and the Plan's annual Form 5500 information return will be filed with
Lender within thirty (30) days of the preparation thereof, and (d) Borrower
covenants that it will send to Lender a copy of any notice of a reportable event
(as defined in ERISA) required by ERISA to be filed with the Labor Department or
the Pension Benefit Guaranty Corporation, at the time that such notice is so
filed.
No Plan shall be instituted by Borrower unless Lender shall have given
its written consent thereto.
ARTICLE
FINANCIAL COVENANTS
NET WORTH REQUIREMENTS. Borrower and Guarantors shall at all times
maintain a minimum tangible net worth of $12,000,000, calculated on a
consolidated basis. For purposes of this covenant, "tangible net worth" shall
refer to the excess of Borrower's and Guarantors' total assets above the sum of
their intangible assets plus total liabilities (exclusive of any debt
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subordinated to indebtedness of Borrower or Guarantors to Lender), all
determined in accordance with generally accepted accounting principles
consistently applied.
DEBT TO WORTH RATIO. Borrower and Guarantors shall at all times
maintain a ratio of total liabilities (exclusive of any debt subordinated to
indebtedness of Borrower or Guarantors to Lender) to tangible net worth of not
more than 2.0 to 1.0, calculated on a consolidated basis. For purposes of this
covenant, "tangible net worth" shall have the meaning set forth in Section 6.1
hereof.
INTEREST COVERAGE RATIO. Borrower and Guarantors shall maintain a ratio
of earnings before interest and taxes to interest expense, all determined in
accordance with generally accepted accounting principles consistently applied,
calculated on a consolidated basis as of the last day of each September,
December, March and June, for the then-previous twelve-month period (beginning
September 30, 1999), of not less than 4.0 to 1.0.
ARTICLE
DEFAULT AND REMEDIES
EVENTS OF DEFAULT. The occurrence of any of the following shall
constitute an Event of Default hereunder:
() Failure to make payment of the principal of or interest on the
indebtedness evidenced by the Note within five (5) days of when due;
() Any misrepresentation by Borrower or either Guarantor as to
any material matter hereunder or under any of the other Loan Documents,
or delivery by Borrower or either Guarantor of any schedule, statement,
resolution, report, certificate, notice or writing to Lender that is
untrue in any material respect on the date as of which the facts set
forth therein are stated or certified;
() Failure of Borrower or any Guarantor to perform any of its
obligations under Sections 5.7, 5.9 or 5.12 of this Agreement within
fifteen (15) days after the earlier of (i) written notice from Lender
to Borrower of such failure to perform, or (ii) the date Borrower
becomes aware of such failure to perform;
() Failure of Borrower or either Guarantor to perform any other
of its obligations under this Agreement, the Note, any of the Security
Instruments or any of the other Loan Documents;
() Borrower or either Guarantor (i) shall generally not pay or
shall be unable to pay its debts as such debts become due; or (ii)
shall make an assignment for the benefit of creditors or petition or
apply to any court or tribunal for the appointment of a custodian,
receiver or trustee for it or a substantial part of its assets; or
(iii) shall commence any proceeding or case under any bankruptcy,
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reorganization, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, whether now or
hereafter in effect; or (iv) shall have had any such petition or
application filed or any such proceeding or case commenced against it
in which an order for relief is entered or an adjudication or
appointment is made; or (v) shall indicate, by any act or omission, its
consent to, approval of or acquiescence in any such petition,
application, case, proceeding or order for relief or the appointment of
a custodian, receiver or trustee for it or a substantial part of its
assets; or (vi) shall suffer any such custodianship, receivership or
trusteeship to continue undischarged for a period of thirty (30) days
or more;
() Borrower or either Guarantor shall be liquidated, dissolved,
partitioned or terminated, or the charter or certificate of authority
thereof shall expire or be revoked;
() A default or event of default shall occur under any of the
other Loan Documents;
() Borrower or either Guarantor shall default in the timely
payment or performance of any obligation now or hereafter owed to
Lender in connection with any other indebtedness of Borrower or either
Guarantor now or hereafter owed to Lender;
() Lender shall reasonably suspect the occurrence of one or more
of the aforesaid events of default and Borrower, upon the written
request of Lender, shall fail to provide evidence reasonably
satisfactory to Lender that such event or events of default have not in
fact occurred; or
() Lender in good faith shall deem itself insecure.
ACCELERATION OF MATURITY; REMEDIES. Upon the occurrence of any Event of
Default described in subsection 7.1(d) hereof as it relates to Borrower, the
indebtednesses evidenced by the Note as well as any and all other indebtedness
of Borrower to Lender shall be immediately due and payable in full; and upon the
occurrence of any other Event of Default described above (including but not
limited to subsection 7.1(d) hereof as it relates to any Guarantor), Lender at
any time thereafter may at its option accelerate the maturity of the
indebtednesses evidenced by the Note as well as any and all other indebtedness
of Borrower to Lender; all without notice of any kind. Upon the occurrence of
any such Event of Default and the acceleration of the maturity of the
indebtednesses evidenced by the Note:
() any obligation of Lender to advance any proceeds under the
Loan shall immediately cease and be of no further force nor effect, and
Lender shall be immediately entitled to exercise any and all rights and
remedies possessed by Lender pursuant to the terms of the Security
Instruments and all of the other Loan Documents;
() Lender shall have all of the rights and remedies of a secured
party under the Uniform Commercial Code; and
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() Lender shall have any and all other rights and remedies that
Lender may now or hereafter possess at law, in equity or by statute.
RIGHT OF SETOFF. Without limitation of the foregoing, upon the
occurrence and during the continuance of any Event of Default, Lender is hereby
authorized at any time and from time to time, without notice to Borrower or
Guarantors (any such notice being expressly waived by Borrower and Guarantors),
to set off and apply any and all deposits (general or special, time or demand,
provisional or final) at any time held by Lender or any of its affiliates, and
any other indebtedness at any time owing by Lender or its affiliates to or for
the credit or the account of Borrower or Guarantors, against any and all of the
Secured Obligations, irrespective of whether Lender shall have made any demand
under this Agreement or the Note or any other Loan Document and although such
obligations may be unmatured. Lender agrees to notify Borrower or Guarantors (as
applicable) within a reasonable time after any such setoff and application;
provided that the failure to give such notice shall not affect the validity of
such setoff and application. The rights of Lender under this Section 7.3 are in
addition to any other rights and remedies (including, without limitation, other
rights of setoff) that Lender may have.
REMEDIES CUMULATIVE; NO WAIVER. No right, power or remedy conferred
upon or reserved to Lender by this Agreement or any of the other Loan Documents
is intended to be exclusive of any other right, power or remedy, but each and
every such right, power and remedy shall be cumulative and concurrent and shall
be in addition to any other right, power and remedy given hereunder, under any
of the other Loan Documents or now or hereafter existing at law, in equity or by
statute. No delay or omission by Lender to exercise any right, power or remedy
accruing upon the occurrence of any Event of Default shall exhaust or impair any
such right, power or remedy or shall be construed to be a waiver of any such
Event of Default or an acquiescence therein, and every right, power and remedy
given by this Agreement and the other Loan Documents to Lender may be exercised
from time to time and as often as may be deemed necessary by Lender.
PROCEEDS OF REMEDIES. Any or all proceeds resulting from the exercise
of any or all of the foregoing remedies shall be applied as set forth in the
Loan Document(s) providing the remedy or remedies exercised; if none is
specified, or if the remedy is provided by this Agreement, then as follows:
First, to the costs and expenses, including reasonable
attorney's fees and expenses, incurred by Lender in connection with the
exercise of its remedies;
Second, to the expenses of curing the default that has
occurred, in the event that Lender elects, in its sole discretion, to
cure the default that has occurred;
Third, to the payment of the Secured Obligations, including
but not limited to the payment of the principal of and interest on the
indebtednesses evidenced by the Note, in such order of priority as
Lender shall determine in its sole discretion; and
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Fourth, the remainder, if any, to Borrower or to any other
person lawfully thereunto entitled.
ARTICLE
MISCELLANEOUS
INDEPENDENCE OF COVENANTS. All covenants hereunder shall be given
independent effect so that if a particular action or condition is not permitted
by any of such covenants, the fact that it would be permitted by an exception
to, or otherwise would be within the limitations of, another covenant shall not
avoid the occurrence of an Event of Default if such action is taken or condition
exists.
PERFORMANCE BY LENDER.
() Lender may file one or more financing statements disclosing
Lender's security interests under this Agreement and the other Loan
Documents without the signature of Borrower appearing thereon, and
Borrower shall pay the costs of, or incidental to, any recording or
filing of any financing statements concerning the collateral security
described in the Security Instruments. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or
any other Security Instrument or of a financing statement is sufficient
as a financing statement.
() If Borrower or Guarantors shall default in the payment,
performance or observance of any covenant, term or condition of this
Agreement, Lender may, at its option, pay, perform or observe the same,
and all payments made or costs or expenses incurred by Lender in
connection therewith (including but not limited to reasonable
attorney's fees and expenses), with interest thereon at the default
rate provided in the Note (if none, then at the maximum rate from time
to time allowed by applicable law), shall be immediately repaid to
Lender by Borrower and Guarantors and shall constitute a part of the
Secured Obligations and be secured hereby until fully repaid. Lender
shall determine at its sole discretion the necessity for any such
actions and of the amounts to be paid.
COSTS AND EXPENSES. Borrower agrees to pay all costs and expenses
incurred by Lender in connection with the making of the Loan, including but not
limited to filing fees, recording taxes and reasonable attorney's fees and
expenses, promptly upon demand of Lender. Borrower further agrees to pay all
premiums for insurance required to be maintained pursuant to the terms of the
Loan Documents and all of the out-of-pocket costs and expenses incurred by
Lender in connection with the administration, servicing and/or collection of the
Loan, including but not limited to reasonable attorney's fees and expenses,
promptly upon demand of Lender.
ASSIGNMENT. The Note, this Agreement and the other Loan Documents may
be endorsed, assigned and/or transferred in whole or in part by Lender, and any
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such holder and/or assignee of the same shall succeed to and be possessed of the
rights and powers of Lender under all of the same to the extent transferred and
assigned. Lender may grant participations in all or any portion of its interest
in the indebtednesses evidenced by the Note. Borrower shall not assign any of
its rights nor delegate any of its duties hereunder or under any of the other
Loan Documents without the prior express written consent of Lender.
SUCCESSORS AND ASSIGNS INCLUDED IN PARTIES. Subject to the provisions
of Section 8.4 hereof, whenever in this Agreement one of the parties hereto is
named or referred to, the heirs, legal representatives, successors,
successors-in-title and assigns of such parties shall be included, and all
covenants and agreements contained in this Agreement by or on behalf of Borrower
or by or on behalf of Lender shall bind and inure to the benefit of their
respective heirs, legal representatives, successors-in-title and assigns,
whether so expressed or not.
THIRD PARTY BENEFICIARIES. This Agreement and the other Loan Documents
are intended for the sole and exclusive benefit of the parties hereto and their
respective successors and permitted assigns, and shall not serve to confer any
rights or benefits in favor of any person not a party hereto. No other person
shall have any right to rely on this Agreement or the other Loan Documents, or
to derive any benefit herefrom.
TIME OF THE ESSENCE. Time is of the essence with respect to each and
every covenant, agreement and obligation of Borrower and Guarantors hereunder
and under all of the other Loan Documents.
SEVERABILITY. If any provision(s) of this Agreement or the application
thereof to any person or circumstance shall be invalid or unenforceable to any
extent, the remainder of this Agreement and the application of such provisions
to other persons or circumstances shall not be affected thereby and shall be
enforced to the greatest extent permitted by law.
INTEREST AND LOAN CHARGES NOT TO EXCEED MAXIMUM ALLOWED BY LAW.
Anything in this Agreement, the Note, the Security Instruments or any of the
other Loan Documents to the contrary notwithstanding, in no event whatsoever,
whether by reason of advancement of proceeds of the Loan, acceleration of the
maturity of the unpaid balance of the Loan or otherwise, shall the interest and
loan charges agreed to be paid to Lender for the use of the money advanced or to
be advanced hereunder exceed the maximum amounts collectible under applicable
laws in effect from time to time. It is understood and agreed by the parties
that, if for any reason whatsoever the interest or loan charges paid or
contracted to be paid by Borrower in respect of the indebtednesses evidenced by
the Note shall exceed the maximum amounts collectible under applicable laws in
effect from time to time, then ipso facto, the obligation to pay such interest
and/or loan charges shall be reduced to the maximum amounts collectible under
applicable laws in effect from time to time, and any amounts collected by Lender
that exceed such maximum amounts shall be applied to the reduction of the
principal balance(s) of the indebtednesses evidenced by the Note and/or refunded
to Borrower so that at no time shall the interest or loan charges paid or
payable in respect of the indebtednesses evidenced by the Note exceed the
maximum amounts permitted from time to time by applicable law.
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ARTICLE AND SECTION HEADINGS; DEFINED TERMS. Numbered and titled
article and section headings and defined terms are for convenience only and
shall not be construed as amplifying or limiting any of the provisions of this
Agreement.
NOTICES. Any and all notices, elections or demands permitted or
required to be made under this Agreement shall be in writing and shall be
delivered personally, telecopied or sent by certified mail or nationally
recognized courier service (such as Federal Express), to the other party at the
address set forth below, or at such other address as may be supplied in writing
by the party whose address is being changed and of which receipt has been
acknowledged in writing. The date of personal delivery or telecopy or the date
of mailing (or delivery to such courier service), as the case may be, shall be
the date of such notice, election or demand. For the purposes of this Agreement:
The address of Lender is:
SouthTrust Bank, National Association
230 Fourth Avenue North
8th Floor
Nashville, Tennessee 37219
Attention: Marci Osesek
Telecopy Number: 615/880-4004
with a copy to:
Bass, Berry & Sims PLC
2700 First American Center
Nashville, Tennessee 37238
Attention: Felix R. Dowsley, III
Telecopy Number: 615/742-2728
The address of Borrower is:
Nor'easter Micro, Inc.
803 Third Avenue North
Nashville, Tennessee 37210
Attention: Jay Nash
Telecopy Number: 615/254-9318
with a copy to:
Kirkpatrick & Lockhart LLP
Miami Center, 20th Floor
201 South Biscayne Boulevard
Miami, Florida 33131-2399
Attention: Clayton E. Parker, Esq.
Telecopy Number: 305/358-7095
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The addresses of Guarantors are:
European Micro Holdings, Inc.
6073 N.W. 167th Street, Unit C-25
Miami, Florida 33015
Attention: Frank Cruz
Telecopy Number: 305/825-7774
American Micro Computer Center, Inc.
6073 N.W. 167th Street, Unit C-25
Miami, Florida 33015
Attention: Frank Cruz
Telecopy Number: 305/825-7774
INTEGRATION. This Agreement and the Loan Documents contain the entire
agreement between the parties relating to the subject matter hereof and
supersede all oral statements and prior writings with respect thereto.
INDEMNITY. Borrower and Guarantors hereby agree to defend, indemnify,
and hold Lender harmless from and against any and all claims, damages,
judgments, penalties, costs and expenses (including reasonable attorney's fees
and expenses and court costs now or hereafter arising from the aforesaid
enforcement of this clause) arising directly or indirectly from the activities
of Borrower or Guarantors, their predecessors in interests, or third parties
with whom they have a contractual relationship, or arising directly or
indirectly from the violation of any law, whether such claims are asserted by
any governmental agency or any other person. This indemnity shall survive the
termination of this Agreement.
JURY TRIAL WAIVER. BORROWER, GUARANTORS AND LENDER HEREBY WAIVE TRIAL
BY JURY IN ANY ACTION, PROCEEDING, CLAIM OR COUNTER-CLAIM, WHETHER IN CONTRACT
IN TORT, AT LAW OR IN EQUITY, ARISING OUT OF OR IN ANY WAY RELATED TO THIS
AGREEMENT OR THE LOAN DOCUMENTS.
VENUE. All actions or proceedings in any way, manner or respect arising
out of or from or related to this Agreement shall be litigated in courts having
situs within the City of Nashville, State of Tennessee. Borrower and Guarantors
hereby consent and submit to the jurisdiction of any local, state or federal
courts located within said city and state.
MISCELLANEOUS. This Agreement shall be construed and enforced under the
laws of the State of Tennessee. No amendment, modification, termination or
waiver of any provision of any Loan Document to which Borrower or either
Guarantor is a party, nor consent to any departure by Borrower or either
Guarantor from compliance with the terms of any Loan Document to which it is a
party, shall be effective unless the same shall be in writing and signed on
behalf of Lender by a duly authorized officer of Lender, and then such waiver or
26
<PAGE>
consent shall be effective only in the specific instance and for the specific
purpose for which given.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement, or
have caused this Agreement to be executed by their duly authorized officers, as
of the day and year first above written.
LENDER:
SOUTHTRUST BANK, NATIONAL ASSOCIATION
By:____________________________
Title:_________________________
BORROWER:
NOR'EASTER MICRO, INC.
By:_____________________________
Title:__________________________
GUARANTORS:
EUROPEAN MICRO HOLDINGS, INC.
By:_____________________________
Title:__________________________
AMERICAN MICRO COMPUTER CENTER, INC.
By:_____________________________
Title:__________________________
27
EXHIBIT 11.01
STATEMENT RE: COMPUTATION OF EARNINGS
The calculation of earnings per share is detailed in the table below:
THREE MONTHS ENDED
SEPTEMBER 30,
------------------------
1999 1998
EARNINGS
Net income (in thousands) $207 $722
--------- ---------
WEIGHTED AVERAGE NUMBER OF SHARES
Outstanding common stock during the period 4,933,900 4,933,900
Contingently issuable shares 85,107 -
--------- ---------
BASIC WEIGHTED AVERAGE NUMBER OF SHARES 5,019,007 4,933,900
Effect of dilutive stock options and other
contingent shares 995 -
--------- ---------
DILUTED WEIGHTED AVERAGE NUMBER OF SHARES 5,020,002 4,933,900
========= =========
Basic earnings per share $0.04 $0.15
========= =========
Diluted earning per share $0.04 $0.15
========= =========
During the three-month period ended September 30, 1999, the Company issued
options to purchase 7,500 shares of its common stock at an exercise price of
$7.50. The above dilutive earnings per share calculations for the three-month
period ended September 30, 1999 and 1998, exclude the effect of options to
purchase 339,000 and 294,000, respectively, shares of common stock at exercise
prices ranging from $9.1875 to $12.00 per share, due to the fact they were
anti-dilutive. Also see "Note 4 (Goodwill) to the Consolidated Condensed
Financial Statements" related to contingently issuable shares related to
acquisitions. The effect of contingent shares related to the guaranteed earn-out
amount not paid at the closing of the Sunbelt acquisition and the effect of
satisfactory completion of part of the first contingent earn-out has been
included in the above basic earnings per share calculations. However, the
remainder of the first contingent earn-out and all of the second contingent
earn-out are not included, as the conditions necessary for such contingent
shares to be issued have not been met as of September 30, 1999. The effect of
contingent shares related to the first and second earnouts of AMCC are not
included, as determination of the amount of such contingent shares to be issued
are not determinable.
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND CONSOLIDATED STATEMENT OF OPERATIONS OF THE
COMPANY AND THE NOTES THERETO SET FORTH IN THIS FILING. THIS INFORMATION IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL INFORMATION.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-START> JUL-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 6,072
<SECURITIES> 0
<RECEIVABLES> 14,532
<ALLOWANCES> 215
<INVENTORY> 7,409
<CURRENT-ASSETS> 28,869
<PP&E> 4,784
<DEPRECIATION> 932
<TOTAL-ASSETS> 35,651
<CURRENT-LIABILITIES> 17,862
<BONDS> 2,434
0
0
<COMMON> 49
<OTHER-SE> 15,026
<TOTAL-LIABILITY-AND-EQUITY> 35,651
<SALES> 32,764
<TOTAL-REVENUES> 32,764
<CGS> 29,067
<TOTAL-COSTS> 3,066
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 16
<INTEREST-EXPENSE> 180
<INCOME-PRETAX> 449
<INCOME-TAX> 242
<INCOME-CONTINUING> 207
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 207
<EPS-BASIC> 0.04
<EPS-DILUTED> 0.04
</TABLE>
