<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 15, 2000
REGISTRATION NO. 2-87197
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 AND 15(D) OF THE
SECURITIES AND EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED: OCTOBER 31, 1999 COMMISSION FILE NUMBER: 0-24015
------------------------
DUNN COMPUTER CORPORATION
(Exact Name of Registrant as Specified in its Charter)
<TABLE>
<S> <C>
VIRGINIA 54-1890464
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification Number)
1306 SQUIRE COURT
DULLES, VIRGINIA 20166
(Address of principal executive office) (Zip Code)
</TABLE>
703-450-0400
Registrant's telephone number, including area code:
------------------------
SECURITIES REGISTERED UNDER SECTION 12(B) OF THE EXCHANGE ACT:
NONE
------------------------
SECURITIES REGISTERED UNDER SECTION 12(G) OF THE EXCHANGE ACT:
COMMON STOCK, PAR VALUE $.001 PER SHARE
------------------------
(Title of class)
Indicate by check mark whether the issuer (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the past 12 months (or for such shorter period that the issuer was required to
file such reports), and (2) has been subject to such filing requirements for the
past 90 days. Yes X No
Indicate by check mark if there is no disclosure of delinquent filers in
response to Item 405 of Regulation K contained in this form, and no disclosure
will be contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. / /
The aggregate market value of the voting and non-voting common equity held
by non-affiliates computed at $2.63 per share, the closing price of the Common
Stock on January 31, 2000, was $16,933,384.
The number of shares of the issuer's Common Stock outstanding as of
January 31, 2000 was 9,419,509.
DOCUMENTS INCORPORATED BY REFERENCE
Certain information called for by Part III of the Form 10-K will either be
filed with the Commission under Regulation 14A under the Securities Exchange Act
of 1934, as amended or by amendment to this Form 10-K, in either case on or
before February 28, 2000.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
Certain statements contained in this Annual Report regarding matters that
are not historical facts are forward-looking statements (as such term is defined
in the Private Securities Litigation Reform Act of 1995). Because such
statements include risks and uncertainties, actual results may differ materially
from those expressed or implied by such forward-looking statements. Factors that
could cause actual results to differ materially include, but are not limited to,
changes in component costs, the U.S. Government's available funding for
information technology purchases, the actions of competitors, the Company's
ability to retain its existing contracts and to procure additional contracts or
other selling vehicles and general economic conditions. These risks and others
are discussed in more detail in context throughout this document. The Company
disclaims any intent or obligation to update any forward-looking statement.
TABLE OF CONTENTS
PART I
<TABLE>
<S> <C> <C>
Item 1. Business.................................................... p. 2
Item 2. Properties.................................................. p. 8
Item 3. Legal Proceedings........................................... p. 8
Item 4. Submission of Matters to a Vote of Security Holders......... p. 9
PART II
Item 5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... p. 10
Item 6. Selected Financial Data..................................... p. 11
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... p. 12
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ p. 16
Item 8. Financial Statements and Supplementary Data................. p. 16
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... p. 16
PART III
Item 10. Directors and Executive Officers of the Registrant..........
Item 11. Executive Compensation......................................
Item 12. Security Ownership of Certain Beneficial Owners and
Management..................................................
Item 13. Certain Relationships and Related Transactions..............
(Part III information is incorporated by reference to portions of the
Company's definitive Proxy Statement to be filed pursuant to Regulation
14A)
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form
8-K......................................................... p. 17
</TABLE>
1
<PAGE>
PART I
ITEM 1. BUSINESS
GENERAL
Dunn Computer Corporation (together with its wholly-owned subsidiaries, the
"Company" or "Dunn") manufactures custom computer systems and provides related
services to departments, agencies and offices of the federal government (the
"Government") and selected businesses. The Company provides its customers with
single-source solutions by manufacturing its own brand of desktop and portable
computers and high performance network client servers and offering services,
which include network consulting, project implementation, and technical support.
The Company currently derives revenues from hardware sales to the Government and
to medium and large businesses. The Company sells its products and services to
more than 300 customers, including entities within the Department of Defense,
Administrative Office of the U.S. Courts, Lockheed Martin Corporation, Blue
Cross and Blue Shield Association and the District of Columbia Government.
In April 1997, the Company sold 1,000,000 shares of common stock ("Common
Stock") in an initial public offering for net proceeds of $3,917,664. In
connection with the offering, warrants were issued to the underwriter for
100,000 shares of common stock at an exercise price of $6.00 per share.
Beginning April 21, 1998, the warrants are exercisable for a period of four
years.
In September 1997, Dunn completed the acquisition of STMS, Inc. a
Virginia-based network services company ("STMS") which expanded Dunn's
capabilities to provide a wide variety of services including network consulting,
project implementation and technical support. The STMS acquisition provided the
Company new opportunities to sell computer hardware into the commercial
marketplace as part of a total package of information technology ("IT") hardware
and services tailored to meet the commercial customers' needs. By manufacturing
its own computer systems, the cost of which represents a significant portion of
the cost of a total project, the Company believes it has a sustainable
competitive advantage over other network service providers.
On May 1, 1998, Dunn acquired International Data Products, Corp. ("IDP Co.")
and the net assets of IDP Co.'s Puerto Rican affiliate, Puerto Rico Industrial
Manufacturing Operations, Corp. ("PRIMO" and together with IDP Co., "IDP"), for
approximately $22 million, consisting of a combination of cash and Common Stock
(the "IDP Acquisition"). When acquired, IDP was a leading supplier of portable
and desktop computers to the Government. In May 1998, in connection with the IDP
Acquisition, the Company completed a public offering of 3,491,493 shares of
Common Stock for net proceeds of $26,287,866.
In fiscal year 1999, the Company recorded a significant Goodwill impairment
charge of approximately $21 million associated with the IDP acquisition. This
was the result of the Company's loss of a significant contract with the U.S. Air
Force which was terminated for the convenience of the government during fiscal
1999. At acquisition date, the Company anticipated revenues from this contract
to be approximately $100 million had all option years been exercised. The
Company determined that the loss of this contract significantly impaired its
ability to recover the Goodwill associated with the purchase. Accordingly, the
Company recorded the Goodwill impairment charge. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations."
The Company seeks to establish itself as a leading provider of network
solutions to both the government and commercial markets. One of the key elements
of this strategy is integrating the Company's hardware and network services into
a total solution for its Government customers. In the commercial market,
management plans to leverage the Company's customer relationships developed
through sales of its network services to expand sales of its hardware products.
2
<PAGE>
PRODUCTS AND SERVICES
COMPUTER HARDWARE PRODUCTS
DESKTOPS: The Company manufactures a high performance line of Pentium II
and Pentium III based desktop computers that may be used on a standalone basis
or as part of a network. These systems are based on Intel motherboards to
guarantee high reliability and are "wired for management" to allow these
desktops, when connected to the network, to be monitored and controlled, by the
network. This technology helps ensure that desktops connected to a network are
properly configured and consistently operating the same level of software.
SERVERS: The Company markets a single, dual or quad processor version of
the Intel Pentium III and Zeon processor based systems. These servers are
designed to give the customer the highest level of performance and reliability
available in the market today. Based on Intel motherboards, these systems when
installed in conjunction with Dunn's desktops provide the "wired for management"
technology to ensure high availability and consistently configured systems on
the network. The Company believes that the server market offers opportunities
for higher profit margins compared to other sectors in the industry. With the
ever increasing popularity of the Internet, the server market represents a
significant growth sector for the Company. Additionally, servers sales
complement the Company's services business due to the complexity of server
installation and maintenance.
LAPTOPS: The Company assembles, on a brand name basis, a state-of-the-art
line of Laptops. These Laptops are produced in our Puerto Rico facility.
NETWORKING HARDWARE & SOFTWARE: The Company integrates, installs, and
maintains major brand networking hardware and software. The Company has
partnerships with companies like Network Associates, Inc (NAI), Cisco Systems,
Inc (Cisco Systems) and Marconi, Inc.
ORIGINAL EQUIPMENT MANUFACTURE (OEM): The Company manufactures, on an OEM
basis, hardware products for major network solutions providers.
TECHNICAL SERVICES
The Company provides network design, implementation, and support services
for wide-area and local-area networks. These services are provided to
commercial, federal government and state/local government clients in two
methods: Project-based and staffing-based engagements.
PROJECT-BASED ENGAGEMENTS: The Company provides network analysis, design,
and implementation services primarily in the form of short-term (less than three
months) projects. Specific completion criteria are achieved and deliverables
submitted to signify the end of the project. These network-engineering services
are performed for a fixed-fee upon completion or on an hourly labor basis at the
pre-negotiated price and estimated levels of effort.
Specific project-based services that the Company performs include network
design, systems implementation, integration, network security, software
migrations, and messaging system implementation. The Company strives to maintain
expertise in specific areas and technologies rather than be generalists in all
IT areas. By maintaining a focus, the Company can provide highly skilled
professionals and services that leverage our experience for maximum benefit to
the client. Project management is the key component of the Company's strategy
and success in project-based engagements.
STAFF AUGMENTATION: The Company provides network support services to our
clients in the form of fixed-rate hourly engineering services. Contracts with
commercial and Government clients typically range from one month to one year in
length. Staffing services consist of placing one or more network engineers, user
support technicians, or programmers on-site with a client. These professionals
perform work as a "virtual" employee for the client and typically work under the
direction and changing needs of the client's
3
<PAGE>
management. We provide skilled technical professionals to our customers, along
with technical support from our vendor partners such as Microsoft, Novell,
Cisco, and Network Associates.
Dunn's success in this area is achieved largely due to contract renewals and
increasing staffing requirements from existing customers. The market for
staffing is consistently increasing as customers try to focus on their core
business and contract Dunn to handle their IT support requirements.
GOVERNMENT CONTRACTS
In fiscal 1999, Dunn derived approximately 65% of its revenues from sales of
hardware and services to the Government pursuant to contracts with the General
Services Administration (GSA) or other agency-specific contracts. Most of these
contracts are leasing of equipment, blanket purchase agreement ("BPA") or
"indefinite delivery, indefinite quantity" ("IDIQ") contracts. Government
contracts, by their terms, generally can be terminated at anytime, without cause
for the convenience of the Government. If a Government contract is so
terminated, the contractor generally is entitled to receive compensation for the
services provided or certain costs incurred at the time of termination and a
reasonable profit on the contract work performed prior to the date of
termination. In addition, all Government contracts require compliance with
various contract provisions and procurement regulations and in certain cases,
accounting and audit requirements. If not cured, certain violations of these
regulations could result in the termination of the contract, imposition of
fines, and suspension or debarment from competing for or receiving awards of
additional Government contracts. Exclusion of the Company from federal
procurements, the termination of any of the Company's significant Government
contracts or the imposition of such penalties could have a material adverse
effect on the Company.
Substantially all of the Company's Government customers purchase equipment
and services from the Company on a long-term contract basis. By contrast, most
of the commercial customers purchase equipment and services by means of task and
open purchase orders.
DESKTOP V CONTRACT. Initially awarded to IDP, this contract was not renewed
in May 1999 and was officially terminated for the convenience of the Government
on October 8, 1999. The Company is currently negotiating a settlement with the
Government for recovery of certain costs incurred to support the contract. A
settlement proposal has been submitted to the Government, however, no agreement
has been reached as of January 31, 2000. The Company cannot estimate any
potential settlement amounts at this time.
Set forth below is a description of some of the Company's more significant
contracts as of October 31, 1999.
GSA CONTRACT. The Company has a multiple award schedule contract with GSA
(the "GSA" Contract). The Company's GSA contract was awarded in April 1996 and
is valid through March 31, 2002. GSA contracts enable Government IT purchasers
to acquire all of their requirements from a particular vendor and largely limits
the competition to selected vendors holding GSA contracts. For fiscal year 1999,
the Company's GSA contract had sales of $5.9 million, which accounted for
approximately 8.5% of the Company's revenues.
IT-21 CONTRACT. In January 1998, IDP was awarded a contract by the Fleet &
Industrial Supply Center, Norfolk Philadelphia Detachment for the IT-21 program
at the CINCLANTFLT Norfolk, VA. This contract is a five-year equipment lease
program in which the Company provides a full spectrum of IT products and
services to the CINCLANTFLT headquarters. A unique aspect of this program is its
"Technology Refresh" feature in which the Company periodically updates the
installed equipment to the latest technology at no incremental cost to the
Government. The leased equipment includes servers, workstations, desktops, hubs,
switches and printers. On-site sparing and 4-hour response time are also part of
the contract requirements. The contract to date total revenue is $4.5 million.
4
<PAGE>
PRSTARNET CONTRACT. After several protest delays, the Company was awarded a
contract with the Puerto Rican Government on January 5, 2000. The Company was
selected as one of several vendors to supply the Puerto Rican school systems
with laptop computers. The terms of the contract require the Company to deliver
approximately 11,000 computers to the Puerto Rican school system by
August 2000. The Company anticipates that this contract will generate
approximately $16 million in revenues for fiscal year 2000.
This contract represents Phase I of the Puerto Rican Government's plan to
increase the technological education in their school system. The Company will
bid on Phase II during fiscal 2000, which will supply the school system with
desktop computers for all students. The Company cannot predict the outcome of
its bid proposal.
COMMERCIAL CONTRACTS
In fiscal year 1999, Dunn derived approximately 30% of its revenues from
sales of hardware and services to the commercial marketplace. The Company's
commercial customer base consists of several Fortune 500 companies as well as
certain small local commercial customers. The Company anticipates continuing to
further increase its commercial customer base in the upcoming fiscal year. The
Company has been successful in developing and maintaining key partnerships with
industry leading companies such as Microsoft, Cisco, Sun and Network Associates.
These partnerships will enable the Company to further diversify its product mix
and attract high quality customers.
MANUFACTURING AND PRODUCTION
The Company's production capacity is 100,000 units per year in the existing
Sterling County facility on a three-shift basis. The Company also leases an
approximately 34,000 square-foot facility in Guayama, Puerto Rico, which is used
for manufacturing, technical support, and personal computer board level repair.
The Guayama facility is ISO 9002 certified, and has the capability to
manufacture 200,000 systems per year.
COMPETITION AND MARKETING
The markets for the Company's products and services are highly competitive.
Many of the Company's competitors offer broader product lines, have
substantially greater financial, technical, marketing and other resources than
the Company and may benefit from component volume purchasing and product and
process technology license arrangements that are more favorable in terms of
pricing and availability than the Company's arrangements. The Company also
competes with a large number of computer systems integrators, resellers and IT
services companies. The Company believes that it is likely that these
competitive conditions will continue in the future. There can be no assurance
that the Company will continue to compete successfully against existing or new
competitors that may enter markets in which the Company operates.
FEDERAL GOVERNMENT MARKET. The Information Technology Reform Act (the
"ITRA") which took effect on August 8, 1996 has had a profound effect on the way
Government procures computers and related products and services. The most
sweeping changes were (1) the repeal of the Brooks Act that had granted sole
authority for purchasing IT to the GSA and, (2) the change in the GSA Schedule
from a single-year small purchase contracting program to a multi-year, IDIQ
contract with no limit on the value of purchases. Prior to the new legislation,
the GSA was responsible for overseeing all IT purchases as well as assuring fair
and open competition. The new legislation has expanded Dunn's ability to market
and sell its products to Government users directly through its GSA contract and
BPA's awarded under the GSA schedule. The Company continues to make marketing
and sales efforts to take advantage of these changes in the federal market.
Since the passage of the ITRA, the Government has increased the amount of
information products acquired through the GSA Schedule. Although Dunn believes
it has benefited from this reform, the
5
<PAGE>
emergence of the GSA Schedule as a significant procurement vehicle has also
enabled traditional mass-market commercial computer companies to be more
responsive to Government requirements. The Company currently competes with
national commercial computer manufacturers such as Dell Computer Corporation
("Dell") and Gateway 2000, Inc. ("Gateway") for a portion of the Government
market.
There has been a consolidation in the industry as a result of acquisitions
and the failure of many firms. The competition for computer sales has settled
into a small group of competitors comprised of manufacturers and systems
integrators. The Company believes that the Government's selection criteria for
vendor selection consists of price, quality, familiarity with the vendor, and
size and financial capability of the vendor.
The following companies are significant competitors of the Company in the
Government market:
<TABLE>
<CAPTION>
COMPANY TYPE
- ------- ----
<S> <C>
Dell............................................. Manufacturer
Gateway.......................................... Manufacturer
Micron Technology, Inc. ("Micron")............... Manufacturer
Government Technology Services, Inc.............. Systems Integrator
Compaq........................................... Manufacturer
</TABLE>
COMMERCIAL MARKET
The microcomputer products industry is highly competitive. Pricing is very
aggressive in the industry and the Company expects pricing pressures to continue
to intensify. The microcomputer products industry is also characterized by rapid
changes in technology and consumer preferences, short product life cycles and
evolving industry standards.
The commercial market for IT services is a highly fragmented market served
by thousands of small value-added resellers. These companies typically service a
small geographic area and resell national brand computer and/or network
hardware. The Company believes its technical services can compete effectively in
the local market because it provides engineering services in conjunction with
products from its strategic partners; e.g., Network Associates, Inc., Cisco,
Microsoft, Marconi, Sun and Intel. The Company believes that its ability to
integrate the computer hardware (Dunn brand or any other) and networking
products provides its technical services group a competitive advantage.
Microcomputers are marketed through several distribution channels including
direct marketing, traditional microcomputer retailers, computer superstores,
consumer electronic and office supply superstores and other resellers. There are
many manufacturers of microcomputers; substantially all of which have greater
financial, marketing and technological resources than the Company. The Company
competes with manufacturers such as Compaq, Dell, Gateway, IBM and Packard Bell
NEC, Inc. The principal elements of competition are product reliability and
quality, customization, price, customer service, technical support, IT services
and product availability. There can be no assurance that the Company will in the
future be able to compete effectively against existing competitors, especially
companies who have historically focused their energies on the commercial market.
MARKETING
The Company markets to select commercial accounts and a wide array of
Government organizations including agencies within the Department of Defense,
civilian agencies and the judicial branch of the Government. The Company also
views the commercial market as an increasingly important part of its business.
The Company uses an in-house sales force and program managers to market its
products and services. Although Dunn markets nationally, the Company's marketing
efforts are concentrated in the Washington, D.C. metropolitan area and in the
state of Florida. Sales were made primarily to target commercial accounts. In
light of the company's pursuit of new commercial business and the new
6
<PAGE>
procurement legislation, which gives different Government users the ability to
purchase directly from vendors, the Company believes that marketing is becoming
increasingly important to its Government as well as to its commercial business.
The Company strives to build a strong relationship with its customers. The
Company believes that a key to building customer loyalty is a team of
knowledgeable and responsive account executives and technical and support staff.
The Company assigns each customer a trained account executive, to whom
subsequent calls to the Company will be directed. The Company believes that
these strong one-on-one relationships improve the likelihood that the customer
may consider the Company for future purchases. Product support technicians are
available 24 hours per day, seven days a week. The Company intends to continue
to provide its customers with products and technical services that offer the
customer the best value.
The Company uses electronic commerce technologies and believes that both the
Government and commercial customers will continue to expand the utilization of
these technologies. Internet and on-line computer services are being used by the
Government and commercial accounts to advertise opportunities, reference vendor
information and in some cases make actual purchases. The Company maintains a web
site on the Internet wherein its GSA catalogue and products can be referenced.
In addition, the Company provides the capability for customers to download
updated software and drivers that become available. The Company believes that
its targeted customer base will have a greater acceptance of these interactive
services because its customers tend to have a greater familiarity with
technology products and services.
SUPPLIERS
The Company devotes significant resources to establishing and maintaining
relationships with its suppliers. The Company, where possible, purchases
directly from component manufacturers such as Intel, Microsoft, Hitachi-Nissei
Sanyo America, Ltd., Cisco and Chicony Corp. The Company also purchases multiple
products directly from large national and regional distributors such as TechData
Corporation, Ingram Micro Incorporated, Decision Support Systems Incorporated,
Wyle Electronics and Bell Micro.
Suppliers provide the Company with incentives in the form of discounts,
rebates, credits, and cooperative advertising and market development funds. In
accordance with the terms of certain of the Company's Government contracts, the
Company provides periodic reporting of pertinent supplier contract terms and
conditions to contracting officials. As a product reseller, the Company must
continue to obtain products at competitive prices from leading suppliers in
order to provide competitively priced products for its customers. In the event
the Company is unable to purchase components from these suppliers, the Company
has alternative suppliers it can rely upon. The Company believes its
relationships with its key suppliers to be good and believes that generally
there are multiple sources of supply available should the need arise.
INVENTORY
Dunn has traditionally and will continue to purchase inventory to fill
orders received from our customers. The Company minimizes their inventory held
for warranty purposes and does not purchase inventory for speculative purposes.
PATENTS, TRADEMARKS AND LICENSES
The Company does not maintain a traditional research and development group,
but works closely with computer product suppliers and other technology
developers to stay abreast of the latest developments in computer technology.
While the Company does not believe that its continued success will depend upon
the rights to a patent portfolio, there can be no assurance that the Company
will continue to have access to existing or new technology for use in its
products.
7
<PAGE>
The Company conducts its business under the trademarks and service marks of
"Dunn", "Dunn Computer Corporation", "International Data Products," and "IDP."
The Company believes its trademarks and service marks have significant value and
are an important factor in the marketing of its products.
Because most software used on the Company's computers is not owned by the
Company, the Company has entered into software licensing arrangements with
several software manufacturers, including Microsoft.
EMPLOYEES
As of October 31, 1999, the Company employed 110 persons. Of such persons, 1
was employed in an executive capacity, 13 in sales and marketing, 19 in
administrative capacities, 30 in technical services and 47 in operations. As of
January 21, 2000 the Company employed 102 persons. None of Dunn's employees are
covered by a collective bargaining agreement. Dunn considers its relationships
with its employees to be good.
The Company believes that its future success will depend in large part upon
its continued ability to attract and retain highly qualified management,
technical and sales personnel. The computer industry is currently undergoing a
shortage of trained and experienced technicians. The Company endeavors to be
attractive to current and prospective employees and has an in-house training
program to produce its own supply of highly qualified technicians and service
providers. However, there can be no assurance that the Company will be able to
attract and retain the qualified personnel necessary for its business.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith, files annual and quarterly reports on Forms 10-K and 10-Q, proxy
statements and other information with the Securities and Exchange Commission
(the "Commission"). The public may read and copy any such materials filed with
the Commission at the Commission's Public Reference Room at 450 Fifth Street,
N.W., Washington, D.C. 20549. The public may obtain information on the operation
of the Public Reference Room by calling the Commission at 1-800-SEC-0330. In
addition, the Commission maintains an Internet site that contains reports, proxy
and information statements, and other information regarding issuers, such as the
Company, that file such materials electronically with the Commission. The
Commission's Internet address is http:\\www.sec.gov.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases an approximately 35,000 square foot facility in Sterling,
Virginia which is used primarily for manufacturing and administrative services.
The lease expires in October 2004. During fiscal 1999, C&T Partnership, an
entity comprised of Thomas Dunne, the Company's President, and his wife Claudia
Dunne, the Company's Vice President, sold the facility and assigned the lease to
a third party building management company.
The Company also leases a 20,000 square-foot facility in Guayama, Puerto
Rico, which is used for manufacturing, technical support, and personal computer
board level repair. The Company believes that its current facilities are
adequate for its existing needs and that additional suitable space will be
available as required.
ITEM 3. LEGAL PROCEEDINGS
By letter dated April 15, 1998, DDI, a competitor of IDP, asserted that IDP
is bound by a settlement agreement entered into in connection with certain
litigation, calling for payments to the competitor of 1.8% of the first
$250 million of IDP's gross sales under the Desktop V contract. IDP and the
Company dispute this claim. On June 1, 1998, the Company filed a Complaint for
Declaratory Judgment in the U.S.
8
<PAGE>
District Court of the Eastern District of Virginia seeking a declaration that
DDI is not entitled to receive payments under the settlement agreement. The
defendant counter-claimed against the Company claiming it did not breach the
settlement agreement and is entitled to the payments. These matters were
litigated and on February 26, 1999, DDI was awarded $1,500 in satisfaction of
its claim. DDI has filed an appeal of the judgment. While the Company believes
that it has a meritorious claim for declaratory judgment and meritorious
defenses to the counter-claim, there can be no assurance that the Company will
be successful in this litigation and, if the appeals court rules against the
Company, it may be required to pay a percentage of its past revenue under the
Desktop V contract to the defendant.
On July 31, 1998, the Company received notice from the SBA that it was
denying the request of the U.S. Air Force to waive the requirement to terminate
IDP's Desktop V contract for the convenience of the Government upon the change
in control of IDP to the Company. The Company appealed the denial of the SBA to
the SBA's Office of Hearings and Appeals. On August 31, 1999, the SBA denied the
appeal and ruled that the U.S. Air Force must terminate-for-convenience the
Desktop V contract. Under a termination-for-convenience, the government is
required generally to reimburse a contractor for all costs incurred in the
performance of the contract. The Company is in the process of attempting to
recover from the government a portion or all of unreimbursed costs associated
with the Desktop V Contract. Prior to this ruling by the SBA, the U.S. Air Force
determined not to exercise any of the remaining option years under the
Desktop V contract on May 1, 1999.
In November 1998, a former employee of the Company filed a demand for
arbitration with the American Arbitration Association, alleging a breach of his
employment agreement with the Company and seeking in excess of $2,350,000 in
damages from the Company. The Company filed an answer denying the claimant's
allegations and stating a counterclaim against the former officer for breach of
the employment agreement and for conversion of certain of the Company's
property. In a Final Arbitration Award dated August 27, 1999, the arbitrator
found in favor of the former employee on certain of the issues presented at the
arbitration and awarded the former employee in excess of $1.6 million in damages
and attorneys' fees. On December 10, 1999, the Fairfax County Circuit Court
denied the Company's motion to vacate the award and confirmed the award. The
Company has filed a writ with the Virginia Supreme Court seeking an appeal of
the Circuit Court's ruling.
On December 18, 1998, the Office of the United States Attorney for the
District of Maryland, Northern Division (the "U.S. Attorney"), informed the
Company that it was of the view that a civil False Claims Act violation was
assessable against certain parties, including IDP, George and Oscar Fuster (the
former principal owners of IDP) and the Company involving allegations of
fraudulent misrepresentations by the Fusters in IDP's 1994 application for
participation in the Section 8(a) program administered by the SBA. On
February 26, 1999, the Company and the other parties entered into a settlement
agreement with respect to this matter with the U.S. Attorney pursuant to which
the matter was settled without determination of liability against or monetary
payment by the Company.
There are routine legal claims pending against the Company, but in the
opinion of management, liabilities, if any, arising from such claims will not
have a material adverse effect on the financial condition and results of
operation of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
9
<PAGE>
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
MARKET INFORMATION
Prior to the quotation of the Company's Common Stock beginning on April 22,
1997, there was no established trading market for the Company's common stock.
The Company's Common Stock is traded in the over-the-counter market and prices
are quoted on The Nasdaq National Market under the symbol DNCC. The following
table sets forth the high and low selling prices as reported by The Nasdaq
National Market for the fiscal quarter indicated. These quotations reflect
inter-dealer prices without retail mark-up, mark-down or commission and may not
represent actual transactions.
<TABLE>
<CAPTION>
1998
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter.............................................. $ 10.50 $6.625
Second Quarter............................................. $10.375 $8.188
Third Quarter.............................................. $ 9.938 $7.483
Fourth Quarter............................................. $ 4.75 $1.938
</TABLE>
<TABLE>
<CAPTION>
1999
-------------------
HIGH LOW
-------- --------
<S> <C> <C>
First Quarter.............................................. $ 6.28 $2.781
Second Quarter............................................. $ 4.94 $2.031
Third Quarter.............................................. $ 2.75 $ 1.97
Fourth Quarter............................................. $ 2.41 $1.031
</TABLE>
On January 31, 2000 the closing price of the Company's Common Stock as
reported by The Nasdaq National Market was $2.63 per share. There were
approximately 1,500 shareholders of the Common Stock of the Company as of such
date.
The Company has not paid cash dividends on its Common Stock and does not
intend to do so in the foreseeable future.
RECENT SALES OF UNREGISTERED STOCK
On May 1, 1998, in connection with the IDP acquisition, the Company acquired
all of the issued and outstanding capital stock of IDP Co. and substantially all
of the net assets of PRIMO. In consideration for the IDP acquisition, the
Company paid the former owners an aggregate of $14.9 million in cash and an
aggregate of 750,000 shares of Common Stock. In November 1998, the Company
received 350,000 shares of the stock previously issued to the Fusters in
connection with a Purchase Price Adjustment Agreement. The shares sold to the
Fusters in the IDP acquisition were sold in reliance upon the exemption from
registration afforded by Section 4(2) of the Securities Act of 1933, as amended.
10
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA
DUNN SELECTED CONSOLIDATED FINANCIAL DATA
(IN THOUSANDS, EXCEPT PER SHARE DATA)
The following selected consolidated financial data of Dunn should be read in
conjunction with the consolidated financial statements and the notes thereto and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". The consolidated statement of operations data set forth below with
respect to the fiscal years ended October 31, 1997, 1998 and 1999 and the
consolidated balance sheet data as of October 31, 1998 and 1999 is derived from
and is referenced to the audited consolidated financial statements of Dunn
included elsewhere in this Annual Report on Form 10-K. The consolidated
statement of income data set forth below with respect to the fiscal years ended
October 31, 1995 and 1996 and the consolidated balance sheet data as of
October 31, 1995, 1996 and 1997 is derived from audited consolidated financial
statements of Dunn not included in this annual report.
<TABLE>
<CAPTION>
YEAR ENDED OCTOBER 31,
----------------------------------------------------
1995 1996 1997(2) 1998(3) 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:
Net revenues................................... $7,491 $18,099 $21,766 $66,888 $ 34,475
Costs of revenues.............................. 6,046 14,103 17,549 54,969 27,981
Gross profit................................... 1,445 3,996 4,217 11,919 6,494
Selling, general and administrative............ 966 1,972 2,198 9,983 37,749
Income (loss) from operations.................. 479 2,024 2,019 1,936 (31,255)
Other income (expense)......................... 8 (9) 98 (270) (2,911)
Net income (loss) before income taxes.......... 487 2,015 2,117 1,666 (34,166)
Provision for (benefit from) income taxes...... 244 776 795 686 (559)
Net income (loss).............................. $ 243 $ 1,239 $ 1,322 $ 980 $(33,607)
Earnings (loss) per share(1)................... $ 0.06 $ 0.31 $ 0.29 $ 0.14 $ (3.57)
Earning (loss) per share assuming
dilution(1).................................. $ 0.06 $ 0.31 $ 0.28 $ 0.13 $ (3.57)
Weighted average shares outstanding(1)......... 4,000 4,000 4,552 7,231 9,404
Weighted average shares outstanding assuming
dilution(1).................................. 4,000 4,000 4,679 7,492 9,404
</TABLE>
<TABLE>
<CAPTION>
AT OCTOBER 31,
----------------------------------------------------
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Working capital................................ $ 512 $ 1,722 $ 4,339 $ 5,773 $ (1,422)
Total assets................................... 3,647 5,275 18,703 62,965 22,287
Long-term debt................................. 75 51 2,845
Total liabilities.............................. 3,047 3,335 10,465 24,592 17,470
Stockholders' equity........................... 600 1,939 8,238 38,373 4,817
</TABLE>
- ------------------------
(1) The earnings per share amounts prior to Fiscal 1998 have been restated as
required to comply with Statement of Financial Accounting Standards
No. 128, EARNINGS PER SHARE. For further discussion of earnings per share
and the impact of Statement No. 128, see Note 2 to the Company's
consolidated financial statements.
(2) Includes the activity of STMS from September 12, 1997 (date of acquisition).
(3) Includes the activity of IDP and PRIMO from May 1, 1998 (date of
acquisition).
11
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Certain statements contained in this section are forward-looking statements
(as such term is defined in the Private Securities Litigation Reform Act of
1995). Because such statements include risks and uncertainties, actual results
may differ materially from those expressed or implied by such forward-looking
statements. Factors that could cause actual results to differ materially
include, but are not limited to, risks associated with the integration of
businesses following an acquisition, competitors with broader product lines and
greater resources, the termination of any of the Company's significant contracts
or the Company's inability to attract and retain highly qualified management,
technical and sales personnel.
OVERVIEW OF FISCAL 1999
In fiscal year 1999, the Company experienced a significant change in its
financial results as compared to fiscal year 1998 as discussed below.
TERMINATION OF A SIGNIFICANT CONTRACT
In May 1999, the U.S. Air Force determined not to exercise the remaining
option years under the "Desktop V" (DTV) contract and therefore terminated the
contract for all participating vendors. Initially awarded to IDP, the DTV
contract was the Company's largest contract. Management believed at the date of
the IDP acquisition, the contract would be renewed by the government through
fiscal year 2003 and would generate over $100 million in revenues during that
time. As a result of the termination of this contract, the recoverability of the
Company's goodwill associated with the IDP acquisition was significantly
impaired. Accordingly, management recorded an impairment charge of approximately
$21 million during 1999.
Additionally, the Small Business Administration (SBA) ruled that the U.S.
Air Force must terminate the contract for the convenience of the government.
Under a termination for convenience, the government shall reimburse the Company
for all costs incurred in the performance of the contract. The Company is
currently negotiating a settlement with the government and has submitted its
reimbursement proposal. As of January 31, 2000, no settlement agreement has been
reached. The Company cannot anticipate the amount of the settlement, if any, at
this time.
Under the terms of the DTV contract, the Company was required to maintain
certain inventory spares for warranty purposes. Due to the termination of the
contract, a considerable amount of these spares became obsolete. Accordingly,
the Company recorded an inventory charge during fiscal 1999 of approximately
$2 million relating to these items. The Company is seeking reimbursement of such
items in the settlement with the government.
ARBITRATION AWARD
In November 1998, a former employee of the Company (who had been an employee
and stockholder of STMS) filed a demand for arbitration with the American
Arbitration Association, alleging breach of his employment agreement with the
Company and sought "in excess of $2,350,000" in damages from the Company. During
fiscal 1999, the arbitration hearing was conducted resulting in a judgment in
favor of the former employee for approximately $1.7 million. Of the
$1.7 million, approximately $400,000 related to lost wages and benefits for the
two remaining years under the agreement. The balance of the award,
$1.3 million, represented the proceeds from stock options (fair market value
less grant price) had the employee exercised all 550,000 options in
November 1998. The options were granted to the former employee in
September 1997 in conjunction with the STMS acquisition and had a three year
vesting period. Under the judgment, the vesting period was accelerated so that
the former employee became fully vested as of October 31, 1998. The calculation
of the proceeds was based on the fair market value of $6.50,
12
<PAGE>
which was the highest selling price of the DNCC stock on the NASDAQ during the
month of November 1998. Although the Company is actively pursuing a settlement
with the former employee, management has properly accrued for the entire award
amount in fiscal 1999.
DELAY OF A CONTRACT AWARD
In January 1999, the Company was one of several vendors to be awarded a
contract to supply laptops to the Puerto Rican government. The contract was
protested and hence delayed due to negotiations between the government and
vendors in order to resolve the protest issues. The protest was ultimately
resolved and the Company was re-awarded the contract in January 2000. During
that 12-month delay period, management determined to continue operations at the
Company's Puerto Rican facility in anticipation of the contract. Accordingly,
the Company incurred significant costs to maintain the facility which resulted
in an operating loss for the Puerto Rican subsidiary for fiscal 1999.
CHANGES IN FEDERAL CONTRACTS
In fiscal year 1999, the Company's revenues from computer sales to the
federal government were adversely affected due to changes in procurement
policies. The changes in the policies included: (1) decentralization of
purchasing decisions outside of the Washington DC area, where Dunn has its most
significant sales coverage; (2) the ability of computer manufacturers (i.e.
Dell, Compaq) to sell directly to the federal government; (3) a continual
decline in PC prices throughout 1999 which resulted in the Company not
participating in certain government proposals for which adequate margins could
not be achieved. The Company believes that this trend will continue in future
periods. As such, the Company will focus its efforts on repeat federal
government business as well as maintaining relationships with its current
government customers which may provide additional opportunities within the
federal market.
INCREASES IN MEMORY PRICES
Memory chip prices increased dramatically in late 1999. This resulted in the
Company's decision to hold and/or delay shipments until memory prices subsided
and each transaction remained profitable. However, in certain circumstances, the
Company reduced its gross profit margin on certain sales in order to meet
contractual requirements and accommodate the increasing price of memory. It
should be noted that the increase in memory prices have significantly subsided
subsequent to October 31, 1999.
The Company has taken the appropriate actions to avoid and/or mitigate its
exposure to these types of factors in future years. These actions include
greater saturation in the commercial markets, diversification of its product mix
and developing partnerships with key commercial organizations within the
industry. While the Company is confident that approach will mitigate its
exposure, there can be no assurance that the Company will be successful with the
implementation of these actions or that the profit levels from these actions
will increase.
13
<PAGE>
RESULTS OF OPERATIONS
The following table sets forth for the fiscal years ended October 31, 1995,
1996, 1997, 1998 and 1999, certain income and expense items of Dunn as a
percentage of net revenues.
<TABLE>
<CAPTION>
1995 1996 1997 1998 1999
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Net Revenues............................... 100.00% 100.00% 100.00% 100.00% 100.00%
Costs of revenues.......................... 80.71% 77.92% 80.63% 82.18% 81.16%
Gross profit............................... 19.29% 22.08% 19.37% 17.82% 18.84%
Selling, general and administrative........ 12.90% 10.90% 10.10% 14.92% 109.50%
Income (loss) from operations.............. 6.39% 11.18% 9.27% 2.90% -90.66%
Other income (expense)..................... 0.11% -0.05% 0.45% -0.40% -8.44%
Net income (loss) before income taxes...... 6.50% 11.13% 9.72% 2.50% -99.10%
Provision for (benefit from) income
taxes.................................... 3.26% 4.28% 3.65% 1.03% -1.62%
Net income (loss).......................... 3.24% 6.85% 6.07% 1.47% -97.48%
</TABLE>
FISCAL YEAR ENDED OCTOBER 31, 1999 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1998
Net revenues of Dunn for fiscal year ended October 31, 1999 ("fiscal 1999")
decreased approximately 48% to $34.5 million from $66.9 million for fiscal year
ended October 31, 1998 ("fiscal 1998"). This decrease was primarily due to loss
of the DTV contract with the U.S. Air Force. The Company anticipated that this
contract would generate revenues of approximately $65 million for fiscal years
1999, 2000 and 2001. Fiscal year 1998 and 1999 revenues under this contract were
approximately $18 million and $3 million, respectively.
Gross profit of Dunn for fiscal 1999 decreased by approximately 46% to
$6.5 million from $11.9 million. This decrease is in proportion with the
decrease in net revenues. Gross profit as a percentage of net revenues during
the same periods slightly increased to 18.8% from 17.8%. The gross profit
percentage increase is a direct result of greater proportion of higher-margin
sales of services.
Selling and marketing expense of Dunn decreased for fiscal 1999 by 37% to
$2.3 million from $3.7 million for fiscal 1998. During fiscal 1999, the Company
consolidated its sales and marketing departments with that of IDP which resulted
in an overall decrease of expenses.
General and administrative expense of Dunn for fiscal 1999 increased 171% to
$14.1 million from $5.2 million for fiscal 1998. As a percentage of net
revenues, general and administrative expense increased to 41% for fiscal 1999
from 7.8% for fiscal 1998. Dunn incurred significant general and administrative
costs during fiscal 1999. These costs were associated with the termination of
the DTV contract, the consolidation and integration of the IDP facilities and
resources, termination of certain benefit plans, and legal expenses associated
with all of these factors. Although the Company considers a majority of the 1999
general and administrative expenses to be nonrecurring, appropriate actions have
been taken to significantly reduce general and administrative expenses in future
periods.
Other expense including interest for fiscal 1999 increased to approximately
$2,911,000 from approximately $271,000 for fiscal 1998. The increase was
primarily due to the accrual of $2 million for the employee arbitration award.
In addition, overall interest expense increased as a result of interest expenses
required to support the debt assumed with the acquisition of IDP, interest
expenses associated with the new debt obtained in 1999, and interest expense
associated with certain operating leases. In fiscal 1999, the Company recorded
gains on the sale of certain leased assets which reduced the overall other
expense. In addition, the Company recorded an income tax benefit of
approximately $559,000 in fiscal 1999.
14
<PAGE>
FISCAL YEAR ENDED OCTOBER 31, 1998 COMPARED TO FISCAL YEAR ENDED OCTOBER 31,
1997
Net revenues of Dunn for fiscal year ended October 31, 1998 ("fiscal 1998")
increased 206% to $66.9 million from $21.8 million for fiscal year ended
October 31, 1997 ("fiscal 1997"). This increase was primarily due to additional
revenue resulting from the third quarter acquisition of International Data
Products, Inc. Net revenues derived from IDP's operations for fiscal 1998
amounted to approximately $40.5 million.
Gross profit of Dunn for fiscal 1998 increased 183% to $11.9 million from
$4.2 million for fiscal 1997. However, the gross profit as a percentage of net
revenues during the same periods decreased to 17.8% from 19.4%. The decrease in
gross profit margin is a result of an increase in the percentage of lower margin
hardware sales by IDP and excess production capacity. The Company has closed the
production facility in Gaithersburg, Maryland.
Selling and marketing expense of Dunn increased for fiscal 1997 by 336% to
$3,672,000 from $842,000 for fiscal 1997. During the same periods, as a
percentage of net revenues, selling and marketing expenses increased to 5.5%
from 3.9%. The increase was primarily attributable to the acquisition of IDP,
increased advertising in selected publications, increased attendance at trade
shows and the development of a marketing campaign aimed at selected businesses.
General and administrative expense of Dunn for fiscal 1998 increased 365% to
$6.3 million from $1.4 million for fiscal 1997. As a percentage of net revenues,
general and administrative expense increased to 9.4% for fiscal 1998 from 6.2%
for fiscal 1997. The Company charged $564,776 of IDP acquisition integration
costs to G&A for the fiscal year. The Company also recognized approximately
$545,000 in amortization expense for fiscal 1998 as compared to $22,000 for
fiscal 1997. Dunn increased its costs in almost all aspects of general and
administrative expenses as a result of the IDP acquisition. The Company has
taken various actions to reduce general and administrative expenses in future
periods. See Item 1 "Business."
Other income (expense) including interest for fiscal 1998 decreased to an
expense of $271,000 from an income of $98,000 for fiscal 1997. The decrease was
a result of increased interest expense required to support the additional debt
assumed as a result of the acquisition of IDP, and interest expense associated
with certain operating leases. Dunn's effective tax rate increased to 41% for
fiscal 1998 from 37.5% for fiscal 1997 as a result of the increase in the
amortization of Goodwill which is not deductible for tax purposes. Dunn's net
income declined by 26% for fiscal 1998 to $980,000 from $1.3 million for fiscal
1997. Net income as a percentage of net revenues during the same periods
declined to 1.5% from 6.1%.
LIQUIDITY AND CAPITAL RESOURCES
In fiscal 1999, Dunn generated approximately $335,000 in cash flow from
operations. Dunn generated cash after the net loss from its reduction in
accounts receivable of approximately $11.8 million, a reduction of inventories
of approximately $5.4 million and a reduction of investment in sales-type leases
of approximately $3.1 million. The cash generated was used to reduce accounts
payable by $7.3 million. The Company used approximately $2.5 million in its
investing activities for the purchase of certain property, equipment and
equipment to be leased.
The Company's financing activities during fiscal 1999 were provided by the
Company's bank line of credit with First Union Bank. The line of credit expires
on November 30, 2000 and currently bears interest at prime plus 1%. As of
January 31, 2000, Dunn had an outstanding balance on the line of credit of
$2.3 million and available borrowing capacity of approximately $115,000.
In fiscal 1999, Dunn's subsidiary, IDP, had borrowing agreements with
Deutsche Financial Services (DFS) for an aggregate of $25 million. The
outstanding balance as of October 31, 1999 was approximately $4.7 million.
Subsequent to year end, the Company executed an agreement terminating the
borrowing agreement whereby $3.25 million was repaid to DFS prior to
December 31, 1999. Approximately $832,000
15
<PAGE>
of the outstanding balance at December 31, 1999 was converted to a 24 month note
accruing interest at the prime rate and the remaining principal of approximately
$750,000 was forgiven by DFS.
As of October 31, 1999, the Company had working capital deficit of
$1.4 million. The Company believes the bank facility, together with cash on
hand, cash generated from operations, sale of certain lease agreements and
significant income tax refunds due will provide sufficient financial resources
to finance the current operations of the Company through fiscal 2000.
Dunn has obligations under its operating lease commitments of approximately
$600,000 and obligations under its existing employment contracts of
approximately $190,000 for fiscal 2000. In addition, there is an outstanding
judgment against Dunn Computer Corporation for approximately $1.7 million.
The Company expects to generate liquidity in fiscal 2000 through the
issuance of preferred stock and through the recovery of income taxes previously
paid.
From time to time, the Company may pursue strategic acquisitions or mergers
which may require significant additional capital, additional capital may be
required to satisfy unusual or infrequent expenses. In such event, the Company
may seek additional financing of debt and/or equity.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS
FINANCIAL STATEMENTS OF DUNN COMPUTER CORPORATION
<TABLE>
<CAPTION>
PAGE
--------
<S> <C>
Report of Ernst & Young LLP, Independent Auditors........... F-1
Consolidated Balance Sheets................................. F-2
Consolidated Statements of Operations....................... F-3
Consolidated Statements of Stockholders' Equity............. F-4
Consolidated Statements of Cash Flows....................... F-5
Notes to the Consolidated Financial Statements.............. F-6
</TABLE>
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL ISSUES
None.
PART III
The Notice and Proxy Statement for the 1999 Annual Meeting of Stockholders
to be filed pursuant to Regulation 14A under the Securities and Exchange Act of
1934, as amended, which is incorporated by reference in this Annual Report on
Form 10-K pursuant to General Instruction G (3) of Form 10-K, will provide the
information required under Part III, including Item 10 (directors and executive
officers of the Company), Item 11 (Executive Compensation), Item 12 (security
ownership of certain beneficial owners and management), and Item 13 (certain
relationships and related transactions).
16
<PAGE>
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K
(a) The following documents are filed as part of this report
1. Financial Statements
Dunn Computer Corporation
Report of Ernst & Young LLP, Independent Auditors
Consolidated Balance Sheets
Consolidated Statements of Operations
Consolidated Statements of Stockholders' Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
2. Financial Statement Schedules
Schedule II--Valuation and Qualifying Accounts
Statements not listed above have been omitted because they are not
applicable or the information required to be set forth therein is included in
the Consolidated Financial Statements or the notes thereto under Item 8.
3. Exhibits.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
2.1 Acquisition Agreement, dated March 9, 1998, by and among
Dunn, the Company, George D. Fuster, D. Oscar Fuster, Carol
N. Fuster and Wendy E. Fuster (refiling to add index of
exhibits and schedules). (Filed as Exhibit 2.1 to the
Company's Registration Statement on Form S-1, Amendment No.
2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference.)
2.2 Agreement of Merger, dated as of March 18, 1998, by and
among Dunn Merger Corp., a Delaware corporation, Dunn and
the Company. (Filed as Exhibit 2.2 to the Company's
Registration Statement on Form S-1, Amendment No. 2, dated
April 23, 1998 (File No. 333-47631) and hereby incorporated
by reference.)
2.3 Stock Purchase Agreement, dated September 12, 1997, by and
among STMS Acquisition Corp., Dunn, STMS, Inc., John
Signorello, Timothy McNamee, Steve Salmon and certain other
stockholders of Dunn. (Filed as Exhibit 2.3 to Dunn's
Current Report on Form 8-K, dated September 12, 1997, filed
September 27, 1997 (File No. 0-22263) and hereby
incorporated by reference).
3.1 Articles of Incorporation of the Company, dated February 25,
1998, and effective as of February 26, 1998. (Filed as
Exhibit 3.1 to the Company's Registration Statement on
Form S-1, Amendment No. 1, dated April 23, 1998 (File
No. 333-47631) and hereby incorporated by reference.)
3.2 By-laws of the Company, effective as of March 5, 1998.
(Filed as Exhibit 3.2 to the Company's Registration
Statement on Form S-1, Amendment No. 2, dated April 23, 1998
(File No. 333-47631) and hereby incorporated by reference.)
4.1 Specimen common stock certificate for the Company. (Filed as
Exhibit 4.1 to the Company's Registration Statement on Form
S-1, Amendment No. 2, dated April 23, 1998 (File
No. 333-47631) and hereby incorporated by reference.)
</TABLE>
17
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.1 GSA Schedule (Filed as Exhibit 10.2 to Dunn's Registration
Statement on Form SB-2, Amendment 1, dated March 14, 1997
(File No. 333-19635) and hereby incorporated by reference).
10.2 Agreement, dated November 21, 1995, by and between GCH
Systems, Inc. and Dunn regarding Lockheed (Filed as Exhibit
10.4 to Dunn's Registration Statement on Form SB-2,
Amendment 1, dated March 14, 1997 (File No. 333-19635) and
hereby incorporated by reference).
10.3 Agreement, dated March 25, 1997, by and between Dunn and the
Social Security Administration (Filed as Exhibit 10.5 to
Dunn's Registration Statement on Form SB-2, Amendment 2,
dated April 4, 1997 (File No. 333-19635) and hereby
incorporated by reference).
10.4 Agreement, dated June 12, 1995, by and between Dunn and the
Administrative Office of the U.S. Courts (Filed as Exhibit
10.6 to Dunn's Registration Statement on Form SB-2,
Amendment 2, dated April 4, 1997 (File No. 333-19635) and
hereby incorporated by reference).
10.5 Agreement, dated September 29, 1994, by and between Dunn and
the Health Care Finance Administration (Filed as Exhibit
10.7 to Dunn's Registration Statement on Form SB-2,
Amendment 2, dated April 4, 1997 (File No. 333-19635) and
hereby incorporated by reference).
10.6 Agreement effective September 8, 1997, by and between
Virginia Contracting Authority and Dunn (Filed as Exhibit
10.6 to Dunn's Form 10-KSB, dated January 30, 1998 (File
No. 0-22263) and hereby incorporated by reference).
10.7 Employment Agreement by and between Dunn and John D. Vazzana
(Filed as Exhibit 99.1 to Dunn's Registration Statement on
Form SB-2, Amendment 2, dated April 4, 1997 (File No.
333-19635) and hereby incorporated by reference).
10.8 Employment Agreement by and between Dunn and Thomas P. Dunne
(Filed as Exhibit 99.2 to Dunn's Registration Statement on
Form SB-2, Amendment 2, dated April 4, 1997 (File
No. 333-19635) and hereby incorporated by reference).
10.9 Deed of Lease, dated October 31, 1994, between C&T
Partnership and Dunn and addenda thereto (Filed as Exhibit
10.9 to Dunn's Form 10-KSB, dated January 30, 1998 (File
No. 0-22263) and hereby incorporated by reference).
10.10 Deed of Lease, dated February 7, 1997, between APA
Properties No. 6 L.P. and STMS, Inc. and First Amendment
thereto, dated July 23, 1997 (Filed as Exhibit 10.10 to
Dunn's Form 10-KSB, dated January 30, 1998 (File
No. 0-22263) and hereby incorporated by reference).
10.11 1997 Stock Option Plan, as amended. (Filed as Exhibit 10.11
to the Company's Registration Statement on Form S-1,
Amendment No. 2, dated April 23, 1998 (File No. 333-47631)
and hereby incorporated by reference.)
10.12 General Service Administration Schedule for International
Data Products, Corp. (Filed as Exhibit 10.12 to the
Company's Registration Statement on Form S-1, Amendment No.
2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference.)
10.13 Agreement, dated May 5, 1997, by and between International
Data Products, Corp. and the U.S. Air Force, the Desktop V
Contract. (Filed as Exhibit 10.13 to the Company's
Registration Statement on Form S-1, Amendment No. 2, dated
April 23, 1998 (File No. 333-47631) and hereby incorporated
by reference.)
10.14 Agreement, dated January 6, 1998, by and between
International Data Products, Corp. and the Department of the
Navy. (Filed as Exhibit 10.14 to the Company's Registration
Statement on Form S-1, Amendment No. 2, dated April 23, 1998
(File No. 333-47631) and hereby incorporated by reference.)
10.15 Deed of Lease, dated January 31, 1995, between Northtech
Business Park and International Data Products. (Filed as
Exhibit 10.15 to the Company's Registration Statement on
Form S-1, Amendment No. 2, dated April 23, 1998 (File No.
333-47631) and hereby incorporated by reference.)
</TABLE>
18
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
- --------------------- ------------------------------------------------------------
<C> <S>
10.16 Deed of Lease, dated July 15, 1994, between Puerto Rico
Industrial Development Company and Puerto Rico Industrial
Manufacturing Operations, Corp. (Filed as Exhibit 10.16 to
the Company's Registration Statement on Form S-1, Amendment
No. 2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference.)
10.17 Agreement, dated July 11, 1995, by and between International
Data Products, Corp. and the Social Security Administration.
(Filed as Exhibit 10.17 to the Company's Registration
Statement on Form S-1, Amendment No. 2, dated April 23, 1998
(File No. 333-47631) and hereby incorporated by reference.)
10.18 Form of Employment Agreement by and between the Company and
each of George D. Fuster and D. Oscar Fuster (refiling to
reflect revised form). (Filed as Exhibit 10.18 to the
Company's Registration Statement on Form S-1, Amendment
No. 2, dated April 23, 1998 (File No. 333-47631) and hereby
incorporated by reference.)
10.19 Consent Agreement by and among Dunn, the Company, Network 1
Financial Securities, Inc., a Texas corporation, and Damon
Testaverde, William Hunt and Richard Hunt, dated as of April
20, 1998. (Filed as Exhibit 10.20 to the Company's
Registration Statement on Form S-1, Amendment No. 2, dated
April 23, 1998 (File No. 333-47631) and hereby incorporated
by reference.)
10.20 Loan and Security Agreement, dated as of May 28, 1996 by and
between Dunn and SIGNET BANK and Amendment Nos. 1, 2 and 3
thereto (Filed as Exhibit 4.2 to Dunn's Form 10-KSB, for the
fiscal year ended October 31, 1997 (File No. 0-22263) and
hereby incorporated by reference).
10.21 Amendment No. 4, dated February 28, 1998 to the Loan and
Security Agreement by and between Dunn and First Union
National Bank, successor by merger to Signet Bank, dated as
of May 28, 1996. (Filed as Exhibit 10.23 to the Company's
Registration Statement on Form S-1, Amendment No. 2, dated
April 23, 1998 (File No. 333-47631) and hereby incorporated
by reference.)
10.22 Employee Stock Purchase Plan.
10.23 Employment Agreement, Termination Agreement, by and among
the Company, George D. Fuster and D. Oscar Fuster, dated as
of November 23, 1998.
10.24 Purchase Price Adjustment Agreement by and among the
Company, George D. Fuster and D. Oscar Fuster, dated as of
November 23, 1998.
10.25 Termination agreement, Promissory Note, dated December 29,
1999 by and between Dunn and Deutsche Financial Services.
10.26 Loan and Security Agreement, dated May 27, 1999 by and
between Dunn and First Union Commercial Corporation.
10.27 Modification Agreement, dated February 11, 2000 by and
between Dunn and First Union National Bank.
10.28 PR Starnet Contract, dated January 5, 2000, by and between
Dunn and Office of Budget and Management of Puerto Rico.
*21.1 List of Subsidiaries.
*23.1 Consent of Ernst & Young LLP, Independent Auditors.
*23.2 Consent of Ernst & Young LLP, Independent Auditors.
*27.1 Financial Data Schedule.
</TABLE>
- ------------------------
* Filed herewith
(b) Reports on Form 8-K
None
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<S> <C> <C>
DUNN COMPUTER CORPORATION
By:
-----------------------------------------
Thomas P. Dunne
Date: February 15, 2000 PRESIDENT AND CHIEF EXECUTIVE OFFICER
</TABLE>
Pursuant to and in accordance with the requirements of the Securities
Exchange Act of 1934, this report has been signed by the following persons on
behalf of the registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ THOMAS P. DUNNE
------------------------------------------- President, Chief Executive February 15, 2000
Thomas P. Dunne Officer and Director
/s/ CLAUDIA N. DUNNE
------------------------------------------- Vice President and Director February 15, 2000
Claudia N. Dunne
/s/ JOHN VAZANNA
------------------------------------------- Director February 15, 2000
John Vazanna
/s/ VADM E. A. BURKHALTER
------------------------------------------- Director February 15, 2000
VADM E. A. Burkhalter USN (Ret.)
/s/ DANIEL SINNOTT
------------------------------------------- Director February 15, 2000
Daniel Sinnott
/s/ BENJAMIN KREIGER
------------------------------------------- Director February 15, 2000
Benjamin Kreiger
</TABLE>
20
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
DUNN COMPUTER CORPORATION (A VIRGINIA CORPORATION)
Report of Ernst & Young LLP, Independent Auditors........... F-1
Consolidated Balance Sheets as of October 31, 1998 and
1999...................................................... F-2
Consolidated Statements of Operations for the three years in
the period ended October 31, 1999......................... F-3
Consolidated Statements of Stockholders' Equity for the
three years in the period ended October 31, 1999.......... F-4
Consolidated Statements of Cash Flows for the three years in
the period ended
October 31, 1999.......................................... F-5
Notes to Consolidated Financial Statements.................. F-6
</TABLE>
21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
Board of Directors
Dunn Computer Corporation
We have audited the accompanying consolidated balance sheets of Dunn
Computer Corporation (a Virginia Corporation) as of October 31, 1998 and 1999,
and the related consolidated statements of operations, stockholders' equity and
cash flows for the three years in the period ended October 31, 1999. These
consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the consolidated
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements. An audit also includes assessing the
accounting principles used and significant estimates made by management, as well
as evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the consolidated financial position of
Dunn Computer Corporation as of October 31, 1998 and 1999, and the consolidated
results of its operations and its cash flows for the three years in the period
ended October 31, 1999, in conformity with accounting principles generally
accepted in the United States.
/s/ ERNST & YOUNG LLP
February 1, 2000, except for Note 6
as to which the date is February 11, 2000
McLean, Virginia
F-1
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents................................. $ -- $ 655,450
Accounts receivable, net of allowance for doubtful
accounts of $46,000 and $100,000 as of October 31, 1998
and 1999, respectively.................................. 16,675,204 5,063,041
Employee and stockholder advances......................... 71,287 --
Other receivables......................................... 117,685 --
Investment in sales-type leases, net--current portion..... 959,243 --
Inventory, net............................................ 10,928,736 5,497,634
Deferred tax asset........................................ 630,000 1,282,695
Income tax receivable..................................... 597,325 585,769
Prepaid expenses and other current assets................. 248,143 118,594
----------- -----------
Total current assets........................................ 30,227,623 13,203,183
Property and equipment, net................................. 1,927,148 1,323,696
Equipment on lease, net..................................... 4,096,483 3,906,011
Investment in sales-type leases, net--long term portion..... 2,140,099 --
Goodwill and other intangible assets, net................... 24,231,852 3,559,005
Investments................................................. 150,000 150,000
Other assets................................................ 191,395 145,121
----------- -----------
Total assets................................................ $62,964,600 $22,287,016
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $12,151,163 $ 4,822,979
Accrued expenses.......................................... 4,726,765 2,515,653
Accrued litigation costs.................................. -- 2,000,000
Line of credit............................................ 3,256,060 3,790,705
Notes payable, current portion............................ 33,514 324,933
Notes payable, related parties............................ 905,960 --
Unearned revenue.......................................... 3,381,291 1,170,417
----------- -----------
Total current liabilities................................... 24,454,753 14,624,687
Notes payable, long-term portion............................ 51,265 545,250
Line of credit--long term................................... -- 2,300,000
Other long-term liabilities................................. 85,890 --
Stockholders' equity:
Preferred stock $.001 par value; 2,000,000 shares
authorized, no shares issued and outstanding............ -- --
Common stock, $.001 par value; 20,000,000 shares
authorized, 9,391,493 and 9,419,509 shares issued and
outstanding at October 31, 1998 and 1999,
respectively............................................ 9,392 9,420
Additional paid-in capital.................................. 37,670,245 37,721,749
Treasury stock, 400,000 shares at October 31, 1998 and 1999,
respectively.............................................. (3,432,500) (3,432,500)
Retained earnings........................................... 4,125,555 (29,481,590)
----------- -----------
Total stockholders' equity.................................. 38,372,692 4,817,079
----------- -----------
Total liabilities and stockholders' equity.................. $62,964,600 $22,287,016
=========== ===========
</TABLE>
SEE ACCOMPANYING NOTES.
F-2
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------------
1997 1998 1999
----------- ----------- ------------
<S> <C> <C> <C>
Net revenues.......................................... $21,766,465 $66,888,478 $ 34,475,297
Costs of revenues..................................... 17,549,655 54,969,061 27,981,691
----------- ----------- ------------
Gross profit.......................................... 4,216,810 11,919,417 6,493,606
Selling and marketing................................. 842,281 3,671,765 2,311,091
General and administrative............................ 1,332,975 5,201,745 14,112,227
Amortization of goodwill and other intangible
assets.............................................. 22,448 544,687 675,743
Acquisition integration costs......................... -- 564,776 --
Impairment of goodwill................................ -- -- 20,649,335
----------- ----------- ------------
Income (loss) from operations......................... 2,019,106 1,936,444 (31,254,790)
Other income (expense):
Interest income..................................... 109,877 104,606 27,998
Interest expense.................................... (11,813) (494,504) (962,004)
Settlement of litigation............................ -- -- (2,000,000)
Gain on sale of assets.............................. -- -- 193,516
Other, net.......................................... -- 119,375 (170,621)
----------- ----------- ------------
Net income (loss) before income taxes................. 2,117,170 1,665,921 (34,165,901)
Provision for (benefit from) income taxes............. 794,870 686,000 (558,756)
----------- ----------- ------------
Net income (loss)..................................... $ 1,322,300 $ 979,921 $(33,607,145)
=========== =========== ============
Earnings (loss) per share............................. $ 0.29 $ 0.14 $ (3.57)
Earnings (loss) per share--assuming dilution.......... $ 0.28 $ 0.13 $ (3.57)
</TABLE>
SEE ACCOMPANYING NOTES.
F-3
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL
-------------------- PAID-IN TREASURY RETAINED
SHARES AMOUNT CAPITAL STOCK EARNINGS TOTAL
--------- -------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at October 31, 1996... 4,000,000 $4,000 $ 111,857 -- $ 1,823,334 $ 1,939,191
Issuance of common stock,
net of offering expenses
of $1,083,336............. 1,000,000 1,000 3,916,664 -- -- 3,917,664
Issuance of stock related to
acquisition of STMS....... 150,000 150 974,850 -- -- 975,000
Issuance of options related
to acquisition of STMS,
recorded at fair value.... -- -- 84,000 -- -- 84,000
Net income.................. -- -- -- -- 1,322,300 1,322,300
--------- ------ ----------- ----------- ------------ ------------
Balance at October 31, 1997... 5,150,000 5,150 5,087,371 -- 3,145,634 8,238,155
Repurchase of common stock
originally issued in the
acquisition of STMS....... -- -- -- (457,500) -- (457,500)
Repurchase of stock option
originally issued in the
acquisition of STMS....... -- -- (75,750) -- -- (75,750)
Issuance of common stock,
net of offering expenses
of $1,330,229............. 3,491,493 3,492 26,284,374 -- -- 26,287,866
Issuance of stock related to
acquisitions of IDP and
PRIMO..................... 750,000 750 6,374,250 -- -- 6,375,000
Return of common stock
originally issued in the
acquisitions of IDP and
PRIMO..................... -- -- -- (2,975,000) -- (2,975,000)
Net income.................. -- -- -- -- 979,921 979,921
--------- ------ ----------- ----------- ------------ ------------
Balance at October 31, 1998... 9,391,493 9,392 37,670,245 (3,432,500) 4,125,555 38,372,692
Issuance of common stock
under employee stock
purchase plan............. 28,016 28 51,504 -- -- 51,532
Net loss...................... -- -- -- -- (33,607,145) (33,607,145)
--------- ------ ----------- ----------- ------------ ------------
BALANCE AT OCTOBER 31, 1999... 9,419,509 $9,420 $37,721,749 $(3,432,500) $(29,481,590) $ 4,817,079
========= ====== =========== =========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES.
F-4
<PAGE>
DUNN COMPUTER CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
-----------------------------------------
1997 1998 1999
----------- ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss).................................... $ 1,322,300 $ 979,921 $(33,607,145)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation and amortization of property and
equipment...................................... 46,029 1,139,210 2,779,926
Amortization of goodwill and other intangibles... 22,448 544,687 675,743
Impairment of goodwill........................... -- -- 20,649,335
Gain on sale of assets........................... -- -- (193,516)
Changes in operating assets and liabilities:
Accounts receivable............................ (5,354,279) 2,057,540 11,801,135
Employee and stockholder advances.............. -- 10,234 --
Income tax receivable.......................... -- 316,461 11,556
Investment in sales-type leases................ -- (3,099,342) 3,099,342
Inventory...................................... (2,865,750) 7,015,014 5,431,102
Prepaid expenses and other assets.............. (85,966) 31,480 175,823
Accounts payable............................... 3,920,267 (9,542,573) (7,328,184)
Accrued expenses............................... 51,930 900,886 (211,112)
Income taxes payable........................... (519,308) (13,290) --
Deferred tax asset (credit).................... 88,914 (761,714) (652,695)
Unearned revenue and other liabilities......... (110,734) 2,958,384 (2,296,764)
----------- ------------ ------------
Net cash provided by (used in) operating
activities......................................... (3,484,149) 2,536,898 334,546
INVESTING ACTIVITIES
Purchases of property and equipment.................. (93,389) (945,794) (2,532,509)
Acquisitions, net of cash acquired................... (928,550) (14,185,021) (652,231)
Proceeds from sale of assets......................... -- 7,315 740,023
----------- ------------ ------------
Net cash used in investing activities................ (1,021,939) (15,123,500) (2,444,717)
FINANCING ACTIVITIES
Proceeds from issuance of common stock............... 3,917,664 26,287,866 51,532
Proceeds of loans for purchase of certain assets..... 64,226 -- --
Repurchase of common stock and options............... -- (533,250) --
Payments on notes payable............................ (10,551) (928,980) (46,248)
Payments on notes payable to related parties......... -- (587,181) (905,960)
Proceeds from (repayments on) lines of credit, net... -- (11,993,819) 3,666,297
Payments on capital leases........................... (20,949) -- --
----------- ------------ ------------
Net cash provided by financing activities............ 3,950,390 12,244,636 2,765,621
Net increase (decrease) in cash and cash
equivalents........................................ (555,698) (341,966) 655,450
Cash and cash equivalents at beginning of year....... 897,664 341,966 --
----------- ------------ ------------
Cash and cash equivalents at end of year............. $ 341,966 $ -- $ 655,450
=========== ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Interest paid........................................ $ 11,813 $ 494,504 $ 962,004
----------- ------------ ------------
Income taxes paid.................................... $ 1,323,308 $ 525,000 $ 223,850
=========== ============ ============
</TABLE>
SEE ACCOMPANYING NOTES
F-5
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
OCTOBER 31, 1997, 1998 AND 1999
1. ORGANIZATION
Dunn Computer Corporation (the "Corporation") was incorporated on July 27,
1987 under the laws of the Commonwealth of Virginia. On January 3, 1997, Dunn
Computer Corporation ("Dunn"), a Delaware corporation, was formed as a holding
company for the stock of Dunn Computer Corporation, the Virginia corporation. On
January 6, 1997, the Board of Directors and stockholders of the Corporation
approved and effected a 2,799.160251 for 1 stock exchange with Dunn whereby the
holders of the Corporation's common stock would receive 2,799.160251 shares of
common stock in Dunn for each share of common stock in the Corporation.
On September 12, 1997, Dunn acquired all of the outstanding stock of
STMS, Inc. (STMS), a Virginia Corporation.
On February 26, 1998, Dunn Computer Corporation (the "Company") was
incorporated in the Commonwealth of Virginia to become a holding company for
Dunn and International Data Products Corp. ("IDP"), as provided for in the
Acquisition Agreement. Simultaneous with the Company's formation, the
Corporation was renamed Dunn Computer Operating Company, a Virginia Corporation.
The Acquisition Agreement provided for the acquisition of all of the stock
of IDP by the Company and the acquisition of substantially all of the net assets
of Puerto Rico Industrial Manufacturing Operations, Corp. ("PRIMO"), an
affiliate of IDP, by the Company. Effective May 1, 1998, the Company's
acquisitions of IDP and PRIMO were consummated. Each outstanding share of common
stock of Dunn was exchanged on a one-for-one basis for a share of common stock
of the Company and each outstanding option and warrant of Dunn was converted
into an option or warrant, respectively, of the Company on substantially the
same terms as applied to each option or warrant of Dunn immediately prior to the
merger. Dunn became a wholly-owned subsidiary of the Company. All references in
the accompanying consolidated financial statements as to the number of shares of
common stock and per-share amounts have been restated to reflect the stock
exchanges described above. Also, the Company authorized 2,000,000 shares of
preferred stock with rights and preferences to be determined by the Board of
Directors at a later date. The Company expects to issue preferred stock in
fiscal 2000 to raise equity capital.
The Company is engaged in the business of selling build-to-order computer
systems and related equipment and providing computer training and maintenance
service to businesses and government agencies. In addition, the Company provides
Information Technology (IT) support and services to certain government and
commercial entities. The Company operates in a competitive environment subject
to technological change and the emergence of new technologies, although the
Company believes that its products and services are, or would be, upgradable to
new technologies.
2. SIGNIFICANT ACCOUNTING POLICIES
USE OF ESTIMATES
The preparation of the consolidated financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the consolidated
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
F-6
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.
CASH AND CASH EQUIVALENTS
The Company maintains demand deposits with several financial institutions.
At times, deposits exceed federally insured limits, but management does not
consider this a significant concentration of credit risk. The Company considers
all highly liquid investments with a maturity of three months or less at the
time of purchase to be cash equivalents. At October 31, 1998, the Company's cash
management process resulted in an overdraft of $741,000 included in accounts
payable.
INVESTMENTS
At October 31, 1998 and 1999, investments consisted of shares of common
stock of a privately-held internet company, Worldwide Internet Solutions
Network, Inc. ("WIZnet"), with a cost basis of approximately $150,000. The
Company believes that this carrying amount represents the lower of cost or
market. The Company is accounting for this investment using the cost method
since the Company's investment represents less than 20% of the privately-held
internet company's outstanding stock. The President and Chief Executive Officer
of WIZnet is a member of the Company's Board of Directors.
INVENTORY
Inventory is stated at the lower of cost or market as determined by the
first-in first-out (FIFO) method. The Company periodically evaluates its
inventory obsolescence reserve to ensure inventory is recorded at net realizable
value.
IMPAIRMENT OF LONG-LIVED ASSETS
Each year, management determines whether any property and equipment or any
other assets have been impaired based on the criteria established in Statement
of Financial Accounting Standards No. 121 (SFAS 121), ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND LONG-LIVED ASSETS TO BE DISPOSED OF. The
Company made no adjustments to the carrying values of the assets during the
years ended October 31, 1997 and 1998. During fiscal year 1999, management
determined that goodwill associated with the purchase of IDP was impaired.
Accordingly, the Company recorded an impairment charge of approximately
$20.6 million (see Note 5).
GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangibles represent the unamortized excess of the cost
of acquiring subsidiary companies over the fair values of such companies' net
tangible assets at the dates of acquisition. Goodwill related to the Company's
acquisitions as described in Note 5 is being amortized on a straight-line basis
over periods ranging from ten to twenty years. Other intangibles, including
contracts, are being amortized on a straight-line basis over a five year period.
F-7
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
ACQUISITION-RELATED LIABILITIES
During fiscal year 1998, the Company recorded $1,376,000 of
acquisition-related liabilities in connection with the IDP Acquisition. These
liabilities were recorded after certain actions had been identified, quantified
and approved by management of the Company having authority to commit the Company
to the plan. Those certain actions included closing the IDP facility in
Maryland, integrating IDP and the Company's production, warehouse, sales,
marketing and administrative functions, eliminating duplicative jobs and
expanding space in the Company's office space in Virginia. During fiscal years
1998 and 1999, $232,000 and $894,000, respectively, of costs were charged
against the liability. The acquisition-related liabilities remaining at
October 31, 1999 amounted to $250,000, consisting of severance payments to be
made in future periods.
STOCK COMPENSATION
In October 1995, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 123 (SFAS 123), ACCOUNTING FOR STOCK-BASED
COMPENSATION. SFAS 123 allows companies to account for stock-based compensation
under either the new provisions of SFAS 123 or the provisions of Accounting
Principles Board Opinion No. 25 (APB 25), ACCOUNTING FOR STOCK ISSUED TO
EMPLOYEES, but requires pro forma disclosure in the footnotes to the
consolidated financial statements as if the measurement provisions of SFAS 123
had been adopted. The Company continues accounting for its stock-based
compensation in accordance with the provisions of APB 25.
REVENUE RECOGNITION
The Company generally recognizes revenues from computer sales and sales-type
leases at the time of shipment. Revenues are earned principally pursuant to
various contracts with agencies of the Federal government and commercial
customers. The length of the Company's contracts generally range from one to
three years.
Service revenues are recognized over the contractual period as the services
are provided. Revenues from operating leases are recognized over the contract
term. In 1998, the Company assigned payments from one of its operating leases to
a financing company in exchange for the present value of the minimum lease
payments. The Company recorded this amount as unearned revenues and recognized
revenues over the lease term as payments were received by the financing company.
As of October 31, 1999, revenues associated with this transaction have been
fully recognized.
The products sold are generally covered by a warranty for periods ranging
from one to three years. The Company accrues a warranty reserve for revenues
recognized during the year to record estimated costs to provide warranty
services.
Unearned revenue also relates to cash received from credit card sales as of
year end for which the related inventory was shipped subsequent to year end and
advance payments on operating leases.
During the year ended October 31, 1997, the Company had revenues from one
agency of the Federal government and one Federal government contractor which
represented 21% and 11% of total revenues, respectively. As of October 31, 1997,
accounts receivable from agencies of the Federal government represented 64% of
total accounts receivable. During the year ended October 31, 1998, the Company
had revenues from one agency of the Federal government which represented 40% of
total revenues. As of
F-8
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
October 31, 1998, accounts receivable from agencies of the Federal government
represented 67% of total accounts receivable. During the year ended October 31,
1999, the Company had revenues from two Federal government agencies which
approximated 12% of total revenues. As of October 31, 1999, accounts receivable
from agencies of the Federal government represented approximately 40% of total
accounts receivable.
For the years ended October 31, 1998 and 1999, approximately 27% and 9%,
respectively, of the Company's revenues were from Federal contracts that were
awarded under Section 8(a) of the Small Business Act.
ADVERTISING EXPENSES
The Company expenses advertising costs as incurred. Advertising costs
amounted to approximately $61,000, $468,000 and $130,000 during fiscal 1997,
1998 and 1999, respectively.
INCOME TAXES
The Company provides for income taxes in accordance with the liability
method.
EARNINGS PER SHARE
In 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128 (SFAS 128), EARNINGS PER SHARE. SFAS 128
replaced the calculation of primary and fully diluted earnings per share with
basic and diluted earnings per share. Unlike primary earnings per share, basic
earnings per share excludes any dilutive effects of options, warrants and
convertible securities. The definition of diluted earnings per share is very
similar to the previous definition of fully diluted earnings per share. All
earnings per share amounts for all periods have been presented and, where
appropriate, restated to conform to the SFAS 128 requirements.
FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash, investments and accounts receivable.
The cash is held by high credit quality financial institutions. For accounts
receivable, the Company performs ongoing credit evaluations of its customers'
financial condition and generally does not require collateral. The Company
maintains reserves for credit losses. The concentration of credit risk is
mitigated by the diverse customer base and the amount of receivables due by the
Federal government. The carrying amount of the receivables approximates their
fair value.
F-9
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
SUPPLEMENTAL INFORMATION OF NON-CASH INVESTING AND FINANCING ACTIVITIES
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------
1997 1998
---------- -----------
<S> <C> <C>
Fair value of assets acquired............................... $5,970,000 $58,951,000
Less: Cash paid............................................. 1,044,000 14,900,000
Stock issued, net of value of stock returned (See Note
10)....................................................... 1,059,000 3,400,000
---------- -----------
Liabilities assumed (including $1,376,000 of
acquisition-related liabilities in 1998).................. $3,867,000 $40,651,000
========== ===========
</TABLE>
RECENT PRONOUNCEMENTS
In December 1999, the SEC issued Staff Accounting Bulletin No. 101, REVENUE
RECOGNITION IN FINANCIAL STATEMENTS, ("SAB 101"). SAB 101 requires that four
basic criteria must be met before revenue can be recognized: (1) persuasive
evidence of an arrangement exists, (2) delivery has occurred or services have
been rendered, (3) the fee is fixed and determinable, and (4) collectibility is
reasonably assured. The Company is required to comply with SAB 101 for
transactions entered into on or after February 1, 2000, but does not expect it
to have a material impact on the Company's consolidated financial position or
results of operation.
3. PROPERTY AND EQUIPMENT AND EQUIPMENT ON LEASE
Property and equipment, including leasehold improvements, are stated at
cost. Property and equipment are depreciated and amortized using the
straight-line method over the estimated useful lives ranging from five to seven
years. Leasehold improvements are amortized over the lesser of the related lease
term or the useful life.
Property and equipment consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-----------------------
1998 1999
---------- ----------
<S> <C> <C>
Computer and office equipment............................... $1,443,992 $1,515,017
Furniture and fixtures...................................... 302,741 302,741
Leasehold improvements...................................... 454,913 491,059
Other....................................................... 416,018 412,766
---------- ----------
2,617,664 2,721,583
Less accumulated depreciation and amortization.............. (690,516) (1,397,887)
---------- ----------
$1,927,148 $1,323,696
========== ==========
</TABLE>
The Company owns equipment that is currently at customer sites under
operating lease agreements (See Note 2 Revenue Recognition). The cost of the
equipment was $6,821,801 and $5,085,287 at October 31, 1999 and 1998,
respectively. The related accumulated depreciation on the equipment was
$2,915,790 and $988,804 at October 31, 1999 and 1998, respectively.
F-10
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill and other intangible assets were comprised of:
<TABLE>
<CAPTION>
OCTOBER 31,
------------------------
1998 1999
----------- ----------
<S> <C> <C>
Goodwill............................................ $24,198,986 $3,485,855
Contracts........................................... 600,000 600,000
Less accumulated amortization....................... (567,134) (526,850)
----------- ----------
$24,231,852 $3,559,005
=========== ==========
</TABLE>
See discussion of goodwill impairment recorded during fiscal 1999 in
Note 5.
5. ACQUISITIONS
STMS
On September 12, 1997, the Company acquired all of the outstanding stock of
STMS, Inc., a Virginia corporation ("STMS"), for 150,000 shares of the Company's
common stock, options to purchase 25,000 shares of the Company's common stock,
and $1,044,500 in cash used specifically to repay certain debt of STMS. The
transaction was accounted for using the purchase method. The 150,000 shares of
common stock were valued at the market price of Company's common stock or
$975,000 on the date of the transaction. The options to purchase 25,000 shares
of common stock were issued to a stockholder/creditor of STMS and were valued at
fair value of $84,000 using the Black-Scholes option-pricing model. The purchase
price was allocated to the assets and liabilities acquired based on their
estimated fair values. In conjunction with the acquisition, the Company recorded
goodwill in the amount of $2,397,287 and other intangible assets (contracts) in
the amount of $600,000. The operations of STMS are included in the consolidated
financial statements of the Company beginning September 12, 1997 (date of
acquisition).
The Company granted options to purchase an aggregate of 1,330,000 shares of
the Company's common stock, at an exercise price equivalent to its fair market
value at the date of grant, to the former stockholders of STMS in conjunction
with their three-year employment agreements. The options vest over a three-year
period. Certain of these options were repriced during fiscal 1999 in accordance
with the employment agreements (see Note 10).
During February 1998, the Company repurchased an aggregate of 50,000 shares
of common stock and the option to purchase 25,000 shares of common stock
originally issued in connection with the STMS acquisition (see Note 10).
IDP AND PRIMO
On May 1, 1998, the Company acquired all of the outstanding stock of IDP and
substantially all of the net assets of PRIMO for $14.9 million in cash and
750,000 shares of common stock of the Company, both subject to adjustment in the
event that the combined net assets of IDP and PRIMO fell below a certain level
stipulated in the Acquisition Agreement (See Note 10). The transaction was
accounted for using the purchase method. The 750,000 shares of common stock were
valued at the market price of the Company's common stock ($8.50 per share) on
the date of the transaction. The purchase price was preliminarily allocated to
the assets and liabilities acquired based on their estimated fair values. In
conjunction with the
F-11
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS (CONTINUED)
acquisition, the Company recorded goodwill (as adjusted) in the amount of
$22,453,929. The operations of IDP, including PRIMO, are included in the
consolidated financial statements of the Company beginning May 1, 1998 (date of
acquisition).
In connection with the IDP acquisition, two of the IDP sellers entered into
employment agreements with the Company pursuant to which they each received
options to purchase 300,000 shares of the Company's common stock. The grant
price of the options was equivalent to the fair market value of the underlying
common stock on the grant date and the options vested immediately.
During November 1998, the Company entered into an Employment Agreement
Termination Agreement and a Purchase Price Adjustment Agreement with the two
former stockholders of IDP whereby employment of the former stockholders of IDP
was terminated and the former IDP stockholders agreed to return 350,000 shares
of the Company's common stock originally issued in connection with the IDP
Acquisition. See Note 10 for additional information.
The selected unaudited pro forma information for the years ended
October 31, 1997 and 1998 includes the operating results of the Company as if
the Company acquired STMS, IDP, and PRIMO on November 1, 1996.
<TABLE>
<CAPTION>
YEARS ENDED
OCTOBER 31,
------------
1998
------------
(UNAUDITED)
<S> <C>
Pro Forma net revenues...................................... $110,310,000
Pro Forma net income (loss)................................. $ (6,768,000)
Pro Forma earnings per share................................ $ (0.75)
Pro Forma earnings per share assuming dilution.............. $ (0.75)
Pro Forma weighted average shares outstanding............... 8,981,000
Pro Forma weighted average shares outstanding assuming
dilution.................................................. 8,981,000
</TABLE>
IMPAIRMENT OF GOODWILL
Statement of Financial Accounting Standards No. 121 (SFAS 121) ACCOUNTING
FOR THE IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED
OF, requires that long-lived assets and certain identifiable intangibles to be
held and used by an entity be reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of an asset may not be
recoverable.
In May 1999, the U.S. Government determined not to exercise the remaining
option years on one of the Company's significant contracts. This contract was a
significant component of the Company's acquisition of IDP. At the date of
termination, the Company anticipated that the contract would have generated
future revenues of approximately $65 million had all option years been renewed.
The former IDP operations have been substantially curtailed as a result of this
contract loss. In addition, significant future business is not expected from IDP
operations as the majority of its sales force has separated from the Company.
The Company determined that these factors indicated that the carrying amount
of goodwill associated with the IDP and PRIMO acquisition may not be
recoverable. The Company performed an analysis of the goodwill in accordance
with SFAS 121 and determined that the fair value of the remaining goodwill
F-12
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. ACQUISITIONS (CONTINUED)
(estimated using the present value of expected future cash flows) was
approximately $1.1 million at the time of the analysis. Accordingly, the Company
recorded an impairment charge of approximately $20.6 million during fiscal year
1999.
6. BANK LINES OF CREDIT AND NOTES PAYABLE
IDP LINE OF CREDIT
In conjunction with the purchase of IDP, the Company assumed a credit
facility of $25,000,000 secured by inventory and accounts receivable of IDP. The
outstanding balance on this line of credit at October 31, 1998 and 1999 was
approximately $3,055,000 and $4,622,000, respectively. The interest rate
applicable to this line of credit as of October 31, 1998 and 1999 was 7.33% and
8.05%, respectively.
On November 8, 1999, the Company executed an agreement with the financial
institution to terminate this facility. Under the terms of the agreement, the
Company repaid approximately $3.0 million of the principal outstanding at
October 31, 1999 prior to December 31, 1999. In addition, outstanding principal
totaling approximately $832,000 was converted to a term note bearing interest at
the prime rate and maturing in January 2002. The remaining amount of
approximately $750,000 was forgiven by the financial institution and will be
reflected as a gain on debt restructuring in fiscal year 2000. The Company has
classified this facility between short and long-term based on the revised
payment terms.
OPERATING LINE OF CREDIT
In April 1996, the Company entered into a line of credit agreement with a
bank that was subsequently amended in December 1997. The amended credit
agreement expired on February 28, 1999. Accordingly, the Company established a
new credit agreement with the same financial institution. The agreement allows
the Company to borrow an amount limited to the minimum of its borrowing base or
$15,000,000. As of October 31, 1999, the Company's borrowing base, which is
based on certain percentages of total accounts receivable less overdue accounts,
is approximately $2.5 million. Outstanding borrowings bear interest at the prime
rate.
As of October 31, 1998, the Company had borrowed $201,000 against this line
of credit facility and had an unused borrowing capacity of $758,843. As of
October 31, 1999, the Company had borrowed $2.3 million against this line of
credit facility and had an unused borrowing capacity of approximately $200,000.
The Company pays a commitment fee based on the unused borrowings under the line
of credit facility. The line of credit is secured by all assets of the Company
and its subsidiaries. On February 11, 2000, the Company amended the line of
credit facility whereby the maximum availability was reduced to $5 million and
the interest rate was increased to the prime rate plus 1%. The amended line of
credit expires Novmeber 30, 2000. The Company has classified this line of credit
as long term based on the amended maturity date.
F-13
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. BANK LINES OF CREDIT AND NOTES PAYABLE (CONTINUED)
Notes payable consisted of the following:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------
1998 1999
-------- --------
<S> <C> <C>
Bank term note, bearing interest at the prime rate; payable
in monthly installments of $34,652 plus accrued interest,
due in January 2002....................................... $ -- $831,652
Asset loans, bearing interest at annual interest rates
ranging from 7.9% to 10.46%; due in aggregate monthly
payments of $2,695 and $1,303 at October 31, 1998 and
1999, respectively, due through August 2002,
secured by certain assets of the Company.................. 78,549 38,531
Other....................................................... 6,230 --
------- --------
84,779 870,183
Less current portion........................................ 33,514 324,933
------- --------
Notes payable, long-term.................................... $51,265 $545,250
======= ========
</TABLE>
Principal payments on the long-term debt for each of the fiscal years from
2000 to 2002 are due as follows:
<TABLE>
<CAPTION>
YEAR ENDED
OCTOBER 31,
-----------
<S> <C>
2000........................................................ $324,933
2001........................................................ 429,960
2002........................................................ 115,290
--------
Total....................................................... $870,183
========
</TABLE>
Notes payable to related parties are payable to certain stockholders and
their relatives, and employees. These notes payable were assumed by the Company
in the IDP Acquisition. All notes payable to related parties are classified as
current liabilities as the outstanding balances are due upon demand. Notes
payable to related parties bear interest at annual interest rates ranging from
8% to 11%. The total amounts outstanding on these related parties' notes payable
were approximately $905,960 and $0 at October 31, 1998 and 1999, respectively.
Interest expense on these notes payable amounted to $58,297 during the period
from May 1, 1998 through October 31, 1998. The total amounts outstanding on
these notes payable were repaid in fiscal year 1999 (See Note 10).
F-14
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. RELATED PARTY TRANSACTION
Thomas Dunne, the Company's President, and his wife, Claudia Dunne, the
Company's Vice President, acquired a building for the purpose of leasing office
space to the Company. In connection with the acquisition of the building, the
Company guaranteed the building's $1 million mortgage. The term of the mortgage
is 25 years. The Company subsequently executed a noncancelable operating lease
with Mr. and Mrs. Dunne. The Company believes that the lease agreement is on
terms no less favorable to the Company than could be obtained from an
unaffiliated third party. In June 1999, the building was sold by Mr. and
Mrs. Dunne and the lease was assigned to the new owner, an unaffiliated third
party.
8. COMMITMENTS
OPERATING LEASES
The Company leased office space under a noncancelable operating lease
agreement with two stockholders (see Note 7). In June 1999, the two stockholders
sold the building and assigned the lease to the new owner, an unaffiliated third
party, under the same terms. The lease agreement was renewed in October 1999 for
an additional five years under the renewal option within the original lease.
Additionally, the Company leases various office equipment and other office space
under non-cancelable operating leases. Rent expense under these leases was
approximately $175,000, $499,100 and $321,000 for the years ended October 31,
1997, 1998 and 1999, respectively.
Future minimum lease payments under noncancelable operating leases,
including the leases assumed in the STMS and IDP acquisitions, at October 31,
1999 are as follows:
<TABLE>
<S> <C>
2000........................................................ $ 595,245
2001........................................................ 613,102
2002........................................................ 631,495
2003........................................................ 573,085
2004 and thereafter......................................... 455,166
----------
Total....................................................... $2,868,093
==========
</TABLE>
In addition, the Company will receive $1,446,516 in aggregate sublease
income through fiscal 2003.
EMPLOYMENT AGREEMENTS
The Company has employment agreements with certain key executives under
which the Company is required to pay a fixed annual base salary. Commitments
under these arrangements are approximately $620,000 for fiscal year 2000. All
contracts expire prior to October 31, 2000.
F-15
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. INVESTMENTS IN SALES-TYPE LEASES
During 1998, the Company leased equipment to certain customers under
sales-type leases. The components of the Company's net investment in sales-type
leases at October 31, 1998 were as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
1998
-----------
<S> <C>
Total minimum lease payments receivable..................... $3,446,095
Less unearned interest.................................... (346,753)
----------
Net investment in sales-type leases......................... 3,099,342
Less current portion...................................... 959,243
----------
$2,140,099
==========
</TABLE>
In fiscal year 1999, the Company sold all of its investment in sales-type
leases resulting in net gains of approximately $213,000. Accordingly, the
Company's investment in sales-type leases at October 31, 1999 was $0.
10. STOCKHOLDERS' EQUITY
EQUITY TRANSACTIONS
On April 21, 1997, the Company sold 1,000,000 shares of common stock in an
initial public offering for net proceeds of $3,917,664. In connection with the
offering, warrants were issued to the underwriter for 100,000 shares of common
stock at an exercise price of $6.00 per share. Beginning April 21, 1998, the
warrants are exercisable for a period of four years.
During February 1998, the Company repurchased 50,000 shares of its common
stock held by former stockholders of STMS. The shares were repurchased at the
current market price of $9.15 per share. The Company accounted for the
repurchase as a treasury stock transaction. The Company also repurchased options
to purchase 25,000 shares of the Company's common stock that were originally
issued in connection with the STMS acquisition. The repurchase price of $75,750
represents the difference between the fair market value of the underlying common
stock on the repurchase date and the grant price multiplied by the 25,000
options. The Company accounted for the repurchase as a reduction of additional
paid-in capital.
The IDP Acquisition Agreement provided for an adjustment of the purchase
price if the combined net worth of IDP and PRIMO exceeded or was below a
specified level. Since the net worth on the closing balance sheet of IDP and
PRIMO was below the specified level, the Company and the former IDP stockholders
agreed to adjust the purchase price. In November 1998, the Company entered into
a Purchase Price Adjustment Agreement with the two former stockholders of IDP
whereby 350,000 shares of the Company's common stock originally issued in
connection with the IDP acquisition were returned to the Company. The Company
accounted for the return as a treasury stock transaction and valued such shares
at the fair market value of the Company's common stock on the date of
acquisition. In connection with the transaction, the Company and the two former
stockholders also agreed to cancel the employment agreements in exchange for
payments totaling $500,000, for which the Company recorded an adjustment to its
purchase price allocation. In addition, the Company agreed and paid the balance
of the notes payable to related parties of $905,960 in full by November 25,
1998. The two former stockholders retained their
F-16
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
options to purchase the Company's common stock subject to all original terms and
conditions. (See Note 5)
In connection with the acquisitions of IDP and PRIMO, the Company completed
a public offering of 3,491,493 shares of common stock for net proceeds of
$26,287,866.
STOCK OPTIONS
On January 6, 1997, the Company adopted the 1997 Stock Option Plan (the
Option Plan) which permits the Company to grant up to 600,000 options to
officers, directors and employees who contribute materially to the success of
the Company. In September 1997, the Company increased the number of options
available for grant under the plan to 2,200,000. Stock options are generally
granted at prices which the Company's Board of Directors believes approximates
the fair market value of its common stock at the date of grant. The options vest
ratably over a stated period of time not to exceed four years. The contractual
term of the options is five years.
Common stock option activity was as follows:
<TABLE>
<CAPTION>
WEIGHTED-AVERAGE
SHARES EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at October 31, 1997................... 1,857,000 $6.18
Options granted................................. 865,400 7.46
Options exercised............................... -- --
Options canceled or expired..................... (226,583) 5.35
---------- -----
Outstanding at October 31, 1998................... 2,495,817 $6.70
Options granted................................. 413,000 2.87
Options exercised...............................
Options canceled or expired..................... (1,026,384) 5.56
---------- -----
Outstanding at October 31, 1999................... 1,882,433 $5.22
========== =====
Exercisable at October 31, 1999................... 1,289,098 $6.00
========== =====
</TABLE>
The total options outstanding include 600,000 options granted to the former
IDP stockholders that are not included in the Option Plan.
As of October 31, 1999, there were 317,567 options available for future
grants under the Option Plan.
During fiscal 1999, the Company repriced approximately 750,000 stock options
granted to certain executives in accordance with their employment agreements. No
compensation expense was recognized as the exercise price for the repriced
options was at or above fair market value of the underlying stock on the date
repriced.
F-17
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. STOCKHOLDERS' EQUITY (CONTINUED)
The following table summarizes information about fixed-price stock options
outstanding at October 31, 1999:
<TABLE>
<CAPTION>
NUMBER AVERAGE WEIGHTED-
OUTSTANDING REMAINING AVERAGE
AT OCTOBER 31, CONTRACTUAL EXERCISE
RANGE OF EXERCISE PRICES 1999 LIFE PRICE
- ------------------------ -------------- ----------- ---------
<S> <C> <C> <C>
$1.75-$4.15................................ 1,087,933 6.60 $3.17
$4.50-$6.50................................ 189,500 3.49 5.73
$6.75-$8.75................................ 605,000 8.95 8.73
--------- ---- -----
$1.75-$8.75................................ 1,882,433 7.05 $5.22
========= ==== =====
</TABLE>
Had compensation expense related to the stock options been determined based
on the fair value at the grant date for options granted during the years ended
October 31, 1997, 1998, and 1999 consistent with the provisions of SFAS 123, the
Company's net income and earnings per share would have been as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------------
1997 1998 1999
---------- ----------- ------------
<S> <C> <C> <C>
Net income (loss) --pro forma.......... $1,098,900 $(2,535,579) $(34,865,823)
Earnings (loss) per share--pro forma... $ 0.24 $ (0.35) $ (3.71)
Earnings (loss) per share--assuming
dilution pro forma................... $ 0.23 $ (0.35) $ (3.71)
</TABLE>
The effect of applying SFAS 123 on pro forma net income as stated above is
not necessarily representative of the effects on reported net income for future
years due to, among other things, the vesting period of the stock options and
the fair value of additional options in the future years.
The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing fair value model with the following
weighted-average assumptions used for grants in 1997, 1998 and 1999: dividend
yield of 0%, expected volatility of 46%, 84% and 86%, respectively; risk-free
interest rates of 5.75%, 5.50% and 6.70%, respectively; and expected life of the
option term of five years. The weighted average fair values of the options
granted in 1997, 1998 and 1999 with a stock price equal to the exercise price is
$6.18, $5.21 and $2.02, respectively. The weighted average fair value of options
granted in 1998 with a stock price greater than the exercise price is $7.36.
11. INCOME TAXES
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes.
F-18
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
Components of the Company's net deferred tax asset balance are as follows:
<TABLE>
<CAPTION>
OCTOBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Deferred tax asset:
Accrued expenses................................. $ 810,378 $ 280,100
Net operating loss carryforwards................. 970,689 5,569,085
Basis differences of acquired assets............. 939,468 411,334
Asset reserves................................... 1,106,423 1,294,156
----------- -----------
Total deferred asset............................... 3,826,958 7,554,675
----------- -----------
Deferred tax credit:
Acquisition of intangible assets................. (100,000) (100,000)
Depreciation..................................... (35,789) (205,674)
Valuation allowance.............................. (3,061,169) (5,966,306)
----------- -----------
Net deferred tax asset............................. $ 630,000 $ 1,282,695
=========== ===========
</TABLE>
As of October 31, 1999, the Company had approximately $14.4 million in net
operating loss carryforwards which expire between 2012 and 2019. Approximately
$1.5 million of those net operating loss carryforwards relate to STMS and IDP
and may be significantly limited under Section 382 of the Internal Revenue
Service Code and the SRLY rules. The Company has recorded a valuation allowance
for a portion of the deferred tax assets because realizability of those assets
is uncertain. The Company expects to file claims for tax refunds using its net
operating loss carryback in fiscal 2000.
The components of the provision for income taxes are as follows:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
---------------------------------
1997 1998 1999
-------- -------- -----------
<S> <C> <C> <C>
Current tax expense (benefit):
Federal................................... $671,070 $411,709 $ (974,781)
State..................................... 125,900 91,144 (213,975)
-------- -------- -----------
796,970 502,853 (1,188,756)
Deferred tax expense:
Federal................................... (1,800) 155,675 535,500
State..................................... (300) 27,472 94,500
-------- -------- -----------
(2,100) 183,147 630,000
-------- -------- -----------
Total provision for (benefit from) income
taxes................................... $794,870 $686,000 $ (558,756)
======== ======== ===========
</TABLE>
F-19
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. INCOME TAXES (CONTINUED)
The reconciliation of income tax from the Federal statutory rate of 34% is:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
----------------------------------
1997 1998 1999
-------- -------- ------------
<S> <C> <C> <C>
Tax at statutory rates:.................... $719,838 $566,413 $(11,536,368)
Non-deductible expenses.................... 8,291 35,480 7,277,936
Valuation allowance........................ -- -- 4,278,322
State income tax, net of federal benefit... 66,741 84,107 (578,646)
-------- -------- ------------
$794,870 $686,000 $ (558,756)
======== ======== ============
</TABLE>
In September 1997 and in May 1998, respectively, the Company acquired the
stock of STMS and IDP in tax-free exchanges. The stock acquisitions were
accounted for using the purchase method. Included in the Company's deferred tax
assets at October 31, 1999 is approximately $3.8 million representing the
differences between the assigned values and tax bases of the assets and
liabilities acquired, as well as net operating loss carry forwards acquired.
These deferred tax assets were fully reserved at the dates of acquisition. To
the extent these deferred tax assets are subsequently realized, the resulting
tax benefit will be applied to reduce goodwill recorded in connection with the
acquisitions and there will be no impact on income tax expense.
12. RETIREMENT PLANS
401(K) PLANS
Effective April 1, 1995, the Company adopted a 401(k) plan (the "Former
Plan"). Employees are eligible to participate after completing six months of
services and attaining age 18. Employees can defer up to 15% of compensation.
Employee contributions are subject to Internal Revenue Service limitations. All
employees who contributed to the Former Plan are eligible to share in
discretionary Company matching contributions. During the years ended
October 31, 1997, 1998 and 1999, the Company contributed $11,855, $0 and $0,
respectively, to the Former Plan.
In connection with the IDP Acquisition, the Company assumed IDP's
tax-deferred savings plan under Section 401(k) of the Internal Revenue Code
which is offered to all employees who have attained the age of 21. The plan
provides for contributions by employees as well as matching and discretionary
contributions by the Company. The Company made contributions of approximately
$123,000 during the period from May 1, 1998 through October 31, 1998.
Effective May 1, 1999 the Company amended and terminated the existing plans.
Simultaneous to the termination, the Company adopted a new 401(k) (the "Plan")
for all current employees. Under the Plan, employees are eligible to participate
after completing 90 days of service and attaining the age of 18. Employees can
defer up to 15% of compensation. Employee contributions are subject to Internal
Revenue Service limitations. All employees who contributed to the Plan are
eligible to share in discretionary Company matching contributions. Company
contributions vest over 5 years. The Company did not contribute to the Plan in
1999.
F-20
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RETIREMENT PLANS (CONTINUED)
DEFINED BENEFIT PLAN
The Company has a defined benefit plan (the "Pension Plan") covering
substantially all salaried employees. The Pension Plan benefits are based on
years of service and the employee's compensation. The Company's funding policy
is to annually contribute amounts sufficient to meet minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974
("ERISA"). Contributions are intended to provide not only for benefits
attributed to service to date, but also for those expected to be earned in the
future. The assets of the Pension Plan are invested in money market and
corporate debt and equity instruments. The Company contributed approximately
$63,777 for the Pension Plan year ending October 31, 1997. The Company has
accrued, but not yet paid, approximately $104,000, which amount represents its
minimum funding requirements under ERISA for fiscal years 1998 and 1999.
On January 6, 1997, the Company amended the Pension Plan to change the
benefits to be paid out after retirement from 100% to 40% of its initial
liability. This resulted in a reduction of the projected benefit obligation by
approximately $150,000.
On October 31, 1999, the Company amended and terminated the Defined Benefit
Plan. Under the termination, no additional benefits accrued to participants in
the Plan after that date. In addition, all existing participants in the Plan
became 100% vested in their accrued benefits in the Plan as of that date. No
gain or loss was recognized as a result of the termination of the Pension Plan.
The Company will distribute the vested benefits to the participants in fiscal
year 2000.
The following table sets forth the Pension Plan's funded status as reported
on activity, and amounts recognized in the Company's consolidated financial
statements:
<TABLE>
<CAPTION>
OCTOBER 31,
--------------------
1998 1999
-------- ---------
<S> <C> <C>
CHANGE IN BENEFIT OBLIGATION:
Benefit obligation at beginning of year................ $321,559 $ 376,404
Service cost........................................... 48,195 48,195
Interest cost.......................................... 27,034 28,230
Actuarial gain (loss).................................. (20,384) 60,770
-------- ---------
Benefit obligation at end of year...................... 376,404 513,599
CHANGE IN PLAN ASSETS:
Fair value of plan assets at beginning of year......... 147,041 306,341
Actual return on plan assets........................... 95,523 81,840
Employer contributions................................. 63,777 --
-------- ---------
Fair value of plan assets at end of year............... 306,341 388,181
FUNDED STATUS:
Unrecognized actuarial loss............................ (70,063) (125,418)
Unrecognized transition asset.......................... (11,339) 3,028
Unrecognized prior service cost........................ 11,477
-------- ---------
Accrued benefit cost................................... $(69,925) $(122,390)
======== =========
</TABLE>
F-21
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. RETIREMENT PLANS (CONTINUED)
Components of net periodic benefit cost
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Service cost................................... $ 44,140 $ 48,195 $ 48,195
Interest cost.................................. 19,355 27,034 28,230
Actual return on assets........................ 21,295 (95,523) (81,840)
Net amortization and deferral.................. (33,340) 90,219 57,880
-------- -------- --------
Total net periodic pension cost................ $ 51,540 $ 69,925 $ 52,465
======== ======== ========
</TABLE>
Key assumptions used in the actuarial valuation were:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
------------------------------
1997 1998 1999
-------- -------- --------
<S> <C> <C> <C>
Weighted average discount rate.......................... 7.5% 7.5% 6.5%
Rate of return on assets:
Pre-retirement........................................ 8.0% 8.0% 8.0%
Post-retirement....................................... 8.0% 8.0% 8.0%
</TABLE>
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted earnings
per share:
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31,
--------------------------------------
1997 1998 1999
---------- ---------- ------------
<S> <C> <C> <C>
Numerator:
Net income (loss)..................... $1,322,300 $ 979,921 $(33,607,145)
Denominator:
Denominator for basic earnings per
share-weighted-average shares......... 4,552,055 7,231,397 9,403,775
Effect of dilutive securities:
Employee stock options................ 124,906 251,132 --
Warrants.............................. 1,887 9,722 --
---------- ---------- ------------
Dilutive potential common shares...... 126,793 260,854 --
---------- ---------- ------------
Denominator for diluted earnings per
share--adjusted weighted-average
shares and assumed conversions........ 4,678,848 7,492,251 9,403,775
---------- ---------- ------------
Basic earnings per share.............. $ 0.29 $ 0.14 $ (3.57)
========== ========== ============
Diluted earnings per share............ $ 0.28 $ 0.13 $ (3.57)
========== ========== ============
</TABLE>
F-22
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. CONTINGENCIES
EMPLOYEE TERMINATION
In November 1998, a former employee of the Company (who had previously been
an employee and stockholder of STMS) filed a demand for arbitration with the
American Arbitration Association, alleging a breach of his employment agreement
with the Company and seeking "in excess of $2,350,000" in damages from the
Company. The Company filed an answer denying the former employee's allegations
and a counterclaim for this former employee's breach of the employment agreement
and for conversion of certain of the Company's property. In August 1999, the
arbitrator entered a judgment in favor of the former employee for approximately
$1.7 million plus attorney's fees and costs. The decision was upheld on appeal
in September 1999. The Company has properly accrued for this claim. Included in
the loss accrual is an estimate of interest and legal costs included in the
award. Although the former employee has not submitted a claim for such costs,
the Company believes its estimated accrual for these costs is adequate. The
Company is currently reviewing whether a further appeal is warranted.
TEAMING PARTNERSHIP TERMINATION
In May 1999, a former contract teaming partner filed a demand for
arbitration with the American Arbitration Association, alleging breach of a
certain contract agreement with the Company. The issue relates to disputed
commissions due to the former teaming partner. The former teaming partner is
seeking damages of approximately $186,000. The matter is currently in
arbitration. Although the Company is aggressively defending this claim, it has
accrued this potential liability in the consolidated financial statements as of
October 31, 1999.
IDP ACQUISITION
In May 1997, the U.S. Air Force awarded a contract to IDP. Dynamic
Decisions, Inc. (DDI), a competitor for this contract, protested the contract
award to the Small Business Administration (SBA), which protest was denied. DDI
filed suit against the SBA and Air Force seeking review of the award decision.
IDP intervened in the litigation and the litigation was subsequently settled.
Based on the terms of the settlement, IDP agreed to pay DDI 1.8% of the first
$250 million of IDP's gross sales under the contract. On June 1, 1998, the
Company filed a Complaint for Declaratory Judgment in U.S. District Court for
the Eastern District of Virginia seeking a declaration that DDI is not entitled
to receive payments under the settlement agreement. This filing is based on the
Company's position that DDI breached the settlement agreement. DDI has
counter-claimed against the Company denying it breached the settlement agreement
and seeking the payments. The U.S. District Court has ruled in DDI's favor
awarding damages of $1,500. DDI is currently appealing this decision. The
Company is aggressively pursuing all avenues of defense against this appeal.
On July 31, 1998 the Company received notice from the SBA that it was
denying the request of the U.S. Air Force to waive the requirement to terminate
IDP's Desktop V contract for the convenience of the Government upon the change
in control of IDP to the Company. The Company appealed the denial by the SBA to
the SBA's Office of Hearings and Appeals. On August 31, 1999, the SBA denied the
appeal and ruled that the U.S. Air Force must terminate-for-convenience the
Desktop V contract. Under a termination-for-convenience, the Government shall
reimburse the Company for all costs incurred in the performance of the contract.
The Company expects to recover from the Government a portion or all of its
unreimbursed costs. The Company is currently in negotiations with the Government
regarding this matter.
F-23
<PAGE>
DUNN COMPUTER CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
14. CONTINGENCIES (CONTINUED)
MICROSOFT LICENSING AGREEMENT
IDP entered into a Government Integrator Agreement, as amended, with
Microsoft Corporation (Microsoft) in 1998 for the licensing of certain Microsoft
software. During 1999, Microsoft asserted that the Company owed approximately
$800,000 under this agreement due primarily to amended billings by Microsoft
concerning sales by the Company. The Company has accrued for amounts due
Microsoft based on the original billing terms. The Company believes that it has
meritorious defenses to Microsoft's allegations and intends to vigorously defend
itself if a suit is filed. The Company can't estimate at this time the amount of
the liability to be incurred, if any, but does not believe that this matter will
have a material adverse effect upon the Company's financial position or results
of operations and as such, the Company has not recorded any amount relating to
this matter, beyond amount accrued as noted above, in the accompanying financial
statements.
MONARCH TECHNOLOGY, INC.
In July 1999, Monarch Technology, Inc. ("Monarch") named the Company as a
cross-claim defendant in a legal action pending in Orange County, California in
which Worldnet Computers, Inc. has filed suit against Monarch. Monarch's cross
claims are that the Company is liable for actions of a former employee who
allegedly engaged in a scheme that resulted in Monarch paying $130,000 to the
employee and not receiving products which the employee allegedly stated that the
Company would sell to Monarch or its agent. Monarch claims that the Company is
liable for the $130,000 plus interest, attorneys fees and other consequential
damages totaling approximately $60,000. The Company can't estimate at this time
the amount of the liability to be incurred, if any, but does not believe that
this matter will have a material adverse effect upon the Company's financial
position or results of operations and as such, the Company has not recorded any
amount relating to this matter in the accompanying financial statements.
F-24
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors
Dunn Computer Corporation
We have audited the consolidated financial statements of Dunn Computer
Corporation (a Virginia corporation) as of October 31, 1998 and 1999, and for
each of the three years in the period ended October 31, 1999 and have issued our
report thereon dated February 1, 2000, except for Note 6 as to which the date is
February 11, 2000 (included elsewhere in this Form 10-K). Our audit also
included the consolidated financial statement schedule listed in Item 14 of this
Form 10-K. The schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
In our opinion, the consolidated financial statement schedule referred to
above, when considered in relation to the basic consolidated financial
statements taken as a whole presents fairly, in all material respects, the
information set forth herein.
/s/ ERNST & YOUNG LLP
McLean, Virginia
February 1, 2000
S-1
<PAGE>
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
DUNN COMPUTER CORPORATION
<TABLE>
<CAPTION>
BALANCE AT BALANCE
BEGINNING OF AT END OF
CLASSIFICATION YEAR ADDITIONS DEDUCTIONS YEAR
- -------------- ------------ ---------- ---------- ----------
<S> <C> <C> <C> <C>
Allowance for doubtful accounts:
Year ended October 31, 1997.................. $ 15,000 $ 62,000 $ -- $ 77,000
Year ended October 31, 1998.................. $ 77,000 $ 59,000 $ 90,000(1) $ 46,000
Year ended October 31, 1999.................. $ 46,000 $1,400,000 $1,346,000(1) $ 100,000
Inventory reserve:
Year ended October 31, 1997.................. $ 20,000 $ 230,000 $ -- $ 250,000
Year ended October 31, 1998.................. $250,000 $ -- $ -- $ 250,000
Year ended October 31, 1999.................. $250,000 $2,241,000 $ 362,000(2) $2,129,000
</TABLE>
- ------------------------
(1) Write-offs of accounts receivable
(2) Write-offs of inventory
S-2
<PAGE>
EXHIBIT 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 333-61557) pertaining to the Employee Stock Purchase Plan of
Dunn Computer Corporation (a Virginia corporation), with respect to the
consolidated financial statements and schedules of Dunn Computer Corporation
included in the Annual Report (Form 10-K) for the year ended October 31, 1999.
/s/ ERNST & YOUNG LLP
McLean, Virginia
February 15, 2000
<PAGE>
EXHIBIT 23.2
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration Statement
on Form S-8 (No. 333-52419) pertaining to the 1997 Stock Option Plan of Dunn
Computer Corporation (a Virginia corporation), with respect to the consolidated
financial statements and schedules of Dunn Computer Corporation included in the
Annual Report (Form 10-K) for the year ended October 31, 1999.
/s/ ERNST & YOUNG LLP
McLean, Virginia
February 15, 2000
<PAGE>
EXHIBIT 10.25
AGREEMENT
THIS AGREEMENT (the "Agreement") is made and entered into this 29th day of
December, 1999, by and between DEUTSCHE FINANCIAL SERVICES CORPORATION, a Nevada
corporation ("DFS"), International Data Products, Corp, a Maryland corporation
("IDP" or "Borrower"), Puerto Rico Industrial Manufacturing Operations
Acquisition, Corp., a Puerto Rico corporation ("PAC"), Dunn Computer
Corporation, a Virginia Corporation ("Dunn VA"), and Dunn Computer Corporation,
a Delaware Corporation ("Dunn Del"). Dunn VA, PAC and Dunn Del are hereinafter
collectively referred to as Guarantors.
Recitals
A. DFS and IDP are parties to that certain Business Financing Agreement dated
May 27, 1993, as amended ("IDP BFA"), whereby IDP agreed to pay to DFS any
and all indebtedness owing by virtue of advances made by DFS on behalf of
IDP for working capital. DFS and IDP also are parties to that certain
Agreement For Wholesale Financing dated October 15, 1991, as amended ("IDP
AWF") whereby IDP agreed to pay DFS any and all indebtedness owing by
virtue of advances made by DFS on behalf of IDP for its acquisition of
inventory. The IDP AWF and IDP BFA are collectively referred to as the
"Financing Agreement." IDP, NationsBank, N.A., and DFS are parties to a
Third-Party Lockbox Service Agreement dated November 20, 1996 (the
"Lockbox Agreement"), which established the Collection Account, as defined
in the Lockbox Agreement.
B. DFS and PAC entered into an Assumption and Assignment Agreement dated May
1, 1998 wherein PAC assumed the obligations of Puerto Rico Industrial
Manufacturing Operations, Corp., a Puerto Rico corporation ("PRIMO") to
DFS. PAC also entered into an Agreement For Wholesale Financing with
Deutsche Financial Services Puerto Rico Corporation dated May 1, 1998
("PAC AWF").
C. As a requirement of the advance of funds by DFS on behalf of Borrower, the
Guarantors unconditionally guarantied the performance of Borrower's
obligations under the Financing Agreement in accordance with the terms and
conditions of the Guaranty agreements each dated May 1, 1998 from Dunn VA,
Dunn Del and PAC (collectively the "Guaranty").
<PAGE>
D. Pursuant to the provisions of the Financing Agreement, Borrower granted to
DFS, as security for the repayment of all advances and indebtedness owed
to DFS by Borrower, a first priority security interest in all of
Borrower's inventory, equipment, fixtures, accounts, contract rights,
chattel paper, security agreements, instruments, deposit accounts,
reserves, documents, and general intangibles, and all judgments, claims,
insurance policies, and payments owed or made to Borrower thereon, whether
now owned or hereafter acquired, and all attachments, accessories,
accessions, returns, repossessions, exchanges, substitutions and
replacements thereof and all proceeds thereof (all of which is hereinafter
collectively referred to as the "Collateral").
E. DFS asserts that it properly perfected its security interest in the
Collateral by recording its UCC-1 Financing Statement with the Maryland
Secretary of State's office and Virginia Secretary of State's office.
G. As contemplated by the terms and conditions of the Financing Agreement,
DFS has made advances on behalf of Borrower, who was obligated to DFS
under the Financing Agreement in the principal sum of $4,694,468.33 as of
the close of business on October 7, 1999, consisting of $1,638,836.39
pursuant to the accounts receivable credit facility under the IDP BFA and
$3,055,631.91 pursuant to the supplemental inventory credit facility under
the IDP BFA, plus interest of $32,863.58 accrued through September 30,
1999 and interest on the unpaid principal balance from October 1, 1999 at
the Prime rate per annum, as well as fees, collection expenses, including
attorneys fees, due under the Financing Agreement and any additional
advances of credit made by DFS on behalf of Borrower and interest thereon
("Debt").
H. As of November 8, 1999, Borrower's obligations to DFS pursuant to the
Financing Agreement were in default, and Borrower failed to cure certain
events of default. As a result of the defaults by Borrower, Borrower and
Guarantor acknowledged that DFS was entitled to enforce its rights
pursuant to the Financing Agreement and Guaranty.
I. DFS, Borrower, and Guarantor entered into a Forbearance Agreement dated
November 8, 1999 (the "Forbearance Agreement"), whereby DFS agreed to
Borrower's and Guarantor's request to forbear from the exercising some of
-2-
<PAGE>
DFS' rights and remedies provided under the Financing Agreement and
Guaranty and under applicable law in consideration of Borrower's agreement
to comply with the terms and conditions set forth in the Forbearance
Agreement and with the Guarantor's consent to the provisions set forth in
the Forbearance Agreement and the Confirmation of the Guaranty, and each
of them.
J. Subject to the terms and conditions set forth herein, DFS has agreed to
release its liens in certain of the Collateral (as set forth on Exhibit A)
and in the Collection Account and to subordinate its interests in certain
other Collateral.
NOW THEREFORE, in consideration of the premises, the mutual covenants and
promises contained herein, and other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, DFS, Borrower and
Guarantor agree as follows:
1. Funds. On or before December 29, 1999, the Borrower and Guarantor will cause
the amount of $2,260,754.93 to be transmitted to DFS by Federal Reserve wire
transfer (the "Funds").
2. Balance of Debt. Assuming DFS's receipt of the Funds, the remaining principal
balance of the Debt in the sum of $831,652 will be paid by Borrower or
Guarantors over no more than 24 equal monthly installments, with interest at the
Prime Rate (as defined in the New 2000 Note, attached hereto as Exhibit B, from
January 1, 2000, which payments shall commence on February 1, 2000 and be
payable on the 1st day of each of the following 23 months.
3. New 2000 Note. In lieu of the 2000 Note (as defined in the Forbearance
Agreement), Borrower and Guarantors will execute a confessed judgment note in
the form as attached hereto as Exhibit B (the "New 2000 Note") for the amount of
$831,652. DFS shall be entitled to file the confessed judgment against Borrowers
and Guarantors upon material default by Borrower or Guarantors of the terms of
this Agreement or the New 2000 Note, including, without limitation, any payment
default. The New 2000 Note shall be delivered to counsel for DFS with the
execution of this Agreement.
4. Partial Release/Subordination of Collateral. In [ILLEGIBLE] for the payment
of the Funds as provided in
-3-
<PAGE>
Paragraph 1 and the delivery of the New 2000 Note, DFS will (a) release its
liens in certain of the Collateral, as is listed on Exhibit A; (b) issue
instructions to Bank of America, N.A., as successor in interest to NationsBank,
N.A., that the interest of DFS in the Collection Account is terminated and
released; and (c) upon request by Borrower, DFS shall enter into an agreement
with lender of Borrower providing for DFS' subordination of its security
interest in the Collateral. Any amounts received in the Collection Account after
the receipt of the Funds, or not previously credited to the Borrower, shall be
the property of the Borrower and shall be released to the Borrower.
Notwithstanding anything in this Agreement, DFS shall have no obligation under
this Paragraph 4 unless the Funds are received by DFS by the close of business
on December 29, 1999, and until the original executed New 2000 Note is received.
Except as expressly provided herein, nothing contained herein shall be deemed to
waive or release DFS' rights in other Collateral of Borrower or PAC.
5. To the extent that DFS provided provisional credit for funds received in the
Collection Account prior to the date hereon, and any deposits into the
Collection Account are returned or otherwise result in a chargeback to the
Collection Account ("Chargebacks"), Borrower will remit the amount of any
Chargebacks to DFS within five working days of notice to Borrower.
6. Amendment of Documents; Governing Effect; Binding Arbitration. This Agreement
shall be deemed to constitute an amendment of the Forbearance Agreement, the
Financing Agreement, and Guaranty to the extent required to cause said documents
to be in compliance with the terms and conditions set forth in this Agreement.
To the extent that the terms and provisions of the Forbearance Agreement, the
Financing Agreement, Guaranty, or any other agreement between DFS and Borrower
shall be inconsistent with the provisions of this Agreement, the provisions of
this Agreement shall govern. Otherwise, all terms and provisions of the
Forbearance Agreement, the Financing Agreement and Guaranty shall continue in
full force and effect, as provided in this Agreement, specifically including but
not limited to all provisions requiring binding arbitration.
7. Further Action. The parties hereby agree to execute and deliver such
additional documents and to take further action as may become necessary or
desirable to fully carry out the provisions and intent of this Agreement.
-4-
<PAGE>
THIS AGREEMENT has been executed to be effective as of the day and year
first above written.
Deutsche Financial Services Corporation
By: /s/ [ILLEGIBLE]
-------------------------------------
Its: Vice President, Operations
CORPORATE ACKNOWLEDGMENT
STATE: OF MASSACHUSETTS )
) ss:
COUNTY OF NORFOLK )
On the ___ day of December, 1999, before me personally came, Mark B.
Schafer, who being by me duly sworn, did depose and say that he is the vice
president/operations of Deutsche Financial Services Corporation, known to me to
be the officer who executed the within Agreement on behalf of said corporation,
and acknowledged to me that they executed the same for the purposes therein
stated.
___________________________________
Notary Public
My commission expires:
International Data Products, Corp.
By: ________________________________
Its:________________________________
CORPORATE ACKNOWLEDGMENT
STATE OF VIRGINIA )
) ss:
COUNTY OF )
On the ___ day of December, 1999, before me personally came, Thomas P.
Dunne, who being by me duly sworn, did depose and say that he is the President
of International Data Products, Corp., known to me to be the officer who
executed the within Agreement on behalf of said corporation, and acknowledged to
me that they executed the same for the purposes therein stated.
___________________________________
5
<PAGE>
THIS AGREEMENT has been executed to be effective as of the day and year
first above written.
International Data Products, Corp.
By: /s/ Thomas P. Dunne
--------------------------------
Its: President
-------------------------------
Dunn Computer Corporation (a Virginia Corporation)
By: /s/ Thomas P. Dunne
--------------------------------
Its: President
-------------------------------
Dunn Computer Corporation (a Delaware Corporation)
By: /s/ Thomas P. Dunne
--------------------------------
Its: President
-------------------------------
Puerto Rico Industrial Manufacturing Operations Acquisition,
Corp.
By: /s/ Thomas P. Dunne
--------------------------------
Its: President
-------------------------------
Deutsche Financial Services Corporation
By:
--------------------------------
Its:
-------------------------------
<PAGE>
PROMISSORY NOTE
DATE: December 29, 1999
PRINCIPAL AMOUNT: $831,652.00
1. FOR VALUE RECEIVED, the undersigned, INTERNATIONAL DATA PRODUCTS
CORP., a Maryland corporation, Puerto Rico Industrial Manufacturing Operations
Acquisition, Corp., a Puerto Rico corporation, Dunn Computer Corporation, a
Delaware corporation, and Dunn Computer Corporation, a Virginia corporation
(referenced herein, collectively and individually, as the "Maker"), jointly and
severally, promise to pay to Deutsche Financial Services Corporation, a Nevada
corporation, its successors, its assigns, or any subsequent holder of this Note
(the "Payee"), without offset, in immediately available funds in lawful money of
the United States at Deutsche Financial Services Corporation, 100 River Ridge
Drive, Suite 202, Norwood, MA 02062, or at such other address as Payee may
direct, the principal amount of $831,652.00, plus interest at the Prime Rate
according to Chase Manhattan Bank (the "Prime Rate"), which shall accrue from
January 1, 2000, until paid. The Prime Rate will change and take effect for
purposes of this Promissory Note on the day that Chase Manhattan Bank announces
any change in its Prime Rate.
2. Payment shall be made by Maker as follows: This Note shall be
paid in twenty four (24) installments of equal principal payments of $34,652.17,
plus accrued interest at the Prime Rate, paid in arrears and due with each
principal
<PAGE>
installment. Each installment shall be paid by the 1st of each month, commencing
on February 1, 2000.
3. If any one or more of the following events (a "Default") occurs,
then Payee, at its option, may declare this Note to be in default, whereupon
this Note and the total outstanding principal balance, and all other obligations
under this Note, including all accrued interest, shall become immediately due
and payable without demand or notice: (i) Maker defaults in making any payment
which is due and payable under this Note (a "Payment Default"); (ii) the filing
of a voluntary or involuntary petition by or with respect to Maker under any of
the provisions of the federal bankruptcy laws; (iii) issuance of a warrant of
attachment or for distraint, or of a notice of tax lien, with respect to Maker
or its assets; or (iv) entry of a judgment against Maker or against the property
of Maker, which is not satisfied after thirty days. Maker shall inform Payee of
the occurrence of any event described above in subsections (ii), (iii) or (iv),
and failure to so inform Payee will be an event of Default.
4. Any amounts payable under this Note which are not paid when due
shall bear interest, from the date due and payable, until the date paid, at the
Prime Rate, plus 2% per annum.
5. Maker hereby waives presentment, demand, protest, notice of
default, notice of protest, notice of dishonor, notice of acceleration or intent
to accelerate, and all exemptions,
-2-
<PAGE>
including, but not limited to, those relating to attachment, garnishment or
execution. Maker agrees that its liability shall not be affected or impaired by
any failure of Payee to proceed or exercise any remedies against any other
person.
6. Any delay or failure on the part of Payee to enforce any
provision of this Note shall not act as a waiver of enforcement of any
provision by Payee. Any acceptance by the Payee from time to time of any payment
under the Note which is past due and payable at the time of such payment under
the Note or which is less than the payment in full of all amounts due at the
time of such payment shall not constitute a novation, waiver or impairment of
any of the rights of the Payee under this Note.
7. If the inclusion of any provisions, provision or any part thereof
in this Note affects the validity or enforceability of this Note, or renders
this Note nonnegotiable, such provision(s) or that part shall be treated as if
it did not appear in this Note; but all remaining terms and provisions of this
Note shall be fully effective.
8. The Maker warrants this Note is made for a commercial purpose and
is not for personal, family or household purposes.
9. The Maker hereby waives any right Maker may have to a trial by
jury in any litigation between the Parties arising from this Note.
-3-
<PAGE>
10. In the event of Default, the Maker authorizes and appoints
Stephanie Wickouski, Esq., to appear for Maker, to waive the issuance and
service of process and to enter judgment by confession with the Clerk of the
Circuit Court for Arlington County, or the Clerk of the United States District
Court for the Eastern District of Virginia, Alexandria Division, in favor of
Payee for the balance then due on this Note, together with court costs,
interest, and actual and reasonable attorneys fees. If by reason of the
acceleration of the unpaid principal balance of this Note for any cause, or if,
for any other reason, interest in excess of the highest legal contract rate in
the Commonwealth of Virginia shall at any time be paid, any such excess shall
constitute and be treated as a payment on the principal hereof and shall operate
to reduce such principal balance.
11. The validity and construction of this Note and all matters
pertaining hereto shall be determined in accordance with the laws of the
Commonwealth of Virginia.
12. This Note constitutes the entire agreement of the parties and
may only be amended by written instrument executed by Maker and Payee.
-4-
<PAGE>
IMPORTANT NOTICE
THIS INSTRUMENT CONTAINS A CONFESSION OF JUDGMENT PROVISION WHICH CONSTITUTES A
WAIVER OF IMPORTANT RIGHTS YOU MAY HAVE AS A DEBTOR AND ALLOWS THE CREDITOR TO
OBTAIN A JUDGMENT AGAINST YOU WITHOUT ANY FURTHER NOTICE.
Attest/Witness: INTERNATIONAL DATA PRODUCTS CORP.
/s/ Anita J. Nelson By: /s/ Thomas P. Dunne
- ----------------------------------- -------------------------------------
Thomas P. Dunne, President
Attest/Witness: PUERTO RICO INDUSTRIAL
MANUFACTURING OPERATIONS
ACQUISITION, CORP.
/s/ Anita J. Nelson By: /s/ Thomas P. Dunne
- ----------------------------------- -------------------------------------
Thomas P. Dunne, President
Attest/Witness: DUNN COMPUTER CORPORATION
(a Delaware Corporation)
/s/ Anita J. Nelson By: /s/ Thomas P. Dunne
- ----------------------------------- -------------------------------------
Thomas P. Dunne, President
Attest/Witness: DUNN COMPUTER CORPORATION
(a Virginia Corporation)
/s/ Anita J. Nelson By: /s/ Thomas P. Dunne
- ----------------------------------- -------------------------------------
Thomas P. Dunne, President
<PAGE>
EXHIBIT 10.26
REVOLVING LINE OF CREDIT LOAN AGREEMENT AND SECURITY AGREEMENT
THIS REVOLVING LINE OF CREDIT LOAN AGREEMENT AND SECURITY AGREEMENT
("Agreement") is made as of May 27, 1999, by and among Dunn Computer
Corporation, a Virginia corporation, Dunn Computer Corporation, a Delaware
corporation, International Data Products, Corp., STMS, Inc., Puerto Rico
Industrial Manufacturing Operations Acquisition, Corp., and Dunn Computer
Operating Company (collectively, the "Borrower"), having an address at c/o Dunn
Computer Corporation, 1306 Squire Court, Sterling, Virginia 20166, and First
Union Commercial Corporation, a North Carolina corporation, having an address of
1970 Chain Bridge Road, McLean, VA 22102 (the "Lender").
RECITALS
1. The Borrower has applied to the Lender for a revolving loan facility in
the maximum principal amount of Fifteen Million Dollars ($15,000,000.00) to be
used by the Borrower for working capital and to finance the performance of
Government Contracts, payments under which are to be assigned to Lender as
security for the revolving loan facility.
2. The Lender is willing to make the Revolving Loan on the terms and
conditions hereinafter set forth.
AGREEMENTS
NOW, THEREFORE, in consideration of the premises, the mutual agreements
herein contained, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Borrower and the Lender hereby
agree as follows:
ARTICLE 1. DEFINITIONS.
1.1 Defined Terms. Certain capitalized terms not otherwise defined herein
are used in this Agreement with the following meanings, unless the
context otherwise requires:
"Account" means collectively and includes any of the following, whether
now owned or hereafter acquired by the Borrower: all present and future rights
to payments for goods sold or leased or for services rendered, whether or not
represented by instruments or chattel paper, and whether or not earned by
performance; all present and future rights to payments arising out of the
licensing of computer software and systems; all accounts, contract rights,
chattel paper, instruments and documents; proceeds of any letter of credit of
which the Borrower is a beneficiary; all forms of obligations whatsoever owed to
the Borrower, together with all instruments and documents of title representing
any of the foregoing; all rights in any returned or repossessed goods; all
rights, security and guaranties with respect to any of the foregoing, including,
without limitation, any right of stoppage in transit; together with all property
included within the definitions of "accounts", "chattel paper", "documents" and
"instruments" set forth in the UCC.
<PAGE>
"Advance" means an advance of funds under the Revolving Loan.
"Affiliate" means, with respect to any specified Person, any other Person
which, directly or indirectly, through one or more intermediaries, controls or
is controlled by, or is under common control with, such specified Person. The
term "control" means the possession, directly or indirectly, of the power to
direct or cause the direction of management and policies of a Person, whether
through ownership of common stock, by contract, or otherwise.
"Agreement" means this Revolving Line of Credit Loan Agreement and
Security Agreement as the same may be amended, modified or supplemented from
time to time.
"Assignment" means a direct assignment of Payments under Government
Contracts, pursuant to and in compliance with the Assignment of Claims Act.
"Assignment of Claims Act" means Title 31, United States Code ss. 3727,
and Title 41, United States Code ss. 15, as revised or amended, and any rules or
regulations issued pursuant thereto, and also shall be deemed to include any
other laws, rules or regulations governing the assignment of payments under
Government Contracts or claims against a Government.
"Billed" means that Borrower has submitted an invoice to a Customer
requesting payment for goods or services provided by Borrower.
"Borrower" means Dunn Computer Corporation, a Virginia corporation, Dunn
Computer Corporation, a Delaware corporation, International Data Products,
Corp., STMS, Inc., Puerto Rico Industrial Manufacturing Operations Acquisition,
Corp., and Dunn Computer Operating Company. The term "Borrower" shall refer to
each such Person or to all of them, as the context may require, and the
representations and obligations hereunder of the Persons comprised by the term
"Borrower" shall be joint and several. For purposes of testing compliance with
the financial covenants hereinafter, the negative covenants hereinafter, the
unused fee provided hereinafter, and pricing under the Revolving Note that is
based on the Borrower's financial performance, financial information concerning
the Borrower shall mean financial information for Dunn Computer Corporation, a
Virginia corporation, and its wholly owned subsidiaries (and wholly owned
subsidiaries of subsidiaries) stated on a consolidated basis.
"Borrowing Base" means at the time in question the sum of: (a) ninety
percent (90%) of the Borrower's Eligible Government Accounts; plus (b) eighty
percent (80%) of Borrower's Eligible Commercial Accounts; plus (c) thirty
percent (30%) of the Borrower's Eligible Inventory; provided that the part of
the Borrowing Base attributable to Inventory shall not exceed the lesser of Four
Million Dollars ($4,000,000.00) or 26.7% of the entire Borrowing Base. In the
absence of manifest error, Lender's determination of the amount of the Borrowing
Base shall be conclusive.
2
<PAGE>
"Borrowing Base Certificate" means a certificate substantially in the form
of Exhibit 1.1 attached hereto (or such subsequent form as the Lender shall
require).
"Borrowing Date" means the date on which an Advance is made.
"Business Day(s)" means any day that is not a Saturday, Sunday or banking
holiday in the Commonwealth of Virginia.
"Capital Lease" means any lease which has been or should be capitalized on
the books of the lessee in accordance with GAAP.
"Cash Collateral Account" means an account to be established by Lender in
Borrower's name, with the Lender, for the purpose of receiving Payments, which
shall constitute part of the Collateral unless and until disbursed to the
Borrower or applied for the Borrower's account in accordance with this
Agreement.
"Closing Date" means May 27, 1999.
"Code" means the Internal Revenue Code of the United States, as amended.
"Collateral" means all of the following kinds of property now owned or
hereafter acquired by the Borrower:
a. all Accounts;
b. all payments or rights to payment due or to become due under
any Government Contract to which the Borrower is a party;
c. all deposit accounts and other obligations or indebtedness
owed to Borrower from whatever source arising;
d. all rights to receive any payment in money or in kind;
e. all contract rights (except contract rights under Government
Contracts other than rights to payments due or to become due);
f. all Inventory;
g. all property, plant and Equipment;
h. all chattel paper;
i. all General Intangibles;
3
<PAGE>
j. all books and records and computer hardware, software
(including, to the extent assignable, the Borrower's right to
used software licensed to the Borrower) and systems;
k. all policies of insurance and the proceeds thereof;
1. all additions and accessions to and replacements of the
collateral described above; and
m. all products and proceeds of all of the collateral described
above.
"Commercial Accounts" means all Accounts due from Customers other than the
Government.
"Contra Account" means an Account due from an account debtor to which the
Borrower owes money.
"Customer" means any governmental entity (federal, state, county,
municipal or otherwise) or business entity (corporation, association,
partnership, limited liability company or partnership, sole proprietorship or
otherwise) or individual to which Borrower provides goods or services for
compensation; however, certain individual agencies of the United States
Government and certain branches of certain major corporations, as determined by
the Lender in its sole discretion, shall be treated as Customers in their own
right, separate and distinct from other such agencies or branches and from the
United States Government or the corporation of which they are a part.
"Debt" means collectively and includes (a) indebtedness or liability for
borrowed money, or for the deferred purchase price of property or services; (b)
obligations as a lessee under a Capital Lease; (c) obligations to reimburse the
issuer of letters of credit or acceptances; (d) all guaranties, endorsements
(other than for collection or deposit in the ordinary course of business), and
other contingent obligations to purchase, to provide funds for payment, to
supply funds to invest in any Person, or otherwise to assure a creditor against
loss; and (e) obligations secured by any lien or Encumbrance on property owned
by the Borrower, whether or not the obligations have been assumed.
"EBIT" means the Borrower's earnings before interest and taxes.
"EBITDA" means the Borrower's earnings before interest, taxes,
depreciation and amortization.
4
<PAGE>
"Eligible" when used to describe an Account, means that the Account
conforms to the following criteria:
1. the Account has been Billed;
2. in the case of a Commercial Account, less than
ninety-one (91) days have passed from the original
billing date;
3. in the case of a Government Account, less than one
hundred and twenty-one (121) days have passed from the
original billing date;
4. at Lender's option, in the case of a Government Account
payable by the United States or any of its departments
or agencies, Borrower has made an Assignment of all
Payments due or to become due under the Government
Contract giving rise to the Account;
5. the Account arose from a bona fide sale of goods or
services to a Customer; the goods or services have been
delivered or provided to the Customer; Borrower
possesses receipts from the Customer acknowledging
delivery of the goods or performance of the services;
and Customer has not returned or rejected the goods or
services;
6. the Account is based upon an enforceable written order
or contract for goods or services;
7. the Borrower's title to the Account is absolute and is
not subject to any prior assignment, claim, escrow
agreement or amendment; lien or security interest, and
Borrower otherwise has the full and unqualified right
and power to assign and grant a security interest in the
Account to the Lender;
8. the amount shown on the books of Borrower and on any
invoice, certificate, schedule or statement delivered to
the Lender is owing to Borrower;
9. the Account is not subject to any claim of reduction,
counterclaim, set-off, recoupment or other defense in
law or equity, or any claim for credits, allowances or
adjustments
5
<PAGE>
by the Customer because of returned, inferior or damaged
goods, unsatisfactory services or for any other reason;
10. the Customer has not notified Borrower of any material
dispute concerning any of the goods or services giving
rise to the Account, nor made claim that the goods or
services fail to conform to the requirements of the
Customer's order or contract, nor notified Borrower to
cure any default under the Customer's order or contract;
11. the Account does not arise out of a Customer's contract
or order that by its terms forbids or makes void or
unenforceable the Borrower's assignment of the Account
to the Lender;
12. Borrower has not received any note, trade acceptance
draft or other instrument tendered in payment of the
Account;
13. Borrower has not received any notice of the death of the
Customer or any partner in a Customer that is a
partnership; nor has Borrower received any notice of
dissolution, termination of existence, insolvency,
business failure, appointment of a receiver for any part
of the property of, assignment for the benefit of
creditors by, or the filing of a petition in bankruptcy
or the commencement of any proceeding under any
bankruptcy or insolvency laws by or against the
Customer;
14. the Customer is not incorporated in any jurisdiction
outside the United States and is not conducting its
business primarily outside the United States;
15. Borrower is not indebted in any manner to the Customer;
16. no bond has been issued or is contemplated with respect
to the goods or services furnished by the Borrower or
with respect to the project or contract for which those
goods or services were furnished; and
17. the Account is not an Ineligible Account; and
when used to describe Inventory, shall mean the cost of the Borrower's
Inventory, less such part of the Inventory that Lender determines to be
ineligible and less a reserve for obsolescence, to be
6
<PAGE>
determined by the Lender. Ineligible Inventory shall include, but shall not be
limited to, work-in-process, Inventory on consignment and any other Inventory
that the Lender believes is of doubtful value as collateral or as to which
Lender believes that its ability to realize on the value of the Inventory is
insecure.
In the event of any dispute, under the foregoing criteria, as to whether
an Account is, or has ceased to be, an Eligible Account, or whether Inventory
is, or has ceased to be, Eligible Inventory, the Lender's judgment shall
control.
"Encumbrance" means any mortgage, pledge, deed of trust, assignment,
security interest, hypothecation, lien or charge of any kind (including any
conditional sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of, or agreement to give, any financing statement under the Uniform Commercial
Code or comparable law of any jurisdiction), except any statutory lien for taxes
not yet due and payable.
"Environmental Laws" mean all laws relating to Hazardous Wastes, Toxic
Substances or materials that might be emitted, released or discharged into the
environment or other laws or regulations protecting the environment.
"Ending Date" means June 1, 2002.
"Equipment" means collectively and includes all of the following, whether
now owned or hereafter acquired by the Borrower: equipment and fixtures,
including, without limitation, computer hardware, computer software and systems,
furniture, machinery, vehicles and trade fixtures, together with any and all
accessories, accessions, parts and appurtenances thereto, substitutions therefor
and replacements thereof, together with all other such items which are included
within the definitions of "equipment" and "fixtures" as set forth in the UCC.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended, and any successor statute thereto, as interpreted by the rules and
regulations thereunder, all as the same may be in effect from time to time.
References to sections of ERISA shall be construed also to refer to any
successor sections.
"ERISA Affiliate" means an entity, whether or not incorporated, which is
under common control with the Borrower or any of its subsidiaries within the
meaning of Section 4001(a)(14) of ERISA, or is a member of a group which
includes the Borrower or any of its subsidiaries and which is treated as a
single employer under Sections 414(b), (c), (m), or (o) of the Code.
"Event of Default" means any one of the events specified as an "Event of
Default" under this Agreement.
7
<PAGE>
"Fixed Charge Coverage Ratio" means the sum of EBITDA and rent expense,
less taxes paid, less capital expenditures and less cash dividends; divided by
sum of: (i) the current portion of the Borrower's long term debt, (ii) current
period capital lease payments, (iii) interest expense, and (iv) rent expense.
"GAAP" means generally accepted accounting principals in the United States
of America.
"General Intangibles" means collectively and includes all of the
following, whether now owned or hereafter acquired by the Borrower: choses in
action, causes of action and all other intangible property of every kind and
nature, including, without limitation, corporate or other business records,
inventions, designs, patents, patent applications, trademarks, trademark
applications, trade names, trade secrets, goodwill, registrations, copyrights,
licenses, franchises, customer lists, tax refunds, tax refund claims, rights of
claims against carriers and shippers, leases and rights to indemnification,
together with all property which is included within the definition of "general
intangibles" as set forth in the UCC or in GAAP.
"Government" means the government for the United States of America or the
departments or agencies of the United States, the government of any state, the
government of the District of Columbia or any departments or agencies of any
state or of the District of Columbia.
"Government Accounts" means all Accounts arising out of any Government
Contract.
"Government Contracts" means all contracts with a Government, including
all renewals, extensions, modifications, change orders and amendments thereof
and thereto.
"Hazardous Wastes" mean all waste materials subject to regulation under
the Comprehensive Environmental Response, Compensation, and Liability Act, 42
U.S.C. ss. 9601 et seq., the Resource Conservation and Recovery Act, 42 U.S.C.
ss. 6901 et seq., or applicable state law and any other applicable federal,
state or local laws and their regulations now in force or hereafter enacted
relating to hazardous wastes.
"Ineligible Accounts" shall include the following Accounts:
1. Accounts that do not conform with the criteria set forth
for Eligible Accounts;
2. An Account owing by any account debtor for which the
Lender has deemed fifty percent (50%) or more of the
account debtor's other Accounts to be non-Eligible;
however, for purposes of this category of Ineligible
Accounts, each Government Contract shall be treated as
an individual Customer; provided, that if more than
fifty
8
<PAGE>
percent (50%) of all Accounts owed by the District of
Columbia and any of its agencies or departments are or
become Ineligible, then all Accounts owed by the
District of Columbia and any of its agencies or
departments shall be deemed Ineligible.
3. The last payment due on a Government Account, unless
such Government Account arises from a Government
Contract which is a "fixed price contract" (as defined
in the Federal Acquisition Regulations) which does not
include any provision for progress payments, incentive
arrangements or price redetermination;
4. Government Accounts arising under Government Contracts
which contain an express prohibition against assignment
of Borrower's rights to Payment;
5. Contra Accounts;
6. Accounts receivable from Affiliates of subsidiaries of
the Borrower;
7. Unbilled Accounts, including, but not limited to,
progress payments, retainages, milestones and final
payments; or
8. Any Account deemed in good faith by the Lender, in the
exercise of its sole and absolute discretion, to be an
Ineligible Account because of uncertainty as to the
creditworthiness of the Customer or because the Lender
otherwise considers in good faith the collateral value
thereof to the Lender to be impaired or its ability to
realize such value to be insecure.
However, Borrower may request in writing that Lender regard as Eligible any
Account that would otherwise be classified an Ineligible Account. Lender may
grant or deny any such request in its sole discretion.
"Intellectual Property" shall mean all patents, licenses, trade names,
trademarks, copyrights, inventions, service marks, trademark registrations,
service mark registrations and copyright registrations, whether domestic or
foreign and applications for any of the foregoing, and all proprietary
technology, know-how, trade secrets or other intellectual property rights owned
or used by the Borrower or any subsidiary in the operation of their respective
businesses.
9
<PAGE>
"Inventory" means collectively and includes all of the following, whether
now owned or hereafter acquired by the Borrower: all goods held or intended for
sale or lease by the Borrower, or furnished or to be furnished under contracts
of service, all raw materials, work in process, finished goods, materials and
supplies of every nature used or usable in connection with the manufacture,
packing, shipping, advertising or sale of any such goods, together with all
property included within the definition of "inventory" set forth in the UCC.
"Item" means any "item" as defined in Section 4-104 of the Uniform
Commercial Code, to include, without exclusion or limitation, checks, drafts,
money orders or other media by which Payment may be made.
"Lender" means First Union Commercial Corporation and its successors and
assigns.
"Letter of Credit" means a standby letter of credit issued by the Lender
for the account of the Borrower under this Agreement.
"Letter of Credit Agreement" means the Lender's standard form of
reimbursement agreement in effect from time to time that Lender requires as a
condition for each letter of credit that Lender issues to one of its customers.
"Letter of Credit Sublimit" means Five Million Dollars ($5,000,000.00).
"Loan" means the Revolving Loan.
"Loan Documents" mean this Agreement, the Revolving Note, or any other
document executed by the Borrower or any other Person evidencing, securing,
guaranteeing or relating to the Revolving Loan, and, without limiting the
generality of the foregoing, include a separate letter agreement, of even date,
providing, among other things, that Accounts and Inventory of International Data
Products, Corp., and Puerto Rico Industrial Manufacturing Operations
Acquisition, Corp. shall not be included in the Borrowing Base until certain
conditions have been satisfied.
"LOC Obligations" means, at any time, the sum of (i) the maximum amount
which is, or at any time thereafter may become, available to be drawn under
Letters of Credit then outstanding, assuming compliance with all requirements
for drawings referred to in such Letters of Credit; plus (ii) the aggregate
amount of all drawings under Letters of Credit honored by Lender but not
reimbursed.
"Margin" means the percentage interest rate shown on the Performance
Pricing Grid to be added to the LIBOR Rate (as defined in the Revolving Note) or
the Reference Rate (as defined in the Revolving Note) to determine the rate of
interest payable at any time under the Revolving Note. The Margin regarding the
LIBOR Rate shall be as stated in the applicable column of the "LIBOR + row" of
the Performance Pricing Grid, and the Margin regarding the Reference Rate
10
<PAGE>
shall be as stated in the applicable column of the "Reference Rate +" row of the
Performance Pricing Grid.
"Maximum Revolving Commitment Amount" means Fifteen Million Dollars
($15,000,000.00), which amount may be reduced, at the Borrower's option, as
hereinafter provided.
"Multiemployer Plan" means a Plan which is a multiemployer plan as defined
in Sections 3(37) or 4001(a)(3) of ERISA.
"Multiple Employer Plan" means a Plan which the Borrower or any of its
subsidiaries or any ERISA Affiliate and at least one employer other than the
Borrower or any of its subsidiaries or any ERISA Affiliate are contributing
sponsors.
"Operating Account" means a demand deposit account to be established by
the Borrower with the Lender for the Borrower's use in connection with its
business operations.
"Payment" or "Payments" means any check, draft, cash or any other
remittance or credit in payment or on account of any or all of the Accounts.
"Performance Pricing Grid" means the following table (part of which is
also contained in the Revolving Note):
<TABLE>
<CAPTION>
==============================================================================================================
Level 1 Level 2 Level 3
- --------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Debt / EBITDA Ratio less than 2.Ox 2.Ox less than Ratio less than 3.Ox Ratio greater than 3.Ox
- --------------------------------------------------------------------------------------------------------------
Commitment Fee .375% .375% 0.500%
- --------------------------------------------------------------------------------------------------------------
LIBOR + 1.75% 2.00% 2.50%
- --------------------------------------------------------------------------------------------------------------
Reference Rate + 0.50% 0.75% 1.0%
==============================================================================================================
</TABLE>
"PBGC" means the Pension Benefit Guaranty Corporation established pursuant
to Subtitle A of Title IV of ERISA and any successor thereto.
"Person" means any individual, partnership, association, trust,
corporation, limited liability company or partnership, or other entity.
"Plan" means any employee benefit plan (as defined in Section 3(3) of
ERISA) which is covered by ERISA and with respect to which the Borrower or any
of its subsidiaries or any
11
<PAGE>
ERISA Affiliate is (or, if such plan were terminated at such time, would under
Section 4069 of ERISA be deemed to be) an "employer" within the meaning of
Section 3(5) of ERISA.
"Reportable Event" means a "reportable event" as defined in Section 4043
of ERISA with respect to which the notice requirements to the PBGC have not been
waived.
"Revolving Loan" means the Revolving Loan facility made available by
Lender to Borrower in the maximum principal amount of Fifteen Million Dollars
($15,000,000.00) evidenced by the Revolving Note.
"Revolving Note" means the Borrower's promissory note, of even date, in
the amount of Fifteen Million Dollars ($15,000,000.00), payable to the order of
the Lender, and evidencing Borrower's obligation to repay the Revolving Loan.
"Single Employer Plan" means any Plan which is covered by Title IV of
ERISA, but which is not a Multiemployer Plan.
"Tangible Net Worth" means the Borrower's total assets, less its total
liabilities. In determining Tangible Net Worth, total assets shall exclude
obligations of officers, directors, employees, affiliates, shareholders or
subsidiaries of the Borrower; General Intangibles, goodwill and any investments
by Borrower in corporations, limited liability companies or partnerships,
partnerships, joint ventures or any other entities.
"Termination Event" means (i) with respect to any Plan, the occurrence of
a Reportable Event or the substantial cessation of operations (within the
meaning of Section 4062(e) of ERISA); (ii) the withdrawal of the Borrower or any
of its subsidiaries or any ERISA Affiliate from a Multiple Employer Plan during
a plan year in which it was a substantial employer (as such term is defined in
Section 4001(a)(2) of ERISA), or the termination of a Multiple Employer Plan;
(iii) the distribution of a notice of intent to terminate or the actual
termination of a Plan pursuant to Section 404 1(a)(2) or 4041A of ERISA; (iv)
the institution of proceedings to terminate or the actual termination of a Plan
by the PBGC under Section 4042 of ERISA; (v) any event or condition which might
constitute grounds under Section 4042 of ERISA for the termination of, or the
appointment of a trustee to administer, any Plan; (vi) the complete or partial
withdrawal of the Borrower or any of its subsidiaries or any ERISA Affiliate
from a Multiemployer Plan.
"Total Debt" means all of the Borrower's Debt.
"Toxic Substances" mean any materials which have been shown to have
significant adverse effects on human health or which are subject to regulation
under the Toxic Substances Control Act, 15 U.S.C.ss. 2601 et seq., applicable
state law, or any other applicable federal, state or local laws now in force or
hereafter enacted relating to toxic substances. "Toxic Substances"
12
<PAGE>
includes, but is not limited to, asbestos, polychlorinated biphenyls (PCBs),
petroleum products, and lead-based paints.
"Unbilled" means that Borrower has not submitted an invoice to a Customer
requesting payment for goods or services provided by Borrower.
1.2 Accounting Terms. Accounting terms used in this Agreement but not
defined in this Agreement shall have the meanings given to them in accordance
with GAAP in effect on the date of this Agreement. Except as otherwise provided
in this Agreement, all financial computations made pursuant to this Agreement
and all financial reports provided to the Lender shall be made in accordance
with GAAP, consistently applied. Except as otherwise provided in this Agreement,
whenever this Agreement refers to a balance sheet, financial statement or the
information contained in a balance sheet or other financial statement, the
Agreement shall be construed to refer to most recent consolidated balance sheet
or other financial statement provided to the Lender.
1.3 Use of Defined Terms. All terms defined in this Agreement shall have
the same defined meanings when used in any certificate, report or other document
made or delivered in connection with this Agreement, unless otherwise set forth
therein.
1.4 UCC Terms. Terms that incorporate definitions provided in the Uniform
Commercial Code ("UCC") of a particular state have the meanings ascribed to them
in the Uniform Commercial Code as adopted in that state. Terms not otherwise
defined herein and not incorporating a definition under the Uniform Commercial
Code of any particular state, but which are defined in the Uniform Commercial
Code as adopted by the Commonwealth of Virginia, shall have the meanings
ascribed to them under the Uniform Commercial Code as adopted by the
Commonwealth of Virginia.
ARTICLE 2. LOAN.
2.1 Revolving Line of Credit. The Lender agrees to extend the Revolving
Loan to Borrower, subject to the terms and conditions of this Agreement. Until
the Ending Date, Borrower may borrow, repay and reborrow Advances in accordance
with this Agreement.
A. Amount of Credit. In no event shall the principal
outstanding under the Revolving Loan plus the amount of
LOC Obligations exceed the lesser of (i) the Borrowing
Base or (ii) the Maximum Revolving Commitment Amount.
B. Reduction of Maximum Revolving Commitment Amount.
The Borrower shall have the option of reducing the
Maximum Revolving Commitment Amount,
13
<PAGE>
in integral multiples of One Million Dollars
($1,000,000.00), on ten (10) business days' written
notice to the Lender; provided that Borrower shall
immediately make any Mandatory Prepayment (as
hereinafter provided) required as a consequence of the
reduction in the Maximum Revolving Commitment Amount. If
the Maximum Revolving Commitment Amount is so reduced,
it may not thereafter be increased without the Lender's
written consent.
C. Mandatory Prepayments. If the principal outstanding
under the Revolving Loan plus the aggregate amount of
LOC Obligations ever exceeds the lesser of (i) the
Maximum Revolving Commitment Amount or (ii) the
Borrowing Base, then the Borrower shall make an
immediate payments of principal under the Revolving Loan
in an amount sufficient that the principal outstanding
under the Revolving Loan plus the aggregate amount of
outstanding LOC Obligations does not exceed the lesser
of (i) the Maximum Revolving Commitment Amount or (ii)
the Borrowing Base. Borrower shall make additional
mandatory prepayment of principal under the Revolving
Loan in amounts equal to the proceeds of any sales of
the Borrower's assets outside the ordinary course of
business.
D. Procedure for Advances. Borrower may request
Advances by telephone through its designated employee or
employees as hereinafter provided. Each Advance request
must be received by Lender not later than 1:00 p.m.
(Eastern Standard time) on the date the Advance is to be
made and must specify the amount of the Advance;
however, any request for an Advance that is to bear
interest at the LIBOR-Based Rate (as defined in the
Revolving Note) must be received by Lender not later
than 1:00 p.m. (Eastern Standard time) on the second
Business Day prior to the date on which the Advance is
to be made. Lender shall deposit the Advance into the
Operating Account if Borrower is entitled to the Advance
subject to the terms and conditions of this Agreement.
E. Letter of Credit Subfacility. Lender shall issue
Letters of Credit for the account of the Borrower from
time
14
<PAGE>
to time upon request from the Closing Date until the
Ending Date, subject to the following terms and
conditions:
(1) the aggregate amount of LOC Obligations
shall at no time exceed the Letter of Credit
Sublimit;
(2) any request for a Letter of Credit to be
issued must be delivered and received by Lender
not later than five (5) business days prior to the
date that Borrower wishes to have the Letter of
Credit issued;
(3) no Letter of Credit shall have an original
expiry date more than one year from the date of
issuance or extending beyond the Ending Date;
(4) the form of each Letter of Credit must be
satisfactory to the Lender, in its sole judgment.
At Lender's option, Letters of Credit shall be
subject to The Uniform Customs and Practice for
Documentary Credits, as published as of the date
of issue by the International Chamber of Commerce
(Publication No. 500 or the most recent
publication, the "UCP");
(5) issuance of the Letter of Credit shall not
cause the sum of: (i) LOC Obligations; plus (ii)
the principal amount outstanding under the
Revolving Note to exceed the lesser of the Maximum
Revolving Commitment Amount or the Borrowing Base;
(6) Lender shall not be required to issue any
Letter of Credit if any circumstance exists that
would entitle Lender not to honor a request for an
Advance under the Revolving Loan;
(7) Borrower shall execute and deliver to Lender
a Letter of Credit Agreement pertaining to the
Letter of Credit;
15
<PAGE>
(8) Upon notice from Lender of any drawing under
any Letter of Credit, and the Borrower shall
immediately reimburse Lender for the amount of the
drawing, plus interest from the date of the
drawing at the highest rate of interest then in
effect under the Revolving Note. The Borrower's
obligation to reimburse the Lender for any drawing
under a Letter of Credit shall be absolute and
unconditional, irrespective of any rights of
set-off, counterclaim or defense to payment the
Borrower may claim or have against the Lender, the
beneficiary of the Letter of Credit or any other
Person;
(9) Unless the Borrower makes reimbursement from
another source on the day of the drawing under any
Letter of Credit, the Borrower shall be deemed to
have requested an Advance under the Revolving Loan
in the amount of the drawing, and (i) Lender, at
its option, may make such an Advance (irrespective
of whether Borrower would then be entitled to an
Advance under the terms of this Agreement) and
apply the proceeds of the Advance to satisfy the
Borrower's obligation to reimburse Lender for the
amount drawn on the Letter of Credit; and (ii) any
such Advance shall be repayable, with interest, in
accordance with the terms and conditions of the
Revolving Note;
(10) If any of the LOC Obligations remains
outstanding on the Ending Date, Borrower shall
make a cash deposit with Lender in an amount equal
to the aggregate amount of such LOC Obligations.
Such deposit will secure the Borrower's obligation
to reimburse Lender for any drawing under any
Letter of Credit on or after the Ending Date, and
Lender shall be entitled to hold such deposit
until L I all LOC Obligations have terminated or,
if any drawing is made under any Letter of Credit,
to apply the deposit, or part of it, to reimburse
the Lender for the amount of the drawing. If
Borrower fails to make such a deposit, the
Lender will be deemed to have made an Advance
under the Revolving Note immediately prior to the
Ending
16
<PAGE>
Date in an amount equal to the aggregate amount of
the LOC Obligations, and the Advance will serve as
the deposit required under this paragraph.
Borrower shall repay the Advance, with interest,
in accordance with the Revolving Note, and
Borrower's obligation to repay the Advance will be
secured by the Collateral to the same extent as
any other Advance under the Revolving Note; and
(11) The provisions of the Letter of Credit
Agreement pertaining to each Letter of Credit are
deemed incorporated into this Agreement by this
reference and shall be binding upon the Lender and
Borrower as if fully set forth herein. If a
conflict exists between the terms of the Letter of
Credit Agreement and any other Loan Document, the
terms of the Letter of Credit Agreement shall
control with respect to the Letter of Credit
issued pursuant to that Letter of Credit Agreement
but not as to other matters governed by this
Agreement or such Loan Document.
F. Use of Revolving Loan Proceeds. The proceeds of
the Revolving Loan shall be used for working capital and
to finance the performance of Government Contracts, and
for no other purpose.
G. Revolving Loan Fees. Borrower promises to pay
Lender the following fees in consideration of entering
into this Agreement. These fees are in addition to
interest payable under the Revolving Note:
(1) an up front fee of three-eighths of one
percent (0.375 %) of the Maximum Revolving
Commitment Amount, which shall be payable on the
Closing Date.
(2) an unused fee calculated for each day by
multiplying the unused portion of the Maximum
Revolving Commitment Amount during that day by the
annual commitment fee rate set forth in the
Performance Pricing Grid, divided by 360. The
unused fee shall be payable quarterly, in arrears,
17
<PAGE>
commencing on the first day of the Borrower's
first fiscal quarter after the Closing Date. The
unused fee payable at the end of each quarter
shall be the sum of the unused fees for each day
during that quarter.
(3) a letter of credit fee calculated for each
day by multiplying the aggregate face amount of
each Letter of Credit outstanding on that day by
the Margin that would be in effect if the Borrower
elected a LIBOR-based interest rate under the
Revolving Loan, divided by 360. The letter of
credit fee shall be payable quarterly, in arrears,
commencing on the first day of the Borrower's
first fiscal quarter after the Closing Date. The
letter of credit fee payable at the end of each
quarter shall be the sum of the unused fees for
each day during that quarter. In addition, the
Borrower shall pay Lender's customary
administrative fee charged in connection with each
Letter of Credit.
(4) a fee of Five Thousand Dollars ($5,000.00)
for each examination performed by the Lender or
its agents, for up to two (2) field examinations
per year. However, the Lender shall have the right
to perform such additional field examinations at
any time, in its sole discretion. Each additional
field examination will be at Lender's own expense
if no Event of Default has occurred and remains
uncured at the time of the additional field
examination, but shall be at the Borrower's
expense if an Event of Default has occurred and
remains uncured at the time of the additional
field examination.
ARTICLE 3. CONDITIONS PRECEDENT TO LOAN.
3.1 Conditions Precedent to Initial Advance. The obligation of the Lender
to make any Advance under the Revolving Loan is subject to the satisfaction (in
the sole judgment of the Lender) of all of the following conditions on or before
the Closing Date:
A. Representations and Warranties; Compliance. All
representations and warranties made by Borrower in or in
connection with this Agreement or any of the other Loan
18
<PAGE>
Documents or otherwise made in writing in connection with this
Agreement shall be true and correct on the Closing Date, and
the Borrower shall have performed all of the promises or
undertakings under this Agreement and satisfied all of the
conditions of this Agreement that the Borrower was required to
perform or to satisfy as of the Closing Date.
B. Documents Concerning the Borrower. Borrower shall
deliver to the Lender copies of all documents requested by the
Lender, including a complete, correct and current copy of the
Borrower's Articles of Incorporation, certified by the
Secretary of State of the Borrower's state of incorporation; a
complete, correct and current copy of its Bylaws, certified by
Borrower's corporate secretary; a complete, correct and
current copy of all resolutions of Borrower's Board of
Directors authorizing the execution, delivery and performance
of this Agreement and of the other Loan Documents, certified
by Borrower's corporate secretary; and appropriate
certificates of incumbency for those officers of Borrower
executing this Agreement or any of the other Loan Documents,
certified by Borrower's corporate secretary and president. In
addition, the following documents and materials shall have
been delivered to the Lender, and must be satisfactory to the
Lender in form and substance:
(1) all supporting documentation with regard to the
Borrower, the Revolving Loan as the Lender may
require;
(2) such additional information, instruments,
opinions, documents, certificates and reports
relating to the Borrower or the Collateral as the
Lender may deem necessary;
(3) such lien releases or termination statements
as Lender may deem necessary to remove any
Encumbrances on the Collateral;
(4) such lien releases or termination statements as
and results of a field examination conducted by the
Lender or by a certified public accounting firm
engaged by the Lender.
19
<PAGE>
C. Executed Note and Loan Documents. Borrower shall deliver
to the Lender, fully executed: this Agreement, the Revolving
Note, UCC-1 Financing Statements and such other documents,
instruments and certificates as the Lender may reasonably
require, in form and substance satisfactory to the Lender. All
taxes, fees and charges with respect to the preparation,
filing and recording of the Loan Documents shall have been
paid by Borrower.
D. Financing Statements. All Financing Statements deemed
necessary by the Lender to perfect its security interest in
the Collateral or any other collateral securing the Loan shall
have been filed in such recording offices as Lender may
require.
E. Legal Opinion. Borrower shall deliver to the Lender a
written opinion or opinions of legal counsel for Borrower
dated the Closing Date and addressed to the Lender, which
opinions must be in form and content satisfactory to the
Lender. Without limiting the generality of the foregoing, the
opinion or opinions must address the Borrower's organization,
existence, power, good standing and authority and as to the
validity, binding effect and enforceability of the Loan
Documents, including the existence, validity, enforceability,
attachment, perfection, and binding effect of any security
interest, lien or assignment being granted by Borrower or
other person providing Collateral to Lender with respect to
the Collateral.
F. Accounts with the Lender. The Borrower shall have
established the Cash Collateral Account and an Operating
Account with the Lender.
G. Compliance with Covenants. Borrower shall establish to
Lender's satisfaction that the Advance will not cause Borrower
to cease to comply with Borrower's financial covenants as set
forth hereinafter.
H. Borrowing Base Certificate. Borrower shall deliver to
the Lender a Borrowing Base Certificate dated the Closing Date
with supporting schedules attached thereto, including without
limitation, current Accounts Receivable and Accounts Payable
reports.
3.2 Future Advances. The obligation of the Lender to make any Advance
under the Revolving Loan subsequent to the Closing Date is further conditional
on:
20
<PAGE>
A. the Lender's determination, in its sole judgment, that
the conditions precedent to the first Advance are satisfied as
of the Borrowing Date for the subsequent Advance;
B. the Lender's receipt of a Borrowing Base Certificate,
executed by a duly authorized officer of the Borrower with
supporting updated schedules attached thereto;
C. all representations and warranties contained herein
shall be true and correct at the date of such disbursement;
D. the Lender's good faith determination, in its sole
discretion, that no material adverse change has occurred in
the financial condition of the Borrower from that disclosed in
the most recent financial statements furnished to the Lender
prior to the Closing Date; and
E. no Event of Default has occurred and remains uncured,
and no event has occurred or circumstance exists which, with
the passage of time or the giving of notice or both, would
constitute an Event of Default.
3.3 Lender's Right To Rely On Communications. Borrower shall provide the
Lender with written notice designating employees or agents of the Borrower who
are authorized to communicate with Lender on the Borrower's behalf regarding
Advances and other matters pertaining to this Agreement. The Borrower authorizes
the Lender to accept, rely upon, act upon and comply with, any verbal or written
instructions, requests, confirmations and orders of any employee or agent so
designated by the Borrower. The Borrower acknowledges that the transmission
between the Borrower and the Lender of any such instructions, requests,
confirmations and orders involves the possibility of errors, omissions, mistakes
and discrepancies and agrees to adopt such internal measures and operational
procedures as Borrower deems necessary to protect its interests. The Borrower
hereby assumes all risk of loss arising out of: (i) the Lender's acceptance,
reliance on, compliance with or observation of any such instructions, requests,
confirmations or orders; and (ii) any such errors, omissions, mistakes and
discrepancies, except those caused by the Lender's gross negligence or willful
misconduct. Borrower agrees to indemnify Lender and to hold Lender harmless for
and from all claims, demands, suits, actions, judgments, decrees, losses or
damages, including reasonable attorneys fees and reasonable expenses, that
Lender may incur as a result of the foregoing events or occurrences for which
the Borrower has assumed the risk of loss.
21
<PAGE>
ARTICLE 4. SECURITY.
4.1 Grant of Security Interest. As security for (i) the payment of the
Loan, and any other extensions of credit, loans, Letters of Credit, interest
rate swap or other hedging transactions (including, without limiting the
generality of the foregoing, interest rate swap termination fees) or other
financial accommodations now or hereafter made by the Lender for the benefit of
the Borrower, and (ii) for any other liability or obligation of Borrower to
Lender whether now or hereafter existing, of every kind and description, whether
or not evidenced by notes or other instruments, and whether or not such
liability or obligations are direct or indirect, fixed or contingent, liquidated
or unliquidated, the Borrower hereby assigns, grants and conveys to the Lender a
security interest in the Collateral. The Borrower further agrees that the Lender
shall have in respect of the Collateral all of the rights and remedies of a
secured party under the Uniform Commercial Code, other applicable law and this
Agreement. The Borrower covenants and agrees to execute and deliver such
financing statements and other instruments and filings or perform any and all
acts as are necessary in the opinion of the Lender to perfect, maintain and
protect the security interest hereby granted. The Borrower shall not dispose of
the Collateral, or any part thereof, other than in the ordinary course of its
business or as otherwise may be permitted by this Agreement. With regard to
Collateral that constitutes Inventory or Equipment, the Borrower further
covenants as follows:
A. The Lender's security interest shall extend and attach
to Inventory which is presently in existence and is owned by
the Borrower or in which the Borrower purchases or acquires an
interest at any time and from time to time in the future,
whether such Inventory is in transit or in the Borrower's
constructive, actual or exclusive occupancy or possession or
not, and wherever the same may be located, including, without
limitation, all Inventory which may be located at the premises
of the Borrower or upon the premises of any carriers,
forwarding agents, truckers, warehousemen, vendors, selling
agents, finishers, convertors or other third parties who may
have possession of the Inventory.
B. Upon sale, exchange, lease or disposition of the
Inventory or Equipment, the security interest of the Lender
shall without break in continuity and without further
formality or act continue in and attach to all cash and
non-cash proceeds of such sale, exchange, lease or
disposition, including Inventory returned or rejected by
customers or repossessed by either the Borrower or the Lender.
As to any such sale, exchange, lease or disposition, the
Lender shall have all of the rights of an
22
<PAGE>
unpaid seller, including stoppage in transit, replevin,
detinue and reclamation.
4.2 Certain Rights of the Lender. The Lender shall have the right, but not
the obligation, (i) to pay any taxes or levies on the Collateral or any costs to
repair or to preserve the Collateral; and (ii) to cure any defaults by Borrower
on contracts by the Borrower intended to give rise to Accounts. Such payments
and the costs of curing such defaults shall constitute Advances under the
Revolving Note and shall be secured pursuant to this Agreement, irrespective of
whether the Borrower would then be entitled to such Advances under this
Agreement.
4.3 Financing Statements. At the request of the Lender, Borrower will join
with the Lender in executing financing statements, continuation statements and
other documents with respect to the Collateral pursuant to the Uniform
Commercial Code or otherwise, in form satisfactory to the Lender, and Borrower
will pay the cost of filing the same in all public offices wherever the Lender
deems filing to be necessary or desirable. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement, provided however,
that it shall not limit the obligations of Borrower as previously set forth
herein. Borrower grants the Lender the right, at the Lender's option, to file
any or all such financing statements, continuation statements and other
documents pursuant to the Uniform Commercial Code and otherwise, without
Borrower's signature, and irrevocably appoints the Lender as Borrower's
attorney-in-fact to execute any such statements and documents in Borrower's name
and to perform all other acts which the Lender deems appropriate to perfect and
to continue the security interests conferred by this Agreement; however, Lender
agrees not to exercise such powers as attorney-in-fact for the Borrower unless
an Event of Default has occurred and remains uncured or there exists any event
or circumstance that, with the giving of notice, the passage of time or both,
would constitute an Event of Default.
4.4 Records of Collateral; Information. Borrower at all times will
maintain accurate books and records covering the Collateral. Borrower
immediately will mark all books and records with an entry showing the absolute
assignment of and granting of a security interest in all Collateral to Lender,
and hereby grants the Lender the right to audit the books and records of
Borrower relating to Collateral at any time and from time to time. Borrower
shall (i) promptly furnish the Lender with any information with respect to
Collateral requested by Lender; (ii) allow the Lender or its representatives to
inspect the Collateral, during ordinary business hours and any other reasonable
time, and wherever located, and to inspect and copy, or furnish the Lender or
its representatives with copies of all records relating to the Collateral;
(iii) furnish the Lender or its representatives such information as the Lender
may request to identify the Collateral, at the time ~ I and in the form
requested by Lender; and (iv) deliver upon request to Lender shipping and
delivery receipts evidencing the shipment of goods and invoices evidencing the
receipt of the Collateral and payment for the Collateral.
23
<PAGE>
4.5 No Release. No injury to the Collateral, loss or destruction of the
Collateral, failure to perfect or to continue the perfection of Lender's
security interest in the Collateral, or release of Lender's security interest in
the Collateral, or any part of it, shall relieve Borrower of any obligation
under this Agreement or under any of the other Loan Documents. Borrower
expressly waives all defenses based on suretyship or impairment of collateral,
and shall not be released or discharged of any obligation under the Loan
Documents, in whole or in part, by Lender's failure to protect or preserve the
Collateral. No Person, in deciding to enter into this Loan Agreement, has relied
on the execution of this Loan Agreement or the granting of a security interest
in Collateral by any other Person. Each Person comprised by the term Borrower
waives notice of any change in financial condition of any Person liable for the
Loans or any part thereof, and agrees that maturity of the Loans or any part
thereof may be accelerated in accordance with the terms of this Agreement,
extended or renewed one or more times by Lender in its discretion, without
notice to the Person and without affecting Lender's security interest in the
Collateral. Lender shall not be required to bring any action against any other
Person or to resort to any other security or to any balance of any deposit
account as a condition of enforcing its rights against any of the Collateral.
4.6 Indemnification. In any suit, proceeding or action brought by or
against the Lender relating to the Collateral, the Borrower will defend,
indemnify and keep the Lender harmless from and against all expense, loss or
damage (including reasonable attorneys' fees) suffered by reason of any defense,
set-off, counterclaim, recoupment or reduction of liability whatsoever of
account debtor or other obligor of the Borrower. The foregoing obligation of the
Borrower to indemnify the Lender shall survive the payment of the Loans and the
termination of this Agreement.
4.7 Assignment of Payments Under Certain Government Contracts and
Government Accounts. On the Closing Date, and thereafter upon the creation of
any Government Contract or Government Account with the United States or any
department or agency of the United States, Borrower shall, at Lender's option,
execute and deliver to the Lender specific Assignments of Payments due or to
become due with respect to any Government Account designated by the Lender.
Borrower shall execute and deliver any and all documents and take any and all
steps necessary to provide the Lender with an Assignment. The separate
Assignment to the Lender of a right to payment under specific Government
Contracts, as contemplated under this Section, shall not be deemed to limit the
Lender's security interest to Payments under those particular Government
Contracts and the related Government Accounts, but rather the Lender's security
interest, as stated above, shall extend to Payments under any and all Government
Contracts and the related Government Accounts and proceeds thereof, now or
hereafter owned or acquired by Borrower.
4.8 Additional Remedy for Failure to Assign Payments. Borrower
acknowledges that the Lender will be irreparably harmed if Borrower fails to
assign Payments due or to become due under any Government Contract when required
by this Agreement, and that the Lender shall have no adequate remedy at law.
Therefore, the Borrower agrees that the Lender shall be entitled, in
24
<PAGE>
addition to all other remedies allowed by law or under this Agreement, to
injunctive or other equitable relief to compel Borrower's compliance with the
provisions of this Agreement requiring the Borrower to assign Payments due or to
become due under any Government Contract.
ARTICLE 5. BORROWER'S REPRESENTATIONS AND WARRANTIES.
To induce the Lender to enter into this Agreement and to extend the
Revolving Loan to Borrower, Borrower makes the following representations and
warranties to the Lender. These representations and warranties are continuing,
and each request for an Advance shall be deemed to be an affirmation of these
representations and warranties as of the date of the most recent Borrowing Base
Certificate submitted prior to the request.
5.1 Corporate Authority; Subsidiaries. Borrower (i) is a corporation duly
organized, validly existing, and in good standing under the laws of its state of
incorporation, (ii) is qualified to do business as a foreign corporation and is
in good standing in all jurisdictions where its activities or ownership of
property require such qualification, if failure so to qualify would have
material adverse effect on the Borrower's business, creditworthiness or ability
to perform its obligations under this Agreement, and (iii) has the full and
unrestricted power and authority, corporate and otherwise, to own, operate and
lease its properties, to carry on its business as currently conducted, to
execute and deliver and perform the Loan Documents, to incur the obligations
provided for herein and therein, and to perform the transactions contemplated
hereby and thereby (including without limitation, the creation of the lien and
security interest in favor of the Lender in the Collateral), and to execute and
deliver the Assignments, all of which have been duly and validly authorized by
all proper and necessary action (all of which actions are in full force and
effect). Borrower has no subsidiaries other than those previously disclosed in
writing to the Lender. Each of the Persons comprised by the term Borrower
maintains it chief executive office at the location stated in Exhibits 5.1-1
through 5.1-6 attached hereto and made a part hereof; further, International
Data Products, Corp. has terminated all business operations at its former office
located at 20 Firstfield Road, Gaithersburg, Maryland, has not conducted
business operations in that former office or at any other office in the State of
Maryland subsequent to June, 1998.
5.2 Approvals. Borrower has provided Lender with a true and accurate
certificate of a Resolution of the Borrower's Board of Directors authorizing the
loan transactions contemplated by this Agreement. No further approval, consent
or other action by the stockholders of Borrower, by any governmental authority
or by any other Person is or will be necessary to permit the valid execution,
delivery or performance by Borrower of this Agreement or any of the other Loan
Documents.
5.3 Binding Effect, No Violations. Each of the Loan Documents, upon its
execution and delivery, will constitute a legal, valid and binding obligation of
Borrower, enforceable against Borrower in accordance with its terms. The
execution, delivery and performance of the
25
<PAGE>
Loan Documents will not (i) violate, conflict with or constitute a default (with
due notice, lapse of time or both) under any law, regulation, order or any other
requirement of any court, tribunal, arbitrator or governmental authority, any
terms of the Articles or Certificate of Incorporation or Bylaws of Borrower, or
any contract, agreement or other arrangement binding upon or affecting Borrower
or any of its properties, or (ii) result in the creation, imposition or
acceleration of any indebtedness or any Encumbrance of any nature upon, or with
respect to, Borrower or any of its properties, except such Encumbrances in favor
of Lender.
5.4 Litigation. Except as set forth in Exhibit 5.4 attached hereto and
made a part hereof, there is no claim, litigation, proceeding or investigation
pending or, to the best of the Borrower's knowledge, threatened or reasonably
anticipated against or affecting Borrower, its properties or business, this
Agreement, any of the other Loan Documents, or any of the transactions
contemplated hereby or thereby, before or by any court, tribunal, arbitrator or
governmental authority, and there is no possibility of any judgment, liability
or award which reasonably may be expected to result in any material adverse
change in the business, operations, prospects, properties or assets or
condition, financial or otherwise, of Borrower. Borrower is not in default with
respect to any judgment, order, writ, injunction, decree, rule, award or
regulation of any court, governmental instrumentality or agency, commission,
board, bureau, arbitrator or arbitration panel.
5.5 Title to and Condition of Assets. The Borrower has good, valid and
marketable title to all of its properties and assets (whether real or personal),
and, except as set forth in Exhibit 5.5 attached hereto and made a part hereof,
there exist no Encumbrances on any of Borrower's properties or assets, including
without limitation, the Collateral. All personal property of Borrower is in good
operating condition and repair, and is suitable and adequate for the uses for
which it is being used. Upon the execution and delivery of this Agreement, and
upon the filing of financing statements or the Lender's taking possession of the
Collateral, as the case may be, the Lender will have a good, valid and perfected
first priority lien and security interest in the Collateral, subject to no
Encumbrance in favor of any other Person, except such Encumbrances as set forth
in Exhibit 5.5 under the heading "Permitted Encumbrances". As to Encumbrances
set forth in Exhibit 5.5.under the heading "Federal Tax Liens", Borrower hereby
represents that, to the best of its knowledge and belief and to the knowledge
and belief of the Persons named in Section 7.3 of this Agreement, all taxes
secured by such Encumbrances have been paid in full, and Borrower further
covenants that it will promptly commence and diligently pursue any and all
actions necessary to have such Encumbrances released if at any time such
Encumbrances could materially affect the operations of the Borrower as
determined in the sole and absolute discretion of the Lender.
5.6 Loan Application. The statements made and the documents delivered by
Borrower to the Lender in connection with its application for the Revolving
Loan and in connection with this Agreement and the other Loan Documents are
true, correct and complete, in all material respects, omit no material facts,
are not misleading, and present fairly the condition (financial or otherwise) of
Borrower.
26
<PAGE>
5.7 No Change. No change in the business, operations, properties or
condition (financial or otherwise) of Borrower, or any other event, has occurred
since the date of the most recent financial statements submitted to the Lender
by Borrower, which, in Lender's good faith judgment, would adversely affect the
ability of Borrower to perform or comply with all terms, conditions and
agreements to be performed or complied with by Borrower under this Agreement or
under any of the other Loan Documents, or to perform the transactions
contemplated by this Agreement or the other Loan Documents.
5.8 Taxes. Borrower has timely filed all tax returns and reports required
by any governmental authority to be filed by Borrower, and such returns and
reports are true and correct. Borrower has paid all taxes, assessments and other
government charges imposed upon it or its income, profits or properties, or upon
any part thereof, other than those presently payable without penalty or interest
and Borrower has timely filed all claims for material refunds to which Borrower
is entitled. The amounts reserved as a liability for income and other taxes
payable in the most recent financial statements of Borrower provided to the
Lender are sufficient for the payment of all unpaid federal, state, county and
local income, excise, property and other taxes, whether or not disputed, of
Borrower accrued for or applicable to the period and on the dates of such
financial statements and all years and periods prior thereto, and for which
Borrower may be liable in its own right or as a transferee of the assets of, or
as successor to, any other Person.
5.9 No Default. No Event of Default, and no event which with notice, lapse
of time or other condition would constitute an Event of Default, has occurred
and is continuing.
5.10 Compliance with Laws, Governance Documents and Agreements. Borrower
has complied and is in full compliance with all applicable laws, ordinances,
rules, regulations, orders and other requirements of any governmental authority
or arbitrator, and with all terms and conditions of its Governance Documents,
and with each agreement binding upon or affecting Borrower or any of its
properties. Borrower is not in default with respect to any Debt. Borrower will
take all necessary actions to remain in full compliance with such laws,
ordinances, rules, regulations, orders and any other requirements, the
Governance Documents and all other agreements. Should Borrower be deemed by any
governmental authority or deem itself to be in violation of any relevant law,
ordinance, rule, regulation, orders or other requirement, Governance Document or
agreement, Borrower shall notify the Lender promptly of such violation and take
all necessary remedial actions. Without limiting the generality of the
foregoing, Borrower represents to Lender that: (1) Borrower has previously
disclosed to Lender all of Borrower's activities that involve the use,
manufacturing, storage, disposal, emission, discharge, generation or
transportation of Hazardous Wastes, Toxic Substances or other materials
regulated by Environmental Laws; (2) Borrower has complied and is in full
compliance with all Environmental Laws; (3) Borrower maintains in full
force and effect all permits required by z Environmental Laws; and (4) there
exists no pending or threatened litigation, order, ruling, notice or
investigation regarding the Borrower's use, manufacturing, storage, disposal,
emission, discharge generation or transportation of Hazardous Wastes or Toxic
Substances or regarding any violation or alleged violation of any Environmental
Laws.
27
<PAGE>
5.11 Licenses and Contracts. All franchises, licenses, trademarks, trade
names, copyrights, patents, permits, certificates, consents, approvals,
authorizations, agreements and contracts necessary to operate Borrower's
business as it currently is being operated and to own or lease Borrower's
property have been obtained, are in effect, have been complied with in all
material respects by Borrower, are free from challenge, and are fully assignable
to the Lender for the purpose of securing the Revolving Loan. Borrower has no
knowledge and has not received any notice to the effect that any product it
manufactures or sells, or any service it renders, or any process, method,
know-how, trade secret, part or material it employs in the manufacture of any
product it makes or sells or any service it renders, or the marketing or use by
it or another of any such product or service, may infringe any trademark, trade
name, copyright, patent, trade secret or legally protected right of any other
Person.
5.12 Intellectual Property. The Borrower owns all right, title and
interest in and to all Intellectual Property used in and material to the
operation of its business or, for such Intellectual Property that is not owned,
possesses adequate licenses or other legally enforceable rights to use the same.
The Borrower has no reason to believe that any valid basis exists upon which a
claim adversely affecting any such Intellectual Property may be asserted against
the Borrower or any subsidiary. To the best knowledge of the Borrower, no Person
is infringing upon the Intellectual Property used by the Borrower or any
subsidiary material to the operation of their respective businesses. The
Borrower has taken appropriate steps to protect the secrecy, confidentiality and
value of its and all subsidiaries' rights in and to such Intellectual Property
and to prevent others from using such Intellectual Property without consent.
5.13 Disclosure. No representation or warranty of Borrower contained in
this Agreement or any of the Loan Documents and no written statement of fact
furnished or to be furnished by Borrower to the Lender pursuant to this
Agreement or any of the Loan Documents, when viewed together, contains or will
contain any untrue statement of a fact material to the financial condition of
Borrower, or omits or will omit to state any material fact necessary in order to
make the statements contained herein or therein, or furnished herewith or
therewith, not misleading.
5.14 Trade Name; Merger. Except as set forth in Exhibit 5.14 attached
hereto and made a part hereof, during the five years immediately preceding the
date of this Agreement: (i) neither the Borrower nor any predecessor of the
Borrower has used any corporate or fictitious name other than its current
corporate name; (ii) Borrower has not changed its name, or been the surviving
entity in a merger or acquired any business; and (iii) Borrower has utilized no
trade names in the conduct of its business.
5.15 Payment of Employees and Subcontractors. Borrower is not in default
with regard to the payment of any employee or subcontractor.
5.16 ERISA Borrower is in compliance with Borrower's obligations under
ERISA. Without limiting the generality of the foregoing:
28
<PAGE>
A. During the five-year period prior to the date on which
this representation is made or deemed made; (i) no Termination
Event has occurred, and, to the best of the Borrower's
knowledge, no event or condition has occurred or exists as a
result of which any Termination Event could reasonably be
expected to occur, with respect to any Plan; (ii) no
"accumulated funding deficiency," as such term is defined in
Section 302 of ERISA and Section 412 of the Code, whether or
not waived, has occurred with respect to any Plan; (iii) each
Plan has been maintained, operated and funded in compliance
with its own terms and in material compliance with the
provisions of ERISA, the Code, and any other applicable
federal or state laws; and (iv) no lien in favor of the PBGC
or a Plan has arisen or is reasonably likely to arise on
account of any Plan.
B. The actuarial present value of all "benefit liabilities"
under each Single Employer Plan (determined within the meaning
of Section 40l(a)(2) of the Code, utilizing the actuarial
assumptions used to fund such Plans), whether or not vested,
did not, as of the last annual valuation date prior to the
date on which this representation is made or deemed made,
exceed the current value of the assets of such Plan allocable
to such accrued liabilities.
C. Neither the Borrower nor any of its subsidiaries nor any
ERISA Affiliate has incurred, or, to the best of the
Borrower's knowledge, are reasonably expected to incur any
withdrawal liability under ERISA to any Multiemployer Plan or
Multiple Employer Plan. Neither the Borrower, any of its
subsidiaries nor any ERISA Affiliate has received any
notification that any Multiemployer Plan is in reorganization
(within the meaning of Section 4241 of ERISA), is insolvent
(within the meaning of Section 4245 of ERISA), or has been
terminated (within the meaning of Title IV of ERISA), and no
Multiemployer Plan is, to the best knowledge of the Borrower,
reasonably expected to be in reorganization, insolvent or
terminated.
D. No prohibited transaction (within the meaning of Section
406 of ERISA or Section 4975 of the Code) or breach of
fiduciary responsibility has occurred with respect
29
<PAGE>
to a Plan which has subjected or may subject the Borrower or
any of its subsidiaries or any ERISA Affiliate to any
liability under Sections 406, 409, 502(i), or 502(l) of ERISA
or Section 4975 of the Code, or under any agreement or other
instrument pursuant to which the Borrower or any of its
subsidiaries or any ERISA Affiliate has agreed or is required
to indemnify any person against any such liability.
5.17 Government Contracts. Borrower is not currently in default as to the
terms of any Government Contract, and no Government Contract has been canceled
or terminated by the Government in the past ten years. No Government Contract
for which Payments have been assigned to the Lender as Collateral is dependent
on appropriations, except as previously disclosed to the Lender in writing.
5.18 No Debarment. Borrower is not subject to any pending or threatened
debarment proceedings.
5.19 Assignment of Payments. Borrower has the right to assign to Lender
all Payments due or to become due under each of Borrower's Government Contract,
and there exists no uncancelled prior Assignment of Payments under any of
Borrower's Government Contracts.
5.20 Assignment of Claims Act. Borrower is now in compliance and hereby
covenants and agrees that Borrower will in the future comply with any and all of
the requirements of the Assignment of Claims Act, where such statutes are
applicable to any Government Contract, and shall take all such other action as
may be necessary to facilitate the assignment and perfection of the Lender's
interest in Payments under any Government Contract.
ARTICLE 6. BORROWER'S AFFIRMATIVE COVENANTS.
Until all obligations of Borrower under this Agreement and the other Loan
Documents are paid in full and performed, Borrower covenants and agrees that it
shall:
6.1 Payment of Revolving Loan. Punctually make the payments on the
Revolving Loan at the times and places and in the manner specified in the
Revolving Note.
6.2 Corporate Existence. Preserve, maintain and keep in full force and
effect its corporate existence and good standing in the jurisdiction of its
incorporation.
6.3 Corporate Rights and Franchises; Qualification; Orderly Conduct of
Business. Preserve, maintain and keep in full force and effect all franchises,
licenses, permits, certificates, consents, approvals, authorizations, agreements
and contracts material to the operation of Borrower's business as it currently
is being conducted, whether now existing or hereafter granted 30
30
<PAGE>
to or obtained by Borrower; qualify and remain qualified as a foreign
corporation in each jurisdiction in which such qualification is necessary or
desirable in view of its activities and ownership of property; continue to
engage in a business of the same general type as now conducted by it; and
conduct such business in an orderly, efficient and regular manner consistent
with the conduct of its business prior to the date of this Agreement.
6.4 Taxes, Charges and Obligations. Pay and discharge all taxes,
assessments and governmental charges or levies imposed upon it or upon its
income, profits, properties or any part thereof, prior to the date on which
penalties attach thereto, as well as all claims which, if unpaid, might become
an Encumbrance upon any properties of Borrower, and pay, discharge or otherwise
satisfy at or before maturity or before they become delinquent, as the case may
be, all of the indebtedness and other obligations of whatever nature of
Borrower; however, Borrower shall not be required to pay any such tax,
assessment, charge, levy, claim, indebtedness or obligation so long as (i) the
validity thereof is being contested by Borrower in good faith and by proper
proceedings, (ii) Borrower sets aside on its books adequate reserves therefor,
and (iii) in the case where any such tax, assessment, charge, claim or levy
might become an Encumbrance upon any item of the Collateral or any part thereof,
Borrower makes arrangements acceptable to the Lender to secure the payment
thereof.
6.5 Maintenance of Property. Preserve and keep all property used or useful
in its business, including without limitation, the Collateral, in good repair,
working order and condition, and from time to time make all necessary or
desirable repairs, renewals and replacements thereof.
6.6 Insurance. Maintain and keep in full force and effect, with
financially sound and reputable insurance companies acceptable to the Lender,
insurance in such amounts and covering such risks as is usually carried by
companies engaged in similar businesses and owning similar properties in the
same general areas in which Borrower operates (but in any event, casualty
insurance covering the Borrower's tangible personal property and real estate for
their full insurable value and comprehensive public liability insurance coverage
with limits of not less than One Million Dollars ($1,000,000.00) for any one
occurrence and Three Million Dollars ($3,000,000.00) for the aggregate of all
occurrences during a policy period of no more than one (1) year), all such
insurance policies to be in form and substance satisfactory to the Lender. If
requested by the Lender, Borrower shall also procure, maintain and keep in full
force and effect business interruption insurance in an amount, in form and
issued by companies acceptable to the Lender in all respects. All liability
insurance policies shall name the Lender as an additional insured, and all
casualty insurance or business interruption insurance policies shall name Lender
as the loss payee. All insurance policies shall prohibit cancellation (including
cancellation for nonpayment of premium) or reduction of coverage except with
thirty (30) days' prior written notice to and consent of the Lender. At least
thirty (30) days prior to the expiration date of each and every insurance policy
required by this Agreement, Borrower shall obtain and deliver to the Lender a
renewal or substitution policy in form and substance satisfactory to the Lender.
31
<PAGE>
6.7 Contract Obligations. Perform in accordance with its terms every
contract, agreement, obligation or other arrangement to which Borrower is a
party or by which it or any of its property is bound including, without limiting
the generality of the foregoing, Government Contracts. In the event that any
default or performance deficiency occurs, Borrower shall notify the Lender
promptly in writing. Borrower shall provide the Lender promptly with copies of
any cure notices or stop work notices it may receive from the Government on any
Government Contract and detail the proposed corrective action.
6.8 Compliance with Laws. Comply with all applicable laws, regulations,
orders and other requirements of any court, tribunal, arbitrator or governmental
authority, non-compliance with which could have a material adverse effect on the
business, operations, property or condition (financial or otherwise) of
Borrower. Without limiting the generality of the foregoing, Borrower shall: (1)
comply strictly and in all respects with all Environmental Laws affecting the
Borrower or its property; (2) promptly forward to the Lender copies of all
orders, notices, permits, applications or other communications and reports
finding or alleging that Borrower or its property does not comply with any of
the Environmental Laws; (3) promptly provide a proposed response action, or plan
with respect to any failure to comply with Environmental Laws; and (4) defend
the Lender, indemnify the Lender, and hold the Lender harmless from and against
any claims, demands, suits, actions, judgements, decrees, losses or damages,
including reasonable attorneys' fees, arising out of the failure of Borrower of
any of its properties to comply with any of the Environmental Laws.
6.9 Books and Records. Keep and maintain at its chief executive offices
adequate and proper records and books of account, in which complete entries are
made in accordance with GAAP, consistently applied, and in accordance with all
laws, regulations, orders and other requirements of any court, tribunal,
arbitrator or governmental authority, reflecting all financial and other
transactions of Borrower normally and customarily included in records and books
of account of companies engaged in the same or similar businesses and activities
as Borrower.
6.10 Access to Borrower's Properties, Books and Records. Permit the Lender
and any agents or representatives thereof to visit and inspect the Borrower's
properties to examine and make copies and abstracts from any of Borrower's books
and records at any and all reasonable times and as often as the Lender or such
agents or representatives may in good faith request, and to discuss the
business, operations, properties and condition (financial and otherwise) of
Borrower with any of the officers, directors, agents or representatives
(including without limitation, the independent certified public accountants) of
Borrower. In addition to having the right to perform field audits of the
Borrower's books and records, Lender shall have the right, but not the
obligation, to contact the contracting officer under any Government Contract
directly to determine Borrower's contract performance status on the Government
Contract.
6.11 Financial and Other Statements. Furnish to the Lender:
32
<PAGE>
A. Annual Financial Statements. As soon as available, but
in no event more than ninety (90) days after the close of each
of the Borrower's fiscal years, audited financial statements
for that year, stating the Borrower's financial condition. The
financial statements shall be prepared by an independent
certified public accountant acceptable to Lender, in
accordance with GAAP consistently applied. The financial
statements must be acceptable to Lender in form and substance,
and shall contain such detail as Lender may require. The
financial statements shall include a consolidated and
consolidating balance sheet and income statement as of the end
of such fiscal year, a profit and loss statement and a cash
flow statement.
B. Annual Opinion of Accountant. As soon as available but
in no event more than ninety (90) days after the close of each
of the Borrower's fiscal years, an opinion of the independent
certified public accountant who prepared the Borrower's annual
financial statements. The opinion shall be acceptable to
Lender in form and substance and shall contain no
qualification that is unacceptable to Lender.
C. Management Letters. Promptly upon receipt thereof,
copies of any reports submitted to the Borrower by independent
certified public accountants in connection with examination of
the financial statements of the Borrower made by such
accountants;
D. Budgets and projections. Within ninety twenty (90) days
after the close of each of the Borrower's fiscal years,
projections and budgets for the upcoming fiscal year, which
projections shall include a pro-form balance sheet, cash flow
statement and profit and loss statement.
E. Quarterly Financial Statements. As soon as available,
but in no event more than forty-five (45) days after the close
of each of the Borrower's fiscal quarters, Borrower-prepared
financial statements for that quarter, stating the
Borrower's financial condition. The financial statements shall
be prepared in accordance with GAAP consistently applied. The
financial statements must be acceptable to Lender in form and
substance, and shall
33
<PAGE>
contain such detail as Lender may require. The financial
statements shall include a consolidated and consolidating
balance sheet and income statement as of the end of such
quarter, a profit and loss statement and a cash flow
statement.
F. Borrowing Base Certificates. Borrower shall submit a
fully completed Borrowing Base Certificate not later than
fifteen (15) days after the end of each month, stating the
Borrowing Base as of the last day of the preceding month. At
Lender's request, the Borrower shall furnish to the Lender
such schedules, certificates, lists, records, reports,
information and documents to enable the Lender to verify the
Borrowing Base.
G. Monthly Reports. Borrower shall deliver to the Lender:
(1) as soon as available, but not later than fifteen
(15) days after the end of each month, balance sheets
and profit and loss statements, with supporting
schedules,
(2) as soon as available, but not later than fifteen
(15) days after the end of each month, an accounts
receivable aging schedule in intervals of not more than
30 days,
(3) as soon as available, but not later than fifteen
(15) days after the end of each month, an accounts
payable report,
(4) as soon as available, but not later than fifteen
(15) after the end of each month, a report itemizing the
Borrower's Inventory,
(5) Reports to SEC. Copies of all public filings
required by the Securities and Exchange Commission
(including forms 10-K and 10-Q and any proxy statements)
within one week of the filing.
H. Government Contract Audits. Provide written notice to
Lender that Borrower has received the results of
34
<PAGE>
any and all audits by the Defense Contract Audit Agency, or
any other government agency, conducted before the award of a
contract, before the final payment on a contract, or at any
other time, said notice to be delivered to Lender within
thirty (30) days of Borrower's receipt of such audit results.
Upon request by Lender, Borrower shall deliver all written
results of such audits to Lender with ten (10) days of a
request by Lender.
I. Additional Reports and Information. With reasonable
promptness, such additional information, reports or statements
as the Lender may from time to time request.
J. Compliance Certificate. With the Borrowing Base
Certificates to be provided pursuant to this Agreement,
Borrower shall deliver a certificate signed by a principal
financial officer of the Borrower stating whether any Event of
Default has occurred, or any event which, upon notice or lapse
of time or both, would constitute an Event of Default.
6.12 Accounts. Upon the creation of Accounts, or from time to time as the
Lender may require, Borrower shall deliver to the Lender schedules of all
outstanding Accounts. Such schedules shall be in form and detail satisfactory to
the Lender, shall show the age of such Accounts in intervals not greater than
thirty (30) days, and shall contain such other information and be accompanied by
such supporting documents as the Lender may from time to time prescribe.
Borrower also shall deliver to the Lender copies of Borrower's invoices,
evidences of shipment or delivery and such other schedules and information as
the Lender may reasonably require. The items to be provided under this Section
are to be prepared and delivered to the Lender from time to time solely for its
convenience in maintaining records of the Collateral, and Borrower's failure to
give any of such items to the Lender shall not affect, terminate, modify or
otherwise limit the Lender's security interest granted in the Accounts. Without
limiting the generality of the foregoing, Borrower shall promptly notify the
Lender when Borrower obtains any new Government Contract or Government Account
for which Payments are to be specifically assigned to the Lender pursuant to
this Agreement, and Borrower shall furnish to the Lender, upon request, a copy
of each Government Contract of Borrower and a copy of each amendment thereto or
modification thereof which changes the price of such contract or the amount
funded to pay for such contract, except to the extent that furnishing such
copies may be prohibited by government security regulations. Borrower shall use
its best efforts and shall take any and all steps necessary to collect its
Accounts, including without limitation, the filing and pursuit of legal
action in furtherance of said collection efforts. Borrower shall use its best
efforts and shall take any and all steps necessary to collect its
Accounts, including without limitation, the filing and pursuit of legal action
in furtherance of said collection efforts.
35
<PAGE>
6.13 Collateral. Maintain all tangible Collateral in good condition;
insure insurable Collateral for its full replacement cost under an insurance
policy acceptable to Lender that names Lender as loss payee; execute, deliver
and file, or cause the execution, delivery and filing of, any and all documents
(including without limitation, financing statements and continuation
statements), necessary or desirable for the Lender to create, perfect, preserve,
validate or otherwise protect a first priority lien and security interest in the
Collateral; maintain, or cause to be maintained, at all times, the Lender's
first priority lien and security interest in the Collateral; provided, however,
Lender shall have a second priority lien and security interest in the Collateral
listed on Exhibit 5.5 under the heading "Permitted Encumbrances"; immediately
upon learning thereof, report to the Lender any reclamation, return or
repossession of any goods forming a part of the Collateral, any claim or dispute
asserted by any debtor or other obligor owing an obligation to Borrower, and any
other matters affecting the value or enforceability or collectibility of any of
the Collateral; defend the Collateral against all claims and demands of all
persons at any time claiming the same or any interest therein adverse to the
Lender, and pay all costs and expenses (including reasonable attorneys' fees and
reasonable expenses) incurred in connection with such defense; at Borrower's
sole cost and expense (including reasonable attorneys' fees and reasonable
expenses), settle any and all claims, demands and disputes, and indemnify and
protect the Lender against any liability, loss or expenses arising from any such
claims, demands or disputes or out of any such reclamation, return or
repossession of goods forming a part of the Collateral; however, if an Event of
Default shall have occurred, the Lender shall have the right at all times to
settle, compromise, adjust or litigate all claims and disputes directly with the
Customer or other obligor owing an obligation to Borrower upon such terms and
conditions as the Lender deems advisable, and all costs and expenses thereof
(including reasonable attorneys' fees and reasonable expenses) shall be incurred
for the account of Borrower and shall constitute a part of the obligations owed
to the Lender and secured pursuant to this Agreement. The Borrower's Equipment
shall be kept and maintained at the locations of the Borrower's offices as set
forth in Exhibits 5.1-1 through 5.1-6 Borrower shall not relocate or move the
Equipment without the Lender's prior written consent, which shall not be
unreasonably withheld. If Lender consents to the relocation of certain
Equipment, Borrower shall execute all documents or financing statements and take
such action as Lender may request to assure that Lender's first priority
security interest in the equipment continues to be perfected under the Uniform
Commercial Code or other applicable laws of the jurisdiction to which the
Equipment is moved.
6.14 Financial Covenants. Maintain:
A. Tangible Net Worth. Borrower shall maintain at all times
a Tangible Net Worth (hereinafter defined) equal to the sum
of(i) 75% of cumulative positive net income for all fiscal
quarters ending June 30, 1998 and thereafter; plus (ii) 75% of
the net proceeds from the issuance or sale by the Borrower of
any of its own equity securities; plus
36
<PAGE>
(iii) $13,000,000.00. This covenant will be tested quarterly.
B. Total Debt to EBITDA. Borrower shall maintain at all
times a ratio of Total Debt to EBITDA of not greater than 4.0
to 1.0 through March 31, 2000; thereafter, Borrower shall
maintain a ratio of total debt to EBITDA of not greater than
3.5 to 1.0. This ratio will be tested quarterly and measured
on a rolling four quarter basis. In computing EBITDA for the
quarters ending March 31, 1999 through December 31, 1999, the
Lender shall not include acquisition integration costs in the
amount of Five Hundred Sixty-Four Thousand, Seven Hundred and
Seventy-Six Dollars ($564,776.00), as disclosed in the
Borrower's form 10-K dated as of October 31, 1998.
Fixed Charge Coverage Ratio. Borrower shall maintain at all times a Fixed
Charge Coverage Ratio (hereinafter defined) of not less than 1.50 to 1.00. This
ratio will be tested quarterly and measured on a rolling four quarter basis.
Unless otherwise expressly provided in this Agreement, if the Borrower
comprises a parent corporation and its subsidiaries, the covenants herein
relating to the financial condition of the Borrower refer to the financial
condition of the parent corporation and those subsidiaries stated on a
consolidated basis.
6.15 Notice of Litigation, Default and Loss. Give immediate notice to the
Lender upon the occurrence of any Event of Default or event which with notice or
lapse of time or otherwise would constitute an Event of Default, and of any loss
or damage to any of the Collateral. Borrower also shall give immediate notice to
the Lender of any action, suit or proceeding at law or in equity or by or before
any governmental instrumentality or agency (domestic or foreign), commission,
board, bureau, arbitrator or arbitration panel which, if adversely determined,
could materially impair or affect the right of Borrower to carry on its business
substantially as now conducted or could materially affect its respective
business, operations, prospects, properties, assets (including the Collateral)
or condition, financial or otherwise. Immediately upon becoming aware that the
holder of any Debt or Encumbrance has given notice or taken any action with
respect to a claimed breach, default or event of default, a written notice shall
be given by Borrower to Lender specifying the notice given or action taken by
such holder and the nature of the claimed breach, default or event of default by
the Borrower thereunder, and the action being taken or proposed to be taken with
respect thereto.
6.16 Proxy Statements, Etc. Promptly after the sending or filing thereof,
copies of all proxy statements, financial statements and reports which the
Borrower sends to its stockholders, and copies of all regular, periodic and
special reports, and all registration statements which the
37
<PAGE>
Borrower files with the Securities and Exchange Commission or any governmental
authority which may be substituted therefor, or with any national securities
exchange.
6.17 ERISA. Give prompt notice to Lender of any of the following: (i) of
any event or condition, including, but not limited to, any Reportable Event,
that constitutes, or might reasonably lead to, a Termination Event; (ii) with
respect to any Multiemployer Plan, the receipt of notice as prescribed in ERISA
or otherwise of any withdrawal liability assessed against the Borrower, any of
its subsidiaries or any of its ERISA Affiliates, or of a determination that any
Multiemployer Plan is in reorganization or insolvent (both within the meaning of
Title IV of ERISA); (iii) the failure to make full payment on or before the due
date (including extensions) thereof of all amounts which the Borrower or any of
its subsidiaries or ERISA Affiliate is required to contribute to each Plan
pursuant to its terms and as required to meet the minimum funding standard set
forth in ERJSA and the Code with respect thereto; or (iv) any change in the
funding status of any Plan that could have a material adverse effect on the
Borrower's financial condition; together, with a description of any such event
or condition or a copy of any such notice and a statement by the principal
financial officer of the Borrower briefly setting forth the details regarding
such event, condition, or notice, and the action, if any, which has been or is
being taken or is proposed to be taken by Borrower with respect thereto.
Promptly upon request, the Borrower shall furnish to Lender such additional
information concerning any Plan as may be reasonably requested, including, but
not limited to, copies of each annual report return (Form 5500 series), as well
as all schedules and attachments thereto required to file with the Department of
Labor or the Internal Revenue Service pursuant to ERISA and the Code,
respectively, for each "plan year" (within the meaning of Section 3(39) of
ERJSA). Such notice shall be given in any event within five (5) business days
after the occurrence of any event that Borrower is required to report to Lender
under this clause.
6.18 Place of Business; Location of Records. Each of the Persons comprised
by the Borrower maintains its chief executive office at the place identified in
Exhibits 5.1-1 through 5.1-6 and keeps its books and records at that office.
Each such Person shall provide Lender with fourteen (14) days' prior written
notice of any change in the location of its chief executive office or the place
at which it keeps its books and records.
6.19 Computer Systems: Year 2000 Compliance. The Borrower shall take all
action necessary to assure that the Borrower's computer based systems are able
to operate and effectively process data including dates for after January 1,
2000. At the request of Lender, Borrower shall provide Lender with assurance
acceptable to Lender of Borrower's Year 2000 compatibility.
6.20 Payments to Borrower. If Borrower has assigned Payments under any
Government Contract to the Lender, remit to the Lender promptly any Payments
erroneously sent directly to Borrower by the Government, and until so remitted,
hold those Payments in trust for the Lender.
38
<PAGE>
ARTICLE 7. BORROWER'S NEGATIVE COVENANTS.
Until all obligations of Borrower under this Agreement and the other Loan
Documents are paid in full and performed, Borrower covenants and agrees that it
shall not, unless the Lender otherwise consents in advance in writing:
7.1 Indebtedness and Contingent Obligations. Contract for any additional
Debt; or agree to assume, guarantee, indorse or otherwise in any way be or
become responsible or liable, directly or indirectly, for the obligation of any
other Person. However, notwithstanding the foregoing sentence, Borrower may
incur trade debt in the ordinary course of business, and Borrower may incur an
aggregate amount of up to Three Million Dollars ($3,000,000.00) in purchase
money financing from the date of this Agreement to the Ending Date for the
purpose of financing the acquisition of Equipment for use in the Borrower's
business operations.
7.2 Encumbrances. Create, incur, assume or suffer to exist any Encumbrance
in addition to those Encumbrances set forth under the heading "Permitted
Encumbrances" in Exhibit 5.5 upon any of its properties or assets (including
without limitation, the Collateral), whether now owned or hereafter acquired;
provided, however, that may grant first purchase money security interests on
Equipment purchased with the Three Million Dollars ($3,000,000.00) in purchase
money financing allowed under the previous section.
7.3 Fundamental Changes. Amend its Articles or Certificate of
Incorporation by any amendment which would adversely affect Borrower's ability
to perform or comply with any of the terms, conditions or agreements to be
performed or complied with by Borrower hereunder or to perform any of the
transactions contemplated hereby; change its name, ownership or key management
(said key management to include Thomas P. Dunne and John D. Vazzana, whose
current offices, positions and responsibilities shall not be changed materially
while this Agreement is in effect); convert its organizational form into another
entity form or establish any new entity to perform the business or similar
business of Borrower; reorganize, consolidate or merge with any other
corporation; or purchase, lease or otherwise acquire all or substantially all of
the assets of any other entity, including shares of stock of other corporations,
except that Borrower may own notes and other receivables acquired in the
ordinary course of business.
7.4 Transfer of Assets. Sell, lease, assign, pledge or otherwise dispose
of any of its properties, stock or assets (including without limitation, the
Collateral), whether now owned or hereafter acquired, except in the ordinary
course of business and for fair market value.
7.5 Investments. Purchase or hold any stock, or evidence of indebtedness
of any other person or entity except investments in direct obligations of the
United States Government and certificates of deposit of United States commercial
banks insured by the Federal Deposit Insurance Corporation.
39
<PAGE>
7.6 Loans. Make any loan or advance to any person, except reasonable
advances for business expenses of Borrower's employees that would be
reimbursable under Borrower's existing expense reimbursement policy.
7.7 Repurchase of Securities. Purchase, redeem or otherwise acquire any of
its own capital stock or purchase, acquire, redeem, retire or make any payment
on account of the principal of any indebtedness of Borrower, except at the
stated maturity of such indebtedness, and except payments of indebtedness
incurred under this Agreement.
7.8 Use of Proceeds. Use, or allow the use of, the proceeds of the
Revolving Loan for any purpose which would cause this Agreement to violate any
Regulations of the Board of Governors of the Federal Reserve System; or for any
purpose other than the purposes or purposes specified hereinabove.
7.9 Other Agreements. Enter into any agreement or undertaking containing
any provision which would be violated or breached by Borrower's performance of
its obligations under the Loan Documents.
7.10. Sale and Leaseback. Enter into any arrangement whereby Borrower
sells or transfers all or any substantial part of its fixed assets then owned by
it and thereupon, or within one (1) year thereafter, rents or leases the assets
so sold or transferred from the purchaser or transferor (or their respective
successors in interest).
7.11 Dividends. Declare or pay dividends on account of any class of stock
in the Borrower, or make any distribution of assets to Borrower's stockholders,
whether in cash, assets or obligations of Borrower.
7.12 Transactions with Affiliates. Except as specifically permitted by the
terms of this Agreement, enter into any transaction, including without
limitation, the purchase, sale or exchange of property or the rendering of any
service, with any Affiliate, except in the ordinary course of and pursuant to
the reasonable requirements of the Borrower's business and upon fair and
reasonable terms no less favorable to the Borrower than would be applicable in a
comparable arm's-length transaction with a Person not an Affiliate.
ARTICLE 8. COLLECTION AND DEPOSIT PAYMENTS.
8.1 Cash Collateral Account. Borrower shall cause all Payments to be
deposited into the Cash Collateral Account. In furtherance of this covenant,
Borrower shall instruct all Customers to make all Payments either by electronic
funds transfer directly to the Cash Collateral Account or by check to a post
office box or other collection facility under Lender's control for deposit
into the Cash Collateral Account. If any Payments are made directly to the
Borrower or otherwise come into the Borrower's possession, the Borrower shall
not commingle any such Payment with the Borrower's other funds or property, but
shall hold the Payment
40
<PAGE>
separate and apart in trust for the Lender and shall promptly deliver the
Payment to the Lender (appropriately endorsed, if the Payment is in the form of
a check) for deposit into the Cash Collateral Account. Interest (if any) earned
on sums on deposit in the Cash Collateral Account shall be added to the Cash
Collateral Account. The Borrower hereby appoints the Lender and any officer,
employee or agent of the Lender as the Lender may from time to time designate as
attorneys-in-fact for the Borrower to endorse and sign the name of the Borrower
on all checks, drafts, money orders or other Items delivered to the Lender for
deposit into the Cash Collateral Account. The Cash Collateral Account shall
constitute part of the Collateral, and funds on deposit in the Cash Collateral
Account shall be disbursed to the Borrower only by a disbursement to the
Operating Account as provided hereafter in this Agreement.
8.2 Release of Funds from Cash Collateral Account. If no Event of Default
has occurred and remains uncured, and there exists no event, occurrence or
circumstance that, with the giving of notice or the passage of time or both,
would constitute an Event of Default, funds on deposit in the Cash Collateral
Account shall be withdrawn by the Lender on the Business Day next following the
day on which the Lender considers such funds to be collected funds, and shall be
applied as follows: (1) first, to unpaid late charges under the Revolving Note;
(2) second, to reimburse any amounts advanced by the Lender to cure defaults
under this Agreement; (3) third, to any unpaid fees due and payable under the
Agreement; (4) fourth, to accrued interest due and payable under the Revolving
Note; (5) fifth, to unpaid principal indebtedness under the Revolving Note; and
(6) sixth, the balance, if any, to the Borrower's Operating Account. Borrower
retains sole responsibility for assuring that Borrower's Operating Account
contains sufficient funds to pay any Items that may be presented for payment
from the Operating Account.
ARTICLE 9. EVENTS OF DEFAULT AND REMEDIES.
9.1 Events of Default. The occurrence of any one or more of the following
events shall constitute an Event of Default hereunder:
A. Borrower shall fail to pay, when due, any sum payable
under the Revolving Note, and such failure shall continue for
five (5) Business Days after Lender has sent Borrower written
notice of the nonpayment; or
B. any representation or warranty made by or on behalf of
Borrower herein or in any of the other Loan Documents which,
in the Lender's judgment, shall prove to have been materially
incorrect or misleading or breached in any respect on or as of
any date as of which made; or
C. a decree or order for relief of Borrower shall be
entered by a court of competent jurisdiction in any
involuntary case involving Borrower under any bankruptcy,
41
<PAGE>
insolvency or similar law now or hereafter in effect, or a
receiver, liquidator or other similar agent for Borrower or
for any substantial part of Borrower's assets or property
shall be appointed, or the winding up or liquidation of
Borrower's affairs shall be ordered, or any action by any
creditor (other than the Lender) of Borrower preparatory to or
for the purpose of commencing any such involuntary case,
appointment, winding up or liquidation shall be taken, and
such proceeding shall not have been dismissed within thirty
(30) days after the date it commenced; or
D. Borrower shall commence a voluntary case under any
bankruptcy, insolvency or similar law now or hereafter in
effect, or Borrower shall consent to the entry of an order for
relief in an involuntary case under any such law or to the
appointment of or taking possession by a receiver, liquidator
or other similar agent for Borrower or for any substantial
part of Borrower's assets or property, or Borrower shall make
any general assignment for the benefit of creditors, or
Borrower shall take any action preparatory to or otherwise in
furtherance of any of the foregoing, or Borrower shall fail
generally to pay its debts as such debts come due; or
E. there shall be a default or event of default under any
indebtedness or obligation of Borrower to any third party in
excess of Two Hundred and Fifty Thousand Dollars ($250,000.00)
that causes that third party to declare such indebtedness or
other obligation due prior to its scheduled date of maturity;
or
F. one or more judgments or decrees in an aggregate amount
of more than Five Hundred Thousand Dollars ($500,000.00) at
any time shall be entered against Borrower (not paid or fully
covered by insurance) and all such judgments or decrees have
not been vacated, discharged, stayed or bonded pending appeal
within thirty (30) days from the entry thereof, or any
attachment or garnishment shall be issued against Borrower or
Borrower's property; or
G. any material change in the business, operations,
property, assets or condition (financial or otherwise) of
42
<PAGE>
Borrower shall occur which adversely affects the ability of
Borrower to meet and carry out its obligations under this
Agreement or any of the other Loan Documents or to perform the
transactions contemplated herein or thereby, the materiality
of such change to be determined by the Lender in good faith;
or
H. any investigative proceeding, audit or other action
shall be initiated by or on behalf of any Customer, which is
based upon a claim or contest with respect to any Government
Contract or Government Account that, if adversely determined
to the Borrower, would have a material adverse effect on the
Borrower's financial condition, as determined by the Lender in
its sole discretion; or
I. the issuance to the Borrower of any cure notice,
show-cause notice, or notice of whole or partial termination,
for default or alleged default, under any material contract
which is either a Government Contract or is a subcontract (at
any tier) which is related to a contract between a third party
and the Government; or
J. with respect to the Borrower, the occurrence of any
debarment or suspension from contracting or subcontracting
with the Government; or
K. any material default by Borrower occurs under the terms
of any Government Contract or any breach in Borrower's
performance obligations occurs under any Government Contract;
or
L. any Government Contract is terminated for default; or
M. any loss, theft, damage or destruction of any material
portion of the Collateral for which there is either no
insurance coverage or for which, in the opinion of the Lender,
there is insufficient insurance coverage; or
N. Thomas P. Dunne ceases to own not less than 20% of the
issued and outstanding common stock in Dunn Computer
Corporation, a Virginia corporation, or Dunn
43
<PAGE>
Computer Corporation, a Virginia corporation, ceases to own
100% of the issued and outstanding stock in any of the
following: Dunn Computer Corporation, a Delaware corporation,
International Data Products, Corp., STMS, Inc., Puerto Rico
Industrial Manufacturing Operations Acquisition, Corp., Dunn
Computer Operating Company, or any other subsidiary now or
hereafter wholly owned by it;
0. any of the following events or conditions shall occur:
(1) any "accumulated funding deficiency," as such term is
defined in Section 302 of ERISA and Section 412 of the Code,
whether or not waived, shall exist with respect to any Plan,
or any lien shall arise on the assets of the Borrower or any
of its subsidiaries or any ERISA Affiliate in favor of the
PBGC or a Plan; (2) a Termination Event shall occur with
respect to a Single Employer Plan, which, in the Lender's
opinion, is likely to result in the termination of such Plan
for purposes of Title IV of ERISA; (3) a Termination Event
shall occur with respect to a Multiemployer Plan or Multiple
Employer Plan, which in the Lender's opinion, is likely to
result in (i) the termination of such Plan for purposes of
Title IV of ERISA, or (ii) the Borrower or any of its
subsidiaries or any ERISA Affiliate incurring any liability in
connection with a withdrawal from, reorganization of (within
the meaning of Section 4241 of ERISA), or insolvency or
(within the meaning of Section 4245 of ERISA) such Plan; or
(4) any prohibited transaction (within the meaning of Section
406 of ERISA or Section 4975 of the Code) or breach of
fiduciary responsibility shall occur which may subject the
Borrower or any of its subsidiaries or any ERISA Affiliate to
any liability under Section 406, 409, 502(i), or 502(1) of
ERISA or Section 4975 of the Code, or under any agreement or
other instrument pursuant to which the Borrower or any of its
subsidiaries or any ERISA Affiliate has agreed or is required
to indemnify any person against any such liability; or
P. Borrower shall fail to observe or perform any other
term, covenant or agreement contained in this Agreement or in
any other Loan Document to be observed or performed on its
part and such default shall continue
44
<PAGE>
unremedied for a period of ten (10)
Business Days after written notice of the
existence of such default is given by
Lender.
9.2 Rights and Remedies of the Lender. Upon the occurrence of any Event of
Default, the Lender may, at its option, exercise any one or more of the
following rights and remedies:
A. Declare this Agreement and the Lender's obligation to
make or extend any Advances on the Revolving Loan to be
terminated, and declare the entire unpaid principal amounts of
the Revolving Loan, all interest accrued and unpaid thereon,
and all other amounts payable under this Agreement and the
other Loan Documents to be accelerated, and to be immediately
due and payable (except that upon the occurrence of an Event
of Default arising out of voluntary or involuntary bankruptcy
proceedings in which the Borrower is the debtor, such
acceleration shall occur automatically and immediately without
any declaration or other action on the part of the Lender)
whereupon the Revolving Loan, all such accrued interest, and
all such amounts shall become and be immediately due and
payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived
by Borrower, anything contained herein or in any of the other
Loan Documents to the contrary notwithstanding;
B. Take possession or control of, store, lease, operate,
manage, sell or otherwise dispose of all or any part of the
Collateral in accordance with the remedies provided to secured
parties under the Uniform Commercial Code, this Agreement, the
Loan Documents or other applicable law. In taking possession
of the Collateral, the Lender may enter the Borrower's
premises and otherwise proceed without legal process, and the
Borrower shall on the Lender's demand, promptly assemble and
make the Collateral available to the Lender at a place
designated by the Lender. The Lender shall be entitled to
immediate possession of all books and records evidencing or
pertaining to any of the Collateral;
C. Notify any or all Customers to make any Payments due to
Borrower from such Customers directly to the
45
<PAGE>
Lender. To facilitate direct collection, Borrower hereby
appoints the Lender and any officer or employee of the Lender,
as the Lender may from time to time designate, as
attorney-in-fact for Borrower to (i) receive, open and dispose
of all mail addressed to Borrower and take therefrom any
Payments on or proceeds of Accounts; (ii) take over Borrower's
post office boxes or make such other arrangements, in which
Borrower shall cooperate, to receive Borrower's mail,
including notifying the post office authorities to change the
address for delivery of mail addressed to Borrower to such
address as the Lender shall designate; (iii) endorse the name
of Borrower in favor of the Lender upon any and all checks,
drafts, money orders, notes, acceptances or other evidences of
payment or Collateral that may come into the Lender's
possession; (iv) sign and endorse the name of Borrower on any
invoice or bill of lading relating to any of the Accounts, on
verifications of Accounts sent to any Customer, to drafts
against any Customer, to assignments of Accounts, and to
notices to any Customer; and (v) do all acts and things
necessary to carry out this Agreement and the transactions
contemplated hereby, including signing the name of Borrower on
any instruments required by law in connection with the
transactions contemplated hereby and on financing statements
as permitted under the Uniform Commercial Code of any
appropriate state. Borrower hereby ratifies and approves all
acts of such attorneys-in-fact within the scope of this
Agreement, and neither the Lender nor any other such
attorney-in-fact shall be liable for any acts of commission or
omission, or for any error of judgment or mistake of fact or
law of any such attorney-in-fact, except in cases of gross
negligence or willful misconduct. This power, being coupled
with an interest and given to secure an obligation, is
irrevocable so long as the Revolving Loan remains unsatisfied,
or any Loan Document remains effective, as solely determined
by the Lender;
D. In the Lender's own name, or in the name of Borrower,
demand, collect, receive, sue for and give receipts and
releases for, any and all amounts due on Accounts, but
the Lender shall not, under any circumstances, be liable for
any error or omission or delay of any kind occurring in the
settlement, collection or
46
<PAGE>
payment of any Accounts or any instrument received in payment
thereof or for any damage resulting therefrom;
E. Endorse as the agent of Borrower any chattel paper,
documents or instruments forming all or any part of the
Collateral;
F. Make formal application for the transfer of all of
Borrower's permits, licenses, approvals, agreements and the
like relating to the Collateral or to Borrower's business to
the Lender or to any assignee of the Lender or to any
purchaser of any of the Collateral;
G. Obtain appointment of a receiver for all or any of the
Collateral, Borrower hereby consenting to the appointment of
such a receiver and agreeing not to oppose any such
appointment. Any receiver so appointed shall have such powers
as may be conferred by the appointing authority including any
or all of the powers, rights and remedies which the Lender is
authorized to exercise by the Loan Documents, and shall have
the right to incur such obligations and to issue such
certificates therefor as the appointing authority shall
authorize;
H. Borrower acknowledges that any failure to comply with
its obligation regarding the Collateral, including (without
limiting the generality of the foregoing) granting of
Assignments and collection of the Accounts, shall cause
irreparable harm to the Lender for which the Lender has no
adequate remedy at law, and agrees that the Lender shall be
entitled to specific performance, an injunction or other
equitable relief to enforce the Borrower's obligations under
this Agreement; and
Take any other action which the Lender deems necessary or desirable to
protect and realize upon its security interest in the Collateral;
In addition to the foregoing, and not in substitution therefor, exercise
any one or more of the rights and remedies exercisable by the Lender under other
provisions of this Agreement, under any of the other Loan Documents, or provided
by applicable law (including, without limiting the generality of the foregoing,
the Uniform Commercial Code).
47
<PAGE>
9.3 Application of Proceeds. Any proceeds from the collection or sale or
other disposition of the Collateral shall be applied in the following order of
priority:
First, to the payment of all reasonable expenses of collecting, storing,
leasing, operating, managing, selling or disposing of the Collateral, and to the
payment of all sums which the Lender may be required or may elect to pay, if
any, for taxes, assessments, insurance and other charges upon such Collateral or
any part thereof, and of all other payments which the Lender may be required or
authorized to make under any provision of this Agreement or of any other Loan
Document (including in each such case legal costs and reasonable attorneys' fees
and reasonable expenses);
Second, to the payment of all obligations on the Revolving Loan under this
Agreement, and under the other Loan Documents, and to the payment of any other
obligations due to the Lender, in such order as the Lender may determine in its
sole discretion; and
Third, to the payment of any surplus then remaining to Borrower, unless
otherwise provided by law or directed by a court of competent jurisdiction;
provided that Borrower shall be liable for any deficiency if the proceeds of the
Collateral are insufficient to satisfy all obligations due to the Lender.
9.4 Collection/Enforcement Costs. Borrower shall pay all costs and
expenses incurred by Lender in connection with the enforcement of its rights
under this Agreement and the other Loan Documents, including without limitation,
legal costs and reasonable attorneys' fees (whether or not suit is instituted)
and arbitration fees and costs, and in connection with the collection of any
sums from Borrower.
ARTICLE 10. MISCELLANEOUS PROVISIONS.
10.1 Additional Actions and Documents. Borrower shall take or cause to be
taken such further actions, shall execute, deliver and file or cause to be
executed, delivered and filed such further documents and instruments, and shall
obtain such consents as may be necessary or as the Lender may reasonably request
in order fully to effectuate the purposes, terms and conditions of this
Agreement and the other Loan Documents, whether before, at or after the closing
of transactions contemplated hereby and thereby or the occurrence of an Event of
Default hereunder.
10.2 Expenses. Borrower shall, whether or not the transactions
contemplated hereby are consummated, (i) reimburse the Lender and save the
Lender harmless against liability for the payment of all out-of-pocket expenses
arising in connection with the preparation, execution, delivery, enforcement of,
or the preservation or exercise of any rights (including the right to collect
and dispose of the Collateral) under this Agreement or any of the other Loan
Documents, including without limitation, the fees and expenses of an audit
by employees or agents of the Lender, of counsel to the Lender and with respect
to any arbitration fees and costs, the fees and
48
<PAGE>
expenses of audits to be subject to the limitations provided above in Section
2.1 (g)(4); and (ii) pay, and hold the Lender and each subsequent holder of the
Note harmless from and against, any and all present and future stamp taxes or
similar document taxes or recording taxes and any and all charges with respect
to or resulting from any delay in paying, or failure to pay, such taxes.
10.3 Notices. All notices, demands, requests or other communications
provided for herein or in the other Loan Documents shall be in writing and shall
be deemed to be effective one (1) day after dispatch if sent by telegram,
mailgram, Federal Express or any other commercially recognized overnight
delivery service or two (2) days after dispatch if sent by registered or
certified mail, return receipt requested and addressed as follows:
If to Borrower:
Dunn Computer Corporation
1306 Squire Court
Sterling, Virginia 20166
Attention: John Vazanna
with a copy to:
Wallace Christner, Esquire
Trip Nesbitt, Esquire
Venable, Baetjer, Howard & Civiletti, LLP
1201 New York Avenue, N.W., Suite 1000
Washington, D.C. 20005
If to Lender:
First Union Commercial Corporation
1970 Chain Bridge Road
McLean, VA 22102
Attention:Michael J. Landini, Vice President
With copy to:
James Bruce Davis, Esquire
Bean, Kinney & Korman, P.C.
2000 N. l4th Street, Suite 100
Arlington, Virginia 22201
If the Borrower comprises more than one Person, notice to the Borrower at the
address specified above in this section for Dunn Computer Corporation, a
Virginia corporation, shall constitute notice to all such Persons, and each
Person signing below as the Borrower hereby irrevocably
49
<PAGE>
appoints Dunn Computer Corporation, a Virginia corporation, as that Person's
agent to receive notices from the Lender under this Agreement or the other Loan
Documents.
Each party may designate by notice in writing a new address to which any notice,
demand, request or communication thereafter may be so given, served or sent.
Each notice, demand, request or communication which is mailed, delivered or
transmitted in the manner described above shall be deemed sufficiently given,
served, sent or received for all purposes at such time as it is delivered: (i)
to the United States Postal Service, in the case of a notice given by certified
mail; (ii) to Federal Express or any other commercially recognized overnight
delivery service, in accordance with the terms and procedures for such delivery
Any notices required under the Uniform Commercial Code with respect to the sale
or other disposition of the Collateral shall be deemed reasonable if mailed by
the Lender to the persons entitled thereto at their last known address at least
five (5) days prior to disposition of the Collateral and, in the case of a
private sale of Collateral, need state only that the Lender intends to negotiate
such a sale.
10.4 Severability. If fulfillment of any provision of the Loan Documents
or performance of any transaction related thereto, at the time such fulfillment
or performance shall be due, shall involve transcending the limit of validity
prescribed by law, then the obligation to be fulfilled or performed shall be
reduced to the limit of such validity; and if any clause or provision contained
in any Loan Document operates or would operate prospectively to invalidate any
Loan Document, in whole or in part, then such clause or provision only shall be
held ineffective, as though not herein or therein contained, and the remainder
of the Loan Documents shall remain operative and in full force and effect.
10.5 Survival. It is the express intention and agreement of the parties
hereto that all covenants, agreements, statements, representations, warranties
and indemnities made by Borrower in the Loan Documents shall survive the
execution and delivery of the Loan Documents and the making of all Advances and
extensions of credit thereunder.
10.6 Waivers. No waiver by the Lender of, or consent by the Lender to, a
variation from the requirements of any provision of the Loan Documents shall be
effective unless made in a written instrument duly executed on behalf of the
Lender by its duly authorized officer, and any such waiver shall be limited
solely to those rights or conditions expressly waived.
10.7 Rights Cumulative. The rights and remedies of the Lender described in
any of the Loan Documents are cumulative and not exclusive of any other rights
or remedies which the Lender or the then holder of the Revolving Note otherwise
would have at law or in equity or otherwise. No notice to or demand on Borrower
in any case shall entitle Borrower to any other notice or demand in similar or
other circumstances.
50
<PAGE>
10.8 Entire Agreement; Modification; Benefit. This Agreement, the exhibits
hereto, and the other Loan Documents constitute the entire agreement of the
parties hereto with respect to the matters contemplated herein, supersede all
prior oral and written agreements with respect to the matters contemplated
herein, and may not be modified, deleted or amended except by written instrument
executed by the parties. All terms of this Agreement and of the other Loan
Documents shall be binding upon, and shall inure to the benefit of and be
enforceable by, the parties hereto and their respective successors and assigns;
however, Borrower may not assign or transfer any of its rights or obligations
hereunder without the prior written consent of the Lender. Lender may assign its
rights and obligations hereunder in accordance with Section 10.17 hereinafter.
10.9 Setoff In addition to any rights or remedies of the Lender provided
by law, upon the occurrence of any Event of Default hereunder, or any event or
circumstance which, with the giving or notice or the passage of time or both,
would constitute an Event of Default hereunder, the Lender is irrevocably
authorized, at any time or times without prior notice to Borrower, to set off,
appropriate and apply any and all deposits, credits, indebtedness or claims at
any time held or owing by the Lender to or for the credit or the account of
Borrower, in such amounts as the Lender may elect, against and on account of the
obligations and liabilities of Borrower to the Lender hereunder or under any of
the other Loan Documents, whether or not the Lender has made any demand for
payment, and although such obligations and liabilities may be contingent or
unmatured.
10.10 Construction. This Agreement and the other Loan Documents, the
rights and obligations of the parties hereto, and any claims or disputes
relating thereto shall be governed by and construed in accordance with the laws
of the Commonwealth of Virginia (excluding the choice of law rules thereof)
except that security interests in Accounts shall be governed, as to each of the
Persons comprised by the Borrower who owns an Account, by the laws of the state
in which such Person, as owner of the Accounts, maintains its chief executive
office. Each party hereto hereby acknowledges that all parties hereto
participated equally in the negotiation and drafting of this Agreement and that,
accordingly, no court construing this Agreement shall construe it more
stringently against one party than against the other.
10.11 Pronouns. All pronouns and any variations thereof shall be deemed to
refer to the masculine, feminine, neuter, singular or plural, as the identity of
the Person may require.
10.12 Headings. Article, section and subsection headings contained in this
Agreement are inserted for convenience of reference only, shall not be deemed to
be a part of this Agreement I I 2 for any purpose, and shall not in any way
define or affect the meaning, construction or scope of any of the provisions
hereof
10.13 Payments. If any payment or performance of any of the obligations
under this Agreement or any of the other Loan Documents becomes due on a day
other than a Business
51
<PAGE>
Day, the due date shall be extended to the next succeeding Business Day, and
interest thereon (if applicable) shall be payable at the then applicable rate
during such extension.
10.14 Execution. To facilitate execution, this Agreement and any of the
other Loan Documents may be executed in as many counterparts as may be required;
and it shall not be necessary that the signature of, or on behalf of, each
party, or the signatures of all persons required to bind any party, appear on
each counterpart; but it shall be sufficient that the signature of, or on behalf
of, each party, or the signatures of the persons required to bind any party,
appear on one or more of the counterparts. All counterparts shall collectively
constitute a single agreement. It shall not be necessary in making proof of this
Agreement or any other Loan Document to produce or account for any particular
number of counterparts; but rather any number of counterparts shall be
sufficient so long as those counterparts contain the respective signatures of,
or on behalf of, all of the parties hereto.
10.15 Consent to Jurisdiction. Subject to any provision of this Agreement
requiring that disputes be submitted to arbitration, the Borrower irrevocably
consents to the jurisdiction of any state or federal court sitting in the
Commonwealth of Virginia over any suit, action, or proceeding arising out of or
relating to this Agreement or the other Loan Documents. The Borrower irrevocably
waives, to the fullest extent permitted by law, any objection that the Borrower
may now or hereafter have to the laying of venue of any such suit, action, or
proceeding brought in any such court, or any claim that any such suit, action,
or proceeding brought in any such court has been brought in an inconvenient
forum. Final judgment in any such suit, action, or proceeding brought in any
such court shall be conclusive and binding upon the Borrower.
10.16 Service of Process. The Borrower consents to process being served in
any suit, action or proceeding by mailing a copy thereof by registered or
certified mail postage prepaid, return receipt requested, to the Borrower's
address specified in or designated in this Agreement. The Borrower agrees that
such service (i) shall be deemed in every respect effective service of process
upon the Borrower in any such suit, action or proceeding and (ii) shall, to the
fullest extent permitted by law, be taken and held to be valid personal service
upon and personal delivery to the Borrower. Nothing in this Section shall affect
the right of the Lender to serve process in any manner permitted by law, or
limit any right that the Lender may have to bring proceedings against the
Borrower in the courts of any jurisdiction or to enforce in any lawful manner a
judgment obtained in one jurisdiction in any other jurisdiction.
10.17 Sale of Loan Documents; Disclosure of Information. Borrower hereby
consents to and agrees that Lender may disclose to any Person any and all
information connected with or related to the Revolving Loan or other Loan
Documents for the purpose of selling the Loan Documents. The information
which may be disclosed by Lender includes but is not limited to all Loan
Documents, credit files and correspondence files and all other writings and oral
communications which Lender wishes to disclose, in its sole and absolute
discretion. Borrower also hereby consents to and agrees that Lender may sell any
or all of the Loan Documents
52
<PAGE>
pursuant to such terms and conditions as may be acceptable to Lender in its sole
and absolute discretion, to any interested Person, and nothing in this Agreement
or the other Loan Documents shall prevent, delay or otherwise impede or effect
the right of Lender to immediately sell the Loan Documents on such terms as it
deems acceptable; however, notwithstanding the foregoing, if no Event of Default
has occurred, Lender shall provide the Borrower with not less than sixty (60)
days prior written notice of any sale of the Loan Documents if the purchaser
will be a Person other than: (i) First Union National Bank; (ii) any current or
future subsidiary of First Union National Bank; (iii) any current or future
subsidiary of the Lender; or (iv) any corporation that owns 100% of the stock in
First Union National Bank or First Union Commercial Corporation.
10.18 WAIVER OF JURY TRIAL. BORROWER AND THE LENDER HEREBY WAIVE, TO THE
FULLEST EXTENT PERMITTED BY LAW, TRIAL BY JURY IN ANY LITIGATION BETWEEN THE
LENDER AND BORROWER ARISING OUT OF THE LOAN DOCUMENTS AND THE TRANSACTIONS
CONTEMPLATED THEREBY OR WITH RESPECT TO THE CONDUCT OF THE RELATIONSHIP BETWEEN
BORROWER AND LENDER. THE PARTIES MAKE THIS WAIVER KNOWINGLY, WILLINGLY AND
VOLUNTARILY FOR THE PURPOSE OF EXPEDITING THE RESOLUTION OF ANY DISPUTES THAT
MAY ARISE BETWEEN THEM AND REDUCING THE COST OF RESOLVING SUCH DISPUTES. THE
PARTIES WARRANT AND REPRESENT TO EACH OTHER THAT EACH OF THEM HAS BEEN ADVISED
BY INDEPENDENT LEGAL COUNSEL OF THE CONSEQUENCES OF THIS WAIVER PRIOR TO SIGNING
THIS AGREEMENT.
10.19 ARBITRATION. UPON DEMAND OF ANY PARTY HERETO, WHETHER MADE BEFORE OR
AFTER INSTITUTION OF ANY JUDICIAL PROCEEDING, ANY CONTROVERSY OR CLAIM ARISING
OUT OF OR RELATING TO THE LOAN DOCUMENTS BETWEEN PARTIES HERETO (A "DISPUTE")
SHALL BE RESOLVED BY BINDING ARBITRATION CONDUCTED UNDER AND GOVERNED BY THE
COMMERCIAL FINANCIAL DISPUTES ARBITRATION RULES (THE "ARBITRATION RULES") OF THE
AMERICAN ARBITRATION ASSOCIATION ("AAA") AND THE FEDERAL ARBITRATION ACT.
DISPUTES MAY INCLUDE, WITHOUT LIMITATION, TORT CLAIMS, COUNTERCLAIMS, A DISPUTE
AS TO WHETHER A MATTER IS SUBJECT TO ARBITRATION, CLAIMS BROUGHT AS CLASS
ACTIONS, OR CLAIMS ARISING FROM DOCUMENTS EXECUTED IN THE FUTURE. A JUDGMENT
UPON THE AWARD MAY BE ENTERED IN ANY COURT HAVING JURISDICTION. NOTWITHSTANDING
THE FOREGOING, THIS ARBITRATION PROVISION DOES NOT APPLY TO DISPUTES UNDER
OR RELATED TO SWAP AGREEMENTS. ALL ARBITRATION HEARINGS SHALL BE CONDUCTED IN
THE CITY OR COUNTY WHERE THE LENDER'S OFFICE, AS FIRST STATED ABOVE, IS LOCATED,
OR AT SUCH OTHER PLACE AS THE PARTIES MAY IN WRITING AGREE. A HEARING SHALL
BEGIN WITHIN 90 DAYS OF DEMAND FOR ARBITRATION AND ALL HEARINGS SHALL CONCLUDE
WITHIN 120 DAYS OF DEMAND FOR ARBITRATION.
53
<PAGE>
THESE TIME LIMITS MAY NOT BE EXTENDED UNLESS A PARTY SHOWS CAUSE FOR EXTENSION
AND THEN FOR NO MORE THAN A TOTAL OF 60 DAYS. THE EXPEDITED PROCEDURES SET FORTH
IN RULE 51, ET SEQ., OF THE ARBITRATION RULES SHALL APPLY TO DISPUTES IN WHICH
THE CLAIM IS LESS THAN $1,000,000.00. ARBITRATORS SHALL BE LICENSED ATTORNEYS
SELECTED FROM THE COMMERCIAL FINANCIAL DISPUTE ARBITRATION PANEL OF THE AAA. THE
PARTIES DO NOT WAIVE APPLICABLE FEDERAL OR STATE SUBSTANTIVE LAW EXCEPT AS
PROVIDED HEREIN. NOTWITHSTANDING THE PRECEDING BINDING ARBITRATION PROVISIONS,
THE PARTIES AGREE TO PRESERVE WITHOUT DIMINUTION, CERTAIN REMEDIES THAT ANY
PARTY MAY EXERCISE BEFORE OR AFTER AN ARBITRATION PROCEEDING IS BROUGHT. THE
PARTIES SHALL HAVE THE RIGHT TO PROCEED IN ANY COURT OF PROPER JURISDICTION OR
BY SELF HELP TO EXERCISE OR PROSECUTE THE FOLLOWING REMEDIES, AS APPLICABLE: (1)
ALL RIGHTS TO FORECLOSE AGAINST ANY REAL OR PERSONAL PROPERTY OR OTHER SECURITY
BY EXERCISING A POWER OF SALE OR UNDER APPLICABLE LAW BY JUDICIAL FORECLOSURE
INCLUDING A PROCEEDING TO CONFIRM THE SALE; (2) ALL RIGHTS OF SELF HELP,
INCLUDING WITHOUT LIMITATION, PEACEFUL OCCUPATION OF REAL PROPERTY AND
COLLECTION OF RENTS, SETOFF, AND PEACEFUL POSSESSION OF PERSONAL PROPERTY; (3)
OBTAINING PROVISIONAL OR ANCILLARY REMEDIES INCLUDING INJUNCTIVE RELIEF,
SEQUESTRATION, GARNISHMENT, ATTACHMENT, APPOINTMENT OF RECEIVER AND FILING AN
INVOLUNTARY BANKRUPTCY PROCEEDING. ANY CLAIM OR CONTROVERSY WITH REGARD TO ANY
PARTY'S ENTITLEMENT TO SUCH REMEDIES IS A DISPUTE. THE PARTIES AGREE THAT THEY
SHALL NOT HAVE A REMEDY OF PUNITIVE OR EXEMPLARY DAMAGES AGAINST OTHER PARTIES
IN ANY DISPUTE, AND THEY HEREBY WAIVE ANY RIGHT OR CLAIM TO PUNITIVE OR
EXEMPLARY DAMAGES THEY MAY NOW HAVE OR WHICH MAY ARISE IN THE FUTURE IN
CONNECTION WITH ANY DISPUTE WHETHER THE DISPUTE IS RESOLVED BY ARBITRATION OR
JUDICIALLY.
IN WITNESS WHEREOF, the undersigned have duly executed this Agreement, or
have caused this Agreement to be duly executed on their behalf, as of the day
and year first hereinabove set forth.
DUNN COMPUTER CORPORATION, a Virginia
corporation
By: /s/ Thomas P. Dunne
------------------------
Thomas P. Dunne
President
54
<PAGE>
DUNN COMPUTER CORPORATION, a Delaware
corporation
By: /s/ Thomas P. Dunne
------------------------
President
INTERNATIONAL DATA PRODUCTS, CORP.
By: /s/ Thomas P. Dunne
------------------------
President
STMS, INC.
By: /s/ Thomas P. Dunne
------------------------
Thomas P. Dunne
President
PUERTO RICO INDUSTRIAL MANUFACTURING
OPERATIONS ACQUISITION, CORP.
By: /s/ Thomas P. Dunne
------------------------
Thomas P. Dunne
President
DUNN COMPUTER OPERATING COMPANY
By: /s/ Thomas P. Dunne
------------------------
Thomas P. Dunne
President
FIRST UNION COMMERCIAL CORPORATION
By: /s/ Michael J. Landini
------------------------
Michael J. Landini
Vice President
55
<PAGE>
EXHIBIT 10.27
MODIFICATION AGREEMENT
THIS MODIFICATION AGREEMENT (this "Agreement") is made as of the 11th day
of February, 2000 by and among DUNN COMPUTER CORPORATION, a Virginia
corporation, DUNN COMPUTER CORPORATION, a Delaware corporation, INTERNATIONAL
DATA PRODUCTS, CORP., STMS, INC., PUERTO RICO INDUSTRIAL MANUFACTURING
OPERATIONS ACQUISITION, CORP. and DUNN COMPUTER OPERATING COMPANY (collectively,
the "Borrower") and FIRST UNION NATIONAL BANK, holder of the Note (as defined
below) pursuant to an assignment from First Union Commercial Corporation to
First Union National Bank (the "Lender").
Recitals
R-1. The Lender extended a revolving line of credit in the original
principal amount of $15,000,000 (the "Line of Credit") to the Borrower pursuant
to a Revolving Line of Credit Loan Agreement and Security Agreement dated May
27, 1999, as amended by an Addendum to Revolving Line of Credit Loan Agreement
and Security Agreement dated May 27,1999 and by a letter agreement dated May 27,
1999 (collectively, the "Line of Credit Agreement"). The Line of Credit is
evidenced by a Revolving Note dated May 27, 1999 from the Borrower to the Lender
in the original principal amount of $15,000,000 (the "Note").
R-2. The Line of Credit is secured by, among other things, the Line of
Credit Agreement, whereby the Borrower granted to the Lender a security interest
in (i) all Accounts, (ii) all payments or rights to payment due or to become due
under any Government Contract to which the Borrower is a party, (iii) all
deposit accounts and other obligations or indebtedness owed to the Borrower from
whatever source arising, (iv) all rights to receive any payment in money or in
kind, (v) all contract rights (except contract rights under Government Contracts
other than rights to payments due or to become due), (vi) all Inventory, (vii)
all property, plant and Equipment, (viii) all chattel paper, (ix) all General
Intangibles, (x) all books and records and computer hardware, software
(including, to the extent assignable, the Borrower's right to use software
licensed to the Borrower) and systems, (xi) all policies of insurance and the
proceeds thereof, (xii) all additions and accessions thereto and replacements
thereof and (xiii) all products and proceeds thereof, as more particularly
described therein.
R-3. Pursuant to the Line of Credit Agreement, the Lender also agreed to
issue from time to time, subject to the provisions thereof, letters of credit
(the "Letters of Credit"). No Letters of Credit have been issued under the Line
of Credit Agreement.
R-4. The Line of Credit Agreement, the Note and all other documents
evidencing, securing, guaranteeing or otherwise related to the Line of Credit
are collectively called the "Loan Documents."
R-5. As of December 14, 1999, there is due under the Line of Credit
principal of Two Million Three Hundred Thousand and 00/100 Dollars
($2,300,000.00) and interest of Seven
<PAGE>
Thousand Six Hundred Two and 84/100 Dollars ($7,602.84), plus attorneys' fees
and other costs which are payable under the Loan Documents.
R-6. Capitalized terms used herein and not otherwise defined herein shall
have the meanings set forth in the Line of Credit Agreement.
R-7. The Lender contends that the Borrower is in default under the Loan
Documents due to, among other things, violations of certain financial covenants
and financial reporting under the Line of Credit Agreement.
R-8. The Borrower has requested that the Lender continue to make advances
under the Line of Credit and extend the maturity date of the Line of Credit
until November 30, 2000 and the Lender is willing to do so subject to the terms
and conditions set forth in this Agreement.
NOW, THEREFORE, in consideration of the foregoing, the mutual covenants
and agreements set forth herein, the sum of Ten Dollars ($10.00) and other good
and valuable consideration, the receipt and sufficiency of which are hereby
acknowledged by the parties, the parties hereto covenant and agree as follows.
1. Recitals. The Recitals set forth above are a material part of this
Agreement. The Borrower acknowledges and affirms the accuracy of the Recitals
set forth above.
2. Confirmation and Ratification of Documents; Consent to this Agreement.
The Borrower agrees that the Loan Documents are in full force and effect and
that each Loan Document shall remain in full force and effect unless and until
modified or amended in writing in accordance with its terms. The Borrower
ratifies and confirms their respective obligations under the Loan Documents, and
agrees that the execution and delivery of this Agreement shall not in any way
diminish or invalidate any of their respective obligations under the Loan
Documents. All parties consent to the execution and delivery of this Agreement
and to all the provisions of this Agreement to the extent that such provisions
may modify the terms and provisions of any of the Loan Documents.
3. Service Charge. Commencing March 1,2000 and on the first day of each
month thereafter, the Borrower shall pay monthly to the Lender a monthly service
charge of $1,500.
4. Principal Curtailments. The Borrower shall pay to the Lender fifty
percent (50%) of the net proceeds remaining after payment in full to Deutsche
Financial Services of certain indebtedness owed by the Borrower to Deutsche
Financial Services and secured by an existing pledge of certain collateral of
IDP and PRIMO of (a) the sale of the business (whether as a stock purchase or a
sale or transfer of the assets) of Puerto Rico Industrial Manufacturing
Operations Acquisition, Corp. ("PRIMO") and (b) any settlement with the U.S. Air
Force in connection with the contract awarded to International Data Products,
Corp. ("IDP") on or about May 1997 for high performance desktop computers (the
"Desktop V contract"), which contract the Borrower has advised was not renewed
by the U.S. Air Force, such proceeds not to exceed
-2-
<PAGE>
$1,000,000 in the aggregate (each, a "Curtailment Event") (i.e., upon the first
Curtailment Event to occur, the Borrower shall pay to the Lender fifty percent
(50%) of the proceeds of such Curtailment Event up to $1,000,000; in the event
that the Lender receives less than $1,000,000 from the proceeds of such
Curtailment Event, the Borrower shall pay to the Lender fifty percent (50%) of
the proceeds of the next Curtailment Event up to an aggregate amount from both
Curtailment Events of $1,000.000).
5. Permanent Reductions in Line of Credit.
(a) Upon execution of this Agreement, the availability under the
Line of Credit shall be permanently reduced from $15,000,000 to $5,000,000.
(b) The availability under the Line of Credit shall be further
permanently reduced by the amount of any principal curtailments received by the
Lender as a result of any Curtailment Event (see paragraph 5 above).
6. Ineligible Accounts. The Borrower and the Lender agree that (a) the
conditions required to be satisfied before the Accounts of IDP and PRIMO could
be considered Eligible Accounts, as set forth in the letter agreement dated May
27, 1999, have not been satisfied and that therefore (b) all Accounts of IDP and
PRIMO have been since the Lender first made the Line of Credit available to the
Borrower and shall continue to be Ineligible Accounts. Notwithstanding the
foregoing and subject to the first priority security interest of Deutsche
Financial Services, all Accounts of IDP and PRIMO shall nevertheless remain as
collateral for all obligations owed to the Lender.
7. Deletion of Inventory from Borrowing Base. Effective upon the execution
of this Agreement, the Borrower shall no longer be able to borrow against
Inventory under the Line of Credit. The definition of "Borrowing Base" set forth
in Section 1.1 of the Line of Credit Agreement is deleted and the following is
substituted in lieu thereof: ""Borrowing Base" means at the time in question the
sum of: (a) ninety percent (90%) of the Borrower's Eligible Government Accounts
plus (b) eighty percent (80%) of the Borrower's Eligible Commercial Accounts,
provided that all Accounts of IDP and PRIMO are Ineligible Accounts and shall
not be included in the Borrowing Base. In the absence of manifest error,
Lender's determination of the amount of the Borrowing Base shall be conclusive."
Notwithstanding that the Borrower cannot borrow against Inventory and subject to
the first priority security interest of Deutsche Financial Services in the
Inventory of IDP and PRIMO, Inventory shall nevertheless remain as collateral
for all obligations owed to the Lender.
8. Borrowing Base Certificates. The Borrower shall furnish the Lender with
borrowing base certificates (in form acceptable to the Lender in its sole
discretion) by 10:00 a.m. (McLean, Virginia time) on the day which is five (5)
business days after the fifteenth (15th) and the thirtieth (30th) day of
each month, respectively, covering the periods from (A) the first (lst) day of
the month through the fifteenth (15th) day of the month and (B) the sixteenth
(16th) day of the month through the thirtieth (30th) day of the month (or the
last day of the month in the event
-3-
<PAGE>
that the month does not have thirty (30) days (i.e. February and months having
thirty-one (31) days), respectively (regardless of whether any advance is
requested). Such borrowing base certificates should be sent to (a) First Union
National Bank, 1970 Chain Bridge Road, McLean, Virginia 22102. Attn: David A.
Dix, Vice President and (b) First Union National Bank, 1970 Chain Bridge Road,
McLean, Virginia 22102, Attn: Nick Edivan, Telecopy (703) 760-5450.
9. Interest Rate. Commencing on the date of the execution of this
Agreement, the unpaid principal balance (both the existing unpaid principal
balance and future advances) of the Line of Credit shall bear interest at the
Lender's prime rate plus one percent (1%). Upon the occurrence of an Event of
Default, interest shall accrue and be payable at the applicable interest rate
plus two percent (2%). The Borrower shall no longer have the option to elect the
Reference Rate-Based Option or the LIBOR-Based Rate Option.
10. Maturity Date. The Line of Credit shall expire on November 30, 2000
(the "Maturity Date") and all principal, interest and other sums then
outstanding shall be immediately due and payable. The Borrower acknowledges that
the Lender has advised the Borrower that the Maturity Date will not be further
extended.
11. Modification of Note. Contemporaneously with the execution of this
Agreement, the Borrower shall execute a modification of the Note reflecting the
modified interest rate and the modified Maturity Date as set forth in paragraphs
9 and 10 above, respectively, substantially in the form attached hereto as
Exhibit A.
12. Letters of Credit. Effective upon the execution of this Agreement, no
Letters of Credit shall be issued under the Line of Credit. Section 2.1 E. of
the Line of Credit Agreement which relates to the Letter of Credit Subfacility
is deleted in its entirety.
13. Costs and Expenses. Upon execution of this Agreement, the Borrower
shall pay to the Lender by certified or cashier's check all actual costs and
expenses, including, without limitation, attorneys' fees, UCC search costs and
costs related to the field audit incurred by the Lender in connection with the
Line of Credit.
14. Lockbox/Restricted Account.
(a) With the consent of the Borrower, the Lender has established or
will establish contemporaneously with the execution of this Agreement (a) a post
office box(es) or other collection facility(ies) under the Lender's control
(collectively, the "Lockbox"). Contemporaneously with the execution of this
Agreement, the Borrower will direct by written notice in form and substance
satisfactory to the Lender in its sole discretion, all account debtors of the
Borrower (excluding IDP and PRIMO) to send all Payments either by check to the
Lockbox for deposit upon collection into the Restricted Account (as defined
below) or by electronic funds transfer directly to the Restricted Account (as
defined below). Restricted Account shall mean collectively those accounts
identified on Exhibit B attached hereto plus any other accounts established by
the Lender at the Borrower's direction for the purpose of receiving
-4-
<PAGE>
Payments. All accounts which constitute the Restricted Account shall be titled
as follows: "First Union National Bank Restricted Account for Dunn Computer
Operating Company." The Restricted Account shall be under the sole and absolute
control of the Lender and the Lender shall have the sole power of withdrawal
from the Restricted Account. The Borrower shall not be entitled to make any
withdrawals or disbursements from or otherwise pay any expenses out of the
Restricted Account, nor shall the Borrower be deemed to have any rights thereto,
or interest therein, except as expressly set forth herein. Within ten (10) days
after all obligations of the Borrower under the Line of Credit Agreement and the
other Loan Documents have been paid in full and performed, the Lender shall pay
the funds remaining, if any, in the Restricted Account to the Borrower.
(b) If any Payments are made directly to the Borrower or otherwise
come into The Borrower's possession, the Borrow shall not commingle any such
Payment with The Borrower's other funds or property, but shall hold the Payment
separate and apart in trust for the Lender and shall promptly deliver the
Payment to the Lender (appropriately endorsed, if the Payment is in the form of
a check) for deposit into the Restricted Account. Interest (if any) earned on
sums on deposit in the Restricted Account shall be added to the Restricted
Account. The Borrower hereby appoints the Lender and any officer, employee or
agent of the Lender as the Lender may from time to time designate as
attorneys-in-fact for the Borrower to endorse and sign the name of the Borrower
on all checks, drafts, money orders or other Items delivered to the Lender for
deposit into the Restricted Account. The Restricted Account shall constitute
part of the Collateral, and funds on deposit in the Restricted Account shall be
disbursed to the Borrower only by a disbursement to the Operating Account as
provided hereafter in this Agreement.
(c) If no Event of Default has occurred and remains uncured, and
there exists no event, occurrence or circumstance that, with the giving of
notice or the passage of time or both, would constitute an Event of Default,
funds on deposit in the Restricted Account shall be withdrawn by the Lender on
the Business Day next following the day on which such funds are deposited, and
shall be applied as follows: (1) first, to unpaid late charges under the
Revolving Note; (2) second, to reimburse any amounts advanced by the Lender to
cure defaults under this Agreement; (3) third, to any unpaid fees due and
payable under the Agreement; (4) fourth, to accrued interest due and payable
under the Note; (5) fifth, to unpaid principal indebtedness under the Revolving
Note; and (6) sixth, the balance, if any, to the Borrower's Operating Account.
Borrower retains sole responsibility for assuring that the Borrower's Operating
Account contains sufficient funds to pay any Items that may be presented for
payment from the Operating Account.
(d) Notwithstanding anything to the contrary contained herein, in
the event that any Item delivered to the Lender for deposit into the Lockbox is
returned unpaid to the Lender, or is dishonored by the Lender, the Lender will
debit the Restricted Account for the entire amount credited thereto in respect
of such Item, together with any applicable service charge. In the event that the
funds on deposit in the Restricted Account are insufficient to pay such returned
or dishonored Items, the amount of such deficiency shall be deemed an Advance
under the Line of Credit which the Borrower shall pay to the Lender immediately
upon demand.
-5-
<PAGE>
(e) Within ten (10) days after the execution of this Agreement, the
Borrower shall execute all supplemental documentation that the Lender may
request, in form and substance acceptable to the Lender, to put in place a cash
management system for the transactions contemplated by this paragraph 14. In the
event the Borrower fails to execute and deliver to the Lender any such
supplemental documentation within three (3) days of a request therefor, the
Borrower hereby appoints the Lender and any officer, employee or agent of the
Lender as the Lender may from time to time designate as attorneys-in-fact for
the Borrower to sign the name of the Borrower on any such supplemental
documentation.
15. Assignment of Government Contracts.
(a) A list of all existing Government Contracts of the Borrower are
attached hereto as Exhibit C and the Borrower represents and warrants to the
Lender that such list is an accurate and complete list of all existing
Government Contracts of the Borrower.
(b) Within fifteen (15) days after the execution of this Agreement,
the Borrower shall execute assignments of moneys due and to become due under
Government Contracts (each, an "Assignment") in form acceptable to the Lender,
assigning (under the Assignment of Claims Act, 31 USC Section 3727 and 41 USC
Section 15) to the Lender all moneys due and to become due from the United
States of America together with all rights to receive the same, under each
existing government contract of the Borrower.
(c) The Borrower will obtain the written acknowledgement of each
government contracting officer (and any other necessary party) to each
Assignment within four (4) weeks after the execution of this Agreement.
(d) In the event that the Borrower enters into any Government
Contracts after closing, the Borrower shall (i) notify the Lender in writing of
such contact, and provide the Lender with a copy of such contract, immediately
upon execution thereof, (ii) execute an Assignment for each such contract within
five (5) days after a request therefor from the Lender and (iii) obtain the
written acknowledgment of the contracting officer (and any other necessary
party) to each such Assignment within four (4) weeks after the execution
thereof.
(e) The separate Assignments to the Lender of a right to payment
under specific Government Contracts as contemplated under this paragraph shall
not be deemed to limit the Lender's security interest to Payments under those
particular Government Contracts and the related Government Accounts, but rather
the Lender's security interest shall extend to Payments under any and all
Government Contracts and the related Government Accounts and proceeds thereof,
now or hereafter owned or acquired by the Borrower.
(f) The Borrower acknowledges that the Lender will be irrevocably
harmed if the Borrower fails to assign Payments due or to become due under any
Government Contract when required and that the Lender shall have no adequate
remedy at law. Therefore, the Borrower agrees that the Lender shall be entitled,
in addition to all other remedies allowed by
-6-
<PAGE>
law or under the Agreement, the Line of Credit Agreement or the other Loan
Documents, to injunctive or other equitable relief to compel the Borrower's
compliance with the provisions of this Agreement and the Line of Credit
Agreement requiring the Borrower to assign Payments due or to become due under
any Government Contract.
(g) Notwithstanding the foregoing, the Lender agrees that the
Borrower shall only be required to assign to the Lender any Government Contracts
which (i) are with the government of the United States or the departments or
agencies of the United States and (ii) cannot be fully performed within six (6)
months of the date of execution of such Government Contract.
16. Financial Covenants. The financial covenants set forth in Section 6.14
of the Line of Credit Agreement are deleted and replaced with the following:
(a) The Borrower shall maintain a minimum liquidity ratio (i.e.,
current assets over total liabilities, to be measured quarterly) of (i) .60 from
January 31, 2000 through April 30, 2000 and (ii) .75 from May 1, 2000 and
thereafter.
(b) The Borrower shall maintain a ratio of EBIT/Interest (i.e.
earnings before interest and taxes over interest to be measured quarterly) of
not less than 1.0 at all times from the execution of this Agreement and
thereafter.
(c) The Borrower shall maintain a ratio of total liabilities to
tangible net worth (i.e. total stockholder equity less goodwill and other
intangible assets, to be measured quarterly) of not more than 13.5 to 1.0 at all
times from the execution of this Agreement and thereafter.
Unless otherwise defined, all accounting terms shall have the
definitions given them in accordance with generally accepted accounting
principles; all accounting terms and covenants shall be applied on a
consolidated basis.
17. Negative Covenants. In addition to the negative covenants set forth in
Article 7 of the Line of Credit Agreement, the Borrower covenants and agrees
that, until all obligations of the Borrower under the Line of Credit Agreement
and the other Loan Documents are paid in full and performed, (a) it shall not
make any payments to Deutsche Financial Services in connection with the
indebtedness owed by the Borrower except as provided in the agreement between
Deutsche Financial Services and the Borrower which is attached hereto as Exhibit
E and (b) it shall not incur any capital expenditures, except that the Borrower
shall be permitted to make capital expenditures provided that the cost of such
capital expenditures do not exceed in the aggregate on an annualized basis
$1,000,000 so long as the Line of Credit is outstanding.
18. Financial Statements and Information.
(a) The Borrower shall provide the Lender with an aging and listing
of accounts receivable (including both Commercial Accounts and Government
Accounts) and an
-7-
<PAGE>
aging and listing of accounts payable by 10:00 a.m. on the day which is five (5)
business days after the fifteenth (15th) and the thirtieth (30th) day of each
month, respectively, covering the periods from (A) the first (lst) day of the
month through the fifteenth (15th) day of the month and (B) the sixteenth (16th)
day of the month through the thirtieth (30th) day of the month (or the last day
of the month in the event that the month does not have thirty (30) days (i.e.,
February and months having thirty-one (31) days), respectively. Such list shall
identify which accounts receivable have been pledged to which creditor.
(b) The Borrower shall provide the Lender on a monthly basis
consolidating financial statements in such form and detail as the Lender may
require.
(c) Within ninety (90) days from the end of each fiscal year, the
Borrower shall provide to the Lender the complete 10-K and consolidating balance
sheets and income and expense statements of the Borrower together with its
subsidiaries audited by an independent certified public accountant firm selected
by the Borrower and acceptable to the Lender. Within forty-five (45) days from
the end of each fiscal quarter, the Borrower shall provide to the Lender the
complete 10-Q and consolidating balance sheets and income and expense statements
of the Borrower together with its subsidiaries, in reasonable detail and
prepared in accordance with GAAP. Notwithstanding the foregoing, in the event
that the Borrower shall file for and receive an extension of time to file its
10-K or l0-Q, the time periods referenced in this paragraph shall be extended by
thirty (30) days, as applicable.
(d) The Borrower shall provide to the Lender such other financial or
other information as the Lender may request in its reasonable discretion from
time to time.
19. Landlord's Waivers. The Borrower shall use their best efforts to
deliver to the Lender, contemporaneously with the execution of this Agreement,
agreements which must be in form and substance satisfactory to the Lender in its
sole discretion, relating to the Borrower's facilities in Sterling, Virginia and
Guayama, Puerto Rico, waiving any landlord's or mortgagee's or lienholder's
rights to enforce any claim against the Borrower against any collateral of the
Lender and allowing the Lender to have access to its collateral for purposes of
inspection and/or to take possession thereof in accordance with the Lender's
rights under the Loan Documents and applicable law. In connection therewith, and
contemporaneously with the execution of this Agreement, the Borrowers shall
provide to the Lender copies of all leases, mortgages or similar agreements
relating to any facility that is not owned by the Borrowers at which any
collateral is located.
20. Audits of Collateral After Closing. The Borrower shall permit the
Lender or any agent or representative thereof, at any reasonable time and from
time to time, to conduct a field audit of the inventory and a records audit of
the accounts receivable and other collateral. The Borrower shall be responsible
for all costs and expenses associated with two (2) such audits conducted after
January 31, 2000 (which shall be deemed to be obligations which are secured by
the Loan Documents, as amended by this Agreement and the documents executed in
connection with this Agreement). Notwithstanding the foregoing, the Lender
agrees that, provided that no
-8-
<PAGE>
Event of Default has occurred, and there exists no event, occurrence or
circumstance that, with the giving of notice or the passage of time or both,
would constitute an Event of Default, the Borrower shall only be responsible for
a maximum of $5,000 of the costs and expenses associated with any such audit(s)
(i.e., the Borrower shall only be responsible for a maximum of $5,000, whether
the Lender elects to conduct one (1) or two (2) audits and whether the costs and
expenses of such audit or audits exceed $5,000 individually or in the
aggregate).
21. Refinancing. The Borrower shall use their best efforts to secure
refinancing or seek debt and/or equity in amounts sufficient to satisfy in full
the Line of Credit on or prior to the Maturity Date. Commencing on April 1, 2000
and on the first day of each month thereafter until the Line of Credit has been
paid in full, the Borrower shall provide to the Lender a written status report
detailing these efforts.
22. Resolutions of the Borrower/Good Standing. Contemporaneously with the
execution of this Agreement, the Borrower shall deliver to the Lender
resolutions prepared by the Borrower evidencing their consent to the execution
of this Agreement and the documents executed in connection with this Agreement.
Contemporaneously with the execution of this Agreement, the Borrower shall also
obtain and deliver to the Lender current good standing certificates for all of
the jurisdictions in which the Borrower is incorporated or doing business.
23. Representations and Warranties. In order to induce the Lender to enter
into this Agreement, the Borrower represents and warrants to the Lender as
follows:
(a) Organization and Standing. Each Borrower is a corporation duly
organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation, with corporate power adequate to own and
operate the properties owned by it, to carry on the business conducted by it, to
enter into and perform this Agreement and to carry out the transactions
contemplated hereby.
(b) Authorization and Validity. The execution and delivery of this
Agreement by the Borrower and the performance of the Borrower's obligations
hereunder have been duly authorized by proper corporate action and this
Agreement constitutes the legal, valid and binding obligations of the Borrower
and is enforceable in accordance with its terms.
(c) Compliance with Other Instruments. The Borrower is not in
violation of any provision of their articles of incorporation or by-laws and are
not in default under any existing judgement (except as set forth on Exhibit F
attached hereto) or decree or of any existing law, governmental order, rule or
regulation applicable to it, or of any agreement or other instrument to which it
is a party or by which it or its assets are bound to the extent that any such
violation would affect the ability of the Borrower to perform any of their
obligations under this Agreement, any documents executed in connection with this
Agreement or the Loan Documents in any material respect. Neither the execution
and delivery of this Agreement nor the consummation of the transactions herein
contemplated, nor compliance with the terms and provisions hereof, has
constituted or resulted in or will constitute or result in a breach of the
-9-
<PAGE>
articles of incorporation or by-laws of any Borrower, or the violation of any
presently existing applicable governmental requirement or will conflict or will
be inconsistent with or will result in any breach of any of the terms,
covenants, conditions or provisions thereof, or will constitute a default under,
any indenture, mortgage, deed of trust, instrument, document, agreement or
contract of any kind to which any Borrower is a party or by which any Borrower
may be bound or subject to the extent that any such breach or default would
affect the ability of any of Borrower to perform any of their obligations under
this Agreement, any documents executed in connection with this Agreement or the
Loan Documents in any material respect.
(d) Litigation. Except as set forth on Exhibit F attached hereto,
there are no actions, suits or proceedings at law or in equity or by or before
any governmental instrumentality or other agency now pending or, to the
knowledge of any Borrower, threatened against or affecting any Borrower or any
property or rights of any Borrower which reasonably may be expected to have a
material adverse effect on the property, business, operations, financial
condition, prospects, liabilities or capitalization of any Borrower. Except as
set forth in this paragraph 23(d), no Borrower is in default with respect to any
judgment, order, writ, injunction, decree, demand, rule or regulations of any
court, arbitrator, grand jury or of any governmental agency.
(e) Assets. The Borrower's assets are not subject to any existing
liens or encumbrances except that granted to the Lender except as shown on
Exhibit G attached hereto. The Borrower maintains in full force and effect the
insurance required under Section 6.6 of the Loan Agreement. The Borrower's
Equipment is kept at the locations set forth on Exhibit H attached hereto. The
Borrower maintains its chief executive office at the place identified on Exhibit
I attached hereto and keeps its books and records at that office.
(f) Taxes. The Borrower has filed and will continue to file all
United States income tax returns and all state income tax returns that are
required to be filed, and has paid, or made adequate provisions for the payment
of all taxes which have or may become due pursuant to said returns or pursuant
to any assessment received by any Borrower.
(g) Licenses and Contracts. All franchises, licenses, trademarks,
trade names, copyrights, patents, permits, certificates, consents, approvals,
authorizations, agreements and contracts necessary to operate the Borrower's
business as it currently is being operated and to own or lease the Borrower's
property have been obtained, are in effect, have been complied with in material
respects by the Borrower, are free from challenge, and are fully assignable to
the Lender for the purpose of securing the Revolving Loan. Borrower has no
knowledge and has not received any notice to the effect that any product it
manufactures or sells, or any service it renders, or any process, method,
know-how, trade secret, part or material it employs in the manufacture of any
product it makes or sells or any service it renders, or the marketing or use by
it or another of any such product or service, may infringe any trademark, trade
name, copyright, patent, trade secret or legally protected right of any other
Person.
-10-
<PAGE>
(h) Intellectual Property. The Borrower owns all right, title and
interest in and to all Intellectual Property used in and material to the
operation of its business or, for such Intellectual Property that is not owned,
possesses adequate licenses or other legally enforceable rights to use the same.
The Borrower has no reason to believe that any valid basis exists upon which a
claim adversely affecting any such Intellectual Property may be asserted against
the Borrower or any subsidiary. To the best knowledge of the Borrower, no Person
is infringing upon the Intellectual Property used by the Borrower or any
subsidiary material to the operation of their respective businesses. The
Borrower has taken appropriate steps to protect the secrecy, confidentiality and
value of its and all subsidiaries' rights in and to such Intellectual Property
and to prevent others from using such Intellectual Property without consent.
(i) Trade Name; Merger. Except as set forth in Exhibit J attached
hereto, during the five years immediately preceding the date of this Agreement:
(i) neither the Borrower nor any predecessor of the Borrower has used any
corporate or fictitious name other than its current corporate name; (ii) the
Borrower has not changed its name, or been the surviving entity in a merger or
acquired any business; and (iii) the Borrower has utilized no trade names in the
conduct of its business.
(j) Payment of Employees and Subcontractors. The Borrower is not in
default with regard to the payment of any employee or subcontractor.
(k) ERISA. The Borrower is in compliance with the Borrower's
obligations under ERISA.
(l) Government Contracts. The Borrower is not currently in default
as to the terms of any Government Contract, and no Government Contract has been
canceled or terminated by the Government in the past ten years except as set
forth in Exhibit K attached hereto. No Government Contract for which Payments
have been assigned to the Lender as Collateral is dependent on appropriations,
except as set forth in Exhibit L attached hereto.
(m) Assignment of Payments. The Borrower has the right to assign to
the Lender all Payments due or to become due under each of the Borrower's
Government Contracts, and there exists no uncancelled prior Assignment of
Payments under any of the Borrower's Government Contracts.
(n) Assignment of Claims Act. The Borrower is now in compliance and
hereby covenants and agrees that the Borrower will in the future comply with any
and all of the requirements of the Assignments of Claims Act, where such
statutes are applicable to any Government Contract, and shall take all such
other action as may be necessary to facilitate the assignment and perfection of
the Lender's interest in Payments under any Government Contract.
(o) No Claims, etc. There are no claims, defenses or setoffs with
respect to the Note or with respect to any of the other Loan Documents, or with
respect to the indebtedness evidenced or secured thereby or with respect to the
collection or enforcement of any of the same
-11-
<PAGE>
(and to the extent any such claim, setoff or defense exists, they are each
waived and relinquished in their entirety).
(p) Disclosure. This Agreement and all agreements, documents,
certificates or statements furnished to the Lender by or on behalf of the
Borrower in connection with the transactions contemplated hereby are true,
correct and complete and do not contain any untrue statement of material fact.
(q) Benefit. Each Borrower has derived direct or indirect benefit
from this Agreement and the transactions contemplated hereby.
(r) Free Act and Will. The Borrower is not entering into this
Agreement in reliance upon any statement, representation or warranty of any
nature whatsoever made by the Lender, or any other person or entity whatsoever,
which is not expressly stated herein, and each Borrower has entered into this
Agreement entirely of its own free act and will.
24. Events of Default. The occurrence of one or more of any of the
following events (the "Events of Default") shall constitute an Event of Default
under this Agreement:
(a) Failure to pay to the Lender when due any amounts required by
this Agreement or any document executed in connection with this Agreement within
five (5) Business Days after written notice from the Lender, provided that the
foregoing shall not be construed to grant to the Borrower an additional five (5)
day cure period beyond the five (5) day cure period presently set forth in the
Loan Documents to pay any sum payable under the Note (i.e., the Borrower has an
aggregate of five (5) days after written notice from the Lender to pay any sum
payable under the Note).
(b) Failure to comply with or perform as and when required, or to
observe, any of the other terms, conditions or covenants of this Agreement or
any document executed in connection with this Agreement within five (5) Business
Days after written notice from the Lender.
(c) If any representation or warranty made herein, in any document
executed in connection with this Agreement or in any report, certificate,
financial statement or other instrument furnished in connection with this
Agreement, shall prove to have been materially false or misleading on the date
as of which it was made.
(d) If the Lender determines in good faith that a material adverse
change has occurred in the financial condition or business condition of the
Borrower.
(e) If a monetary default(s) in excess of $100,000 in the aggregate
which remains uncured after the expiration of any applicable cure period occurs
under any indebtedness or other obligation of the Borrower to any third party
unless such default(s) constitute(s) a bona fide dispute which the Borrower is
contesting in good faith.
-12-
<PAGE>
(f) If a default which remains uncured after the expiration of any
applicable curt period or an Event of Default occurs under any of the Loan
Documents.
(g) The failure of the Borrower, within forty-five (45) days after
the execution of this Agreement, to enter into an agreement (the "Forbearance
Agreement") with John Signorello, a judgment creditor (the "Judgment Creditor")
of Dunn Computer Corporation pursuant to a judgement entered in the Circuit
Court of Fairfax County, Virginia (At Law Number 185647) (the "Judgement"),
which Forbearance Agreement must provide that the Judgment Creditor will forbear
from exercising his rights and remedies under the Judgment until all obligations
of the Borrower under the Line of Credit Agreement and the other Loan Documents
have been paid in full and performed except in the event the Borrower fails to
pay the Judgment pursuant to the terms of the Forbearance Agreement.
(h) A default occurs under the Forbearance Agreement (see paragraph
24(g) above).
(i) The use of the proceeds of the Line of Credit (directly or
indirectly) to satisfy the Judgment (see paragraph 24(g) above) (The Borrower
has represented to the Lender that a Borrower or a principal of a Borrower will
satisfy the Judgment (if not dismissed) through a contribution of new equity)
(j) The failure of the Borrower, within fourteen (14) days after the
execution of this Agreement, to deliver to the Lender Exhibits C, E, F, G, H and
I referenced herein.
(k) The failure of the Borrower, within thirty (30) days after the
execution of this Agreement, to deliver to the Lender Exhibits J, K and L
referenced herein.
Notwithstanding that the Borrower is entitled to certain written
notice and an opportunity to cure as set forth in paragraphs 24(a), (b) and (f)
(by reference to the Loan Documents) above, the Lender's obligation to make
Advances to the Borrower shall cease immediately upon the occurrence of any
event, occurrence or circumstance that, with the giving of notice or the passage
of time or both, would constitute an Event of Default (i.e., the Lender's
obligation to make Advances to the Borrower shall cease immediately upon the
occurrence of a default hereunder or under the Loan Documents, even though an
Event of Default may not have occurred because the Borrower is entitled to such
notice and opportunity to cure). At such time as such default is cured by the
Borrower within the applicable cure period to the satisfaction of the Lender,
and provided that no new default or Event of Default has occurred and is
continuing, the Lender shall be obligated to make Advances pursuant to the terms
of the Loan Agreement and subject to the conditions set forth therein.
25. Remedies. Immediately upon the occurrence of any Event of Default, the
Lender shall have the right to exercise any and all rights available to it under
this Agreement, any document executed in connection with this Agreement or any
of the Loan Documents and
-13-
<PAGE>
applicable law. All rights and remedies available to the Lender under this
Agreement, any document executed in connection with this Agreement or any of the
Loan Documents and applicable law may be asserted concurrently, cumulatively or
successively, from time to time, as long as the parties hereto shall be indebted
to the Lender.
26. Primary Depository Account. The Borrower shall maintain their primary
depository accounts with the Lender.
27. Release. Each Borrower, for itself and its directors, officers,
employees, agents, members, predecessors, successors and assigns, hereby
releases and forever waives and relinquishes all claims, demands, obligations,
liabilities and causes of action of whatsoever kind or nature, whether known or
unknown, which it or he has, may have or might have or assert now or in the
future as a result of events occurring prior to or contemporaneously with the
execution of this Agreement against the Lender (which term for the purpose of
this paragraph 27 shall mean both First Union National Bank and First Union
Commercial Corporation) and/or any affiliates or entities related to such
entity, and any of the directors, officers, employees, agents, successors and
assigns, as the case may be, of all such entities, in connection with, directly
or indirectly, this Agreement, the Loan Documents, any document executed in
connection with this Agreement or any transactions contemplated hereby or
thereby, any prior loan made or credit extended to the Borrower by the Lender or
otherwise to any relationship between any Borrower and the Lender.
Notwithstanding the foregoing, the Borrower does not release First Union
National Bank from any claims, if any, the Borrower may have against First Union
National Bank in connection with the handling of check nos. 009786, 009787 and
009788 made by the Borrower to various payees in the aggregate amount of
approximately $58,000, provided that the Borrower shall not have the right to
claim any consequential or incidental damages.
28. Further Assurances and Corrective Instruments. The Borrower will
execute, acknowledge and deliver, from time to time, such supplements hereto and
such further instruments and documents, as the Lender may require in its
reasonable discretion to protect, perfect and enforce the Lender's interest in
any collateral security for the Line of Credit or to facilitate the carrying out
of the intentions of the parties to this Agreement.
29. Waiver of Trial by Jury. Each Borrower and the Lender hereby waive
trial by jury in any action or proceeding to which any Borrower and the Lender
may be parties, arising out of or in any way pertaining to this Agreement, any
of the documents executed in connection with this Agreement or the Loan
Documents. It is agreed and understood that this waiver constitutes a waiver of
trial by jury of all claims against all parties to such actions or proceedings,
including claims against parties who are not parties to this Agreement. This
waiver is knowingly, willingly and voluntarily made by each Borrower and each
Borrower hereby represents that no representations of fact or opinion have been
made by any individual to induce this waiver of trial by jury or to in any way
modify or nullify its effect. Each Borrower further represents that it has been
represented or has had the opportunity to be represented in the signing of this
Agreement and in the making of
-14-
<PAGE>
this waiver by independent legal counsel, selected of its own free will, and
that it has had the opportunity to discuss this waiver with counsel.
30. Consent to Assignment of Line of Credit and Disclosure of Documents.
Each Borrower consents to the sale and assignment by the Lender of any or all of
their interest in the Line of Credit at any time in the Lender's sole and
absolute discretion. Within fifteen (15) days after any such sale or assignment,
the Lender shall provide the Borrower with notice of the name of the individual
or entity purchasing such Line of Credit. In conjunction with such assignment,
Each Borrower consents to the disclosure of any and all books, records, files,
loan agreements, notes, deeds of trust, guaranties, financing statements,
assignments of leases, statements, ledger cards, signature cards, corporate
and/or partnership documents, financial statements, leases, appraisals,
environmental audits, hazard and liability insurance policies, title insurance
policies, loan payment histories, income tax returns, credit analyses, notes,
correspondence, internal memoranda, checks, deposit account records and other
documents which are in the Lender's possession or control or to which the Lender
is entitled under the terms of this Agreement, any documents executed in
connection with this Agreement or the Loan Documents relating to the Line of
Credit to prospective assignees in connection with any sale or contemplated sale
of the Line of Credit or any participation interest therein.
31. Arbitration. Section 10.19 of the Line of Credit Agreement relating to
arbitration is deleted in its entirety. All other references to arbitration in
the Line of Credit Agreement are also deleted in their entirety. A confession of
judgment provision shall be included in the modification of the Note (see
paragraph 11 above).
32. Miscellaneous.
(a) Waivers by the Lender. Neither any failure nor any delay on the
part of the Lender in exercising any right, power or remedy under this
Agreement, any documents executed in connection with this Agreement or the Loan
Documents, or under applicable law shall operate as a waiver thereof, nor shall
a single or partial exercise thereof preclude any other or further exercises
thereof or the exercise of any other right, power or remedy. No waiver or
forbearance by the Leader as to any Borrower shall waive or release any rights
or claims which the Lender may now have or hereafter have against any other
person, firm or individual. The Lender reserves all rights except to the extent
expressly provided herein.
(b) Modifications. No modification or waiver of any provision of
this Agreement, any documents executed in connection with this Agreement or the
Loan Documents, and no consent by the Lender to any departure by the Borrower
therefrom shall in any event be effective unless the modification, waiver or
consent shall be in writing. Any such waiver or consent shall be effective only
in the specific instance or for the purpose for which given. No notice to, or
demand upon the Borrower in any case shall entitle the Borrower to any other or
further notice or demand in the same, similar or other circumstances.
-15-
<PAGE>
(c) No Novation. Nothing set forth in this Agreement or in any of
the documents executed in connection with this Agreement shall cause a novation
nor shall it extinguish, terminate, or impair the Borrower's obligations under
the Loan Documents, as amended by this Agreement, or affect the priority of the
lien of the Lender established by the Loan Documents.
(d) Applicable Law. The performance, construction and enforcement of
this Agreement, the documents executed in connection with this Agreement and the
Loan Documents shall be governed by the Laws of the Commonwealth of Virginia.
(e) Survival; Successors and Assigns. All covenants, agreements,
representations and warranties made herein, in any documents executed in
connection with this Agreement and in the Loan Documents shall continue in full
force and effect. Whenever in this Agreement any of the parties is referred to,
such reference shall be deemed to include the successors and assigns of such
party. All covenants, agreements, representations and warranties by or on behalf
of the Borrower which are contained in this Agreement, in any documents executed
in connection with this Agreement and the Loan Documents shall inure to the
benefit of the Lender and its successors and assigns.
(f) Severability. If any term, provision or condition, or any part
thereof, of this Agreement, any documents executed in connection with this
Agreement or the Loan Documents shall for any reason be found or held to be
invalid or unenforceable by any court or governmental agency of competent
jurisdiction, such invalidity or enforceability shall not affect the remainder
of such term, provision or condition or any other term, provision or condition,
and this Agreement, any documents executed in connection with this Agreement and
the Loan Documents shall survive and be construed as if such invalid or
unenforceable term, provision or condition had not been contained therein.
(g) Merger and Integration. This Agreement, any documents executed
in connection with this Agreement and the Loan Documents contain the entire
agreement of the parties hereto with respect to the matters covered and the
transactions contemplated hereby, and no other agreement, statement or promise
made by any party hereto, or any employee, officer, agent or attorney of any
party hereto, shall be valid or binding.
(h) Headings. The headings and subheadings contained in the titling
of this Agreement are intended to be used for convenience only and shall not be
used or deemed to limit or diminish any of the provisions hereof.
(i) Gender, Singular. All references made (a) in the neuter,
masculine or feminine gender shall be deemed to have been made in all such
genders, and (b) in the singular or plural member shall be deemed to have been
made, respectively, in the plural or singular number as well.
(j) Time of Essence. Time is of the essence of this Agreement.
-16-
<PAGE>
Exhibit D [Intentionally Deleted]
Exhibit E Agreement between Deutsche Financial Services and the
Borrower
Exhibit F Litigation/Judgements
Exhibit G Existing Liens and Encumbrances Against Assets
Exhibit H Location of Equipment
Exhibit I Chief Executive Office of the Borrower
Exhibit J Other Trade Names/Mergers
Exhibit K Government Contracts Canceled or Terminated in Past Ten
Years
Exhibit L Government Contracts Dependent on Appropriations
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed, this Agreement under seal as of the date first written above.
WITNESS/ATTEST BORROWERS:
DUNN COMPUTER CORPORATION,
a Virginia corporation
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
DUNN COMPUTER CORPORATION,
a Delaware corporation
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
INTERNATIONAL DATA PRODUCTS,
CORP.
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
-18-
<PAGE>
STMS, INC.
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
PUERTO RICO INDUSTRIAL
MANUFACTURING OPERATIONS
ACQUISITION, CORP.
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
DUNN COMPUTER OPERATING
COMPANY
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
LENDER:
FIRST UNION NATIONAL BANK
/s/ [ILLEGIBLE] By: /s/ David A. Dix (SEAL)
- ------------------ --------------------------
David A. Dix
Vice President
-19-
<PAGE>
STATE OF Virginia )
)SS: ###-##-####
CITY/COUNTY of Loudoun )
I HEREBY CERTIFY that on this 11th day of February, 2000, before me,
the undersigned officer, personally appeared Thomas P. Dunne, who acknowledged
himself/herself to be the President of Dunn Computer Corporation, a Virginia
corporation, and that (s)he, in such capacity, being authorized to do so,
executed the foregoing instrument for the purposes therein contained, by signing
the name of Dunn Computer Corporation, as President of Dunn Computer
Corporation.
IN WITNESS WHEREOF, I hereunto set my hand and Notarial Seal.
/s/ Linda Kiechlin
------------------
Notary Public
My Commission expires: 4/30/2003
STATE OF Virginia )
)SS: ###-##-####
CITY/COUNTY of Loudoun )
I HEREBY CERTIFY that on this 11th day of February, 2000, before me,
the undersigned officer, personally appeared Thomas P. Dunne, who acknowledged
himself/herself to be the President of Dunn Computer Corporation, a Maryland
corporation, and that (s)he, in such capacity, being authorized to do so,
executed the foregoing instrument for the purposes therein contained, by signing
the name of Dunn Computer Corporation, as President of Dunn Computer
Corporation.
IN WITNESS WHEREOF, I hereunto set my hand and Notarial Seal.
/s/ Linda Kiechlin
------------------
Notary Public
My Commission expires: 4/30/2003
-20-
<PAGE>
STATE OF Virginia )
)SS: ###-##-####
CITY/COUNTY of Loudoun )
I HEREBY CERTIFY that on this 11th day of February, 2000, before me,
the undersigned officer, personally appeared Thomas P. Dunne, who acknowledged
himself/herself to be the President of International Data Products, Corp., and
that (s)he, in such capacity, being authorized to do so, executed the foregoing
instrument for the purposes therein contained, by signing the name of
International Data Products, Corp., as President of International Data Products,
Corp.
IN WITNESS WHEREOF, I hereunto set my hand and Notarial Seal.
/s/ Linda Kiechlin
------------------
Notary Public
My Commission expires: 4/30/2003
STATE OF Virginia )
)SS: ###-##-####
CITY/COUNTY of Loudoun )
I HEREBY CERTIFY that on this 11th day of February, 2000, before me,
the undersigned officer, personally appeared Thomas P. Dunne, who acknowledged
himself/herself to be the President of STMS, Inc., and that (s)he, in such
capacity, being authorized to do so, executed the foregoing instrument for the
purposes therein contained, by signing the name of STMS, Inc., as President of
STMS, Inc.
IN WITNESS WHEREOF, I hereunto set my hand and Notarial Seal.
/s/ Linda Kiechlin
------------------
Notary Public
My Commission expires: 4/30/2003
-21-
<PAGE>
STATE OF Virginia )
)SS: ###-##-####
CITY/COUNTY of Loudoun )
I HEREBY CERTIFY that on this 11th day of February, 2000, before me,
the undersigned officer, personally appeared Thomas P. Dunne, who acknowledged
himself/herself to be the President of Puerto Rico Industrial Manufacturing
Operations Acquisition, Corp., and that (s)he, in such capacity, being
authorized to do so, executed the foregoing instrument for the purposes therein
contained, by signing the name of Puerto Rico Industrial Manufacturing
Operations Acquisition, Corp., as President of Puerto Rico Industrial
Manufacturing Operations Acquisition, Corp.
IN WITNESS WHEREOF, I hereunto set my hand and Notarial Seal.
/s/ Linda Kiechlin
------------------
Notary Public
My Commission expires: 4/30/2003
STATE OF Virginia )
)SS: ###-##-####
CITY/COUNTY of Loudoun )
I HEREBY CERTIFY that on this 11th day of February, 2000, before me,
the undersigned officer, personally appeared Thomas P. Dunne, who acknowledged
himself/herself to be the President of Dunn Computer Operating Company, and that
(s)he, in such capacity, being authorized to do so, executed the foregoing
instrument for the purposes therein contained, by signing the name of Dunn
Computer Operating Company, as President of Dunn Computer Operating Company.
IN WITNESS WHEREOF, I hereunto set my hand and Notarial Seal.
/s/ Linda Kiechlin
------------------
Notary Public
My Commission expires: 4/30/2003
-22-
<PAGE>
STATE OF Virginia )
)SS:
CITY/COUNTY of Fairfax )
I HEREBY CERTIFY that on this 11th day of February, 2000, before me,
the undersigned officer, personally appeared David A. Dix, who acknowledged
himself/herself to be a Vice President of First Union National Bank, and that
(s)he, in such capacity, being authorized to do so, executed the foregoing
instrument for the purposes therein contained, by signing the name of First
Union National Bank, as Vice President of First Union National Bank.
IN WITNESS WHEREOF, I hereunto set my hand and Notarial Seal.
/s/ [ILLEGIBLE]
---------------
Notary Public
[NOTARY SEAL]
My Commission expires: 8/31/00
-23-
<PAGE>
MODIFICATION OF REVOLVING NOTE
THIS MODIFICATION OF REVOLVING NOTE (this "Modification") is made this
11th day of February, 2000 between DUNN COMPUTER CORPORATION (a Virginia
corporation), DUNN COMPUTER CORPORATION (a Delaware corporation), INTERNATIONAL
DATA PRODUCTS, CORP., STMS, INC., PUERTO RICO INDUSTRIAL MANUFACTURING
OPERATIONS ACQUISITION, CORP. and DUNN COMPUTER OPERATING COMPANY (collectively,
the "Borrower") and FIRST UNION NATIONAL BANK, holder of the Note (as defined
below) pursuant to an assignment from First Union Commercial Corporation to
First Union National Bank (the "Lender").
Preliminary Statements; Certain Defined Terms
A. The Lender extended a revolving line of credit in the original
principal amount of $15,000,000 (the "Line of Credit") to the Borrower pursuant
to a Revolving Line of Credit Loan Agreement and Security Agreement dated May
27, 1999, as amended by an Addendum to Revolving Line of Credit Loan Agreement
and Security Agreement dated May 27,1999 and by a letter agreement dated May
27,1999 (collectively, the "Line of Credit Agreement"). The Line of Credit is
evidenced by a Revolving Note dated May 27,1999 from the Borrower to the Lender
in the original principal amount of $15,000,000 (the "Note"). A copy of the Note
is attached as Exhibit A.
B. The Line of Credit is secured by, among other things, the Line of
Credit Agreement, whereby the Borrower granted to the Lender a security interest
in (i) all Accounts (ii) all payments or rights to payment due or to become due
under any Government Contract to which the Borrower is a party, (iii) all
deposits accounts and other obligations or indebtedness owed to the Borrower
from whatever source arising, (iv) all rights to receive any payment in money or
in kind, (v) all contact rights (except contract rights under Government
Contracts other than rights to payments due or to become due), (vi) all
Inventory, (vii) all property, plant and Equipment, (viii) all chattel paper,
(ix) all General Intangibles, (x) all books and records and computer hardware,
software (including, to the extent assignable, the Borrower's right to use
software licensed to the Borrower) and systems, (xi) all policies of insurance
and the proceeds thereof (xii) all additions and accessions thereto and
replacements thereof and (xiii) all products and proceeds thereof, as more
particularly described therein.
C. The Line of Credit Agreement, the Note and all other documents
evidencing, securing, guaranteeing or otherwise related to the Line of Credit
are collectively called the "Loan Documents".
D. As of December 14, 1999, there is due under the Line of Credit
principal of Two Million Three Hundred Thousand and 00/100 Dollars
($2,300,000.00) and interest of Seven
<PAGE>
Thousand Six Hundred Two and 84/100 Dollars ($7,602.84), plus attorneys' fees
and other costs which are payable under the Loan Documents.
E. The Lender contends that the Borrower is in default under the Loan
Documents due to, among other things, violations of certain financial covenants
and financial reporting under the Line of Credit Agreement.
F. The Borrower has requested that the Lender continue to make advances
under the Line of Credit and extend the maturity date of the Line of Credit
until November 30, 2000 and the Lender is willing to do so subject to the terms
and conditions set forth in a Modification Agreement of even date herewith (the
"Agreement").
G. As a condition of entering into the Agreement, the Lender has required
that the Borrower execute and deliver this Modification.
H. Therefore, the Borrower is executing this Modification amending the
Note as set forth herein.
NOW, THEREFORE, in consideration of the premises and other good and
valuable consideration, the receipt of which is hereby acknowledged, the
Borrower and the Lender agree as follows:
1. The Borrower shall no longer have the option to elect to Reference
Rate-Based Option or the LIBOR-Based Rate Option. Commencing as of the date
hereof, the unpaid principal balance (both the existing unpaid principal balance
and future advances) of the Note shall bear interest at the Lender's "Prime
Rate" (as hereinafter defined) plus one percent (1%). "Prime Rate" means the
rate of interest from time to time established and publicly or privately
announced by the Lender as its then applicable prime rate of interest to be used
as an index in determining actual interest rates to be charged to certain
borrowers of the Lender. The rate of interest shall be adjusted as and when any
change in the "Prime Rate" shall occur. The Lender may establish and reestablish
the "Prime Rate" from time to time in its sole discretion, it being understood
and agreed that (a) such rate is intended merely as an index for setting
interest rates of the Lender and (b) the actual rate of interest to be charged
by the Lender to any particular borrower may be more than, equal to or less than
such index; provided, however, that at no time shall the rate of interest exceed
the highest rate permissible under applicable law. Interest shall be paid on the
first day of each month in arrears for the previous month.
2. The Note shall mature on November 30, 2000, on which date, if not
sooner paid, the entire principal balance of the Note, all accrued and unpaid
interest thereon and all other sums due thereunder shall be due and payable in
full.
3. The occurrence of an Event of Default (as defined in the Agreement)
under the Agreement shall constitute a default under the Note.
-2-
<PAGE>
4. Upon the occurrence of a default, interest shall accrue and be payable
at the applicable interest rate plus two percent (2%).
5. The Borrower hereby acknowledges, consents and agrees (i) that the
provisions of the Note and the rights of all parties mentioned herein shall be
governed by the laws of the Commonwealth of Virginia and interpreted and
construed in accordance with such laws (excluding Virginia conflict of laws) and
(ii) that the United States District Court for the Eastern District of Virginia
and any court of competent jurisdiction of the Commonwealth of Virginia shall
have jurisdiction in any proceeding instituted to enforce the Note and any
objections to such venue are hereby waived.
6. Nothing in this Modification changes any interest rate or other term or
condition applicable to the Note prior to the date of this Modification.
7. This Modification does not extinguish the outstanding indebtedness
evidenced by the Note. Nothing herein contained shall be construed as a
substitution or novation of the original indebtedness or of the instruments
securing the same, which shall remain in full force and effect, except as
modified hereby or by instruments executed concurrently herewith. The Note as
modified hereby remains in full force and effect in accordance with its terms
and constitutes a binding obligation of the Borrower to the Lender. No further
modifications shall be effective unless in writing and signed by the Lender.
8. The Borrower acknowledges and agrees that the indebtedness evidenced by
the Note is owed to the Lender without any setoffs, claims or defenses of any
kind, and the Borrower forever waives and relinquishes any and all defenses and
claims, of any kind, known or unknown, that the Borrower may have against the
Lender with regard to the Line of Credit.
9. The Borrower and the Lender voluntarily and intentionally mutually
waive any right each may have to a trial by jury in any action, proceeding, or
litigation directly or indirectly arising out of, under or in connection with
this Modification, the Note, any other Loan Documents or any transactions
contemplated thereby.
10. The Borrower shall reimburse the Lender for all reasonable attorneys'
fees, costs and expenses advanced or incurred in collecting and enforcing the
Note and/or the other Loan Documents, and/or in successfully defending or
prosecuting any actions or proceedings arising out of or relating to the Note
and/or the other Loan Documents. Until paid in full, all such fees, costs and
expenses to be paid by the Borrower shall bear interest from the date such fees,
costs or expenses are advanced or incurred by the Lender, at the then applicable
rate of interest on the Note.
11. This Modification represents the entire agreement of the parties
hereto as it relates to the contents hereof; all prior oral and written
communications are merged herein.
-3-
<PAGE>
IN WITNESS WHEREOF, the parties hereto have executed or caused to be
executed, this Agreement under seal as of the date first written above.
WITNESS/ATTEST: BORROWERS:
DUNN COMPUTER CORPORATION,
a Virginia corporation
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
DUNN COMPUTER CORPORATION,
a Delaware corporation
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
INTERNATIONAL DATA PRODUCTS,
CORP.
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
STMS, INC.
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
-4-
<PAGE>
PUERTO RICO INDUSTRIAL
MANUFACTURING OPERATIONS
ACQUISITION, CORP.
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
DUNN COMPUTER OPERATING
COMPANY
/s/ Linda Kiechlin By: /s/ Thomas P. Dunne (SEAL)
- ------------------ --------------------------
Name: Thomas P. Dunne
Title: President
LENDER:
FIRST UNION NATIONAL BANK
/s/ [ILLEGIBLE] By: /s/ David A. Dix (SEAL)
- ------------------ --------------------------
David A. Dix
Vice President
-5-
<PAGE>
EXHIBIT 10.28
================================================================================
GOVERNMENT OF PUERTO RICO
GOVERNOR'S OFFICE
OFFICE OF MANAGEMENT AND BUDGET
AND
DEPARTMENT OF EDUCATION OF PUERTO RICO
================================================================================
<PAGE>
TABLE OF CONTENTS
ARTICLE I - TERMS AND CONDITIONS ............................................ 2
Section 1.1 Purchase and Sale of the Units ........................... 2
Section 1.2 Purchase Price ........................................... 3
Section 1.3 Schedules for Inspection and Delivery of Units
and Training Program ..................................... 3
Section 1.4 Inspection, Acceptance and Delivery of the Units ......... 5
Section 1.5 Updated Accessories ...................................... 6
Section 1.6 Training Program ......................................... 6
Section 1.7 Payment Procedure and Acceptance and Delivery Date ....... 8
Section 1.8 Early Termination Rights ................................. 8
Section 1.9 Technical Support ........................................ 9
Section 1.10 Replacement Unit ......................................... 10
Section 1.11 Toll-Free Telephone Support .............................. 10
Section 1.12 Warranties ............................................... 10
Section 1.13 Licenses ................................................. 11
ARTICLE II - ADDITIONAL COVENANTS ........................................... 11
Section 2.1 Performance Bond ......................................... 11
Section 2.2 Discrimination ........................................... 12
Section 2.3 Certificates ............................................. 12
ARTICLE III - REPRESENTATIONS AND WARRANTIES OF VENDOR ...................... 12
Section 3.1 Organization and Qualification ........................... 12
Section 3.2 Conduct of Business ...................................... 12
Section 3.3 Corporate Authorization .................................. 12
Section 3.4 Binding Effect ........................................... 13
Section 3.5 Noncontravention ......................................... 13
Section 3.6 Litigation; Adverse Claims ............................... 13
Section 3.7 Compliance with Contracts and RFB/Settlement
Agreement; Outstanding Offers ............................ 14
Section 3.8 Compliance with Act No. 199 of August 7, 1999 and
Act No. 92 of March 12, 1999 ............................. 14
Section 3.9 Personal Interests ....................................... 15
Section 3.10 Taxes and Early Termination Provisions ................... 15
Section 3.11 Insurance and Early Termination Provisions ............... 16
Section 3.12 Representations and Warranties from OMB and DOE .......... 16
ARTICLE IV - DEFAULT ........................................................ 16
Section 4.1 Event of Default ......................................... 16
Section 4.2 Default Remedies ......................................... 17
<PAGE>
ARTICLE V - MISCELLANEOUS ................................................... 17
Section 5.1 Relationship ............................................. 17
Section 5.2 Entire Agreement and Conflicting Terms ................... 18
Section 5.3 Validity of Provisions ................................... 18
Section 5.4 Expenses ................................................. 18
Section 5.5 Notices .................................................. 18
Section 5.6 Amendments ............................................... 19
Section 5.7 Assignment; Binding Upon Successors ...................... 19
Section 5.8 Acknowledgment and Waiver ................................ 20
Section 5.9 Governing Law; Consent to Jurisdiction ................... 20
Section 5.10 Section Headings ......................................... 20
Section 5.11 Reasonable Efforts ....................................... 20
Section 5.12 Further Assurances ....................................... 21
Section 5.13 Rights of Third Parties .................................. 21
Section 5.14 Indemnification .......................................... 21
Section 5.15 Force Majeure ............................................ 21
-ii-
<PAGE>
AGREEMENT
This Agreement (the "Agreement") dated this 5th day of January, 2000, by
and among the OFFICE OF BUDGET AND MANAGEMENT OF PUERTO RICO ("0MB")
(Identification Number ###-##-####), the DEPARTMENT OF EDUCATION OF PUERTO RICO
("DOE") (Identification Number ###-##-####), and Puerto Rico Industrial
Manufacturing Operations Acquisition Corporation, (Corporate Identification
Number ###-##-####), a corporation organized under the laws of Puerto Rico
("Vendor").
WITNESSETH
WHEREAS, 0MB desires to enter into this Agreement in order to fulfill its
obligations under Act No. 147 of June 18, 1980, as amended;
WHEREAS, DOE desires to enter into this Agreement in order to fulfill its
obligations under Act No. 149 of July 15, 1999, as amended;
WHEREAS, Act No. 259 of December 29, 1995 authorizes funding for the
design, acquisition and updating of the Government's computer systems;
WHEREAS, pursuant to Request for Bid No. 98-01 dated September 21, 1999
(the "RFB") Vendor and other parties submitted bids to 0MB for the sale of
personal computers and related software and services to DOE;
WHEREAS, in connection with the RFB, 0MB, Vendor and other parties reached
certain agreements described in the Memorandum and Explanatory Report of
Negotiations ("Acta e Informe Explicativo de Negociacion") (the "Memorandum")
and the Informative Motion Requesting Authorization to Sign Contracts ("Mocion
Informativa y Solicitando se Autorice Firma de Contratos") attached hereto and
made part hereof as Exhibit "A" (the "Settlement Agreement")
<PAGE>
-2-
which was filed before the Reconsideration Board of the General Services
Administration ("Junta de Reconsideracion de la Administracion de Servicios
Generales");
WHEREAS, the Settlement Agreement was approved by the Resolution issued by
the Reconsideration Board of the General Services Administration dated December
16, 1999 (the "Resolution"), attached hereto and made part hereof as Exhibit
"B";
WHEREAS, pursuant to the RFB, the Memorandum, the Settlement Agreement and
the Resolution, 0MB and Vendor have agreed that Vendor will sell to DOE the
portable computers listed and described in Exhibit "A" attached hereto and made
part hereof (each, a "Unit," and collectively, the "Units"); and
WHEREAS, to implement these agreements, 0MB, DOE and Vendor hereby enter
into this Agreement providing for DOE's purchase of the Units from Vendor.
NOW THEREFORE, in consideration of the foregoing premises and for other
good and valuable consideration, the sufficiency and adequacy of which is hereby
acknowledged, the parties hereto agree to the following:
ARTICLE I
TERMS AND CONDITIONS
Section 1.1 Purchase and Sale of the Units. Pursuant to the provisions of
the RFB, the Settlement Agreement and the Agreement, Vendor sells the Units to
DOE, and 0MB and DOE purchase the Units from Vendor.
All Units will be equipped, and to the extent relevant, licensed, with the
specifications listed and described in Exhibit "C" attached hereto and made a
part hereof (collectively, the "Specifications"). Within five (5) Business Days
after the execution of this Agreement, 0MB
<PAGE>
-3-
and/or DOE will provide Vendor with an image copy of the software described in
item (xvi) of Exhibit "C" hereof (the "Government Package") so that Vendor is
able to install such software in the Units as provided under this Agreement. DOE
and 0MB represent and warrant that all of the Government Package software will
be duly licensed. Vendor shall not be liable in any way for (i) failure to
install the Government Package in the event 0MB or DOE fails to deliver such
software to Vendor in a timely manner as provided herein, or (ii) DOE's and/or
OMB's breach of the foregoing representation and warranty.
Vendor shall deliver each Unit with all the standard issued manufacturer's
manuals, instructions and materials pertaining to the Unit's hardware and
operational software installed by Vendor. Vendor shall not be responsible for
providing any manuals, instructions or materials related to the Government
Package programs installed in the Units at 0MB and/or DOE's request.
Section 1.2 Purchase Price. The purchase price for each Unit shall be the
Unit price appearing on Exhibit "A" hereof (the "Purchase Price"). The Purchase
Price of the Unit includes, at no additional cost to 0MB or DOE, the services,
support, delivery, training and other features described in Sections 1.3 through
1.7 and 1.9 through 1.13 of this Agreement (collectively, the "Services"). The
Purchase Price shall be payable to Vendor by DOE from accounts number
141-081-00-00-1008-081-1999 and 141-081-00-00-1008-081-2000.
Section 1.3 Schedules for Inspection and Delivery of Units and Training
Program. DOE shall inspect and accept the Units as provided in Section 1.4.1 of
this Agreement before Vendor physically delivers the Units to DOE. Thereafter,
Vendor will physically deliver the Units to DOE and provide the user of such
Unit with the Training Program described and as defined in
<PAGE>
-4-
Section 1.6 of this Agreement. The parties will agree on and establish the
schedules described below in order to implement these procedures. DOE shall
designate a contact person (the "DOE Contact Person") to coordinate with Vendor
the inspection and delivery of the Units and the Training Program.
Within five (5) days from the date of execution of this Agreement, Vendor
shall provide 0MB and DOE with a schedule for the inspection and delivery of the
Units reasonably acceptable to 0MB and DOE (the "Inspection and Delivery
Schedule") which shall specify the dates, times and locations for: (i) DOE's
inspection and acceptance of the Units at Vendor's facility or warehouse or
another location agreed upon by the parties, and (ii) the subsequent physical
delivery of the Units to DOE. The Inspection and Delivery Schedule shall specify
the date of commencement of delivery of the Units. The Inspection and Delivery
Schedule shall also provide for the inspection of the Units to be held on the
Business Day prior to the date of delivery of the Units, to the extent possible,
or the nearest preceding date.
In addition, within five (5) Business Days after the execution of this
Agreement, the DOE Contact Person and Vendor shall agree on a schedule for the
Training Program (the "Training Schedule"). The Training Schedule shall state
the location, dates and time for administering the Training Program. The
Training Program with respect to a specific Unit shall be held following its
acceptance by and delivery to DOE (as described in Section 1.4 hereof) and in no
event later than two (2) Business Days following its delivery. DOE and the
Vendor shall appoint or make available all necessary personnel to facilitate the
successful completion of the Inspection and Delivery Schedule, the Training
Schedule and the Training Program. The Inspection and Delivery
<PAGE>
-5-
Schedule, the Training Schedule and the Training Program may be modified or
amended with the written consent of DOE and the Vendor.
Vendor shall not be liable for any failure to deliver any Unit pursuant to
the Inspection and Delivery Schedule or provide any training pursuant to the
Training Schedule due to DOE's failure to inspect a Unit or to provide access to
the delivery/training locations.
Vendor shall be responsible for providing any furnishings, power plugs,
power extension cords and any other facilities necessary to install the Units at
the inspection locations. DOE shall be responsible for providing any
furnishings, power plugs, power extension cords and any other facilities
necessary to install and use the Units at the delivery/training locations.
Section 1.4 Inspection, Acceptance and Delivery of the Units.
Section 1.4.1 Inspection and Acceptance. DOE personnel shall inspect and
accept the Units on the dates provided therefor in the Inspection and Delivery
Schedule. For purposes of this Section 1.4.1, the term "acceptance" or
"accepted" as used in this Agreement shall mean DOE's inspection and acceptance
of a Unit substantially in the manner described in this paragraph. DOE shall
inspect each Unit by verifying that the Unit operates properly (including the
Unit's power source), complies with the Specifications, and has the appropriate
licenses. Immediately following the inspection of a Unit, DOE personnel shall
(i) repackage the Unit in its original packaging and seal it with an adhesive
band indicating that it was inspected, (ii) certify in writing that the Unit was
inspected and accepted, and (iii) provide a copy of such certificate to Vendor.
If DOE fails to inspect a Unit as scheduled under the Inspection and Delivery
Schedule, DOE's Contact Person shall promptly arrange with Vendor to re-schedule
the inspection of such Unit for another date,
<PAGE>
-6-
which shall be no later than two (2) Business Days after the originally
scheduled inspection date, and modify, if necessary, the Inspection and Delivery
and Training Schedules accordingly. Any Unit which is rejected by DOE pursuant
to the criteria and the procedures set forth in this paragraph, shall be
replaced by Vendor with another Unit that meets the Specifications within two
(2) Business Days of the date of DOE's rejection. In no event shall DOE's
rejection of a Unit pursuant to the procedures set forth in this paragraph be
deemed a Default by Vendor under this Agreement if such Unit is replaced as
provided herein.
Section 1.4.2 Delivery. After inspection and acceptance as provided
herein, Vendor shall deliver the Units to DOE pursuant to the Inspection and
Delivery Schedule. The cost of delivery of each accepted Unit to the designated
location as agreed upon by the Vendor and DOE's Contact Person shall be borne
exclusively by Vendor. In the event Vendor delivers an accepted Unit pursuant to
the Inspection and Delivery Schedule agreed upon by the Vendor and the DOE's
Contact Person and DOE is unwilling or unable to receive such Unit, DOE shall be
solely responsible for the costs of delivering such Unit.
Section 1.5 Updated Accessories. Vendor agrees that the model/product of
all of the Units under this Agreement shall be equipped with the most recent
hardware available for such Unit at the date scheduled for delivery of the Units
to DOE.
Section 1.6 Training Program. Vendor shall provide each individual user of
a Unit with a minimum four (4) hour training program (the "Training Program")
pursuant to the Training Schedule. The Training Program is to be conducted at
such dates, times and locations reasonably determined by the Vendor and DOE's
Contact Person under the Training Schedule. The Training
<PAGE>
-7-
Program shall be given to user groups of at least twenty (20) trainees but not
exceeding thirty (30) trainees. Vendor shall engage and use qualified trainers
to conduct the Training Program. Vendor agrees to distribute such materials and
literature (in Spanish, as available) as may be necessary to conduct the
Training Program. At each Training Program session, DOE's Contact Person or a
DOE representative designated by such DOE Contact Person, shall prepare a list
of all individual users who attended the session and of any absentee users and
shall provide a copy of such list to Vendor's authorized trainer at the end of
such session. These attendance lists shall be certified as true and correct and
signed by the DOE representative, and shall be deemed conclusive for purposes of
establishing user attendance at or absence from the particular Training Program
session.
Vendor shall not be responsible for the failure of any individual user to
attend such user's Training Program under the Training Schedule. In such case,
it shall be DOE's sole responsibility to arrange with Vendor for that user or
users to attend a subsequent Training Program. If after Vendor provides the last
Training Program under the Training Schedule there remain one or more individual
users who failed to attend their scheduled Training Programs, DOE shall notify
Vendor in writing thereof no later than fifteen (15) calendar days after the
last scheduled Training Program. If Vendor is notified as provided herein,
Vendor agrees to provide one Make-Up Session (the "Make-Up Session") at a
location, date and time agreed upon by Vendor and DOE's Contact Person for those
individual users who failed to take their scheduled Training Program, and Vendor
shall have no obligation to provide any additional training sessions thereafter.
For purposes of this Agreement, Vendor shall have completed all Training
Programs required under
<PAGE>
-8-
this Section 1.6 after it has provided the last scheduled Training Program under
the Training Schedule and the Make-Up Session.
Section 1.7 Payment Procedure and Acceptance and Delivery Date. Vendor
will issue an invoice covering each Unit at the time of (i) inspection and
acceptance as defined in Section 1.4.1 hereof, and (ii) completion of the
Training Program. DOE shall pay the Purchase Price for each Unit (the "Payment")
within thirty (30) days of the date the Unit is accepted (as defined herein) by
0MB and/or DOE and the individual user of such Unit has completed his/her
Training Program (the "Acceptance and Delivery Date").
For purposes of this Section 1.7, it shall be understood that an
individual user has completed his/her Training Program upon completion of the
Training Program session which the user was scheduled to take pursuant to the
Training Schedule, regardless of whether the user attended such program or not.
Section 1.8 Early Termination Rights. In the event Vendor fails to deliver
the Units and conduct the Training Program pursuant to the relevant schedule,
but in no event later than September 30, 2000; or if any Unit delivered does not
comply with the Specifications, 0MB and DOE shall have the following options,
provided such failure was not caused by Force Majeure and Vendor fails to cure
such failure as provided in Section 4.1: DOE may (i) terminate this Agreement
forthwith and shall be under no further obligation to the Vendor, including,
making payments hereunder for Units and Services with respect to which Vendor is
in Default and Units and Services not yet delivered and performed; or (ii)
charge Vendor a fee of two hundred and fifty dollars ($250) per day or portion
of a day of delay by Vendor in making delivery of the Unit, or
<PAGE>
-9-
conducting the Training Program with respect to the Unit. Vendor shall reimburse
DOE the amount equal to all payments made by DOE as to a Unit or Services
rendered as to which Vendor is in default.
Section 1.9 Technical Support. Vendor shall provide and guarantee to DOE
technical support for the Units (but limited to any hardware or software
provided and installed by Vendor) and on-site repairs at the site of the Unit
user's work location, from 8:00 a.m. to 5:00 p.m. ("Business Hours"), any day
other than Saturday, Sunday or an official government holiday ("Business Day")
within four (4) Business Hours of receiving notice of a problem with a Unit. Any
call for on-site service received after 1:00 p.m. will be processed the
following Business Day.
Prior to the Vendor dispatching a technician for on-site repairs, Vendor's
technical support technician may conduct a trouble-shooting session by telephone
with the pertinent DOE representative or personnel in order to determine whether
an on-site visit is warranted. The Unit's individual users shall perform all
necessary data back-up and/or safeguarding of software programs prior to the
Unit being serviced and/or replaced by Vendor. Vendor will not be responsible
for any loss of data contained in the Unit's hard drive at the time of the
on-site visit. At an additional cost to DOE, Vendor and DOE may agree to extend
the foregoing technical support services to Non-Business Days. The technical
support and on-site repair services described herein shall be provided by Vendor
for a period of three (3) years from the Acceptance and Delivery Date. In the
event the Unit being repaired cannot be repaired on-site, the technician
<PAGE>
-10-
conducting such repairs shall deliver a Replacement Unit (as such term is
defined herein) to the individual user whose Unit is being repaired.
Notwithstanding the above, Vendor will not be obligated to provide on-site
support for damages or failures caused by misuse or abuse of the Unit(s),
mishandling, external electrical power fluctuations, acts of third persons, or
addition of other components not listed in the Specifications.
Section 1.10 Replacement Unit. For a period of three (3) years from the
Acceptance and Delivery Date, Vendor agrees to keep readily available and in
stock in Puerto Rico units with the Specifications for replacement purposes in
an amount equal to two percent (2%) of the Units (each, a "Replacement Unit,"
and collectively, the "Replacement Units").
Section 1.11 Toll-Free Telephone Support. Vendor shall provide DOE
(including individual users thereunder) with toll-free telephone support to
answer technical questions from users related to all hardware and the operating
systems installed by Vendor in the Unit(s) for a period of three (3) years from
the Acceptance and Delivery Date. Vendor shall not be responsible for providing
telephone support in connection with Government Package software installed in
the Units.
Section 1.12 Warranties. In addition to the Services, Vendor agrees to
honor the warranty offered by the manufacturer of each Unit as of the Acceptance
and Delivery Date and as provided in Section 1.4 hereof, provided that the
warranty remedies available to DOE shall be subject to the warranty conditions
of the manufacturer. Vendor's local warranty work shall be conducted following
and complying with all manufacturer norms and procedures. The request for local
<PAGE>
-11-
warranty work shall not be deemed a waiver by 0MB or DOE of their right to
enforce their warranty rights directly against the manufacturer, independent of
a prior or on-going local warranty service or request. All Unit warranties and
service support commitments shall commence and become effective as of the
Acceptance and Delivery Date and as provided in Section 1.4 hereof.
Section 1.13 Licenses. All Units shall be fully and properly licensed at
all times. Vendor shall deliver to DOE a complete list of all licenses
pertaining to the software installed in the Units (other than any Government
Package software) as of the date the Units were accepted by and delivered to
DOE. Vendor shall update such list, if necessary, to include any revisions
required as a result of any software installed in the Units by Vendor during the
term of this Agreement (other than any Government Package software).
ARTICLE II
ADDITIONAL COVENANTS
Section 2.1 Performance Bond. At the execution of this Agreement, Vendor
shall deliver to 0MB and DOE a performance bond (the "Performance Bond") issued
by a surety company duly authorized to do business in Puerto Rico rated by Best
Insurance Report at not less than A-9 and reasonably acceptable to 0MB and DOE,
such Performance Bond to be in an amount equal to fifteen percent (15%) of the
aggregate Purchase Price of the Units. The Performance Bond shall be valid and
enforceable for a period of three (3) years as of the date of this Agreement.
The Performance Bond shall guarantee the performance of any and all of the
obligations of Vendor under this Agreement, including, but not limited to, the
performance of the Services.
<PAGE>
-12-
Section 2.2 Discrimination. Vendor agrees to not discriminate for reason
of race, color, sex, origin or social condition, age, political or religious
beliefs or any other grounds for discrimination while performing its obligations
under this Agreement.
Section 2.3 Certificates. Vendor shall deliver to 0MB and DOE certified
copies of the insurance policies and programs listed in Section 3.11 hereof
simultaneously with the execution of the Agreement.
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF VENDOR
Section 3.1 Organization and Qualification. Vendor is a corporation duly
organized, validly existing and in good standing under the laws of Puerto Rico
and has the required corporate power and authority to own its assets and to
carry on its business in Puerto Rico as currently conducted.
Section 3.2 Conduct of Business. Vendor has conducted and is now
conducting its business in compliance with all applicable United States and
Puerto Rico laws, and, to Vendor's knowledge, there is no pending or threatened
material investigation, inquiry, order, decree, decision or judgment of any
governmental agency or regulatory body outstanding against Vendor, nor has
Vendor received any written notice from any court, governmental agency or
regulatory body with respect to an alleged actual or potential material
violation and/or failure to comply with any such applicable law.
Section 3.3 Corporate Authorization. Vendor has the required corporate
power and authority to execute and deliver this Agreement and to perform its
obligations hereunder. The execution, delivery and performance by Vendor of this
Agreement have been duly and validly
<PAGE>
-13-
authorized and no additional corporate or shareholder authorization or consent
is required in connection with the execution, delivery and performance by Vendor
of this Agreement.
Section 3.4 Binding Effect. This Agreement constitutes a valid and legally
binding obligation of Vendor enforceable against Vendor in accordance with its
terms.
Section 3.5 Noncontravention. The execution, delivery and performance of
this Agreement by Vendor, Vendor's consummation of the transactions contemplated
herein, will not violate any injunction, judgment, order, decree, ruling,
charge, or other restriction of any government, governmental agency, or court to
which Vendor is subject or any provision of Vendor's Articles of Incorporation
or Bylaws, or will not conflict with, result in a breach or constitute a default
under, result in the acceleration of, create in any party the right to
accelerate, terminate, modify, or cancel, or require any notice under any
agreement, contract, lease, license, instrument, or other arrangement to which
Vendor is a party or by which it is bound or to which any of its assets is
subject, except where the violation, conflict, breach, default, acceleration,
termination, modification, cancellation, or failure to give notice, would not
have a material adverse effect on the financial condition of Vendor taken as a
whole or on the ability of the parties to consummate the transactions
contemplated by this Agreement.
Section 3.6 Litigation; Adverse Claims. Vendor is not, and has not been
for the past five (5) years, the subject of any pending material litigation,
claim, proceeding, action or other contingent obligations with any party or any
governmental investigation or inquiry that may materially and adversely affect
the ability of Vendor to perform and complete the transactions contemplated by
this Agreement. Vendor is not aware of any circumstances which might give rise
<PAGE>
-14-
to a claim or claims which might severally or in the aggregate materially and
adversely affect its business.
Section 3.7 Compliance with Contracts and RFB/Settlement Agreement;
Outstanding Offers. Vendor is not in breach of any of its material obligations
under any agreement or legal obligation to which it is a party which may
materially and adversely affect its performance under this Agreement, and, to
Vendor's knowledge, no other party is in breach of its material obligations
under such agreements or obligations including but not limited to the RFB, the
Settlement Agreement and the Resolution. None of the parties to any agreement or
obligation of Vendor has given Vendor any written notice of its intention to
terminate or otherwise repudiate or disclaim any such agreement or obligation
which may materially or adversely affect Vendor's performance under this
Agreement.
Section 3.8 Compliance with Act No. 199 of August 7, 1999 and Act No. 92
of March 12, 1999. Vendor here by warrants that (i) the Units and any software
installed therein by Vendor (excluding the Government Package), will be able to
adequately process information related to date and hour, including but not
limited to, the calculation, comparison and sequence of dates from, up to, and
between the 20th and 21St centuries and the years 1999 and 2000 and the
recognition of leap years; and (ii) the Units and the software installed therein
by Vendor may adequately exchange information about date and time with any other
information technology that may be used in conjunction with the Units. The term
of this warranty and the remedies available to DOE hereunder in the event of
Vendor's breach thereof shall be subject to the terms of the manufacturer's
warranty statement. Notwithstanding anything to the contrary herein or in the
<PAGE>
-15-
absence of a warranty clause, the remedies available to DOE for breach of this
warranty will include the repair or substitution of all Units that do not meet
the requirements set forth in this paragraph, provided that the DOE notifies
Vendor in writing about the deficiency in such Unit(s) within one hundred and
eighty (180) days of DOE's acceptance of such Unit(s). Nothing contained in this
paragraph will be understood to limit the DOE's rights or remedies with respect
to any other defect in the Units not related to the year 2000 problem.
Section 3.9 Personal Interests. Vendor certifies that, to Vendor's
knowledge and after reasonable inquiry, no officer, employee or executive of 0MB
and DOE has a personal interest or gain (monetary or otherwise) in the execution
or performance of this Agreement.
Section 3.10 Taxes and Early Termination Provisions. Vendor represents and
warrants that it has submitted true and correct income tax returns to the
relevant governmental authorities for the five (5) tax years prior to the date
of this Agreement and that it does not owe any income, withholding, "patentes",
excise, or other taxes, liens or assessments to relevant federal and local
governmental authorities. Vendor represents and warrants that in the event
Vendor has a payment plan for the payment of any such taxes, such payment plan
is in full force and effect and Vendor is in full compliance with the terms and
conditions thereof. Vendor recognizes that this representation is an essential
condition of this Agreement, and that if the above-mentioned representation or
any part of it is not true, this shall be sufficient cause for the termination
of this Agreement by 0MB or DOE, and that Vendor will be required to return all
payments received under the terms of this Agreement to DOE.
<PAGE>
-16-
Section 3.11 Insurance and Early Termination Provisions. Vendor represents
and guarantees that at the time of execution of this Agreement it has filed all
required documents and has made all payments for unemployment insurance,
workmen's compensation, temporary disability, drivers' insurance and any other
applicable and required insurance coverages to the appropriate government
agencies. Vendor recognizes that this representation is an essential condition
of this Agreement, and that if the representation (in whole or in part) is not
accurate and true, it will be sufficient cause for the termination of this
Agreement. In the event of any such termination, Vendor will be required to
return to DOE all Payments received under the terms of this Agreement.
Section 3.12 Representations and Warranties from 0MB and DOE. DOE and 0MB
represent and warrant that they have the authority to enter into, execute and
deliver this Agreement and perform the transactions contemplated herein.
ARTICLE IV
DEFAULT
Section 4.1 Event of Default. In the event (i) any of Vendor's
representations or warranties in this Agreement is materially false, inaccurate
or incorrect; or if (ii) Vendor does not fulfill or discharge any of its
material obligations and covenants under this Agreement (any such event under
(i) and (ii) above is, other than those resulting from Force Majeure as
hereafter defined, a "Default"), 0MB and DOE may give Vendor notice of any such
Default, and if at the expiration of ten (10) calendar days after the service of
notice, such Default continues to exist, 0MB or DOE shall have the right to
pursue the remedies described in Section 4.2 herein.
<PAGE>
-17-
Section 4.2 Default Remedies. In the event of a Default and in addition to
the early termination and reimbursement provisions of Section 1.8; Section 3.10
and Section 3.11 hereof, Vendor shall forfeit its right to receive Payments for
Units and Services with respect to which the Default occurs and Units and
Services not yet delivered or performed. In the event of a Default by Vendor
which is not cured as herein provided, 0MB or DOE shall, in addition to other
rights conferred hereunder or available in law or in equity, have the right to
seek injunctive relief and the right to invoke any remedy allowed by law or in
equity, as if such specific remedies or reimbursement were provided for herein,
provided that in no event shall 0MB and DOE have the right or be allowed to
recover or be compensated more than once with respect to any Default. The rights
and remedies given to 0MB and DOE in this Agreement are distinct, separate and
cumulative, and failure by 0MB or DOE to exercise any one of them shall not be
deemed to be a waiver, release, or exclusion of any such right or remedy.
ARTICLE V
MISCELLANEOUS
Section 5.1 Relationship. The role of Vendor under this Agreement is that
of an independent contractor. Nothing contained in this Agreement shall create
or imply the existence of an agency, partnership or joint venture relationship
between Vendor and 0MB or DOE. Vendor agrees that it is providing the Services
under this Agreement as an independent contractor and will not seek
reimbursement from 0MB or DOE of any compensation paid by Vendor for vacation,
sickness, retirement, Christmas bonus or Social Security due to its employers or
for any expenses incurred in the performance of this Agreement.
<PAGE>
-18-
Section 5.2 Entire Agreement and Conflicting Terms. This Agreement shall
constitute the purchase order for the purchase of the Units and contains the
final agreement between the parties hereto with respect to the purchase of the
Units. In the event that there are material issues or matters not specifically
addressed by this Agreement with respect to such subject matter, the parties
shall refer to the terms of the RFB and the Settlement Agreement to supply any
such deficiency. In such case, the terms of the Settlement Agreement shall
prevail over the terms of the RFB.
Section 5.3 Validity of Provisions. Should any provision of this Agreement
be declared by any court of competent jurisdiction to be invalid or
unenforceable, the remaining provisions of this Agreement shall not be affected
thereby. If any provision of this Agreement shall be held to be partially
invalid or unenforceable, then that portion which is not held to be invalid or
unenforceable shall be deemed enforceable to the maximum extent permitted by
law.
Section 5.4 Expenses. Except as otherwise specifically provided herein,
each party shall pay its own expenses, including counsel fees, incurred in
connection with this Agreement and the transactions contemplated hereunder.
Section 5.5 Notices. Any notice, request or other document to be given
hereunder to any party shall be in writing and delivered personally, by
facsimile transmission with receipt confirmation or sent by certified mail,
return receipt requested, postage prepaid or by a commercially recognized
overnight courier, prepaid, as follows:
<PAGE>
-19-
if to the 0MB:
Government of Puerto Rico
Office of Budget and Management of Puerto Rico
P.O. Box 9023228
San Juan, Puerto Rico 00902-3228
Attention: Director
Tel.: 787-725-9420
Fax 787-724-1374
if to the DOE:
Government of Puerto Rico
Department of Education
P0 Box 190759
San Juan, PR 00919-0759
Tel.: 759-2000
Fax 754-7195
if to Vendor:
Puerto Rico Industrial Manufacturing Corporation
P.O. Box 2910
Guayama, Puerto Rico 00785-2910
Attention: General Manager
Tel.: 864-8640
Fax 864-8644
or such other address or telecopier number as any party shall indicate by
writing as herein provided. Notices to Vendor, 0MB and DOE shall be deemed given
on the date received.
Section 5.6 Amendments. This Agreement cannot be amended or modified
except by written document signed by the parties hereto.
Section 5.7 Assignment: Binding Upon Successors. This Agreement is not
assignable without the prior written consent of the parties hereto; except that
0MB and DOE may assign, transfer or convey their rights and obligations
hereunder to another governmental authority by giving Vendor advance written
notice.
<PAGE>
-20-
Section 5.8 Acknowledgment and Waiver. The parties, in consideration of
the grants, terms and conditions of this Agreement, acknowledge and agree that
the Resolution is final and unappealable, and irrevocably waive any and all of
their rights to seek review, appeal, or reversal of the Resolution.
Section 5.9 Governing Law; Consent to Jurisdiction. This Agreement shall
be governed by and construed in accordance with the laws of Puerto Rico. Legal
proceedings hereunder shall be brought exclusively in the courts of Puerto Rico.
All parties irrevocably waive any objection which they may have to the laying of
venue of any suit, action or proceeding brought in the courts of Puerto Rico and
further irrevocably waive any claim that any such suit, action or proceeding
brought in such courts has been brought in an inconvenient forum. Final judgment
in any such suit shall be conclusive and may be enforced in other jurisdictions
by suit on the judgment, a certified or true copy of which shall be conclusive
evidence of the fact and the amount of any indebtness or liability of any party
therein.
Section 5.10 Section Headings. The section headings contained in this
Agreement are for reference purposes only and shall not affect in any way the
meaning or interpretation of the particular section or of this Agreement.
Section 5.11 Reasonable Efforts. Subject to the terms and conditions
herein provided, and unless otherwise stated to the contrary, the parties hereto
agree to use all reasonable efforts to take, or cause to be taken, all actions
and to do, or cause to be done, all things necessary, proper or advisable under
applicable laws and regulations to consummate and make effective, as soon as
reasonably practicable, the transactions contemplated by this Agreement.
<PAGE>
-21-
Section 5.12 Further Assurances. At any time and from time to time, each
party hereto, without further consideration, shall cooperate, take such further
action and execute and deliver such additional public or private instruments and
documents as may be reasonably requested by any other party in order to carry
out the provisions and purposes of this Agreement.
Section 5.13 Rights of Third Parties. Nothing in this Agreement shall be
construed as giving any person, firm, corporation or other entity, other than
the parties hereto and their respective successors and permitted assigns, any
rights, remedy or claim under or in respect of this Agreement or any provision
thereof.
Section 5.14 Indemnification. Vendor shall indemnify and hold 0MB and DOE
harmless, against and from any and all liability, fines, suits, claims, demands,
fees, costs, expenses and actions of any kind or nature incurred by or claimed
against 0MB or DOE in relation to the Units, products or services supplied by
Vendor pursuant to this Agreement, caused, in whole or in part, by any negligent
act or omission on the part of Vendor or an employee, servant, agent or licensee
of Vendor; or from any breach, violation or non-performance of any covenant in
this Agreement on the part of Vendor, other than any breach or non-performance
arising from Force Majeure.
Section 5.15 Force Majeure. Anything to the contrary notwithstanding in
this Agreement, Vendor shall not be deemed to have breached this Agreement or
defaulted hereunder in the event Vendor is unable to perform or comply with any
of the provisions of this Agreement due to Force Majeure.
For purposes of this Agreement, "Force Majeure" means the following acts,
omissions, events, or conditions that delay or impede the Vendor's ability to
perform under this Agreement
<PAGE>
-22-
but not resulting from Vendor's negligent acts or omissions: (i) fire or
explosion; (ii) hurricane, flood, earthquake, or other natural occurrence; (iii)
act of war, civil disorder, riot or similar occurrence; (iv) order, legislation,
judgment or other official action of any governmental body, agency or official
having jurisdiction over the parties to this Agreement, the Services or other
matters covered in this Agreement; or (v) strikes or work shutdowns caused by
labor disputes and lockouts.
The burden of proof as to whether Force Majeure has caused the
non-performance or inability to perform or the delay being claimed shall reside
in Vendor. In the event of Force Majeure, the deadline for Vendor to perform a
duty, activity or requirement under this Agreement affected by the Force Majeure
event shall be extended by the same number of days during which the Force
Majeure delayed such performance and Vendor shall not be liable in any way for
any such delay or delays; provided that (i) Vendor gives DOE written notice
describing the particulars of the occurrence and its expected or estimated
duration, (ii) the suspension of Vendor's performance be of no greater scope and
of no longer duration than strictly required by the Force Majeure occurrence,
(iii) no obligation of Vendor which arose prior to the Force Majeure is excused
as a result thereof, and (iv) Vendor uses its earnest best efforts to remedy its
inability to perform and resume in full its performance under the Agreement.
<PAGE>
-23-
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed on the date first above written.
OFFICE OF MANAGEMENT AND BUDGET DEPARTMENT OF EDUCATION
By: /s/ Jorge Aponte 1/19/2K By: /s/ Victor Fajardo
--------------------------------- ----------------------------------
Name: CPA Jorge Aponte Name: Victor Fajardo
Title: Director Title: Secretary
VENDOR
By: /s/ Luis E. Maldonado
---------------------
Name: Luis E. Maldonado
Title: General Manager
