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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
____________________
FORM 10-KSB
(Mark One)
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
Commission file No. 0-5351
EIP MICROWAVE, INC.
(Exact name of small business issuer as specified in its charter)
DELAWARE 95-2148645
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
6950 SW HAMPTON STREET, SUITE 300
PORTLAND, OREGON 97223
(Address of principal executive offices) (Zip Code)
(503) 598-2605
(Issuer's telephone number)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: Common Stock,
$.01 Par Value
(Title of Class)
Check whether the Issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. YES [ X ] NO [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B 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-KSB or any
amendment to this Form 10-KSB.
[ ]
The issuer's revenues for the fiscal year ended September 30, 1998, were
$3,714,686. The aggregate market value of the voting stock held by
non-affiliates of the issuer, computed by reference to the average bid and
asked prices as of December 15, 1998, was approximately $978,695. For
purposes of this determination only, directors and officers of the issuer
have been assumed to be affiliates. There were a total of 7,237,152 shares
of the issuer's Common Stock outstanding as of December 15, 1998.
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DOCUMENTS INCORPORATED BY REFERENCE
(1) Portions of the Company's definitive Proxy Statement relating to the
Company's 1999 Annual Meeting of Stockholders are incorporated by reference
into Part III.
Transitional Small Business Disclosure Format
(check one): Yes [ ] No [X]
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WHEN USED HEREIN, THE WORDS "ANTICIPATE," "ESTIMATE," "PROJECT," "EXPECT" AND
SIMILAR EXPRESSIONS ARE INTENDED TO IDENTIFY FORWARD-LOOKING STATEMENTS
WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED
(THE "SECURITIES ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF
1934, AS AMENDED (THE "EXCHANGE ACT"), AND ARE INTENDED TO BE COVERED BY THE
SAFE HARBORS CREATED THEREBY. ALTHOUGH EIP MICROWAVE, INC. BELIEVES THAT THE
EXPECTATIONS REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS ARE REASONABLE, IT
CAN GIVE NO ASSURANCE THAT SUCH EXPECTATIONS WILL PROVE TO HAVE BEEN CORRECT.
SUCH STATEMENTS ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND ASSUMPTIONS.
SHOULD ONE OR MORE OF THESE RISKS OR UNCERTAINTIES MATERIALIZE, OR SHOULD
UNDERLYING ASSUMPTIONS PROVE INCORRECT, ACTUAL RESULTS MAY VARY MATERIALLY
FROM THOSE ANTICIPATED, ESTIMATED, PROJECTED OR EXPECTED. AMONG THE KEY
FACTORS THAT MAY HAVE A DIRECT BEARING ON THE COMPANY'S OPERATING RESULTS ARE
THOSE LISTED IN THE SECTION TITLED "MANAGEMENT'S DISCUSSION AND ANALYSIS -
CERTAIN FACTORS" IN PART II HEREOF.
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL/PRODUCTS
The Company was incorporated under the laws of the State of Delaware in
1987 under the name EIP Microwave, Inc. The predecessor corporation was
organized under the laws of California in 1961, and merged with the Company
in 1987.
The Company is engaged in a single industry segment constituting the
development, manufacture and sale of high frequency microwave and radio
frequency (RF) test and measurement instruments. These instruments include
microwave heterodyne-type automatic frequency counters, microwave and RF
pulse frequency counters, microwave and RF synthesized signal generators,
pulse generators, and downconverters. All of these products are electronic
devices that are used in the design, manufacture and maintenance of microwave
and RF products and systems throughout the world.
Stand-alone microwave frequency counters represented 66% of net sales in
fiscal 1998 and 53% of net sales in fiscal 1997. The balance of sales in
those years was mainly derived from the Company's VXIbus-based products.
VXIbus is a hardware and software standard for modular instrumentation. EIP
manufactures individual modules in the VXIbus format that provide various
functions, including frequency measurement, synthesized signal generation,
downconversion and modulation. These modules plug into standardized racks
that supply power and computer resources. In fiscal 1998, the Company
announced its plans to discontinue sales of the VXIbus-based product lines.
See "Management's Discussion and Analysis - Results of Operations."
During fiscal 1997, the Company introduced a new line of microwave
frequency counters suitable for use in laboratory, manufacturing and field
service environments. These products are portable and can be operated on
their own internal batteries. The Company began distributing these products
in fiscal 1998, on a private label basis worldwide through an OEM
relationship with Hewlett-Packard Company ("Hewlett Packard").
The Company designs and manufactures its own YIG (Yitrium iron garnet)
filters, which are a key feature of many EIP microwave products.
Additionally, the Company manufactures hybrid microwave
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integrated circuits (MICs) and proprietary microwave subassemblies used in
its microwave products. Management believes that the Company's YIG and MIC
capabilities provide its microwave products with competitively superior
performance, protection from overload, and compact size.
MARKETS/PRINCIPAL CUSTOMERS
The Company has a variety of customers worldwide for its microwave products,
including the military, government agencies, government subcontractors, the
telecommunications industry, the aerospace industry, and research and
development facilities. The primary customers for the Company's RF products are
telecommunication companies. The Company's principal customers, and the percent
of its net sales attributable to such customers, are Hewlett-Packard (29% in
fiscal 1998) and ManTech Systems Engineering Corporation ("ManTech") (15% in
fiscal 1998). Other important customers that provided less than 10% of revenues
to the Company in fiscal 1998 were Northrop-Grumman, Lockheed Martin, Kelly Air
Force, Hughes Aircraft, and Harris Corporation.
The Company's sales of microwave products to the United States Government and
its contractors comprised approximately 26% of net sales in fiscal 1998 and 43%
of net sales in fiscal 1997. Foreign sales represented 24% of net sales in
fiscal 1998 and 30% of net sales in fiscal 1997.
METHODS OF DISTRIBUTION
The Company distributes a line of microwave frequency counters through
Hewlett-Packard on a private label OEM basis. The Company's other products are
principally sold direct to customers through the use of independent
manufacturers' representatives in the United States and in foreign countries.
The Company provides service and technical support to its manufacturers'
representatives, and directly to its customers.
COMPETITION
The Company believes there are three to six competitors in the respective
markets for its products. Competition in these markets is based upon
performance, reliability, product design, availability and price and is
characterized by technological change. Reliable data on sales and profits of
most of the Company's competitors is not readily available because the
competitors are either privately held or are separate divisions of large
publicly held companies which do not separately report financial results for
such competing divisions.
The markets in which the Company's frequency counters are sold are
well-defined and narrow markets, which have become increasingly competitive
both in the United States and abroad. Within these narrow markets, the
Company believes it holds a significant competitive position. The Company
encounters competition, however, from certain firms that are substantially
larger and have greater financial resources than the Company, including
Hewlett-Packard which is believed to be the market leader. Other companies
selling products in the same markets as the Company include Anritsu,
Advantest, Racal and XL Microwave.
The market for microwave synthesized signal generators is considered to be
larger than the microwave frequency counter market, although the Company only
sells these products in the VXIbus format. As the market for this type of
product is still developing, the Company has not been able to determine its
market share. At present, the only other known supplier of VXIbus microwave
synthesized signal generators is Giga-tronics. However, Hewlett Packard recently
announced it will enter this market in the spring of 1999.
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The Company's VXIbus pulse generator and downconverter are sold primarily as
companion products for integrated systems. Competitors for the pulse generator
include Wavetek and Tektronix. There is no known current direct competition for
the VXIbus downconverter.
RESEARCH, DEVELOPMENT AND ENGINEERING
Management believes that the Company's future success is dependent, to a
significant extent, upon engineering and new product development. Expenditures
for research, development and engineering were 34% and 21% of annual net sales
in fiscal years 1998 and 1997, respectively. Research, development and
engineering expenditures were $1,262,000 and $996,000, for fiscal years 1998 and
1997, respectively. All of the Company's research, development and engineering
activities have been Company-funded.
RAW MATERIALS
The principal raw materials used by the Company in its manufacturing
operations include capacitors, resistors, semiconductors, integrated circuits,
transformers, printed circuit boards, display devices, and metal and plastic
cases, most of which are purchased from outside suppliers. For the majority of
raw materials, the Company has access to several suppliers and does not believe
that it is dependent upon any one supplier. The Company also believes that
adequate alternate sources for its raw materials are, for the most part, readily
available. There are, however, many applications that require specialized
components currently available, in each instance, only through a single source
of supply. The loss of any of these sources, or the inability of any such
source to meet the Company's production and quality control requirements, could
be detrimental to the Company with respect to the specific products involved.
EMPLOYEES
The Company had 34 employees at September 30, 1998, including 31 full-time
employees. The Company believes that its employee relations are good, but can
make no assurances that it will continue to be able to attract and retain
qualified employees. The Company also has engaged the services of consultants
when appropriate.
PATENTS AND TRADEMARKS
The Company holds no patents, trademarks, franchises, concessions or royalty
agreements that have a material importance to or effect on its frequency
counter, pulse counter, synthesized signal generator, pulse generator, or
downconverter product lines. However, the Company has obtained a license from a
third party for digital modulation implementations relating to products under
development by the Company.
The Company relies on trade secrets and technical know-how in order to
maintain its competitive advantage and scientific expertise. It is the practice
of the Company to enter into confidentiality agreements with employees,
consultants, and any third party to whom it discloses confidential information.
There can be no assurance that such confidential information will not be
disclosed, that similar trade secrets or expertise will not be independently
developed, or that access to such information could not be gained inadvertently.
GOVERNMENT APPROVAL OF PRINCIPAL PRODUCTS
Government approval is not required for any of the Company's principal
products.
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EFFECT OF EXISTING OR PROBABLE GOVERNMENTAL REGULATIONS
The Company believes it is in compliance with applicable governmental
regulations. The Company is not aware of any probable governmental regulation
that would have a detrimental or disruptive effect on the Company.
COMPLIANCE WITH PROVISIONS ON ENVIRONMENTAL PROTECTION
The Company does not believe that compliance with federal, state, and local
provisions which have been enacted or adopted regulating the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, will have any material effect upon the capital expenditures,
earnings, or competitive position of the Company.
ITEM 2. DESCRIPTION OF PROPERTY
The Company leases a 9,700 square foot production, warehouse and office
facility in San Jose, California. The lease term continues until October 2001.
The annual rent for the current fiscal year is $174,636, which includes
applicable real property taxes and insurance costs. The Company also uses part
of an office facility in Portland, Oregon as its principal executive office.
The Company believes that its current facilities are suitable and adequate for
its present requirements.
The Company owns and uses machinery, equipment, and furniture with an
original cost of approximately $951,000 at September 30, 1998. The Company also
leases and uses equipment with capital lease obligations of $96,000 (principal
amount) at September 30, 1998. The Company believes that its personal property
is in acceptable condition. The Company's management believes that its
facilities, machinery and equipment are adequately insured to cover loss of
equipment or occupancy privileges.
The Company does not have any investments in real estate, real estate
mortgages or securities of persons primarily engaged in real estate activities,
and has no present policy or limitations with respect to any such future
investments.
ITEM 3. LEGAL PROCEEDINGS
There are no pending legal proceedings to which the Company is a party or of
which any of its property is the subject. The Company is not aware of any such
legal proceeding contemplated by a governmental authority.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the fourth quarter of fiscal 1998, no matters were submitted to a vote
of security holders through the solicitation of proxies or otherwise.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The following table reflects the high and low bid information for the
Company's Common Stock for the last two fiscal years, based on quotes
provided by Nasdaq. For the period through June 25, 1997, the Common Stock
was listed on the Nasdaq SmallCap Market under the symbol EIPM.
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For the period since June 25, 1997, the Common Stock has been quoted on the
NASD Bulletin Board under the symbol EIPM. These quotations reflect
interdealer prices, without retail mark-up, mark-down or commission, and may
not necessarily represent actual transactions.
<TABLE>
<CAPTION>
Fiscal Year 1997 BID Fiscal Year 1998 BID
HIGH LOW HIGH LOW
<S> <C> <C> <C> <C> <C>
First Quarter 5 1 First Quarter 2 3/4 3/4
Second Quarter 2 1 Second Quarter 15/16 3/8
Third Quarter 6 1 1/4 Third Quarter 2 5/8 3/8
Fourth Quarter 3 5/8 1 1/4 Fourth Quarter 1 5/8 3/4
</TABLE>
As of December 15, 1998, there were approximately 155 holders of record of
the Company's Common Stock.
No dividends were paid during the past two fiscal years. Under the terms of
agreements with the Company's senior and subordinated lenders, the Company may
not pay or declare dividends without the lenders' prior written consent.
On July 20, 1998, the Company obtained a revolving loan for up to $500,000
from James A. Cutler, Jr., a director and shareholder of the Company (the
"Cutler Revolving Loan"). See "Management's Discussion and Analysis-Liquidity
and Capital Resources." As consideration for the Cutler Revolving Loan, the
Company issued the lender warrants to purchase 100,000 shares of the Company's
Common Stock at an exercise price of $0.52 per share. The warrants expire on
July 1, 2000. The warrants were issued in reliance on the exemption from
registration in Section 4(2) of the Securities Act.
On July 20, 1998, the Company issued a $200,000 subordinated convertible note
to Cascade Microwave Investments LLC (the "Cascade Note"). See "Management's
Discussion and Analysis-Liquidity and Capital Resources." At the option of
either the Company or the holder, exercisable after October 1, 1998, the Cascade
Note is convertible into 200,000 shares of the Company's Common Stock. The
Cascade Note was issued in reliance on the exemption from registration in
Section 4(2) of the Securities Act.
On April 8, 1998, the Company issued 725,000 shares of Common Stock to its
directors in connection with the exercise of stock purchase rights (the "Stock
Purchase Rights") granted to the directors in March 1998 pursuant to the
Company's 1998 Stock Plan. Of such shares, 200,000 were purchased for $0.50 per
share and 525,000 shares were purchased for $0.01 per share, with part of the
difference between the purchase price and the assigned fair market value of
$0.50 per share accounted for as Board of Directors fees expensed and the
balance accounted for as prepaid Board of Directors fees. See Note 1 of "Notes
to Consolidated Financial Statements." The shares issued upon exercise of the
Stock Purchase Rights were issued in reliance on the exemption from registration
in Section 4(2) of the Securities Act.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS
THE FOLLOWING DISCUSSION AND ANALYSIS SHOULD BE READ IN CONJUNCTION WITH THE
FINANCIAL STATEMENTS AND THE ACCOMPANYING NOTES INCLUDED HEREIN, AND IS
QUALIFIED ENTIRELY BY THE FOREGOING AND BY OTHER MORE DETAILED FINANCIAL
INFORMATION APPEARING ELSEWHERE HEREIN.
RECENT DEVELOPMENTS
On December 18, 1998, the Company entered into a definitive agreement to
acquire all of the outstanding shares of Axiom Electronics, Inc. ("Axiom") for
$2.6 million in cash, $4.9 million (plus
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the amount of Axiom's net earnings from August 1, 1998 through the closing
date) in promissory notes and warrants to acquire 500,000 shares of the
Company's Common Stock. The acquisition is expected to close in late January
1999, subject to the satisfaction of various closing conditions, including
the Company's ability to secure acquisition financing. Axiom is a privately
held manufacturing and process development company that provides services for
OEM's that require high performance digital and radio frequency assembly,
testing and integration. For its fiscal year ended May 31, 1998, Axiom had
sales of approximately $14.6 million, EBIDTA of approximately $1.6 million
and net earnings of approximately $700,000. The Company believes that
Axiom's management team and technology expertise will significantly enhance
the Company's ability to grow and expand into new markets. There can be no
assurance, however, that the acquisition of Axiom will be consummated or that
the acquisition, if consummated, will enhance the Company's financial and
strategic position. See " - Certain Factors - Risks Inherent in Potential
Acquisitions." In addition, Axiom's results of operations following an
acquisition by the Company could differ materially from Axiom's historical
results.
RESULTS OF OPERATIONS
Net sales for fiscal 1998 were $3,715,000, a 22% decrease from fiscal 1997
sales of $4,739,000. The decrease in net sales in fiscal 1998, compared to the
prior fiscal year, was primarily attributable to a soft market for the Company's
products both in domestic and international markets, lower sales of frequency
counter products in international markets, and a decline in sales of
VXIbus-based products. During fiscal 1998, the Company announced it would
discontinue the sale of its VXIbus-based product line. The Company believes
this announcement combined with the economic downturn in Asian markets and the
strong dollar contributed to the lower sales volume in fiscal 1998.
The Company's gross profit margin decreased from 38% in fiscal 1997 to
negative 3% in fiscal 1998. The decrease in the fiscal 1998 gross profit
margin, compared to the prior fiscal year, was primarily attributable to lower
sales levels without corresponding reductions in fixed manufacturing overhead
and inefficiencies associated with the introduction of new products. In
addition, the decrease in gross profit margin was affected by a writedown of
inventory by $1,094,000 to reserve for the potential obsolescence related to the
discontinuance of selected products.
Inflation did not have a material effect on revenues or gross profit during
fiscal years 1998 or 1997.
Incoming orders for fiscal 1998 were $5,584,000, a 26% increase from
$4,428,000 for fiscal 1997. Backlog at September 30, 1998, was approximately
$2,310,000, a 423% increase from $441,000 at September 30, 1997. The
increase in orders and backlog in fiscal 1998, compared to the prior fiscal
year, resulted primarily from one $1,429,000 order from ManTech for RF
downconverters and RF synthesized signal generators and orders received for
certain VXIbus-based products which will be discontinued.
Research, development and engineering expenditures increased 27% to
$1,262,000 in fiscal 1998, from $996,000 in fiscal 1997. The increase in fiscal
1998 was primarily attributable to increased new product development
expenditures, including development support for products sold to ManTech and
costs associated with the ongoing development of a new portable field services
product.
Selling, general and administrative expenses increased 26% in fiscal 1998
to $2,536,000, compared to $2,005,000 in fiscal 1997. The increase in
selling, general and administrative expenses was primarily due to a
non-recurring charge of $350,000 plus related expenses associated with the
retirement of the Company's former Chairman, higher professional fees and
expenses related to the Company's rights offering to its stockholders
("Rights Offering") completed in March 1998 and other equity and credit
arrangements completed in the fourth quarter of fiscal 1998. In addition,
the Company recorded a non-recurring charge of $99,000 in the fourth quarter
of fiscal year 1998 to account for expenses related to
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moving its facility from Milpitas, California to a smaller and less costly
facility in San Jose, California. The move was completed in November 1998.
Interest and other expense was $271,000 in fiscal 1998, compared to $73,000
in fiscal 1997. The increase in expense in fiscal 1998 was primarily due to a
higher level of outstanding debt and associated interest expense ($274,000 in
interest expense during fiscal 1998 compared to $80,000 during fiscal 1997), and
lower cash balances and associated interest and dividend income ($3,000 during
fiscal 1998 compared to $6,000 during fiscal 1997).
The Company recorded a net loss of $4,181,000 in fiscal 1998, compared to a
net loss of $1,290,000 in fiscal 1997. The increase in net loss for fiscal 1998,
compared to the prior fiscal year, was primarily due to lower sales levels
without a corresponding reduction in fixed manufacturing overhead, higher
research, development and engineering expenses associated with the introduction
and development of new products, and higher selling, general and administrative
expenses.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1998, the Company's cash, cash equivalents and short-term
investment balance was $72,000, as compared to $280,000, at September 30, 1997.
The Company's accounts payable balance was $918,000 at September 30, 1998,
compared to $401,000 at September 30, 1997. At September 30, 1998, the Company
had no material commitments for capital expenditures other than those required
to update the Company's systems to make them Year 2000 compliant. The Company
estimates it will spend approximately $100,000 in fiscal 1999 to accomplish
this.
Working capital was negative $551,000 at September 30, 1998. The Company's
current ratio was 0.74:1 at September 30, 1998.
At September 30, 1998, the Company had outstanding borrowings in the
aggregate principal amount of $134,000 under its bank revolving loan (the "Bank
Revolving Loan"). The Bank Revolving Loan provides for borrowings up to 85% of
eligible accounts receivable, not to exceed $1,000,000. Interest under the Bank
Revolving Loan is charged at the prime rate as published by The Wall Street
Journal plus 3.5% per annum (12.0% as of September 30, 1998) and is payable
monthly. The Bank Revolving Loan will expire in August 2001. The Bank
Revolving Loan's restrictive covenants preclude or limit the Company's ability
to take certain actions, such as paying dividends, making loans, making
acquisitions or incurring indebtedness, without the lender's prior written
consent. The Bank Revolving Loan is secured by substantially all of the
Company's assets.
At September 30, 1998, the Company had outstanding borrowings in the
aggregate principal amount of $500,000 under its bank term loan (the "Bank Term
Loan"). Interest under the Bank Term Loan is charged at the prime rate as
published by The Wall Street Journal plus 3.5% per annum (12.0% as of September
30, 1998) and is payable monthly. The principal amount of the Bank Term Loan is
payable in monthly installments of approximately $8,000 through August 2001 and
contains the same restrictive covenants as the Bank Revolving Loan. The Bank
Term Loan is secured by substantially all of the Company's assets.
The loan and security agreement governing both the Bank Revolving Loan and
the Bank Term Loan contains a minimum annual interest charge requirement of
$90,000 per year. If average borrowings under the Bank Revolving Loan and the
Bank Term Loan do not result in annual interest charges totaling at least
$90,000, the Company will be required to pay the difference between actual
interest paid and the minimum interest charge to the lender.
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At September 30, 1998, the Company had no outstanding borrowings under the
Cutler Revolving Loan which provides for borrowings of up to $500,000. Interest
under the Cutler Revolving Loan is charged at the prime rate as published in The
Wall Street Journal plus 2% per annum (10.5% as of September 30, 1998) and is
payable monthly. As additional consideration for the Cutler Revolving Loan,
the Company issued the lender warrants to purchase 100,000 shares of the
Company's Common Stock at an exercise price of $0.52 per share. The warrants
expire on July 1, 2000. The Cutler Revolving Loan will expire on July 1, 1999
and contains various restrictive covenants that preclude or limit the Company's
ability to take certain actions, such as paying dividends or incurring
indebtedness, without the lender's prior written consent. The Cutler Revolving
Loan is secured by substantially all of the Company's assets. The Cutler
Revolving Loan is subordinated to the Bank Revolving Loan, the Bank Term Loan
and will be subordinated to any future extension of credit by a financial
institution or any seller financing in connection with a strategic acquisition
by the Company.
At September 30, 1998, the Company had outstanding borrowings in the
aggregate principal amount of $200,000 under the Cascade Note. All principal and
interest is due June 30, 2000. Interest is charged at 8% per annum. The
Cascade Note is subordinated to the Bank Revolving Loan and the Bank Term Loan
and will be subordinated to any future extension of credit by a financial
institution or any seller financing in connection with a strategic acquisition
by the Company. After October 1, 1998, either the Company or the note holder
can convert the Cascade Note into 200,000 shares of the Company's Common Stock.
At September 30, 1998, the Company was is in compliance with the financial
and other covenants under the agreements governing the Bank Revolving Loan, the
Bank Term Loan, the Cutler Revolving Loan and the Cascade Note.
To date, the Company has not achieved business volume sufficient to restore
profitability and a positive cash flow. The Company operated at a net loss of
$4,181,000 in fiscal 1998 and since September 30, 1998 has continued to
experience operating losses. See "--Certain Factors--Recurring Material Losses
and Accumulated Deficit." The Company's available cash and credit facilities
are not sufficient to fund its operations and successfully implement its
business plan, part of which consists of pursuing potential strategic
acquisitions of companies, products and technologies such as Axiom. As a
result, the Company's ability to continue as a going concern is dependent upon
future events, including its ability to obtain additional debt or equity
financing or obtain relief from creditors. There can be no assurance that
additional debt or equity financing or accommodations from creditors, if
required, will be available to the Company on commercially reasonable terms, or
at all. Even if the Company is able to obtain additional debt or equity
financing, there can be no assurance as to the terms thereof. If the Company is
unable to obtain additional debt or equity financing, the Company and its
business will likely be materially adversely affected.
If the Company is unable to obtain such capital on a timely basis, the
Company will be required to consider, among other actions, a substantial
reduction in its research and development expenses which will impact the
introduction of new products, a substantial reduction in other operating
expenses and the sale of one or more product lines of the Company. Such
actions to significantly curtail its planned operations could have a
materially adverse affect on the Company's business, financial condition and
results of operations.
In addition, the actual cash resources required to successfully implement the
Company's business plan in fiscal year 1999 will depend upon numerous factors,
including but not limited to those described below in the following sections
under "--Certain Factors": "Recurring Material Losses and Accumulated Deficit,"
"Repayment of Existing Debt," "Dependence on OEM Relationship," "Dependence on
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Government Contractors," "Uncertainty of Product Development and Introduction"
and "Risks Inherent in Potential Acquisitions."
Year 2000 (Y2K) ISSUES
The Company is aware of and is addressing the issues associated with the
programming code in existing computer systems as the year 2000 approaches. The
Year 2000 problem is pervasive and complex, as many computer systems,
manufacturing equipment and industrial control systems will be affected in some
way by the rollover of the two-digit year value to 00. Systems that do not
properly recognize such data could generate erroneous information or cause a
system to fail. The Year 2000 issue creates risk for the Company from
unforeseen problems in its own systems and from third parties with which the
Company deals.
The Company is in the process of analyzing the Company's internal systems as
well as certain external systems (such as vendor, customer, banking systems,
etc.) upon which the Company is dependent, to identify and evaluate potential
Year 2000 issues. Although the Company will attempt to achieve Year 2000
compliance, there can be no assurances that its internal systems will be fully
or even significantly Year 2000 compliant by the year 2000. Nor can there be
any assurances that the third party external systems upon which the Company is
dependent will be fully or significantly Year 2000 compliant on time. Failures
of the Company's and/or third parties' computer systems, manufacturing equipment
or industrial control systems could have a material adverse effect on the
Company's ability to conduct its business and on the Company's results of
operations and financial condition.
To date, the Company has incurred costs of approximately $106,000 in fiscal 1998
and approximately $40,000 in fiscal 1999 to address Year 2000 issues, and
believes that it will incur additional costs of approximately $100,000 in fiscal
1999. These costs are principally comprised of hardware, software, installation
and related training costs for a new business management and accounting system.
These are systems that would not otherwise have been replaced or upgraded at
this time. There can be no assurance that actual costs the Company will incur
to address Year 2000 issues will not be materially higher than currently
anticipated.
CERTAIN FACTORS
IN ADDITION TO THE FACTORS DISCUSSED ELSEWHERE IN THIS FORM 10-KSB, THE
FOLLOWING ARE IMPORTANT FACTORS WHICH COULD CAUSE ACTUAL RESULTS OR EVENTS TO
DIFFER MATERIALLY FROM THOSE CONTAINED IN ANY FORWARD-LOOKING STATEMENT MADE BY
OR ON BEHALF OF THE COMPANY.
RECURRING MATERIAL LOSSES AND ACCUMULATED DEFICIT. The Company operated at a
loss of $1,290,000 in the fiscal year ended September 30, 1997 and $4,181,000 in
the fiscal year ended September 30, 1998. Net cash used in operations and
investing activities by the Company was $1,045,000 in fiscal 1997 and $2,668,000
in fiscal 1998. At September 30, 1998, the Company's accumulated deficit was
$5,097,000 and stockholders' deficiency was $840,000. At September 30, 1998 the
Company's ratio of interest-bearing indebtedness to total interest-bearing
indebtedness and stockholder's equity was 1,033:1. There can be, and is, no
assurance that profitable operations and positive cash flow can be achieved or
maintained or that any funds obtained from equity issuances or debt facilities
will be sufficient to carry the Company to a time when profitable operations and
positive cash flow would sustain the Company. Continued losses would negatively
impact the Company's working capital and the extension of credit by any existing
or future lenders. See "--Liquidity and Capital Resources."
The report of BDO Seidman, LLP on the Company's financial statements for
the year ended September 30, 1998, issued on December 18, 1998 and the report of
Meredith, Cardozo, Lanz & Chiu
11
<PAGE>
LLP (now known as BDO Seidman, LLP) on the financial statements for the year
ended September 30, 1997, and issued as of November 20, 1997, include an
explanatory paragraph to express substantial doubt regarding the Company's
ability to continue as a going concern. There can be no assurance that the
Company will not continue to incur significant operating losses or that
required additional financing will be available to enable the Company to fund
its operations and implement its business plan in fiscal 1999 or thereafter.
REPAYMENT OF EXISTING DEBT. At December 15, 1998, the Company had
outstanding borrowings in the aggregate principal amount of $50,000 under its
Bank Revolving Loan and $467,000 under its Bank Term Loan, each of which expires
in August 2001. The principal amount of the Bank Term Loan is payable in
monthly installments. See "--Liquidity and Capital Resources."
At December 15, 1998, the Company had outstanding borrowings in the aggregate
principal amount of $500,000 under its Cutler Revolving Loan, which expires July
1, 1999. All such borrowings are payable in full upon expiration. There can be
no assurance that the Company will be able to extend, repay or refinance its
indebtedness under the Cutler Term Loan. The Company is continuing to pursue
discussions with other lenders concerning a replacement and additional working
capital facilities; however, there can be no assurance that the Company will be
able to obtain satisfactory working capital facilities. Even if the Company is
able to obtain working capital facilities from another lender, there can be no
assurance as to the terms of such facility; and the terms of such facility could
be even less attractive to the Company than the terms of the existing loans. If
the Company is unable to obtain satisfactory working capital facilities, the
Company and its business could be materially adversely affected. Further, the
Company's existing credit facilities and loans are subject to various covenants
relating to the Company's performance and financial condition. If the Company
does not maintain compliance with such covenants, the lenders have the right to
declare all outstanding amounts immediately due and payable. There can be no
assurance that the Company will be able to maintain compliance with the
covenants under the Bank Revolving Loan, the Bank Term Loan or the Cutler
Revolving Loan.
DEPENDENCE ON OEM RELATIONSHIP. The Company began distributing a new line of
microwave frequency counters in fiscal 1998, on a private label basis worldwide
through an OEM relationship with Hewlett-Packard. The Company expects that this
OEM relationship will account for more than 30% of its revenues in fiscal 1999.
However, Hewlett-Packard is not obligated to purchase a minimum quantity of
products, and the failure of Hewlett-Packard to purchase the product quantity
expected by the Company would have a material, negative impact upon the
Company's business and prospects of profits. There can be no assurance that the
Company will be able to maintain a successful relationship with Hewlett-Packard
and generate revenues or profits from the relationship.
DEPENDENCE ON GOVERNMENT CONTRACTORS. Approximately 26% and 43% of the
Company's revenues in fiscal 1998 and fiscal 1997 have been derived from the
sale of products to government contractors. In fiscal 1998, the Company
received a five-year indefinite quantity, fixed-price supply subcontract from
ManTech, a government contractor, for the supply of RF synthesized signal
generators and RF down converters, with total sales value to the Company that
could range from approximately $3.5 to $20 million. Revenues under this
subcontract in fiscal 1998 were approximately $568,000. Further production
purchase order releases under the subcontract are subject to satisfactory
completion of field testing of the U.S. Marine Corps' Third Echelon Test Set
("TETS") systems and the Company's components. The Company has and will incur
substantial expenses in satisfying its obligations under this subcontract.
However, despite the incurrence of such expenses, this and other subcontracts
with government contractors are subject to cancellation provisions in favor of
the government contractor. The subcontract with ManTech is subject to
termination by ManTech in the event the government terminates its contract with
ManTech. Further, this subcontract can be terminated if the Company's
components do not satisfy field testing requirements or the Company otherwise
defaults under the subcontract. There can
12
<PAGE>
be no assurance that such subcontracts will not be canceled. Further, there
can be no assurance that the Company will receive additional subcontracts
from government contractors.
DEPENDENCE ON KEY SUPPLIERS. A number of the Company's products require
specialized components currently available only through single sources of
supply. The loss of any of these sources, or the inability of any such source
to meet the Company's production and quality control requirements or Y2K
compliance, could be detrimental to the Company with respect to the specific
products involved. If any of the Company's single source suppliers is not able
to deliver these specialized components, the Company would be required to
implement alternative supply strategies (such as changing to one or more other
suppliers, which could require product design or specification changes and would
likely cause delays in shipment of the Company's products) or discontinue sales
of the affected products.
UNCERTAINTY OF PRODUCT DEVELOPMENT AND INTRODUCTION. The Company's success
depends to a large degree on its ability to develop and introduce in a timely
manner new or updated products which are affordable, functional in purpose,
distinctive in quality and design and tailored to the purchasing patterns of the
Company's customers and potential customers. Misjudgments as to customer
interest in new or updated products could lead to excess inventories and
markdowns and could have a material adverse effect on the Company's financial
condition and results of operations. There can be no assurance that new
products under development will be successfully developed and introduced.
Further, due to the uncertainty associated with any product development and
introduction (such as delays in development and lack of market acceptance of a
new product), there can be no assurances that the Company's development and
introduction efforts will be successful. If products under development are not
successfully introduced, the Company's business, financial condition and results
of operations would be materially adversely affected.
COMPETITION. The markets in which the Company's products are sold have
become increasingly competitive. Most of the Company's principal competitors
have substantially greater financial resources than the Company. The Company's
results of operations can be significantly affected by pricing pressures arising
from customer demand and pricing strategies by the Company's competitors, and
the timing and market acceptance of new product introductions by competitors of
the Company. There can be no assurance that pricing pressures will not have a
material adverse effect on the Company, or that the Company's competitors will
not succeed in developing products that would render the Company's technology
and products obsolete and noncompetitive.
RISKS INHERENT IN POTENTIAL ACQUISITIONS. As part of its business
strategy, the Company may make acquisitions of, or significant investments in,
other companies, products or technologies. Any such future acquisitions,
including the pending acquisition of Axiom, if consummated, would be accompanied
by the risks commonly encountered in acquisitions of companies, products or
technologies. See "--Recent Developments." Such risks include, among other
things, the difficulty of assimilating the operations and personnel of the
acquired companies, products or technologies, the potential disruption of the
Company's ongoing business, the inability of management to maximize the
financial and strategic position of the Company through the successful
incorporation of acquired companies, products or technologies into the Company's
products, additional expense associated with amortization of acquired intangible
assets, the maintenance of uniform standards, controls, procedures and policies
and the impairment of relationships with employees and customers as a result of
any integration of new management personnel. There can be no assurance that the
Company would be successful in overcoming these risks or any other problems
encountered in connection with the acquisition of Axiom or any other companies,
products or technologies.
NET OPERATING LOSS CARRYFORWARDS. At September 30, 1998, the Company fully
provided against its deferred tax assets. The Company believes sufficient
uncertainty exists regarding the realizability of
13
<PAGE>
the deferred tax assets such that a full valuation allowance is required. At
September 30, 1998, the Company had approximately $8,200,000 of federal net
operating loss carryforwards for tax reporting purposes available to offset
future taxable income. Such carryforwards will expire by 2013 if not offset
by taxable income. In addition, the Tax Reform Act of 1986 imposes
limitations on the use of net operating loss carryforwards under certain
circumstances. Events which may limit or impair the Company's net operating
loss carryforwards include, without limitation, certain stock ownership
changes. Such stock ownership changes may result if the Company raises
additional capital through an equity financing.
Due to the foregoing and other factors, past results are not a reliable
predictor of future results. In addition, the securities of many technology and
developmental companies, such as the Company, have historically been subject to
extensive price and volume fluctuations that may adversely affect the market
price of their common stock.
ITEM 7. FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements, together with
the notes thereto and the reports thereon of BDO Seidman, LLP and Meredith,
Cardozo, Lanz & Chiu LLP appearing on the pages of this report set forth below:
PAGE
Consolidated Balance Sheet as of September 30, 1998 15
Consolidated Statements of Operations for the Years Ended
September 30, 1998 and 1997 16
Consolidated Statements of Stockholders' Equity (Deficiency)
for the Years Ended September 30, 1998 and 1997 16
Consolidated Statements of Cash Flows for the Years Ended
September 30, 1998 and 1997 17
Notes to Consolidated Financial Statements 18
Report of Independent Certified Public Accountants 28
Report of Independent Auditors 29
14
<PAGE>
CONSOLIDATED BALANCE SHEET
(In thousands except share amounts)
September 30,
1998
ASSETS
Current assets:
Cash and cash equivalents $ 67
Short-term investments 5
-------
72
Accounts receivable, net 663
Inventories, net 704
Prepaid expenses 131
-------
Total current assets 1,570
Property and equipment, net 459
Other non-current assets 58
-------
Total assets $ 2,087
-------
-------
LIABILITIES AND STOCKHOLDERS' DEFICIENCY
Current liabilities:
Current portion of long term debt $ 96
Accounts payable 918
Accrued liabilities 1,079
Current portion of obligations under capital leases 28
-------
Total current liabilities 2,121
-------
Subordinated notes payable 200
Long term bank borrowings 538
Long term obligations under capital leases 68
-------
Total liabilities 2,927
-------
Commitments and contingencies (Note 5)
Stockholders' deficiency:
Common stock, $.01 par value;
authorized-10,000,000 shares;
7,234,152 shares issued and outstanding 72
Additional paid-in capital 4,185
Accumulated deficit (5,097)
-------
Total stockholders' deficiency (840)
-------
Total liabilities and stockholders' deficiency $ 2,087
-------
-------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
15
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS AND
STOCKHOLDERS' EQUITY (DEFICIENCY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands except per share amounts)
<TABLE>
<CAPTION>
For the years ended September 30, 1998 1997
<S> <C> <C>
Net sales $ 3,715 $ 4,739
-------- --------
Cost and expenses:
Cost of sales 3,827 2,955
Research, development and engineering 1,262 996
Selling, general and administrative 2,536 2,005
Interest and other, net 271 73
-------- --------
Total costs and expenses 7,896 6,029
-------- --------
Net loss $ (4,181) $ (1,290)
-------- --------
-------- --------
Net loss per share-basic and diluted $ (1.04) $ (3.04)
-------- --------
-------- --------
Weighted average common shares outstanding 4,006 425
-------- --------
-------- --------
</TABLE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
(In thousands except share amounts)
Retained
Additional Earnings
Common Stock Paid-in (Accumulated
Shares Amount Capital Deficit) Total
--------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at September 30, 1996 424,907 $ 5 $ 848 $ 374 $ 1,227
Net loss - - - (1,290) (1,290)
--------- ------ ------- ------ --------
Balance at September 30, 1997 424,907 5 848 (916) (63)
Issue of common stock for stock
purchase rights exercised 725,000 7 355 - 362
Issue of common stock for rights offering 5,802,245 58 2,843 - 2,901
Issue of common stock for retirement of debt 282,000 2 139 - 141
Net loss - - - (4,181) (4,181)
--------- ------ ------- ------ --------
Balance at September 30, 1998 7,234,152 $72 $4,185 $(5,097) $(840)
--------- ------ ------- ------ --------
--------- ------ ------- ------ --------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
16
<PAGE>
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended September 30, 1998 1997
<S> <C> <C>
(In thousands)
Cash flows from operating activities:
Net loss $ (4,181) $ (1,290)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 214 167
Inventory reserve 1,094 -
Loss (gain) on the sale of capital equipment 6 (118)
Issuance of stock for services 147 -
Issuance of stock for retirement of debt 141 -
Change in assets and liabilities:
Accounts receivable (258) 281
Inventories (775) 44
Prepaid expenses and other assets (33) (3)
Accounts payable 517 (305)
Accrued liabilities 467 83
Advance payments from customers - (190)
------ ------
Net cash used in operating activities (2,661) (1,331)
------ ------
------ ------
Cash flows from investing activities:
Sale of short-term investments 25 294
Capital expenditures (68) (168)
Proceeds from the sale of capital equipment 36 160
------ ------
Net cash (used in) provided by investing activities (7) 286
------ ------
Cash flows from financing activities:
Proceeds from bank borrowings 1,162 111
Repayment of bank borrowings (836) -
Proceeds from notes payable to affiliates 1,350 1,000
Proceeds from sales of common stock 842 -
Repayment of obligations under capital leases (33) (32)
------ ------
Net cash provided by financing activities 2,485 1,079
------ ------
(Decrease) increase in cash and equivalents (183) 34
Cash and equivalents at beginning of year 250 216
------ ------
Cash and equivalents at end of year $ 67 $ 250
------ ------
------ ------
Supplemental information:
Interest paid $ 251 $ 31
------ ------
------ ------
Equipment acquired pursuant to capital leases $ 32 -
------ ------
------ ------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. THE COMPANY AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
THE COMPANY
EIP Microwave, Inc. (the "Company") is engaged in a single industry segment
constituting the development, manufacture, and sale of high frequency microwave
and radio frequency (RF) test and measurement instruments. The Company's
stand-alone microwave frequency counters represented 66% of net sales in fiscal
1998 and 53% of net sales in fiscal 1997. Substantially all of the Company's
activities are conducted in the United States. The Company has no foreign
manufacturing operations or material amounts of foreign assets. Foreign sales,
principally to customers in Western Europe and Pacific Rim countries, as a
percent of net sales were approximately 24% in 1998 and 30% in 1997. Profit
margins are similar on foreign and domestic sales. Direct sales to the United
States government and its contractors as a percent of net sales were
approximately 26% in fiscal 1998 and 43% in fiscal 1997. During fiscal 1998,
two customers accounted for 29% and 15% of net sales, respectively. During
fiscal 1997, one customer accounted for 21% of net sales.
LIQUIDITY
As shown in the accompanying consolidated financial statements, the Company
incurred a loss from operations for the year ended September 30, 1998 of
$4,181,000 and at September 30, 1998 had negative working capital of $551,000
and a stockholders' deficiency of $840,000. These conditions raise substantial
doubt as to the Company's ability to continue as a going concern. To date, the
Company has not achieved business volume sufficient to restore profitability and
a positive cash flow. The Company's available cash and credit facilities are not
sufficient to fund its operations and successfully implement its business plan.
As a result, the Company's ability to fund its operations and implement its
business plan is dependent, among other things, upon the Company's ability to
obtain additional debt or equity financing or obtain relief from creditors.
There can be no assurance that additional financing or accommodations from
creditors, if required, will be available to the Company on commercially
reasonable terms, or at all. Even if the Company is able to obtain additional
debt or equity financing, there can be no assurance as to the terms thereof. If
the Company is unable to obtain additional debt or equity financing, the Company
and its business would likely be materially adversely affected.
If the Company is unable to obtain such capital on a timely basis, the
Company will be required to consider, among other actions, a substantial
reduction in its research and development expenses which will impact the
introduction of new products, a substantial reduction in other operating
expenses and the sale of one or more product lines of the Company. Such actions
to significantly curtail its planned operations could have a materially adverse
effect on the Company's business, financial condition and results of operations.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and
its wholly-owned subsidiary. All significant intercompany transactions and
accounts have been eliminated.
18
<PAGE>
CASH EQUIVALENTS
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
SHORT-TERM INVESTMENTS
Short-term investments, consisting of publicly traded preferred stocks and
government bonds, are stated at fair value. The Company has adopted Statement
of Financial Accounting Standards No. 115, "Accounting for Certain Investments
in Debt and Equity Securities" ("SFAS 115"). SFAS 115 requires companies to
classify investments in debt and equity securities with readily determinable
fair values as "held-to-maturity," "available for sale" or "trading" and
establishes accounting and reporting requirements for each classification. The
Company classifies all securities held as available for sale. Securities
classified as available for sale are reported at their fair market value with
unrealized gains and losses reported as a separate component of stockholders'
equity. Such unrealized gains and losses were not material as of September 30,
1998 or 1997. The Company's government bonds have a maturity of one year or
less. Publicly traded preferred stocks are considered highly liquid and are
classified as short-term investments.
CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash, cash equivalents and
short-term investments and trade accounts receivable. The Company places its
cash, cash equivalents and short-term investments in a variety of financial
instruments such as certificates of deposit and marketable equity securities.
The Company performs ongoing credit evaluations of its customers' financial
condition and, generally, requires no collateral from its customers. The
Company requires either letters of credit or purchases export insurance from the
Export Import Bank of the United States for all its international sales. The
Company maintains an allowance for uncollectible accounts receivable based upon
the expected collectibility of all accounts receivable balances. At September
30, 1998, the accounts receivable balances from three customers represented 48%,
12%, and 10% of net trade receivables.
INVENTORIES
Inventories are stated at the lower of standard cost, which approximates
actual cost (determined on a first-in, first-out basis), or market. The Company
recorded a write-down of inventory totaling $1,094,000 during fiscal 1998 to
reserve for the potential obsolescence related to the discontinuance of certain
products. While management believes the amount of the inventory reserve is
appropriate under current circumstances, there can be no assurance that the
amount of the reserves will be sufficient to account for the discontinuance of
such products.
PREPAID EXPENSES
In March 1998, the Company granted Stock Purchase Rights, exercisable for an
aggregate of 725,000 shares of the Company's common stock, to its directors
pursuant to the Company's 1998 Stock Plan. The directors exercised the Stock
Purchase Rights in full and, in connection therewith, the Company issued 725,000
shares of common stock to the directors in April 1998. The Company received
$100,000 for the issuance of 200,000 of these shares. The other 525,000 shares
were purchased for the par value of $0.01 per share and assigned a fair market
value of $0.50 per share. Of the difference between the aggregate purchase
price and the aggregate assigned fair market value of the 525,000 shares,
$147,000 was
19
<PAGE>
expensed as Board of Directors fees and $110,000 was accounted for
as prepaid Board of Directors fees to be amortized over thirty-six months,
beginning in March 1998. Of the 525,000 shares of common stock purchased for
$0.01, 225,000 shares are subject to restrictions and repurchase options in
favor of the Company. One-third of the shares issued pursuant to the exercise
of the respective Stock Purchase Rights covering such 225,000 shares fully vest
and will be released from the Company's repurchase option one day before the
annual stockholders' meeting in each of 1999, 2000 and 2001.
PROPERTY AND EQUIPMENT
Purchased property and equipment are stated at cost and are depreciated
using the straight-line method over lives ranging from three to five years.
Self-constructed demonstrator products are stated at their standard
manufacturing cost. In fiscal 1998, the Company retired all fully
depreciated and obsolete assets to accommodate the relocation of the Company
to a smaller manufacturing facility. See Notes 2 and 5.
REVENUE RECOGNITION AND WARRANTY
Sales are recognized at the time of shipment provided no significant
obligations remain and collectibility is probable. The Company provides for the
estimated costs of fulfilling its warranty obligation at the time the related
sale is recorded.
INCOME TAXES
The Company utilizes an asset and liability approach that requires the
recognition of deferred tax assets and liabilities for the expected future tax
consequence of events that have been recognized in the Company's financial
statements or tax returns.
BASIC AND DILUTED LOSS PER SHARE
The Company adopted Statements of Financial Accounting Standards No. 128
("SFAS 128"), "Earnings Per Share," during the year ended September 30, 1998
with no impact on previously reported amounts. Basic earnings per share is
computed using the weighted average number of common shares outstanding during
the period. Diluted earnings per share is computed using the weighted average
number of common and common equivalent shares outstanding during the period.
As a result of the losses incurred in fiscal 1998 and 1997, the common
equivalent shares were antidilutive and, accordingly, were excluded from the
computation of loss per share for those years.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the dates of financial statements and the
reported amounts of revenues and expenses during the reporting periods. Actual
results could differ from those estimates.
ADOPTION OF NEW ACCOUNTING PRONOUNCEMENTS.
In February 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 129 ("SFAS 129"), "Disclosure of
Information about Capital Structure."
20
<PAGE>
SFAS 129 requires disclosure of certain information related to the Company's
capital structure and did not have a material impact on the Company's
financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 130 ("SFAS 130"), "Reporting Comprehensive
Income." SFAS 130 establishes standards for reporting comprehensive income and
its components in a financial statement that is displayed with the same
prominence as other financial statements. Comprehensive income as defined
includes all changes in equity (net assets) during a period from non-owner
sources. Examples of items to be included in comprehensive income, which are
excluded from net income, include foreign currency translation adjustments and
unrealized gain/loss on available-for-sale securities. The disclosure
prescribed by SFAS 130, implemented beginning with the first quarter of 1998,
did not have a material impact on the Company's financial statements.
In June 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 131 ("SFAS 131"), "Disclosures about Segments
of an Enterprise and Related Information." This statement establishes standards
for the way companies report information about operating segments in annual
financial statements. It also establishes standards for related disclosures
about products and services, geographic areas, and major customers. The
disclosures prescribed by SFAS 131, effective in 1998, did not have a material
impact on the Company's financial statements as the Company operates as one
business segment.
In February 1998, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 132 ("SFAS 132"), "Employer's Disclosures
about Pensions and Other Postretirement Benefits," which standardizes the
disclosure requirements for pension and other postretirement benefits. The
adoption of SFAS No. 132 is not expected to have a material impact on the
Company's financial statements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 requires companies to recognize
all derivatives contracts as either assets or liabilities in the balance sheet
and to measure them at fair value. If certain conditions are met, a derivative
may be specifically designated as a hedge, the objective of which is to match
the timing of gain or loss recognition on the hedging derivative with the
recognition of (i) the changes in the fair value of the hedged asset or
liability that are attributable to the hedged risk or (ii) the earnings effect
of the hedged forecasted transaction. For a derivative not designated as a
hedging instrument, the gain or loss is recognized in income in the period of
change. SFAS 133 is effective for all fiscal quarters of fiscal years beginning
after June 15, 1999. Historically, the Company has not entered into derivatives
contracts either to hedge existing risks or for speculative purposes.
Accordingly, the adoption of SFAS No. 133 is not expected to have a material
impact on the Company's financial statements.
21
<PAGE>
NOTE 2. CONSOLIDATED BALANCE SHEET DETAIL
<TABLE>
<CAPTION>
(in thousands) September 30,
1998
<S> <C>
Accounts receivable:
Trade $ 713
Less - allowance for doubtful accounts (50)
---------
$ 663
---------
---------
Inventories:
Raw materials $ 268
Work-in-process 433
Finished goods 3
---------
$ 704
---------
---------
Prepaid expenses
Current portion, prepaid Board of Directors fees $ 37
Other prepaid expenses 94
---------
$ 131
---------
---------
Other non-current assets
Prepaid Board of Directors fees $ 52
Deposits 6
---------
$ 58
---------
---------
Property plant and equipment:
Machinery and equipment $ 199
Computer equipment and software 34
Demonstrator equipment 283
Equipment under capital lease 32
Furniture, fixtures and other fixed assets 402
---------
950
Less: accumulated depreciation (491)
---------
$ 459
---------
---------
Accrued liabilities:
Salaries, wages and benefits $ 675
Board of Directors fees and expenses 61
Legal and accounting 156
Commissions 36
Warranty 25
Other 126
---------
$ 1,079
---------
---------
</TABLE>
NOTE 3. EMPLOYEE BENEFIT PLANS
RETIREMENT PLAN
The Company has a Retirement/Savings Plan that qualifies as a thrift plan
under Section 401(k) of the Internal Revenue Code. All employees who have
completed three months of service on or before the semiannual entry period are
eligible to participate in the Retirement Plan. The Retirement Plan allows
participants to contribute up to 12% of their earnings to the Retirement Plan,
subject to the statutory maximum, and deduct this amount from their wages for
federal income tax purposes. The Company will
22
<PAGE>
contribute 50 cents for each dollar contributed by the employee up to 3% of
total wages. Company contributions in fiscal 1998 and fiscal 1997 totaled
$35,000 and $39,000, respectively.
INCENTIVE COMPENSATION
The Company has an incentive compensation plan that provides for awards of
bonuses to officers and key employees based principally on achieving stipulated
Company financial objectives. In making specific awards, consideration is given
to the individual's contribution to the success of the Company, to the success
and performance of the unit or department of which the individual is a member,
and to the achievement of individual performance goals established at the
beginning of the fiscal year. The formula for computing bonuses has been
subject to annual modification and may in the future be again modified at the
discretion of the Board of Directors. No bonuses were awarded for fiscal years
1998 or 1997.
STOCK APPRECIATION RIGHTS PLAN
On November 11, 1992, the Board of Directors adopted a Stock Appreciation
Rights Plan ("SAR Plan"). The SAR Plan provided for the award of appreciation
rights ("SARs") to officers and key management employees of the Company
entitling such participants to receive the increase, if any, in the value of one
share of Company common stock from the date of the award to the date(s) of
valuation established at the time of the award. Generally, SARs were deemed
vested in five equal annual installments. Each award vested was required to be
paid in cash on a scheduled payment date. During fiscal 1998 and 1997, no SARs
were awarded. A total of 760 SARs were vested during each of fiscal 1998 and
fiscal 1997. No SARs were outstanding at September 30, 1998. The Company
accrues a compensation liability over the vesting period based on the increase
in the market value of the common stock over the award price. The liability
recorded in fiscal 1998 and fiscal 1997 was $0 and $2,000, respectively.
STOCK PLAN AND STOCK OPTION PLAN
FASB Statement 123, "Accounting for Stock-Based Compensation," requires
the Company to provide pro forma information regarding net loss and net loss
per share as if compensation cost for the Company's stock option plans had
been determined in accordance with the fair value based method prescribed in
FASB Statement 123. The Company estimates the fair value of stock options at
the grant date by using the Black-Scholes option pricing-model with the
following weighted average assumptions used for grants in fiscal 1998 and
1997, respectively: dividend yield of 0; expected volatility of 253% and
211%; risk-free interest rates of 5.87% and 5.79%; and expected lives of four
years for the plan options.
Under the accounting provisions of FASB Statement 123, the Company's net loss
and primary loss per share would have been increased to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
September 30,
-------------
1998 1997
------------ -----------
<S> <C> <C>
Net loss:
As reported $(4,181,000) $(1,290,000)
----------- -----------
----------- -----------
Pro forma $(4,330,000) $(1,334,000)
----------- -----------
----------- -----------
Primary loss per share:
As reported $ (1.04) $ (3.04)
----------- -----------
----------- -----------
Pro forma $ (1.08) $ (3.14)
----------- -----------
----------- -----------
</TABLE>
23
<PAGE>
A summary of the status of options granted under the Company's Stock Plan
and Stock Option Plan as of September 30, 1998 and 1997, and changes during the
years ended on those dates is presented below:
<TABLE>
<CAPTION>
Options Outstanding
-------------------
September 30, 1998 September 30, 1997
-------------------------- ---------------------------
Weighted-Average Weighted-Average
Shares Exercise Price Shares Exercise Price
------ -------------- ------ --------------
<S> <C> <C> <C> <C>
Outstanding at
beginning of year 132,400 $ 3.727 95,400 $ 3.039
Granted 625,000 $ 0.574 50,000 $ 4.750
Exercised -- -- -- --
Cancelled (113,400) $ 3.483 (13,000) $ 2.721
-------- -------
Outstanding at
end of year 644,000 $ 0.634 132,400 $ 3.727
-------- ----------- ------- ---------
-------- ----------- ------- ---------
Options exercisable
at year-end 204,800 49,800
-------- -------
-------- -------
Weighted-average
fair value of
options granted
during the year $ 0.574 $ 4.750
----------- ---------
----------- ---------
</TABLE>
The following table summarizes certain information relating to stock
options outstanding at September 30, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------- ---------------------------------
Number Weighted-Average Number
Range of Outstanding Remaining Weighted-Average Exercisable Weighted Average
Exercise Prices at 9/30/98 Contractual Life Exercise Price at 9/30/98 Exercise Price
- --------------- ---------- ----------------- ----------------- ------------ -----------------
<S> <C> <C> <C> <C> <C>
$0.500 - 1.999 625,000 9.5 years $ 0.574 180,000 $ 0.520
$2.000 - 3.499 16,000 6.5 years $ 2.375 13.600 $ 2.375
$3.500 - 4.999 3,000 7.7 years $ 4.689 11.200 $ 4.656
-------- --------
644,000 8.7 years $ 0.634 204,800 $ 0.869
-------- --------- -------- ---------
-------- --------- -------- ---------
</TABLE>
NOTE 4. INCOME TAXES
Deferred tax assets (liabilities) are summarized as follows:
<TABLE>
<CAPTION>
(in thousands) 1998
----
<S> <C>
Net operating loss carryforwards $ 2,968
Tax credit carryforwards 126
Inventory and other valuation reserves 597
-------
3,691
Gross deferred tax asset
Deferred tax asset valuation allowance (3,691)
-------
Net deferred tax asset $ -
-------
-------
</TABLE>
The Company has provided a full valuation allowance for deferred tax assets as
the Company believes that sufficient uncertainty exists regarding the
realizability of the deferred tax assets.
The federal net operating loss carryforward of approximately $8,200,000 at
September 30, 1998 expires by fiscal year 2013 if not offset against taxable
income. The amount of and the benefit from net operating losses that can be
carried forward may be impaired in certain circumstances. Events which may
cause
24
<PAGE>
changes in the Company's tax carryovers include, but are not limited to, a
cumulative ownership change of more than 50% over a three-year period.
NOTE 5. COMMITMENTS AND CONTINGENCIES
The Company has signed a lease for 9,700 square feet in a building located in
San Jose, California, for a term of 3 years ending October 2001. The lease
provides for rentals of $175,000, $192,000 and $211,000 (including applicable
real property taxes and insurance costs) for fiscal years 1999, 2000 and 2001,
respectively. Future lease commitments for the next five fiscal years for all
other leases as of September 30, 1998 were as follows (in thousands):
<TABLE>
<CAPTION>
Fiscal year ending September 30, Capital Leases Operating Leases
- -------------------------------- -------------- ----------------
<S> <C> <C>
1999 $ 34 $ 268
2000 33 253
2001 30 256
2002 10 6
2003 4 -
------ ------
Total minimum lease payments 111 $ 783
Less amount representing interest (15) ------
------ ------
Present value of minimum lease payments 96
Less current portion (28)
------
Long-term lease obligation $ 68
------
------
</TABLE>
The Company also leases certain equipment on a month-to-month basis. Total
rental expense under all operating leases was $264,000 and $254,000 in fiscal
1998 and 1997, respectively.
On October 1, 1995, the Company entered into an Employment Agreement (the
"Agreement") with John F. Bishop, Vice-Chairman of the Board, Treasurer, and
Secretary of the Company, whereby Mr. Bishop agreed to provide his services
for a monthly salary of $6,500 for an initial term of two years. On the
first day of each month, the initial term was automatically extended for an
additional month, unless either party notified the other in writing of his or
its desire not to extend the term. In the event the Company elected not to
extend the term or there was a change in control of the Company (the date of
such event is referred to as the "Transition Date"), Mr. Bishop agreed to
continue to perform services for the Company for a three-month transition
period and the Company agreed to maintain his compensation and other benefits
for the three-month transition period and an additional twenty-one months.
Effective January 1, 1997, Mr. Bishop agreed to reduce his monthly salary to
$3,250 until the Transition Date. The Agreement also allowed Mr. Bishop the
use of an automobile and the right to receive title to the automobile,
arising out of his agreement to forgo $56,846 of salary in prior years.
Maintenance, insurance and gasoline costs for the automobile and an office
location were also part of the Agreement. The Agreement was terminated by
mutual agreement effective September 30, 1998. As part of the mutual
termination, the Company agreed to pay Mr. Bishop approximately $350,000 over
a 24-month period commencing in October 1998. The Company accrued the
$350,000, plus a reserve for related expenses, in fiscal 1998.
NOTE 6. BANK BORROWINGS
At September 30, 1998, the Company had outstanding borrowings in the
aggregate principal amount of $134,000 under its bank revolving loan (the "Bank
Revolving Loan"). The Bank Revolving Loan provides for borrowings up to 85% of
eligible accounts receivable, not to exceed $1,000,000. Interest under the Bank
Revolving Loan is charged at the prime rate as published by The Wall Street
Journal plus
25
<PAGE>
3.5% per annum (12.0% as of September 30, 1998) and is payable monthly. The
Bank Revolving Loan will expire in August 2001. The Bank Revolving Loan's
restrictive covenants preclude or limit the Company's ability to take certain
actions, such as paying dividends, making loans, making acquisitions or
incurring indebtedness, without the bank's prior written consent. At
September 30, 1998, the Company was in compliance with such covenants. The
Bank Revolving Loan is secured by substantially all of the Company's assets.
At September 30, 1998, the Company had outstanding borrowings in the
aggregate principal amount of $500,000 under its bank term loan (the "Bank Term
Loan"). Interest under the Bank Term Loan is charged at the prime rate as
published by The Wall Street Journal plus 3.5% per annum (12.0% as of September
30, 1998) and is payable monthly. The principal amount of the Bank Term Loan is
payable in monthly installments of approximately $8,000 through August 2001 and
contains the same restrictive covenants as the Bank Revolving Loan. The Bank
Term Loan is secured by substantially all of the Company's assets.
The loan and security agreement governing both the Bank Revolving Loan and
the Bank Term Loan contains a minimum annual interest charge requirement of
$90,000 per year. If average borrowings under the Bank Revolving Loan and the
Bank Term Loan do not result in annual interest charges totaling at least
$90,000, the Company will be required to pay the difference between actual
interest paid and the minimum interest charge to the lender.
NOTE 7. SUBORDINATED LOANS AND BRIDGE LOANS
At September 30, 1998, the Company had no outstanding borrowings under its
revolving loan with James N. Cutler, Jr., a director and shareholder of the
Company (the "Cutler Revolving Loan"). The Cutler Revolving Loan provides for
borrowings up to $500,000. Interest under the Cutler Revolving Loan is charged
at the prime rate as published in The Wall Street Journal plus 2% per annum
(10.5% as of September 30, 1998), and is payable monthly. As further
consideration for the Cutler Revolving Loan, the Company issued the lender
warrants to purchase 100,000 shares of the Company's common stock at an exercise
price of $0.52 per share. The warrants expire on July 1, 2000. The Cutler
Revolving Loan will expire on July 1, 1999 and contains various restrictive
covenants that preclude or limit the Company's ability to take certain actions,
such as paying dividends or incurring indebtedness, without the lender's prior
written consent. At September 30, 1998, the Company was in compliance with such
covenants. The Cutler Revolving Loan is secured by substantially all of the
Company's assets. The Cutler Revolving Loan is subordinated to the Bank
Revolving Loan, the Bank Term Loan and will be subordinated to any future
extension of credit by a financial institution or any seller financing in
connection with a strategic acquisition by the Company.
At September 30, 1998, the Company had outstanding borrowings in the
aggregate principal amount of $200,000 under a subordinated convertible note
issued on July 20, 1998 to Cascade Microwave Investments LLC (the "Cascade
Note"). All principal and interest is due June 30, 2000. Interest is charged
at 8% per annum. The Cascade Note is subordinated to the Bank Revolving Loan
and the Bank Term Loan and will be subordinated to any future extension of
credit by a financial institution or any seller financing in connection with a
strategic acquisition by the Company. After October 1, 1998, either the Company
or the note holder can convert the Cascade Note into 200,000 shares of the
Company's common stock.
From October 15, 1997 through March 20, 1998, the Company was party to a loan
and security agreement (the "Loan Facility") with John F. Bishop and Ann R.
Bishop, trustees of the Bishop Family Trust (the "Bishop Family Trust"). The
Loan Facility provided for a term loan of $1,000,000 and revolving advances up
to $450,000. Interest was charged at the prime rate plus 5% and was payable
26
<PAGE>
monthly. Under the terms of the Loan Facility, the Company paid facility fees
of up to $141,000 to the Bishop Family Trust by issuance of 282,000 shares of
common stock in lieu of cash payment. The Loan Facility terminated on March 20,
1998, and all obligations thereunder were repaid in full on such date with the
proceeds from the Rights Offering.
From December 16, 1996, through October 15, 1997, the Company was party to a
Subordinated Loan Agreement with J. Bradford Bishop, Chairman and Chief
Executive Officer of the Company, and John F. Bishop, Vice Chairman, Treasurer
and Secretary of the Company (together, the "Bishops"). The Bishops advanced
$600,000 to the Company under the Subordinated Loan Agreement. Interest accrued
thereon at 8% per annum, payable quarterly. In connection with the Subordinated
Loan Agreement, the Company issued warrants to the Bishops to purchase 90,000
shares of Common Stock at $3.00 per share. The Subordinated Loan Agreement
terminated on October 15, 1997, and all obligations thereunder were repaid in
full on such date with the proceeds from the Loan Facility with the Bishop
Family Trust. As consideration for the early repayment of such obligations, the
warrants issued to the Bishops were canceled on October 15, 1997.
During fiscal year 1997 and through October 15, 1997, the Company received
several bridge loans from the Bishops payable on demand (the "Bridge Loans"),
which amounted to $400,000, plus interest, on September 30, 1997. Interest
accrued thereon at 10% per annum. The Bridge Loans were repaid in full on
October 15, 1997, with the proceeds from the Loan Facility with the Bishop
Family Trust.
NOTE 8. COMMON STOCK ISSUANCES
On March 20, 1998, the Company issued approximately 5,802,000 shares of
common stock pursuant to a rights offering (the "Rights Offering") to its
stockholders. Gross proceeds from the Rights Offering were approximately
$742,000 paid in cash and approximately $2,159,000 paid in retirement of Company
indebtedness. Subsequent to the Rights Offering, the Company issued an
aggregate of 725,000 shares of the Company's common stock to its directors upon
the exercise of Stock Purchase Rights granted pursuant to the Company's 1998
Stock Plan. See "Note 1--Prepaid expenses."
NOTE 9. CONSOLIDATED STATEMENTS OF CASH FLOWS
During the year ended September 30, 1998, the Company issued 300,000
shares of its common stock in exchange, in part, for services rendered valued
at $147,000, 225,000 shares in exchange, in part, for $110,000 of prepaid
Board of Directors Fees, 282,000 shares in exchange for the retirement of
facility fees of $141,000, and 4,318,000 shares in exchange for the
retirement of approximately $2,159,000 of debt, including accrued interest.
See Notes 1, 7 and 8.
NOTE 10. SUBSEQUENT EVENTS
On December 18, 1998, the Company entered into a definitive agreement to
acquire all of the outstanding shares of Axiom Electronics, Inc. ("Axiom") for
$2,600,000 in cash, $4,900,000 (plus the amount of Axiom's net earnings from
August 1, 1998 through the closing date) in promissory notes and warrants to
acquire 500,000 shares of the Company's common stock. The acquisition is
expected to close in late January 1999, subject to the satisfaction of various
closing conditions, including the Company's ability to secure acquisition
financing. There can be no assurance, however, that the acquisition of Axiom
will be consummated.
In November 1998, the Company completed the move of its manufacturing and
administration operations to a 9,700 square feet in a building located in San
Jose, California, for a term of 3 years ending September 2001. See Note 5.
27
<PAGE>
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
To the Board of Directors and
Stockholders of EIP Microwave, Inc.
We have audited the accompanying consolidated balance sheet of EIP Microwave,
Inc. and subsidiary (the Company) as of September 30, 1998, and the related
consolidated statements of operations, stockholders' equity (deficiency), and
cash flows for the year then ended. 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
audit. The consolidated financial statements for the year ended September 30,
1997 were audited by Meredith, Cardozo, Lanz & Chiu LLP, whose practice has been
combined with our firm and whose report dated November 20, 1997 included an
explanatory paragraph relating to a going concern uncertainty.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about 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 audit provides a reasonable basis
for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EIP Microwave, Inc.
and subsidiary as of September 30, 1998, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred significant losses from operations and will
need to obtain additional financing to meet its business plans for fiscal 1999
and beyond. These conditions raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
/s/ BDO SEIDMAN, LLP
BDO SEIDMAN, LLP
San Jose, California
December 18, 1998
28
<PAGE>
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
of EIP Microwave, Inc.
We have audited the consolidated balance sheet of EIP Microwave, Inc. and
subsidiary as of September 30, 1997 (not included herein), and the related
consolidated statements of operations, stockholders' equity, and cash flows
for the year then ended. 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 audit.
We conducted our audit in accordance with generally accepted auditing
standards. 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 audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of EIP Microwave, Inc.
and subsidiary as of September 30, 1997, and the results of their operations and
their cash flows for the year then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming the Company
will continue as a going concern. As discussed in Note 1 to the financial
statements, the Company has incurred significant recent losses from operations
and will need to obtain additional financing to meet its business plans for
fiscal 1998 and beyond. These conditions raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Meredith, Cardozo, Lanz & Chiu LLP
San Jose, California
November 20, 1997
29
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE
The Company engaged Meredith, Cardozo, Lanz & Chiu LLP as its new
independent auditors as of October 9, 1997. The practice of Meredith, Cardozo,
Lanz & Chiu LLP combined with BDO Seidman, LLP as of October 1, 1998.
On October 9, 1997, the Company dismissed Price Waterhouse LLP as its
independent auditors. The reports of Price Waterhouse LLP on the financial
statements for the years ended September 30, 1995 and 1996 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principle, except that their reissued
report on the financial statements for the year ended September 30, 1996, which
was dual dated December 23, 1996 and October 23, 1997 includes an explanatory
paragraph to express substantial doubt regarding the Company's ability to
continue as a going concern. The Company's Audit Committee participated in and
approved the decision to change independent auditors. In connection with its
audits for the two most recent fiscal years and through October 9, 1997, there
have been no disagreements with Price Waterhouse LLP on any matter of accounting
principles or practices, financial statement disclosure, or auditing scope or
procedure, which disagreements if not resolved to the satisfaction of Price
Waterhouse LLP would have caused them to make reference thereto in their report
on the financial statements for such years. Price Waterhouse LLP furnished the
Company with a letter addressed to the Securities and Exchange Commission
stating that it agrees with the statements in this paragraph.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
Incorporated by reference to the Company's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days from September 30, 1998.
ITEM 10. EXECUTIVE COMPENSATION
Incorporated by reference to the Company's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days from September 30, 1998.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference to the Company's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days from September 30, 1998.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference to the Company's definitive Proxy Statement for
its 1999 Annual Meeting of Stockholders, which will be filed with the Securities
and Exchange Commission within 120 days from September 30, 1998.
30
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) Exhibits.
EXHIBIT NO.
3.1 Company's Certificate of Incorporation, filed on April 29, 1987,
and Certificate of Amendment of Certificate of Incorporation, filed
February 8, 1993, previously filed on February 12, 1993, as Exhibit
3(a) to Form 10-QSB Quarterly Report for quarter ended December 31,
1992, and incorporated herein by reference.
3.2 Company's Bylaws, previously filed June 25, 1987 (File No. 0-5351),
as Exhibit 3(b) to Form 8-K, and incorporated herein by reference.
10.1 Standard Form Lease dated as of August 6, 1998, by and between
Roger F. and Wendy W. Mairose, Trustees, as landlord, and the
Company, as tenant, covering the Company's facility located at 109
Bonaventura Drive, San Jose, California.
10.2 Loan and Security Agreement dated as of October 15, 1997, between
the Company and the Bishop Family Trust, previously filed on
November 14, 1997, as Exhibit 10(i) to Form SB-2/A Registration
Statement (No. 333-37289), and incorporated herein by reference.
10.3 Commitments to Subscribe in Rights Offering dated February 18,
1998, previously filed on February 19, 1998, as Exhibit 10(dd) to
Form SB-2/A Registration Statement (No. 333-42595), and
incorporated herein by reference.
10.4 Loan and Security Agreement dated as of August 4, 1998, between the
Company and Fremont Financial Corporation.
10.5 Subordinated Loan Agreement dated as of July 20, 1998, between the
Company and James N. Cutler, Jr. ("Cutler").
10.6 Security Agreement dated as of July 20, 1998, between the Company
and Cutler.
10.7 Warrant Certificate dated as of July 20, 1998, issued by the
Company to Cutler.
10.8 Subordinated Convertible Promissory Note dated July 20, 1998,
issued by the Company to Cascade Microwave Investments, LLC.
10.9 Fixed Price Subcontract dated August 15, 1997, between the Company
and ManTech Systems Engineering Corporation, previously filed on
February 19, 1998, as Exhibit 10(k) to Form SB-2/A Registration
Statement (No. 333-42595), and incorporated herein by reference. **
10.10 OEM Purchase Agreement effective on May 28, 1997, between the
Company and Hewlett-Packard Company, previously filed on August 14,
1997, as Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter
ended June 30, 1997, and incorporated herein by reference. **
10.11 1998 Stock Plan, previously filed on January 14, 1998, as an
attachment to the definitive Proxy Statement on Schedule 14A, and
incorporated herein by reference. *
31
<PAGE>
10.12 Company's medical reimbursement plan (entitled "Full Medical
Coverage") covering certain officers, previously filed on December
23, 1981 (File No. 0-5351), as Exhibit 10(o) to Form 10-K Annual
Report for fiscal year ended September 30, 1981, and incorporated
herein by reference. *
10.13 Company's Tax and Financial Counseling reimbursement plan covering
officers, previously filed on December 23, 1981 (File No. 0-5351),
as Exhibit 10(p) to Form 10-K Annual Report for fiscal year ended
September 30, 1981, and incorporated herein by reference. *
10.14 Indemnification Agreement dated July 15, 1992, between the Company
and J. Bradford Bishop, previously filed on December 20, 1992, as
Exhibit 10(n) to Form 10-KSB Annual Report for fiscal year ended
September 30, 1992 (the "1992 Annual Report"), and incorporated
herein by reference.
10.15 Indemnification Agreement dated July 15, 1992, between the Company
and Robert D. Johnson, previously filed on December 20, 1992, as
Exhibit 10(o) to the 1992 Annual Report, and incorporated herein by
reference.
10.16 Indemnification Agreement dated July 15, 1992, between the Company
and J. Sidney Webb, Jr., previously filed on December 20, 1992, as
Exhibit 10(q) to the 1992 Annual Report, and incorporated herein by
reference.
10.17 Indemnification Agreement dated July 15, 1992, between the Company
and John F. Bishop, previously filed on December 23, 1993, as
Exhibit 10(m) to Form 10-KSB Annual Report, for fiscal year 1993
(the "1993 Annual Report"), and incorporated herein by reference.
10.18 Indemnification Agreement dated February 13, 1996, between the
Company and Michael E. Johnson, previously filed on May 9, 1996, as
Exhibit 10(a) to Form 10-QSB Quarterly Report for quarter ended
March 31, 1996, and incorporated herein by reference.
10.19 Indemnification Agreement dated February 19, 1997, between the
Company and Ivan Andres, previously filed on May 13, 1997, as
Exhibit 10(d) to Form 10-QSB Quarterly Report for quarter ended
March 31, 1997, and incorporated herein by reference.
16 Letter dated November 13, 1997 from Price Waterhouse LLP to the
Securities and Exchange Commission, previously filed on November
14, 1997, as Exhibit 16 to Form 8-K/A Current Report, and
incorporated herein by reference.
21 Subsidiaries of the Company, previously filed on December 30, 1996,
as Exhibit 21 to the 1996 Annual Report, and incorporated herein by
reference.
23.1 Consent of BDO Seidman, LLP.
23.2 Consent of Meredith, Cardozo, Lanz and Chiu LLP.
32
<PAGE>
27 Financial Data Schedule.
___________________________________
* Management contract or compensatory plan or arrangement.
** Portions of this document are confidential, and have been omitted pursuant
to 17 C.F.R. Section 230.406 and filed separately with the Securities and
Exchange Commission.
(B) Reports on Form 8-K.
None.
33
<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.
EIP MICROWAVE, INC.
January 12, 1999 By: /s/ J. BRADFORD BISHOP
----------------------
J. Bradford Bishop
Chairman of the Board
Chief Executive Officer and Director
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.
/s/ J. BRADFORD BISHOP Chairman of the Board, January 12, 1999
- ---------------------- Chief Executive Officer
J. Bradford Bishop and Director (Principal
Executive Officer)
/s/ JOHN F. BISHOP Vice Chairman and Director January 12, 1999
- ----------------------
John F. Bishop
/s/ JAMES N. CUTLER Director January 12, 1999
- ----------------------
James N. Cutler
/s/ MICHAEL E. JOHNSON Director January 12, 1999
- ----------------------
Michael E. Johnson
/s/ ROBERT D. JOHNSON Director January 12, 1999
- ----------------------
Robert D. Johnson
/s/ J. SIDNEY WEBB Director January 12, 1999
- ----------------------
J. Sidney Webb
/s/ TOM LINNEMAN Chief Operating Officer, January 12, 1999
- ---------------------- Chief Financial Officer and
Tom Linneman Secretary (Principal Financial
Officer and Principal Accounting
Officer)
<PAGE>
LEASE
Between
ROGER F. MAIROSE AND WENDY W. MAIROSE, TRUSTEES
-----------------------------------------------
and
EIP MICROWAVE, INC.
-------------------
<PAGE>
LEASE
This Lease is made this 6th day of AUGUST 1998, between ROGER F. AND
WENDY W. MAIROSE. TRUSTEES ("LANDLORD"), AND EIP MICROWAVE, INC. ("TENANT"),
who agree as follows:
1. RECITALS: This Lease is made with reference to the following facts and
objectives:
A. LANDLORD is the Owner of the Premises commonly known as 109
Bonaventura Dr., San Jose, California which consist generally of a
multi-tenant building.
B. TENANT is willing to lease the Premises from LANDLORD pursuant
to the provisions stated in this Lease.
C. TENANT wishes to lease the Premises for purposes of operating
assembly, testing, distribution of electronic equipment and research and
development.
D. TENANT has examined the Premises and is fully informed of
their condition.
2. PREMISES: LANDLORD leases to TENANT and TENANT leases from LANDLORD the
real property located in the City of SAN JOSE, County of SANTA CLARA, State
of California, described as 109 Bonaventura Dr., San Jose, California
("Premises").
3. TERM: The term shall commence October 1, 1998, and shall expire
September 30, 2001.
4. DELIVERY OF POSSESSION: If LANDLORD is unable to deliver possession of
the Premises by the date specified for the commencement of the term, LANDLORD
shall not be liable for any damage caused for failing to deliver possession,
and this Lease shall not be void or voidable. TENANT shall not be liable for
Rent until LANDLORD delivers possession of the Premises to TENANT, but the
term shall not be extended by the delay. If LANDLORD does not deliver
possession of the Premises to TENANT within twelve (12) months of the date of
execution of this Lease, either LANDLORD or TENANT can elect to terminate
this Lease by giving notice to the other at any time before the date LANDLORD
delivers possession of the Premises to TENANT.
5. ACCEPTANCE OF PREMISES: TENANT'S taking possession of the Premises on
commencement of the term shall constitute TENANT'S acknowledgment that the
Premises are in good condition.
6. RENT:
A. BASE RENT: TENANT shall pay to LANDLORD as monthly Rent ("Base
Rent"), without deduction, setoff, prior notice, or demand, the sum of PER
SCHEDULE A Dollars ($______), per month in advance of the first (1st) day of
each month, commencing on the date the term commences, and continuing during
the term. Monthly Rent for the first month or portion of it shall be paid on
the day the term commences. Monthly Rent for any partial month shall be
prorated at the rate of one-thirtieth (1/30th) of the monthly Rent per day.
Monthly Rent shall be adjusted according to the schedule attached hereto as
Schedule A. Base Rent and all other sums payable to LANDLORD hereunder shall
be herein referred to as Rent.
All Rent shall he paid to LANDLORD at the address to which notices to
LANDLORD are given.
B. LATE CHARGES: LANDLORD hereby acknowledges that late payment by
TENANT of Rent will cause LANDLORD to incur costs not contemplated by this
Lease, the exact amount of which will be extremely difficult to ascertain.
Such costs include, but are not limited to, processing and accounting
charges, and late charges, which may be imposed upon LANDLORD by any Lender.
Accordingly, if any Rent shall not be received by LANDLORD on or before the
date such amount shall be due, then, without any requirement for notice to
TENANT, TENANT shall pay to LANDLORD a late charge equal to six percent (6%)
of each such overdue amount. If payment is not made within five (5) days
after the payment is due, the amount of the late charge shall increase to ten
percent (10%) of such overdue amount. The parties hereby agree that such late
charge represents a fair and reasonable estimate of the costs LANDLORD will
incur by reason of such late payment. Acceptance of such late charge by
LANDLORD shall in no event constitute a waiver of TENANT'S Default or Breach
with respect to such overdue amount, nor prevent the exercise of any of the
other rights and remedies granted hereunder. In the event that a late charge
becomes payable hereunder, whether or not collected, for three (3)
installments of Base Rent at any time during the term, then notwithstanding
any provision of this Lease to the contrary, Base Rent shall, at LANDLORD'S
option, become due and payable quarterly in advance.
7. COMMON AREAS - OPERATING COSTS:
TENANT shall pay to LANDLORD at the times set forth in this paragraph
TENANT'S Share (as defined in Paragraph 16) of LANDLORD's operating costs for
the building and outside areas in which the Premises are located; in monthly
installments payable with the Base Rent, as established by LANDLORD in
accordance with Paragraph 16 hereof.
LANDLORD'S operating costs include, without limitation, all costs of any
kind paid or incurred by LANDLORD in operating, cleaning, equipping,
protecting, lighting, repairing. replacing and maintaining the areas of the
building not leased or available for lease to tenants, common areas,
landscaping, parking areas and walkways. The costs shall include, without
<PAGE>
limitation. utilities, supplies, janitorial services, employees' wages,
social security and unemployment insurance contributions, union benefits,
rubbish removal, maintenance and replacement of landscaping. and premiums for
commercial general liability insurance and all risk property insurance. These
costs shall include a reasonable reserve for repair and replacement of
equipment used in the maintenance and operation of the building and all costs
except those properly charged as a capital expense and depreciation of the
original cost of construction. TENANT'S Share, of such expense, shall be
considered to he a TENANT cost for purposes of Paragraph 16 hereof.
LANDLORD shall keep full, accurate, and separate books of account
covering LANDLORD'S operating costs, and the statement to TENANT shall
accurately reflect the total operating costs and TENANT'S share. The books of
account shall be retained by LANDLORD for a period of at least ten (10)
months after the expiration of each calendar year. TENANT shall have the
right at all reasonable times during the term to inspect the books of account.
8. SECURITY DEPOSIT: On execution of this Lease, TENANT shall deposit with
LANDLORD FOURTEEN THOUSAND FIVE HUNDRED FIFTY-THREE Dollars ($14,553.00) as a
security deposit for the performance by TENANT of the provisions of this
Lease. If TENANT is in default, LANDLORD can use the security deposit, or any
portion of it, to cure the default or to compensate LANDLORD for all damage
sustained by LANDLORD resulting from TENANT'S default. TENANT shall
immediately on demand pay to LANDLORD a sum equal to the portion of the
security deposit expended or applied by LANDLORD as provided in this
paragraph so as to maintain the security deposit in the sum initially
deposited with LANDLORD. If TENANT is not in default at the expiration or
termination of this Lease, LANDLORD shall return the security deposit to
TENANT. LANDLORD'S obligation with respect to the security deposit are those
of a debtor and not a trustee. LANDLORD can maintain the security deposit
separate and apart from LANDLORD'S general funds or can commingle the
security deposit with LANDLORD'S general and other funds. LANDLORD shall not
be required to pay TENANT interest on the security deposit.
9. TAXES; ASSESSMENTS:
A. PERSONAL PROPERTY TAXES: TENANT shall pay before delinquency all
taxes, assessments, license fees, and other charges ("taxes") that are levied
and assessed against TENANT'S personal property installed or located in or on
the Premises, and that become payable during the term. On demand by LANDLORD,
TENANT shall furnish LANDLORD with satisfactory evidence of these payments.
B. REAL PROPERTY TAXES: TENANT shall pay to LANDLORD Tenant's Share
of the amount, if any. by which Real Property Taxes applicable to the
Premises for any fiscal tax year increase over the Real Property Taxes for
The fiscal tax year during which the term commences. As used herein, the term
"Real Property Taxes" shall include any form of assessment, real estate,
general, special, ordinary or extraordinary or rental levy or tax (other than
inheritance, personal income or estate taxes), improvement bond and/or
license fee imposed upon or levied against any legal or equitable interest of
LANDLORD in the Premises, LANDLORD'S right to other income therefrom and/or
LANDLORD'S business of leasing, by any authority having the direct or
indirect power to tax. Real Property Taxes shall also include any charge or
increase imposed by reason of events occurring during the term of this Lease,
including, but not limited to, a change in ownership of the Premises.
TENANT'S said share of such real property taxes shall be considered to
be a TENANT cost for purposes of Paragraph 16 hereof.
If any general or special assessment is levied and assessed against the
building, other improvements, or land of which the Premises are a part,
LANDLORD can elect to either pay the assessment in full or allow the
assessment to go to bond. If LANDLORD pays the assessment in full, TENANT
shall pay to LANDLORD each time a payment of real property taxes is made a
sum equal to that which would have been payable (as both principal and
interest) had LANDLORD allowed the assessment to go to bond.
10. USE: TENANT shall use the Premises for assembly, testing, distributing
of electronic equipment and research and development, and for no other use
without LANDLORD'S prior written consent.
A. LIMITATIONS ON USE: TENANT'S use of the Premises as provided in
this Lease shall be in accordance with the following:
(1) CANCELLATION OF INSURANCE: INCREASE IN INSURANCE RATES:
TENANT shall not do, bring, or keep anything in or about the Premises that
will cause a cancellation of any insurance covering the building in which the
Premises are located.
If the rate of any insurance carried by LANDLORD is increased as a
result of TENANT'S use, TENANT shall pay to LANDLORD within ten (10) days
before the date LANDLORD is obligated to pay a premium on the insurance, or
within ten (10) days after LANDLORD delivers to TENANT a certified statement
from LANDLORD'S insurance carrier stating that the rate increase was caused
solely by an activity of TENANT on the Premises as
<PAGE>
permitted in this Lease, whichever date is later, a sum equal to the
difference between the original premium and the increased premium.
(2) COMPLIANCE WITH LAWS: TENANT shall comply with all laws,
covenants or restrictions of record, building codes, regulations and
ordinances (collectively "laws") concerning the Premises or TENANT'S use of
the Premises, including, without limitation, the obligation at TENANT'S cost
to alter, maintain, or restore the Premises in compliance and conformity with
all laws relating to the condition, use, or occupancy of the Premises during
the term. If any law is changed after the commencement date of this Lease so
as to require during the term the construction of an addition and/or an
alteration of the building, or the reinforcement or other physical
modification of the Building ("Capital Expenditure"), LANDLORD and TENANT
shall allocate the cost of such work as follows:
(a) Subject to subparagraph (c) below, if such Capital
Expenditures are required as a result of the specific and unique use of the
Premises by Tenant as compared with uses by tenants in general, TENANT shall
be fully responsible for the cost thereof, provided, however that if such
Capital Expenditure is required during the last two (2) years of this Lease
and the cost thereof exceeds six (6) months' Base Rent, TENANT may instead
terminate this Lease unless LANDLORD notifies TENANT, in writing, within ten
(10).days after receipt of TENANT'S termination notice that LANDLORD has
elected to pay the difference between the actual cost thereof and the amount
equal to six (6) months' Base Rent. If TENANT elects termination, TENANT
shall immediately cease the use of the Premises which requires such Capital
Expenditure and deliver to LANDLORD written notice specifying a termination
date at least ninety (90) days thereafter. Such termination date shall,
however, in no event be earlier than the last day that TENANT could legally
utilize the Premises without commencing such Capital Expenditure.
(b) If such Capital Expenditure is not the result of the
specific and unique use of the Premises by TENANT (such as, governmentally
mandated seismic modifications), then Landlord shall pay the cost thereof and
such cost shall be prorated between the parties and TENANT shall only be
obligated to pay each month during the remainder of the term on the date on
which Base Rent is due an amount equal to the product of multiplying the cost
of such replacement by a fraction, the numerator of which is one (1) and the
denominator of which is the useful life as reasonably determined by LANDLORD
(including interest at the rate often percent (10%) per annum, with TENANT
reserving the right to prepay the obligation at any time); provided, however,
that if such Capital Expenditure is required during the last two years of
this Lease or if LANDLORD reasonably determines that it is not economically
feasible to pay its share thereof, LANDLORD shall have the option to
terminate this Lease upon ninety (90) days prior written notice to TENANT
unless TENANT notifies LANDLORD, in writing, within ten (10) days after
receipt of LANDLORD'S termination notice that TENANT will pay for such
Capital Expenditure. If LANDLORD does not elect to terminate, and fails to
tender its share of any such Capital Expenditure, TENANT may advance such
funds and deduct same, with interest, from Rent until LANDLORD'S share of
such costs have been fully paid. If TENANT is unable to finance TENANT'S
share, or if the balance of the Rent due and payable for the remainder of
this Lease is not sufficient to fully reimburse TENANT on an offset basis,
TENANT shall have the right to terminate this Lease upon thirty (30) days
written notice to Lessor.
(c) Notwithstanding the above, the provisions concerning
Capital Expenditures are intended to apply only to non-voluntary, unexpected,
and new Applicable Requirements. If the Capital Expenditures are instead
triggered by TENANT as a result of an actual or proposed change in use,
change in intensity of use, or modification to the Premises then, and in that
event, TENANT shall be fully responsible for the cost thereof, and TENANT
shall not have any right to terminate this Lease.
(3) WASTE; NUISANCE: TENANT shall not use the Premises in any manner
that will constitute waste, nuisance, or unreasonable annoyance (including,
without limitation, the use of loudspeakers or sound or light apparatus that
can be heard or seen outside the Premises) to owners or occupants of adjacent
properties.
TENANT shall not use the Premises for sleeping, washing clothes,
cooking, or the preparation, manufacture or mixing of anything that might
emit any odor or objectionable noises or lights onto adjacent properties.
(4) OVERLOADING: TENANT shall not do anything on the Premises
that will overload, cause damage to, vibrate or shake the building in which
the Premises are located.
11. MAINTENANCE:
A. TENANT'S MAINTENANCE: Subject to the provisions of paragraphs
10.A(2) (Compliance With Laws), 11.C Landlord's Maintenance), 17
(Destruction) and 18 (Condemnation), TENANT at its cost shall maintain, in
good condition, all portions of the Premises (whether or not the portion of
the Premises requiring repairs, or the means of repairing the same, are
reasonably or readily accessible to TENANT, and whether or not the need for
such repairs occurs as a result of TENANT'S use, or any prior use, the
elements or the age of the Premises). TENANT shall also be responsible for
keeping the roof and roof drainage clean and
<PAGE>
free of debris. TENANT'S obligations shall include restorations, replacements
or renewals when necessary to keep the Premises and all improvements thereon
or a part thereof in good order, condition and state of repair.
B. SERVICE CONTRACTS: TENANT shall, at TENANT'S sole expense, procure
and maintain contracts, with copies to LANDLORD, in customary form and
substance for, and with contractors specializing and experienced in the
maintenance of the following equipment and improvements: (i) HVAC equipment;
(ii) fire extinguishing systems, including fire alarm and/or smoke detection;
and (iii) any other equipment as reasonably required by LANDLORD.
C. LANDLORD'S MAINTENANCE: LANDLORD, at its cost, shall maintain, in
good condition, the surface and structural elements of the roof, foundations
and bearing wall. Except as herein provided, LANDLORD shall have no
obligation to maintain the Premises.
TENANT shall be liable for any damage to the building in which the
Premises are located resulting from the acts or omissions of TENANT or its
authorized representatives.
12. ALTERATIONS: TENANT shall not make any alterations to the Premises
without LANDLORD'S consent. All work with respect to allowed alterations
shall be performed by MAI Industries, Inc., or such other contractor as may
be designated by LANDLORD. With respect to allowed alterations. TENANT shall:
(i) prior to commencing work, acquire all applicable governmental permits,
copies of which, together with the plans therefor, shall be furnished
LANDLORD prior to commencing work; (ii) comply with all conditions of said
permits and perform all work in a good and workmanlike manner with good and
sufficient materials; (iii) upon completion, provide LANDLORD "as-built"
plans and specifications; and (iv) for work not performed by MAI Industries,
Inc., which costs an amount greater than Ten Thousand Dollars ($10,000.00),
provide a lien and completion bond in an amount equal to one hundred fifty
percent (150%) of the estimated cost of the work. Any alterations made shall
remain and be surrendered with the Premises on expiration or termination of
the term, except that LANDLORD can elect within thirty (30) days before
expiration of the term, or within thirty (30) days after termination of the
term, to require TENANT to remove any alterations that TENANT has made to the
Premises. If LANDLORD so elects, TENANT at its cost shall restore the
Premises to the condition designated by LANDLORD in its election, before the
last day of the term, or within thirty (30) days after notice of election is
given, whichever is later.
If TENANT makes any alterations to the Premises as provided in this
paragraph, the alterations shall not be commenced until twenty (20) days
after the LANDLORD has received notice from TENANT stating the date the
installation of the alterations is to commence so that LANDLORD can post and
record an appropriate Notice of Nonresponsibility.
13. MECHANICS' LIENS: TENANT shall pay all costs for construction done by
it or caused to be done by it on the Premises as permitted by this Lease.
TENANT shall keep the building, other improvements, and land of which the
Premises are a part free and clear of all mechanic's liens resulting from
construction done by or for TENANT.
TENANT shall have the right to contest the correctness or the validity
of any such lien if, immediately on demand by LANDLORD, TENANT procures and
records a lien release bond issued by a corporation authorized to issue
surety bonds in California in an amount equal to one and one-half (1 - 1/2)
times the amount of the claim of lien. The bond shall meet the requirements
of Civil Code Section 3143 and shall provide for the payment of any sum that
the claimant may recover on the claim (together with costs of suit, if it
recovers in the action).
14. UTILITIES AND SERVICES:
A. TENANT'S UTILITIES AND SERVICES: TENANT shall make all
arrangements for and pay for all utilities, telecommunication services, and
all other services furnished to or used by TENANT or by the Premises,
including, without limitation, gas, electricity, water, telecommunication
service and trash collections. TENANT shall also pay for any and all
connection charges and other maintenance and repair of any cabling or other
systems required to supply such utility service to the Premises. TENANT shall
have reasonable access to any wiring or cabling within the Premises. If the
wiring or cabling is in a portion of the building in which the Premises is a
part, but is not accessible from the Premises, TENANT shall notify LANDLORD
of the requirement of any such repairs so that reasonable arrangements can be
made for TENANT to effect any such needed repairs. TENANT agrees that
LANDLORD shall have no responsibility whatsoever for providing any utility
service or providing utility service lines, wiring or cable maintenance,
repair or replacement and that the responsibility for all utilities and all.
utility service lines, wiring or cabling shall be with TENANT. TENANT agrees
to indemnify and hold LANDLORD free and harmless from and against any and all
claims, liabilities or damages resulting to TENANT from the failure or
interruption of use of any utility services, or otherwise resulting to any
person or to any property as a result of TENANT'S repair, maintenance or
replacement, or failure thereof, of any utility system required to be
maintained hereunder.
15. INDEMNITY AND EXCULPATION: INSURANCE:
A. EXCULPATION OF LANDLORD: LANDLORD shall not be liable for injury
or damage to the person or goods, wares, merchandise or other property of
TENANT, TENANT'S
<PAGE>
employees, contractors, invitees, customers, or any other person in or about
the Premises, whether such damage or injury is caused by or results from
fire, steam, electricity, gas, water or rain, or from the breakage, leakage,
obstruction or other defects of pipes, fire sprinklers, wires, appliances,
plumbing, HVAC or lighting fixtures, or from any other cause, whether the
said injury or damage results from conditions arising upon the Premises or
upon other portions of the Building of which the Premises are a part, or from
other sources or places. LANDLORD shall not be liable for any damages arising
from any act or neglect of any other tenant of LANDLORD. Notwithstanding
LANDLORD'S negligence or breach of this Lease, LANDLORD shall under no
circumstances be liable for injury to TENANT'S business or for any loss of
income or profit therefrom.
B. INDEMNITY: TENANT shall indemnify, protect, defend and hold
harmless the Premises, LANDLORD and its agents, partners and lenders, from
and against any and all claims, loss of rents and/or damages, liens,
judgments, penalties, attorneys' and consultants' fees, expenses and/or
liabilities arising out of, involving, or in connection with the use and/or
occupancy of the Premises by TENANT. If any action or proceeding is brought
against LANDLORD by reason of any of the foregoing matters, TENANT shall upon
notice defend the same at TENANT'S expense by counsel reasonably satisfactory
to LANDLORD and LANDLORD shall cooperate with TENANT in such defense.
LANDLORD need not have first paid any such claim in order to be defended or
indemnified.
C. PUBLIC LIABILITY AND PROPERTY DAMAGE INSURANCE:
(1) CARRIED BY TENANT: TENANT shall obtain and keep in force a
Commercial General Liability Policy of Insurance, ISO form CGO001, or its
equivalent, protecting TENANT and LANDLORD against claims for bodily injury,
personal injury and property damage based upon or arising out of the
ownership, use, occupancy or maintenance of the Premises and all areas
appurtenant thereto. Such insurance shall be on an occurrence basis providing
single limit coverage in an amount not less than Two Million Dollars
($2,000,000.00) per occurrence with an "ADDITIONAL INSURED-MANAGERS OR
LESSORS OF PREMISES ENDORSEMENT", ISO form CG2011, or its equivalent, and
contain the "AMENDMENT OF THE POLLUTION EXCLUSION ENDORSEMENT", ISO form
CG0041, or its equivalent, for damage caused by heat, smoke or fumes from a
hostile fire. The Policy shall not contain any intra-insured exclusions as
between insured persons or organizations, but shall include coverage for
liability assumed under this Lease as an "insured contract" for the
performance of TENANT'S indemnity obligations under this Lease. The limits of
said insurance shall not, however, limit the liability of TENANT nor relieve
TENANT of any obligation hereunder. All insurance carried by TENANT shall be
primary to and not contributory with any similar insurance carried by
LANDLORD, whose insurance shall be considered excess insurance only.
(2) CARRIED BY LANDLORD: LANDLORD shall maintain liability
insurance as described in Paragraph 15.C.(1), in addition to, and not in lieu
of, the insurance required to be maintained by TENANT. TENANT shall not be
named as an additional insured therein.
D. TENANT'S FIRE INSURANCE: TENANT at its cost shall maintain on all
its personal property, TENANT'S improvements, and alterations, in, on, or
about the Premises, a property insurance on an all-risk policy form, with
vandalism and malicious mischief endorsements, to the extent of at least one
hundred percent (100%) of their full replacement value. The proceeds from any
such policy shall be used by TENANT for the replacement of personal property
or the restoration of TENANT'S improvements or alterations.
E. PLATE GLASS INSURANCE: TENANT at its cost shall maintain full
coverage plate glass insurance on the Premises.
F. BOILER AND MACHINERY INSURANCE: TENANT at its cost shall maintain
boiler and machinery insurance on all boilers, air-conditioning equipment,
and other pressure vessels and systems located in, on or about the Premises.
If any of these items and the damage that may be caused by them are not
covered by the standard fire and extended coverage insurance referred to in
this Paragraph, the boiler and machinery insurance shall have limits of not
less than Five Hundred Thousand Dollars ($500,000.00) per occurrence.
The insurance policy shall be issued in the names of LANDLORD, TENANT,
and LANDLORD'S lender, as their interests appear. The insurance policy shall
provide that any proceeds shall be made payable to LANDLORD as provided in
this Paragraph.
In case this Lease is terminated, the insurance policy, all rights under
it, and the insurance proceeds shall be assigned to LANDLORD at LANDLORD'S
election.
G. FIRE INSURANCE: LANDLORD, as a TENANT cost, shall maintain on the
building and other improvements in which the Premises are located the
following policy or policies:
(1) fire and extended coverage insurance, with vandalism and
malicious mischief endorsements, and such other endorsements as LANDLORD
deems appropriate. The amount of such insurance shall be equal to the lull
replacement cost of the Premises, as the same shall exist from time to time,
or the amount required by lenders. TENANT'S alteration, trade
<PAGE>
fixtures and personal property shall be insured by TENANT under Paragraph
15.D and not by LANDLORD. Such policy or policies shall insure against all
risks of direct physical loss or damage (including the perils of flood and/or
earthquake if required by a lender and/or generally maintained by owners of
similar buildings in the vicinity of the Premises), including coverage for
debris removal and the enforcement of any laws requiring the upgrading,
demolition, reconstruction or replacement of any portion of the Premises as
the result of a covered loss. The policy or policies shall also contain an
agreed valuation provision in lieu of any coinsurance claim, waiver of
subrogation and inflation guard protection.
(2) loss of Rent coverage insuring the loss of full Rent
(including TENANT costs) for one (1) year.
H. WAIVER OF SUBROGATION: The parties release each other, and their
respective authorized representatives, from any claims for damage to any
person or to the Premises and the building and other improvements in which
the Premises are located and to the fixtures, personal property, TENANT'S
improvements, and alterations of either LANDLORD or TENANT in or on the
Premises and the building and other improvements in which the Premises are
located that are caused by or result from risks insured against, under any
insurance policies carried by the parties and in force at the time of any
such damage.
Each party shall cause each insurance policy obtained by it to provide
that the insurance company waives all right of recovery by way of subrogation
against either party in connection with any damage covered by any policy.
Neither party shall be liable to the other for any damage caused by fire or
any of the risks insured against under any insurance policy required by this
Lease. If any insurance policy cannot be obtained with a waiver of
subrogation, or is obtainable only by the payment of an additional premium
charge above that charged by insurance companies issuing policies without
waiver of subrogation, the party undertaking to obtain the insurance shall
notify the other party of this fact. The other party shall have a period of
thirty (30) days after receiving the notice either to place the insurance
with a company that is reasonably satisfactory to the other party and that
will carry the insurance with a waiver of subrogation, or to agree to pay the
additional premium if such a policy is obtainable at additional cost. If the
insurance cannot be obtained or the party in whose favor a waiver of
subrogation is desired refuses to pay the additional premium charged, the
other party is relieved of the obligation to obtain a waiver of subrogation
rights with respect to the particular insurance involved.
I. OTHER INSURANCE MATTERS: All the insurance required under this
Lease shall:
(1) Be issued by insurance companies authorized to do business in
the State of California, with a financial rating of at least an A-VII status
as rated in the most recent edition of Best's Insurance Reports.
(2) Be issued as a primary policy.
(3) Contain an endorsement requiring thirty (30) days written
notice from the insurance company to both parties and LANDLORD'S lender for
or reduction of coverage, ten (10) days notice for cancellation for
non-payment of premium.
Each policy, or a certificate of the policy, together with evidence of
payment of premiums, shall be deposited with the other party at the
commencement of the term, and on renewal of the policy not less than ten (10)
days before expiration of the term of the policy.
16. TENANT'S SHARE OF TENANT COSTS: TENANT shall pay to LANDLORD an amount
estimated by LANDLORD to be TENANT'S Share of TENANT costs (as defined
herein), for the calendar year or other accounting period used by LANDLORD,
on the first day of each month, commencing on the date the term commences, or
on the first day of the month following the month the term commences if the
term commences on a day other than the first day of a month, as the case may
be, and continuing during the term. TENANT'S Share (TENANT's Share) of TENANT
costs shall be the ratio of the total TENANT costs (as defined herein) that
the total number of square feet in the Premises bears to the total number of
leasable square feet in the building or buildings located on the land of
which the Premises are a part. TENANT costs that cover a period which is in
any part not within the term of this Lease shall be prorated. TENANT costs
are those items designated as a TENANT cost herein.
LANDLORD shall furnish to TENANT a statement showing the total actual
TENANT costs, TENANT'S Share of TENANT costs for the accounting period, and
the payments made by TENANT with respect to each accounting period within
ninety (90) days after the end of each accounting period, covering the
accounting period just ended. Each statement shall be prepared, signed and
certified to be correct by LANDLORD, or by an officer of LANDLORD if LANDLORD
is a corporation.
If TENANT'S Share of actual TENANT costs for the accounting period
exceeds the payments made by TENANT, TENANT shall pay LANDLORD the deficiency
within thirty (30) days after receipt of the statement. If TENANT'S payments
made during the accounting period exceed TENANT'S Share of actual TENANT
costs, LANDLORD shall credit the excess to the next installment of TENANT's
costs.
<PAGE>
17. DESTRUCTION:
A. DESTRUCTION DUE TO RISK COVERED BY INSURANCE: If, during the term,
the Premises or the building and other improvements in which the Premises are
located are totally or partially destroyed from a risk covered by the
insurance described in Paragraph 15, above, rendering the Premises totally or
partially inaccessible or unusable, LANDLORD shall restore the Premises or
the building and other improvements in which the Premises are located to
substantially the same condition as they were in immediately before
destruction, excepting LANDLORD shall have no obligation to restore TENANT'S
alterations additions or improvements. Such destruction shall not terminate
this Lease. If the existing laws do not permit the restoration, either party
can terminate this Lease immediately by giving notice to the other party.
If the cost of the restoration of the building exceeds the amount of
proceeds received from the insurance required under Paragraph 15, above,
LANDLORD can elect to terminate this Lease by giving notice to TENANT within
thirty (30) days after determining that the restoration cost will exceed the
insurance proceeds. In the case of destruction to the Premises only, whereby
the cost of the restoration of the Premises exceeds the amount of proceeds
received from the insurance required under Paragraph 15, above, and if
LANDLORD elects to terminate this Lease TENANT, within fifteen (15) days
after receiving LANDLORD'S notice to terminate, can elect to pay to LANDLORD,
at the time TENANT notified LANDLORD of its election, the difference between
the amount of insurance proceeds and the cost of restoration, in which case
LANDLORD shall restore the Premises, and TENANT shall diligently restore its
improvements, alterations and additions. LANDLORD shall give TENANT
satisfactory evidence that all sums contributed by TENANT as provided in this
paragraph have been expended by LANDLORD in paying the cost of restoration.
If LANDLORD elects to terminate this Lease and TENANT does not elect to
contribute toward the cost of restoration as provided in this paragraph, this
Lease shall terminate.
B. DESTRUCTION DUE TO RISK NOT COVERED BY INSURANCE: If, during the
term, the Premises or the building and other improvements in which the
Premises are located are totally or partially destroyed from a risk not
covered by the insurance described in Paragraph 15, rendering the Premises
totally or partially inaccessible or unusable, LANDLORD shall restore the
Premises or the building and other improvements in which the Premises are
located to substantially the same condition as they were in immediately
before destruction, excepting for TENANT'S improvements, alterations and
additions. Such destruction shall not terminate this Lease. If the existing
laws do not permit the restoration, either party can terminate this Lease
immediately by giving notice to the other party.
If the cost of restoration exceeds five percent (5%) of the then
replacement value of the Premises or the building and other improvements in
which the Premises are located that are destroyed, LANDLORD can elect to
terminate this Lease by giving notice to TENANT within thirty (30) days after
determining the restoration cost and replacement value.
In case of destruction to the improvements only, if LANDLORD elects to
terminate this Lease TENANT, within fifteen (15) days after receiving
LANDLORD'S notice to terminate, can elect to pay to LANDLORD, at the time
TENANT notifies LANDLORD of its election, the difference between five percent
(5%) of the then replacement value of the Premises and the actual cost of
restoration, in which case LANDLORD shall restore die Premises. LANDLORD
shall give TENANT satisfactory evidence that all sums contributed by TENANT
as provided in this paragraph have been expended by LANDLORD in paying the
cost of restoration.
If LANDLORD elects to terminate this Lease and TENANT does not elect to
perform the restoration or contribute toward the cost of restoration as
provided in this paragraph, this Lease shall terminate.
C. ABATEMENT OR REDUCTION OF RENT: In case of destruction there shall
be no abatement or reduction of Rent.
D. LOSS DURING LAST PART OF TERM: If destruction to the Premises
occurs during the last year of the term, LANDLORD can terminate this Lease by
giving notice to TENANT, not more than ninety (90) days after the destruction.
E. WAIVER OF CIVIL CODE SECTIONS: TENANT waives the provisions of
Civil Code Section 1932(2) and Civil Code Section 1933(4) with respect to any
destruction of the Premises.
18. CONDEMNATION:
A. DEFINITIONS:
(1) "Condemnation" means: (a) the exercise of any governmental
power, whether by legal proceedings or otherwise, by a condemnor; and (b) a
voluntary sale or transfer by LANDLORD to any condemnor, either under threat
of condemnation or while legal proceedings for condemnation are pending.
(2) "Date of taking" means the date the condemnor has the right to
possession of the property being condemned.
(3) "Award" means all compensation, sums, or anything of value
awarded, paid or received on a total or partial condemnation.
<PAGE>
(4) "Condemnor" means any public or quasi-public authority, or
private corporation or individual, having the power of condemnation.
If, during the term or period of time between the execution of this
Lease and the date the term commences, there is any taking of all or any part
of the building, other improvements, or land of which the Premises are a part
or any interest in this Lease by condemnation, the rights and obligations of
the parties shall be determined pursuant to this Paragraph 18.
B. TOTAL TAKING: If the Premises are totally taken by condemnation,
this Lease shall terminate on the date of taking.
C. PARTIAL TAKING: If any portion of the Premises is taken by
condemnation this Lease shall remain in effect, except that TENANT can elect
to terminate this Lease if the remaining portion of the Premises is rendered
unsuitable for TENANT'S continued use of the Premises. If TENANT elects to
terminate this Lease, TENANT must exercise its right to terminate pursuant to
this paragraph by giving notice to LANDLORD within twenty (20) days after the
nature and the extent of the taking have been finally determined. If TENANT
elects to terminate this Lease as provided in this paragraph, TENANT also
shall notify LANDLORD of the date of termination, which date shall not be
earlier than (30) days nor later than sixty (60) days after TENANT has
notified LANDLORD of its election to terminate; except that this Lease shall
terminate on the date of taking if the date of taking falls on a date before
the date of termination as designated by TENANT. If TENANT does not terminate
this Lease within the twenty (20) day period, this Lease shall continue in
full force and effect, except that minimum monthly Rent shall be reduced
pursuant to paragraph 18(D).
D. EFFECT ON RENT: If any portion of the Premises is taken by
condemnation and this Lease remains in full force and effect, on the date of
taking the minimum monthly Rent shall be reduced by an amount that is in the
same ratio to minimum monthly Rent as the value of the area or the portion of
the Premises taken bears to the total value of the Premises immediately before
the date of taking.
E. AWARD-DISTRIBUTION: The award shall belong to and be paid to
LANDLORD, except that TENANT shall receive from the award a sum attributable to
TENANT'S improvements or alterations made to the Premises by TENANT in
accordance with this Lease, which TENANT'S improvements or alterations TENANT
has the right to remove from the Premises pursuant to the provisions of this
Lease but elects not to remove.
TENANT shall have the right to independently pursue a TENANT award.
19. ASSIGNMENT:
A. VOLUNTARY ASSIGNMENT SUBLETTING AND ENCUMBERING:
(1) TENANT shall not voluntarily or by operation of law (1)
mortgage, pledge, hypothecate or encumber this Lease or any interest herein,
(2) assign or transfer this Lease or any interest herein, sublet the premises
or any part thereof, or any right or privilege appurtenant thereto, or allow
any other person (the employees, agents and invitees of Tenant excepted) to
occupy or use the Premises, or any portion thereof; without first obtaining
the written consent of LANDLORD, which consent shall not be withheld
unreasonably. When TENANT requests LANDLORD'S consent to such assignment or
subletting, it shall notify LANDLORD in writing of the name and address of
the proposed assignee or subtenant and shall provide current financial
statements for the proposed assignee or subtenant prepared in accordance with
generally accepted accounting principles. TENANT shall also provide LANDLORD
with a copy of the proposed sublet or assignment agreement, including all
material terms and conditions thereof. LANDLORD shall have the option, to be
exercised within thirty (30) days of receipt of the foregoing, to (1) cancel
this Lease as of the commencement date stated in the proposed sublease or
assignment, (2) acquire from Tenant the interest, or any portion thereof, in
this Lease and/or the Premises that TENANT proposes to assign or sublease, on
the same terms and conditions as stated in the proposed sublet or assignment
agreement, (3) consent to the proposed assignment or sublease, or (4) refuse
its consent to the proposed assignment or sublease, providing that such
consent shall not be unreasonably withheld.
(2) Without otherwise limiting the criteria upon which LANDLORD
may withhold its consent, LANDLORD may take into account the reputation and
credit worthiness of the proposed assignee or subtenant, the character of the
business proposed to be conducted in the Premises or portion thereof sought
to be subleased, and the potential impact of the proposed assignment or
sublease on the economic value of the Premises. In any event, LANDLORD may
withhold its consent to any assignment or sublease, if (1) the actual use
proposed to be conducted in the Premises or portion thereof conflicts with
the provisions of Paragraph 10, or (2) the proposed assignment or sublease
requires alterations, improvements or additions to the Premises or portions
thereof.
(3) If LANDLORD approves an assignment or subletting as herein
provided, TENANT shall pay to LANDLORD, as additional Rent, the difference,
if any, between (I) the Base Rent plus TENANT's Share of TENANT's costs
allocable to that part of the Premises affected by such assignment or
sublease pursuant to the provisions of this Lease, and (2) the Base
<PAGE>
Rent and any additional Rent payable by the assignee or sublessee to TENANT,
after deducting the costs incurred by TENANT in connection with any such
assignment or sublease.
(4) TENANT shall pay LANDLORD'S reasonable fees, not to exceed One
Thousand Dollars ($1 .000.00) per transaction incurred in connection with
LANDLORD'S review and processing of documents regarding any proposed
assignment or sublease.
If TENANT is a partnership, a withdrawal or change, voluntary,
involuntary, or by operation of law, of any partner of the dissolution of the
partnership, shall be deemed a voluntary assignment. If TENANT consists of
more than one person, a purported assignment, voluntary, involuntary, or by
operation of law, from one person to the other shall be deemed a voluntary
assignment. If TENANT is a corporation, any dissolution, merger,
consolidation, or other reorganization of TENANT, or the sale or other
transfer of a controlling percentage of the capital stock of TENANT, or the
sale of forty-five percent (45%) of the value of the assets of TENANT, shall
be deemed a voluntary assignment. The phrase "controlling percentage" means
the ownership of, and the right to vote, stock possessing at least forty-five
percent (45%) of the total combined voting power of all classes of TENANT'S
capital stock issued, outstanding, and entitled to vote for the election of
directors. This paragraph shall not apply to corporations the stock of which
is traded through an exchange or over the counter.
B. INVOLUNTARY ASSIGNMENT: No interest of TENANT in this Lease shall
be assignable by operation of law (including without limitation, the transfer
of this Lease by testacy or intestacy). Each of the following acts shall be
considered an involuntary assignment:
(1) If TENANT is or becomes bankrupt or insolvent, makes an
assignment for the benefit of creditors, or institutes a proceeding under the
Bankruptcy Act in which TENANT is the bankrupt; or, if TENANT is a
partnership or consists of more than one (1) person or entity, if any partner
of the partnership or other person or entity is or becomes bankrupt or
insolvent, or makes an assignment for the benefit of creditors;
(2) If a writ of attachment or execution is levied on this Lease;
(3) If in any proceeding or action to which TENANT is a party, a
receiver is appointed with authority to take possession of the Premises.
An involuntary assignment shall constitute a default by TENANT and
LANDLORD shall have the right to elect to terminate this Lease in which case
this Lease shall not be treated as an asset of TENANT.
If a writ of attachment or execution is levied on this Lease, TENANT
shall have thirty (30) days in which to cause the attachment or execution to
be removed. If any involuntary proceeding in bankruptcy is brought against
TENANT, or if a receiver is appointed, TENANT shall have sixty (60) days in
which to have the involuntary proceeding dismissed or the receiver removed.
20. DEFAULT:
A. TENANT'S DEFAULT: The occurrence of any of the following shall
constitute a default by TENANT:
(1) Failure to pay Rent when due, if the failure continues for
three (3) days after notice has been give to TENANT.
(2) Abandonment and vacation of the Premises (failure to occupy
and operate the Premises for ten (10) consecutive days shall be deemed an
abandonment and vacation).
(3) Failure to perform any other provision of this Lease if the
failure to perform is not cured within thirty (30) days after notice has been
given to TENANT. If the default cannot reasonably be cured within thirty (30)
days, TENANT shall not be in default of this Lease if TENANT commences to
cure the default within the thirty (30) day period and diligently and in good
faith continues to cure the default.
No notice given pursuant to this paragraph shall be deemed forfeiture or a
termination of this Lease unless LANDLORD so elects in the notice. The notice
periods provided in this paragraph are intended to satisfy all notice
requirements imposed by LANDLORD by law (including, without limitation,
California Code of Civil Procedure Section 1161) and are to run concurrent
with, and not in addition to, any such requirements.
B. LANDLORD'S REMEDIES: LANDLORD shall have the following remedies if
TENANT commits a default. These remedies are not exclusive; they are
cumulative in addition to any remedies now or later allowed by law.
LANDLORD can continue this Lease in full force and effect, and the Lease
will continue in effect as long as LANDLORD does not terminate TENANT'S right
to possession, and LANDLORD shall have the right to collect Rent when due.
During the period TENANT is in default, LANDLORD can enter the Premises and
relet them, or any part of them, to third parties for TENANT'S account.
TENANT shall be liable immediately to LANDLORD for all costs LANDLORD incurs
in reletting the Premises, including, without limitation, brokers'
commissions, expenses of remodeling the Premises required by the reletting,
and like costs. Reletting can be for a period shorter or longer than the
remaining term of this Lease. TENANT
<PAGE>
shall pay to LANDLORD the Rent due under this Lease on the dates the Rent is
due, less the Rent LANDLORD receives from any reletting. No act by LANDLORD
allowed by this paragraph shall terminate this Lease unless LANDLORD notifies
TENANT that LANDLORD elects to terminate this Lease. After TENANT'S default
and for as long as LANDLORD does not terminate TENANT'S right to possession
of the Premises, if TENANT obtains LANDLORD'S consent TENANT shall have The
right to assign or sublet its interest in this Lease, but TENANT shall not be
released from liability. LANDLORD'S consent to a proposed assignment or
subletting shall not be unreasonably withheld.
LANDLORD can terminate TENANT'S right to possession of the Premises at
any time. No act by LANDLORD other than giving notice to TENANT shall
terminate this Lease. Acts of maintenance, efforts to relet the Premises or
the appointment of a receiver on LANDLORD'S initiative to protect LANDLORD'S
interest under this Lease shall not constitute a termination of TENANT'S
right to possession. On termination, LANDLORD has the right to recover from
TENANT:
(1) The worth, at the time of the award of the unpaid Rent that
had been earned at the time of termination of this Lease;
(2) The worth, at the time of the award of the amount by which the
unpaid Rent that would have been earned after the date of termination of this
Lease until the time of award exceeds the amount of the loss of Rent that
TENANT proves could have been reasonably avoided;
(3) The worth, at the time of the award of the amount of which the
unpaid Rent for the balance of the term after the time of award exceeds the
amount of the loss of Rent that TENANT proves could have been reasonably
avoided; and
(4) Any other amount, and court costs, necessary to compensate
LANDLORD for all detriment proximately caused by TENANT'S default.
"The worth, at the time of the award," as used in (1) and (2) of this
paragraph, is to be computed by allowing interest at the rate of ten percent
(10%) per annum. "The worth, at the time of the award," as referred to in (3)
of this paragraph, is to be computed by discounting the amount at the
discount rate of the Federal Reserve Bank of San Francisco at the time of the
award, plus one percent (1%).
If TENANT is in default of this Lease LANDLORD shall have the right to
have a receiver appointed to collect Rent and conduct TENANT'S business.
Neither the filing of a petition for the appointment of a receiver nor the
appointment itself shall constitute an election by LANDLORD to terminate this
Lease.
LANDLORD, at any time after TENANT commits default, can cure the default
at TENANT'S cost. If LANDLORD at anytime, by reason of TENANT'S default, pays
any sum or does any act that requires the payment of any sum, the sum paid by
LANDLORD shall be due immediately from TENANT to LANDLORD at the time the sum
is paid, and if paid at a later date shall bear interest at the rate of ten
percent (10%) per annum from the date the sum is paid by LANDLORD until
LANDLORD is reimbursed by TENANT. The sum, together with interest on it,
shall be additional Rent.
C. LANDLORD'S DEFAULT: LANDLORD shall not be deemed in breach of
this Lease unless LANDLORD fails within a reasonable time to perform an
obligation to be performed by LANDLORD. For purposes of this paragraph, a
reasonable time shall in no event be less than twenty (20) days after receipt
by LANDLORD of written notice specifying wherein such obligation of LANDLORD
has not been performed. Provided, however, that of the nature of LANDLORD's
obligation is such that more than thirty (30) days are reasonably required
for its performance, then LANDLORD shall not be in breach if performance is
commenced within such thirty (30) day period and diligently prosecuted to
completion.
Rent not paid when due shall bear interest at the rate of ten percent
(10%) per aunum from the date due until paid. Interest is payable in addition
to the potential late charge provided for in Paragraph 6.B.
21. SIGNS; ADVERTISING: LANDLORD reserves the exclusive right to the roof,
and to all exterior walls or parts of the Premises, and access thereto and
the same are not covered by this Lease, and TENANT agrees that no signs,
advertisements or notices whatsoever shall be inscribed, painted, affixed or
displayed on, to or in any part of the outside or inside, or on the roof of
the Premises, without written consent of LANDLORD. Any signs so placed on the
Premises shall be so placed upon the understanding and agreement that TENANT
will remove same at the termination of the tenancy herein created and repair
any damage or injury to the Premises caused thereby, and if not so removed by
TENANT then LANDLORD may have same removed at TENANT'S cost.
A. COMPLIANCE WITH LAWS: Any sign that TENANT has the right to place,
construct, and maintain shall comply with all laws, and TENANT shall obtain
any approval required by such laws. LANDLORD makes no representation with
respect to TENANT'S ability to obtain such approval.
<PAGE>
22. LANDLORD'S ENTRY ON PREMISES: LANDLORD and its authorized
representatives shall have the right to enter the Premises at all reasonable
times for any of the following purposes:
(1) To determine whether the Premises are in good condition and whether
TENANT is complying with its obligations under this lease;
(2) To do any necessary maintenance and to make any restoration to the
Premises or the building and other improvements in which the Premises are
located that LANDLORD has the right or obligation to perform;
(3) To serve, post, or keep posted any notices required or allowed
under the provisions of this Lease;
(4) To post "for sale" signs at any time during the term, to post "for
Rent" or "for lease" signs during the last six (6) months of the term, or
during any period while TENANT is in default;
(5) To show the Premises to prospective brokers, agents, buyers,
tenants, or persons interested in an exchange, at any time during the term;
(6) To shore the foundations, footings, and walls of the Premises or
the building in which the Premises are located and to erect scaffolding and
protective barricades around and about the Premises, but not so as to prevent
entry to the Premises, and to do any other act or thing necessary for the
safety or preservation of the Premises or the building and other improvements
in which the Premises are located if any excavation or other construction is
undertaken or is about to be undertaken on any adjacent property or nearby
street. LANDLORD'S right under this provision extends to the owner of the
adjacent property on which excavation or construction is to take place and
the adjacent property owner's authorized representatives.
LANDLORD shall not be liable in any manner for any inconvenience,
disturbance, loss of business, nuisance, or other damage arising out of
LANDLORD'S entry on the Premises as provided in this Paragraph, except damage
resulting from the acts or omissions of LANDLORD or its authorized
representatives.
TENANT shall not be entitled to an abatement or reduction of Rent
if LANDLORD exercises any rights reserved in this Paragraph.
LANDLORD shall conduct its activities on the Premises as allowed in this
Paragraph in a manner that will cause the lease possible inconvenience,
annoyance, or disturbance to TENANT.
23. SUBORDINATION; ESTOPPEL:
(A) SUBORDINATION: This Lease is and shall be subordinate to any
encumbrance now of record or recorded after the date of this Lease affecting
the building, other improvements, and land of which the Premises are a part.
Such subordination is effective without any further act of TENANT.
TENANT shall from time to time on request from LANDLORD execute and deliver
any documents or instruments that may be required by a lender to effectuate
any subordination. If TENANT fails to execute and deliver any such documents
or instruments, TENANT irrevocably constitutes and appoints LANDLORD as
TENANT'S special attorney-in-fact to execute and deliver any such documents
or instruments.
B. RIGHT TO ESTOPPEL CERTIFICATES: Each party, within twenty (20)
days after notice from the other party, shall execute and deliver to the
other party, in recordable form, a certificate stating that this Lease is
unmodified and in full force and effect, or in full force and effect as
modified, and stating the modifications. The certificate also shall state the
amount of minimum monthly Rent, the dates to which the Rent has been paid in
advance, and the amount of any security deposit or prepaid Rent.
Failure to deliver the certificate within the twenty (20) days shall be
conclusive upon the party failing to deliver the certificate for the benefit
of the party requesting the certificate and any successor to the party
requesting the certificate, that this Lease is in full force and effect and
has not been modified except as may be represented by the party requesting
the certificate.
If a party fails to deliver the certificate within the twenty (20) days,
the party failing to deliver the certificate irrevocably constitutes and
appoints the other party as its special attorney-in-fact to execute and
deliver the certificate to any third party.
24. NOTICE: Any notice, demand, request, consent, approval, or
communication that either party desires or is required to give to the other
party or any other person shall be in writing and either serviced personally
or sent by prepaid, first-class mail. Any notice, demand, request, consent,
approval, or communication that either party desires or is required to give
to the other party shall be addressed to the other party at the address set
forth next to their respective signatures on this Lease. Either party may
change its address by notifying the other party of the change of address.
Notice shall be deemed communicated within forty-eight (48) hours from the
time of mailing if mailed as provided in this Paragraph.
25. WAIVER: No delay or omission in the exercise of any right or remedy of
LANDLORD on any default by TENANT shall impair such a right or remedy or be
construed as a waiver. The receipt and acceptance by LANDLORD of delinquent
Rent shall not constitute a waiver of any
<PAGE>
other default; it shall constitute only a waiver of timely payment for the
particular Rent payment involved.
No act or conduct of LANDLORD, including, without limitation, the
acceptance of the keys to the Premises, shall constitute an acceptance of the
surrender of the Premises by TENANT before the expiration of the term. Only a
notice from LANDLORD to TENANT shall constitute acceptance of the surrender
of the Premises and accomplish a termination of the lease.
LANDLORD'S consent to or approval or any act by TENANT requiring
LANDLORD'S consent or approval shall not be deemed to waive or render
unnecessary LANDLORD'S consent to or approval of any subsequent act by TENANT.
Any waiver by LANDLORD of any default must be in writing and shall not
be a waiver of any other default concerning the same or any other provision
of the Lease.
26. RECORDATION; OUITCLAIM DEED:
A. RECORDATION: This Lease shall not be recorded, except that if
either party requests the other party to do so, the parties shall execute a
memorandum of lease in recordable form.
B. QUITCLAIM DEED: TENANT shall execute and deliver to LANDLORD on
the expiration or termination of this Lease, immediately upon LANDLORD'S
request, a quitclaim deed to the Premises, in recordable form, designating
LANDLORD as transferee.
27. SALE OR TRANSFER OF PREMISES:
A. EFFECT ON LEASE: If LANDLORD sells or transfers all or any portion
of the building, other improvements, and land of which the Premises are a
part LANDLORD, on consummation of the sale or transfer, shall be released
from any liability thereafter accruing under this Lease. If any security
deposit or prepaid Rent has been paid by TENANT, LANDLORD can transfer the
security deposit or prepaid Rent to LANDLORD'S successor and on such transfer
LANDLORD shall be discharged from any further liability in reference to the
security deposit or prepaid Rent.
28. ATTORNEYS' FEES: If either party becomes a party to any litigation
concerning this Lease, the Premises, or the building or other improvements in
which the Premises are located, by reason of any act or omission of the other
party or its authorized representatives, and not by any act or omission of
the party that becomes a party to that litigation or any act or omission of
its authorized representatives, the party that causes the other party to
become involved in the litigation shall be liable to that party for
reasonable attorneys' fees and court costs incurred by it in the litigation.
If either party commences an action against the other party arising out
of or in connection with this Lease, the prevailing party shall be entitled
to have and recover from the losing party reasonable attorneys' fees and
costs of suit. In addition, LANDLORD shall be entitled to attorneys' fees,
costs and expenses incurred in the preparation and service of notices of
default and consultations in connection therewith, whether or not legal
action is subsequently commenced in connection with such default or resulting
breach.
29. SURRENDER OF PREMISES: HOLDING OVER:
A. SURRENDER OF PREMISES: On expiration of the Lease term, TENANT
shall surrender to LANDLORD the Premises and all TENANT'S improvements and
alterations in good condition except for ordinary wear and tear occurring
after the last necessary maintenance made by TENANT and destruction to the
Premises, except for alterations that TENANT has the right to remove or is
obligated to remove under the provisions of this Lease. TENANT shall remove
all its personal property within the above stated time. TENANT shall perform
all restoration made necessary by the removal of any alterations or TENANT'S
personal property within the time periods stated in this Paragraph.
LANDLORD can elect to retain or dispose of in any manner any alterations
or TENANT'S personal property that TENANT does not remove from the Premises
on expiration or termination of the term as allowed or required by this Lease
by giving at least ten (10) days notice to TENANT. Title to any such
alterations or TENANT'S personal property that LANDLORD elect to retain or
dispose of on expiration of the ten (10) day period shall vest in LANDLORD.
TENANT waives all claims against LANDLORD for any damage to TENANT resulting
from LANDLORD'S retention or disposition of any such alterations or TENANT'S
personal property. TENANT shall be liable to LANDLORD for LANDLORD'S costs
for storing, removing, and disposing of any alterations or TENANT'S personal
property.
If TENANT fails to surrender the Premises to LANDLORD on expiration of
the Lease term as required by this paragraph, TENANT shall hold LANDLORD
harmless from all damages resulting from TENANT'S failure to surrender the
Premises, including, without limitation, claims made by a succeeding tenant
resulting from TENANT'S failure to surrender the Premises.
B. HOLDING OVER: If TENANT, with LANDLORD'S consent, remains in
possession of the Premises after expiration or termination of the term, or
after the date in any notice given by LANDLORD to TENANT terminating this
Lease, such possession by TENANT shall be deemed to be a month-to-month
tenancy terminable on thirty (30) days notice given at any time
<PAGE>
by either party. All provisions of this Lease except those pertaining to term
and option to extend (if any) shall apply to the month-to-month tenancy.
30. MISCELLANEOUS PROVISIONS:
A. TIME OF ESSENCE: Time is of the essence of each provision of this
Lease.
B. CONSENT OF PARTIES: Whenever consent or approval of either party
is required, that party shall not unreasonably withhold such consent or
approval.
C. SUCCESSORS: This Lease shall be binding on and inure to the
benefit of the parties and their successors.
D. RENT PAYABLE IN U.S. MONEY: Rent and all other sums payable under
this Lease must be paid in lawful money of the United States of America.
E. CALIFORNIA LAW: This Lease shall be construed and interpreted in
accordance with the laws of the State of California.
F. INTEGRATED AGREEMENT; MODIFICATION: This Lease contains all the
agreements of the parties and cannot be amended or modified except by a
written agreement.
G. PROVISIONS ARE COVENANTS AND CONDITIONS: All provisions, whether
covenants or conditions, on the part of TENANT shall be deemed to be both
covenants and conditions.
H. CAPTIONS; TABLE OF CONTENTS: The captions and the table of
contents of this Lease shall have no effect on its interpretation.
I. SINGULAR AND PLURAL: When required by the context of this Lease,
the singular shall include the plural.
J. JOINT AND SEVERAL OBLIGATIONS: "Party" shall mean LANDLORD or
TENANT; and if more than one person or entity is LANDLORD or TENANT, the
obligations imposed on that party shall be joint and several.
K. SEVERABILITY: The unenforceability, invalidity, or illegality of
any provision shall not render the other provisions unenforceable, invalid,
or illegal.
31. COST OF LIVING ADJUSTMENT: The monthly Rental shall be adjusted at the
rate of N/A % percent per annum on each anniversary date of this Lease during
the term of the Lease.
32. POLLUTION CONTROL: TENANT shall at TENANTS sole cost satisfy all
applicable governmental agencies in handling neutralization and pollution
control.
33. DAMAGE REPAIRS: TENANT shall be solely responsible and at its own cost
and repair all damage to the Premises and shall make all reasonable efforts
to prevent damage to the Premises and to any adjacent Premises and to any
appurtenance due to any chemical process and to carry out repairs within a
reasonable time in the event any damage is caused thereby. Adequate
ventilation to be provided by TENANT at its cost to prevent damage due to
corrosive atmosphere.
34. ADDENDA: The provisions of Addenda I - II - III are incorporated
into this Lease.
IN WITNESS WHEREOF, the parties hereto have executed this Lease as of
the date and year first above written, at _________________, California.
TENANT: LANDLORD:
EIP Microwave, Inc. Roger F. Mairose, Trustee
Wendy W. Mairose, Trustee
By: /s/ WILLIAM J. STANNERS, JR. By: /s/ ROGER F. MAIROSE,
---------------------------- ---------------------
/s/ WENDY W. MAIROSE
---------------------
TRUSTEES
Address: 6950 S.W. Hampton Street, Ste. 200 Address: 105 Bonaventura Dr.
Portland, OR 97223 San Jose, CA 95134
35. EARLY POSSESSION: TENANT shall be allowed possession of the PREMISES
September 1, 1998 rent and expense free. TENANT shall pay its utility
expenses during this month of early occupancy.
<PAGE>
ADDENDUM II
1 HAZARDOUS SUBSTANCES.
(1) REPORTABLE USES REQUIRE CONSENT. The term "Hazardous Substance" as
used in this Lease shall mean any product, substance, or waste whose
presence, use, manufacture, disposal, transportation, or release, either by
itself or in combination with other materials expected to be on the Premises,
is either: (i) potentially injurious to the public health, safety or welfare,
the environment or the Premises, (ii) regulated or monitored by any
governmental authority, or (iii) a basis for potential liability of LANDLORD
to any governmental agency or third party under any applicable statute or
common law theory. Hazardous Substances shall include, but not be limited to,
hydrocarbons, petroleum, gasoline, and/or crude oil or any products,
by-products or fractions thereof. TENANT shall not engage in any activity in
or on the Premises which constitutes a Reportable Use of Hazardous Substances
without the express prior written consent of LANDLORD and timely compliance
(at TENANT's expense) with all Applicable Requirements. "Reportable Use"
shall mean (i) the installation or use of any above or below ground storage
tank, (ii) the generation, possession, storage, use, transportation, or
disposal of a Hazardous Substance that requires a permit from, or with
respect to which a report, notice, registration or business plan is required
to be filed with, any governmental authority, and/or (iii) the presence at
the Premises of a Hazardous Substance with respect to which any Applicable
Requirements requires that a notice be given to persons entering or occupying
the Premises or neighboring properties. Notwithstanding the foregoing, TENANT
may use any ordinary and customary materials reasonably required to be used
in the normal course of the Agreed Use, so long as such use is in compliance
with all Applicable Requirements, is not a Reportable Use, and does not
expose the Premises or neighboring property to any meaningful risk of
contamination or damage or expose LANDLORD to any liability therefor. In
addition, LANDLORD may condition its consent to any Reportable Use upon
receiving such additional assurances as LANDLORD reasonably deems necessary
to protect itself, the public, the Premises and/or the environment against
damage, contamination, injury and/or liability, including, but not limited
to, the installation (and removal on or before Lease expiration or
termination) of protective modifications (such as concrete encasements)
and/or increasing the Security Deposit.
(2) DUTY TO INFORM LANDLORD. If TENANT knows, or has reasonable cause
to believe, that a Hazardous Substance has come to be located in, on, under
or about the Premises, other than as previously consented to by LANDLORD,
TENANT shall immediately give written notice of such fact to LANDLORD, and
provide LANDLORD with a copy of any report, notice, claim or other
documentation which it has concerning the presence of such Hazardous
Substance.
(3) TENANT REMEDIATION. TENANT shall not cause or permit any Hazardous
Substance to be spilled or released in, on, under or about the Premises
(including through the plumbing or sanitary sewer system) and shall promptly,
at TENANT's expense, take all investigatory and/or remedial action reasonably
recommended, whether or not formally ordered or required, for the cleanup of
any contamination of, and for the maintenance, security and/or monitoring of
the Premises or neighboring properties, that was caused or materially
contributed to by TENANT, or pertaining to or involving any Hazardous
Substance brought onto the Premises during the term of this Lease, by or for
TENANT, or any third party.
(4) TENANT INDEMNIFICATION. TENANT shall indemnity, defend and hold
LANDLORD, its agents employees, lenders and ground LANDLORD, if any, harmless
from and against any and all loss of rents and/or damages, liabilities,
judgments, claims, expenses, penalties, and attorneys' and consultants' fees
arising out of or involving any Hazardous Substance brought onto the Premises
by or for TENANT, or any third party (provided, however, that TENANT shall
have no liability under this Lease with respect to underground migration of
any Hazardous Substance under the Premises from adjacent properties).
TENANT's obligations shall include, but not be limited to, the effects of any
contamination or injury to person, property or the environment created or
suffered by TENANT, and the cost of investigation, removal, remediation,
restoration and/or abatement, and shall survive the expiration or termination
of this Lease. No termination, cancellation or release agreement entered into
by LANDLORD and TENANT shall release TENANT from its obligations under this
Lease with respect to Hazardous Substances, unless specifically so agreed by
LANDLORD in writing at the time of such agreement.
(e) LANDLORD TERMINATION OPTION. If a Hazardous Substance Condition
occurs during the term of this Lease, unless TENANT is legally responsible
therefor (in which case TENANT shall make the investigation and remediation
thereof required by the Applicable
<PAGE>
Requirements and this Lease shall continue in full force and effect, but
subject to LANDLORD's rights under Paragraph 6.2(d), LANDLORD may, at
LANDLORD's option, either (i) investigate and remediate such Hazardous
Substance Condition, if required, as soon as reasonably possible at
LANDLORD's expense, in which event this Lease shall continue in full force
and effect, or (ii) if the estimated cost to remediate such condition exceeds
twelve (12) times the then monthly Base Rent or One Hundred Thousand Dollars
($100,000.00), whichever is greater, give written notice to TENANT, within
thirty (30) days after receipt by LANDLORD of knowledge of the occurrence of
such Hazardous Substance Condition, of LANDLORD'S desire to terminate this
Lease as of the date sixty (60) days following the date of such notice. In
the event LANDLORD elects to give a termination notice, TENANT may, within
ten (10) days thereafter, give written notice to LANDLORD of TENANT's
commitment to pay the amount by which the cost of the remediation of such
Hazardous Substance Condition exceeds an amount equal to twelve (12) times
the then monthly Base Rent or One Hundred Thousand Dollars ($100,000.00),
whichever is greater. TENANT shall provide LANDLORD with said filings or
satisfactory assurance thereof within thirty (30) days following such
commitment. In such event, this Lease shall continue in full force and
effect, and LANDLORD shall proceed to make such remediation as soon as
reasonably possible after the required filings are available. If TENANT does
not give such notice and provide the required filings or assurance thereof
within the time provided, this Lease shall terminate as of the date specified
in LANDLORD's notice of termination.
(f) TENANT'S COMPLIANCE WITH APPLICABLE REQUIREMENTS. Except as
otherwise provided in this Lease, TENANT shall, at TENANT's sole expense,
fully, diligently and in a timely manner, materially comply with all
Applicable Requirements, the requirements of any applicable fire insurance
underwriter or rating bureau, and the recommendations of LANDLORD's engineers
and/or consultants which relate in any manner to the Premises, without regard
to whether said requirements are now in effect or become effective after the
Start Date. TENANT shall, within ten (10) days after receipt of LANDLORD's
written request, provide LANDLORD with copies of all permits and other
documents, and other information evidencing TENANT's compliance with any
Applicable Requirements specified by LANDLORD, and shall immediately upon
receipt, notify LANDLORD in writing (with copies of any documents involved)
of any threatened or actual claim, notice, citation, warning, complaint or
report pertaining to or involving the failure of TENANT or the Premises to
comply with any Applicable Requirements.
(g) INSPECTION; COMPLIANCE. LANDLORD and LANDLORD's Lender and
consultants shall have the right to enter into Premises at any time, in the
case of any emergency, and otherwise at reasonable times, for the purpose of
inspecting the condition of the Premises and for verifying compliance by
TENANT with this Lease. The cost of any such inspections shall be paid by
LANDLORD, unless a violation of Applicable Requirements, or a contamination
is found to exist or be imminent, or the inspection is requested or ordered
by a governmental authority. In such case, TENANT shall upon request
reimburse LANDLORD for the cost of such inspections, so long as such
inspection is reasonably related to the violation or contamination.
<PAGE>
ADDENDUM III
ADDENDUM TO LEASE
The following additions, deletions and modifications are hereby
incorporated into the attached Lease.
2. Paragraph 2 is hereby modified by adding the following phrase
in the second (2nd) line after the words, "State of California":
"as indicated in the plan attached hereto as Addendum I and
commonly"
4. Paragraph 4 is hereby modified by deleting the phrase, "within
twelve (12) months of" appearing in the fifth (5th) line, and adding the
following in place of the deletion:
"within sixty (60) days after"
7. Paragraph 7 is deleted in its entirety.
9. Paragraph 9 is deleted in its entirety.
10. Paragraph 10.A(2) is hereby modified by deleting the parenthetical
"(collectively "laws")" appearing in the second (2nd) line and inserting the
following in place of the deletion:
"(collectively, "Laws")"
Paragraph 10.A(2)(a) is hereby modified be deleting the word,
"immediately" appearing in the seventh (7th) line and adding the following in
place of the deletion:
"as soon as commercially practical"
Paragraph 10.A(2)(b) is hereby deleted in its entirety, and the
following is inserted in its place:
"(b) If such Capital Expenditure is not the result of the specific and
unique use of the Premises by TENANT (such as, governmentally mandated
seismic modifications), then LANDLORD shall pay the cost thereof and
such cost shall be prorated between the parties and TENANT shall only
be obligated to pay each month during the remainder of the term of the
date on which Base Rent is due an amount determined by (i) multiplying
the required Capital Expenditure by a fraction, the numerator of which
is one (1) and the denominator of which is the useful life (in months)
of the improvement for which such Capital Expenditure was made, as
reasonably determined by LANDLORD (including interest at the rate of
ten percent (10%) per annum, and (ii) multiplying that result by a
fraction the numerator of which is the number of leasable square feet
in the Premises and the denominator of which is the number of leasable
square feet in the Building. In lieu of monthly payments calculated as
set forth in the preceeding sentence, TENANT shall have the right to
pay a prorata portion of the cost of such Capital Expenditure, based
on (i) the useful life of the improvement for which such Capital
Expenditure was made, (ii) the remaining term of the Lease, and (iii)
the leasable square footage of the Premises as it relates to the total
leasable square footage of the Building. If such Capital Expenditure
is required during the last twelve (12) months of the term of the
Lease or if LANDLORD reasonably determines that it is not economically
feasible to pay its share thereof, LANDLORD shall have the option to
terminate this Lease upon ninety (90) days prior written notice to
TENANT unless TENANT notifies LANDLORD, in writing, within ten (10)
days of receipt of LANDLORD'S termination notice that TENANT will pay
for such Capital Expenditure. If LANDLORD does not elect to
terminate, and fails to proceed with such Capital Expenditure, TENANT
may, but shall be under no obligation to, advance such funds and
deduct same, with interest, from Rent until LANDLORD' share of such
costs have been fully paid. If TENANT is unable to finance TENANT'S
share of any required Capital Expenditure, or if the balance of the
Rent due and payable for the remainder of this Lease is not sufficient
to fully reimburse TENANT on an offset basis, TENANT shall have the
right to terminate this Lease upon thirty (30) days written notice to
LANDLORD."
<PAGE>
11. Paragraph 11.A is hereby deleted in its entirety and the following
is inserted in its place:
"A. TENANT'S MAINTENANCE: Subject to the provisions of Paragraph 10.A(2)
(Compliance With Laws), 11.C (LANDLORD'S Maintenance), 17
(Destruction) and 18 (Condemnation), TENANT at its cost shall
maintain, in good condition, reasonable wear and tear excepted, all
interior portions of the Premises, and all windows and doors on the
Premises. TENANT shall also be responsible for keeping the roof and
roof drainage clean and free of debris. TENANT'S obligations shall
include restorations, replacements or renewals when necessary to keep
the Premises and all improvements thereon or a part thereof for which
TENANT is responsible hereunder in good order, condition and state of
repair, reasonable wear and tear excepted.
B. SERVICE CONTRACTS: TENANT shall, at TENANT'S sole expense, procure
and maintain contracts, with copies to LANDLORD, in customary form and
substance for, and with contractors experienced in the maintenance of
the following equipment and improvements: (i) HVAC equipment; (ii)
fire extinguishing systems, including fire alarm and smoke detection;
and (iii) any other equipment as reasonably required by LANDLORD.
C. LANDLORD'S MAINTENANCE: LANDLORD, at its sole cost and expense, shall
maintain, in good condition, the exterior of the Building in which the
Premises is located, including without limitation, maintaining the
surface and structural elements of the roof in a sound and leak-free
condition, and maintaining the foundations, and bearing wall(s).
Except as herein provided, LANDLORD shall have no obligation to
maintain the Premises.
TENANT shall be liable for any damage to the Building in which
the Premises are located resulting from the acts or omissions of
TENANT or its authorized representatives."
" and to all exterior walls and parts of the Premises"
27. Paragraph 27.A is hereby deleted in its entirety and the following
is inserted in its place:
"A. EFFECT ON LEASE: If LANDLORD sells or transfers all or any
portion of the Building, other improvements, and land of which
the Premises are a part, LANDLORD, on consummation of the sale or
transfer shall be released from any liability thereafter accruing
under this lease, but with respect to TENANT, shall retain
liability for any acts or omissions of LANDLORD or its authorized
representatives accruing and written notice of which has been
given to LANDLORD by TENANT prior to the date of such transfer,
unless such liability is assumed by LANDLORD'S transferee in a
written agreement approved by TENANT. If any security deposit or
prepaid Rent has been paid by TENANT, LANDLORD can transfer the
security deposit or prepaid Rent to LANDLORD'S successor and on
such transfer LANDLORD shall be discharged from any further
liability in reference to the security deposit or prepaid rent,
provided that such transferee shall have assumed LANDLORD'S
obligations hereunder in a written agreement approved by TENANT."
31. Paragraph 31 is deleted in its entirety.
33. Paragraph 33 is hereby modified by adding the following phrase in
the third (3rd) line after the words, "chemical process":
"conducted by TENANT or on TENANT'S behalf"
ADDENDUM II: Subparagraph (1) of Addendum II is hereby modified by
deleting the phrase, "Applicable Requirements" at the end of the sixteenth
(16th) line, and adding the following in place of the deletion:
"Laws"
<PAGE>
RENT SCHEDULE A
Base Rent to be as follows:
<TABLE>
<S> <C>
For Month 1 thru 12 $14,553.00
For Month 13 thru 24 $16,008.00
For Month 25 thru 36 $17,609.00
</TABLE>
<PAGE>
Exhibit 10.4
LOAN AND SECURITY AGREEMENT
This LOAN AND SECURITY AGREEMENT is entered into as of AUGUST 4,
1998 between FREMONT FINANCIAL CORPORATION, a California corporation
(FREMONT), with a place of business located at 2020 Santa Monica Boulevard,
Suite 500, Santa Monica, California 90404-2023 and EIP MICROWAVE, INC., a
Delaware corporation (BORROWER), with its chief executive office located at
6950 SW Hampton Street, Suite 200, Portland, Oregon 97223.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION
1.1 TERMS. In addition to the terms that are defined within this
Agreement, the following terms shall have the following definitions when used
in this Agreement:
ACCOUNT DEBTOR means any Person who is or who may become obligated under, with
respect to, or on account of an Account.
ACCOUNTS means all presently existing and hereafter arising accounts
receivable, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale or lease of goods or the rendition of
services by Borrower, whether or not earned by performance, all credit
insurance, guaranties, and other security therefor, as well as all goods
returned to or reclaimed by Borrower, and Borrower's Books relating to any of
the foregoing.
AGREEMENT means this Loan and Security Agreement and any riders, addenda,
extensions, supplements, amendments or modifications to or in connection with
this Loan and Security Agreement.
AUTHORIZED REPRESENTATIVE means any officer, employee or other representative
of Borrower authorized in writing by Borrower to transact business with
Fremont.
BANKRUPTCY CODE means the United States Bankruptcy Code (11 U.S.C. Sections
101 ET SEQ.), as amended, and any successor statute.
BORROWER'S BOOKS means all of Borrower's books and records including all of
the following: ledgers; records indicating, summarizing or evidencing
Borrower's assets (including the Collateral) or liabilities; all information
relating to Borrower's business operations or financial condition; and all
computer programs, disk or tape files, printouts, runs or other computer
prepared information, and the equipment containing such information.
BUSINESS DAY means any day which is not a Saturday, Sunday or other day on
which banks in the State of California are authorized or required to close.
CODE means the California Uniform Commercial Code, as amended from time to
time.
COLLATERAL means all of the following: the Accounts; the Equipment; the
General Intangibles; the Inventory; the Negotiable Collateral; any money or
other assets of Borrower which hereafter come into the possession, custody or
control of Fremont; and all proceeds and products, whether tangible or
intangible, of any of the foregoing, including proceeds of insurance covering
any or all of the Collateral, and any and all Accounts, Equipment, General
Intangibles, Inventory, Negotiable Collateral, money, deposit accounts or
other tangible or intangible property resulting from the sale or other
disposition of the Collateral, or any portion thereof or interest therein,
and the proceeds thereof.
ELIGIBLE ACCOUNTS means those Accounts created by Borrower in the ordinary
course of business that arise out of Borrower's sale of goods or rendition of
services, are owing from Account Debtors that are acceptable to Fremont,
strictly comply with all of Borrower's representations and warranties to
Fremont and are, and at all times continue to be, acceptable to Fremont in
all respects; PROVIDED, HOWEVER, that standards of eligibility may be fixed
and revised from time to time by Fremont in Fremont's exclusive judgment. In
determining such eligibility, Fremont may, but is not obligated to, rely on
agings, reports and schedules of Accounts furnished by Borrower, but reliance
by Fremont thereon from time to time shall not be deemed to limit Fremont's
right to revise standards of eligibility at any time as to Borrower's present
and future Accounts. Eligible Accounts shall not include any of the
following: (a) Accounts which he Account Debtor has failed to pay within 90
days after the original invoice date; (b) all Accounts owed by any Account
Debtor that has failed to pay fifty percent (50%) or more of its Accounts
owed to Borrower within 90 days after the original invoice date; (c) Accounts
with respect to which the Account Debtor is an officer, director, employee or
agent of Borrower; (d) Accounts with respect to which the Account Debtor is a
subsidiary of, related to, affiliated with or has common shareholders,
officers or directors with Borrower; (e) Accounts with respect to which goods
are placed on consignment, guaranteed sale, sale or return, sale on approval,
bill and hold, or which contain other terms by reason of which payment by the
Account Debtor may be conditional; (f) Accounts with respect to which the
Account Debtor is not a resident of the United States *; (g) Accounts with
respect to which the Account Debtor is the United States or any department,
agency or instrumentality of the United States; (h) Accounts with respect to
which Borrower is or may become liable to the Account Debtor for goods sold
or services rendered by the Account Debtor to Borrower or, for any other
reason, are subject to any right of offset in favor of the Account Debtor **;
(i) Accounts with respect to an Account Debtor whose total obligations to
Borrower exceed fifteen percent (15%) of all Accounts, to the extent such
obligations exceed such percentage ***; (j) Accounts with respect to which
the Account Debtor disputes liability or makes any claim with respect
thereto, or is subject to any Insolvency Proceeding, or becomes insolvent, or
goes out of business; (k) Accounts that represent progress billings or other
advance billings that are due prior to the completion of performance by
Borrower of the subject contract for goods or services; or (l) Accounts that
are payable in currency other than United States dollars.
* AND FOR WHICH BORROWER HAS NOT OBTAINED CREDIT INSURANCE OR A LETTER OF
CREDIT WHICH, IN EITHER CASE, IS SATISFACTORY TO FREMONT IN ITS SOLE
DISCRETION
** PROVIDED THAT SUCH ACCOUNTS SHALL ONLY BE INELIGIBLE TO THE EXTENT OF
SUCH OFFSET OR POTENTIAL OFFSET
<PAGE>
*** PROVIDED, HOWEVER, THAT WITH RESPECT TO ACCOUNTS FOR WHICH EITHER
HEWLETT PACKARD OR MANTECH SYSTEMS IS THE ACCOUNT DEBTOR, SUCH PERCENTAGE
SHALL BE 60%
ELIGIBLE INVENTORY means [Not Applicable]
ENVIRONMENTAL LAW means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended, the Resource
Conservation and Recovery Act of 1976, the Hazardous Materials Transportation
Act, the Toxic Substances Control Act, the regulations pertaining to such
statutes, and any other safety, health or environmental statutes, laws,
regulations or ordinances of the United States or of any state, county or
municipality in which Borrower conducts its business or the Collateral is
located.
EQUIPMENT means all of Borrower's present and hereafter acquired equipment,
machinery, machine tools, motors, furniture, furnishings, fixtures, motor
vehicles, rolling stock, processors, tools, parts, dies, jigs, goods (other
than consumer goods, farm products or Inventory), wherever located, and any
interest of Borrower in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions and
improvements to any of the foregoing, wherever located.
ERISA means the Employee Retirement Income Security Act of 1974, as amended,
and the regulations thereunder.
ERISA AFFILIATE means each trade or business (whether or not incorporated and
whether or not foreign) which is or may hereafter become a member of a group
of which Borrower is a member and which is treated as a single employer under
ERISA Section 4001(b)(l), or IRC Section 414.
EVENT OF DEFAULT means the events specified in SECTION 8.
FREMONT EXPENSES means all of the following: costs and expenses (including
taxes, assessments and insurance premiums) required to be paid by Borrower
under any of the Loan Documents which are paid or advanced by Fremont;
filing, recording, publication, appraisal (including periodic Collateral
appraisals), real estate survey, environmental audit and search fees
assessed, paid or incurred by Fremont in connection with Fremont's
transactions with Borrower; costs and expenses incurred by Fremont in the
disbursement or collection of funds to or from Borrower; charges resulting
from the dishonor of checks; costs and expenses paid or incurred by Fremont
to correct any default or enforce any provision of the Loan Documents, or in
gaining possession of, maintaining, handling, preserving, storing, shipping,
selling, preparing for sale or advertising to sell the Collateral, or any
portion thereof, irrespective of whether a sale is consummated; costs and
expenses paid or incurred by Fremont that result from third party claims
against Fremont covered by Borrower's indemnification of Fremont in SECTION
11.4; costs and expenses paid or incurred by Fremont in enforcing or
defending the Loan Documents; and Fremont's reasonable attorneys fees and
expenses incurred (including the allocated costs of Fremont's in-house
counsel) in advising, structuring, drafting, reviewing, administering,
amending, terminating, enforcing, defending or otherwise representing Fremont
in connection with the Loan Documents or the Obligations (including attorneys
fees and expenses incurred in connection with a workout, a restructuring, an
action to lift the automatic stay of Section 362 of the Bankruptcy Code, any
other action or participation by Fremont in an Insolvency Proceeding
concerning Borrower or any guarantor of the Obligations or any defense or
participation by Fremont in any lender liability, preference or fraudulent
conveyance actions).
GENERAL INTANGIBLES means all of Borrower's present and future general
intangibles and other personal property (including contract rights, rights
arising under common law, statutes or regulations, choses or things in
action, goodwill, patents, trade names, trademarks, service marks,
copyrights, blueprints, drawings, purchase orders, customer lists, monies due
or recoverable from pension funds, monies due under any royalty or licensing
agreements, route lists, infringement claims, computer programs, computer
discs, computer tapes, literature, reports, catalogs, deposit accounts,
insurance premium rebates, tax refunds and tax refund claims) other than
goods and Accounts, and Borrower's Books relating to any of the foregoing.
HAZARDOUS MATERIAL means any substance, material, emission or waste which is
or hereafter becomes regulated or classified as a hazardous substance,
hazardous material, toxic substance or solid waste under any Environmental
Law, asbestos, petroleum products, urea formaldehyde, polychlorinated
biphenyls (PCBs), radon and any other hazardous or toxic substance, material,
emission or waste.
INSOLVENCY PROCEEDING means any proceeding commenced by or against any Person
under any provision of the Bankruptcy Code or under any other bankruptcy or
insolvency law, including assignments for the benefit of creditors, formal or
informal moratoria, compositions, extensions generally with its creditors or
proceedings seeking reorganization, liquidation, arrangement or other similar
relief.
INVENTORY means all present and future inventory in which Borrower has any
interest, including goods held for sale or lease or to be furnished under a
contract of service, Borrower's present and future raw materials, work in
process, finished goods and materials used in or consumed in Borrower's
business, goods which have been returned to, repossessed by or stopped in
transit by Borrower, packing and shipping materials, wherever located, any
documents of title representing any of the above, and Borrower's Books
relating to any of the foregoing.
IRC means the Internal Revenue Code of 1986, as amended, and the regulations
thereunder.
LOAN DOCUMENTS means, collectively, this Agreement, any Notes, any security
agreements, pledge agreements, deeds of trust, mortgages or other
encumbrances or agreements which secure the Obligations, any guaranties of
the Obligations, any lock box or blocked account agreements and any other
agreement entered into between Borrower or any guarantor of the Obligations
and Fremont relating to or in connection with this Agreement.
MULTIEMPLOYER PLAN means a MULTIEMPLOYER PLAN as defined in ERISA Sections
3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of Borrower
or any ERISA Affiliate.
NEGOTIABLE COLLATERAL means all of Borrower's present and future letters of
credit, notes, drafts, instruments, certificated and uncertificated
securities, securities entitlements, securities accounts, documents, leases
and chattel paper, and Borrower's Books relating to any of the foregoing.
2
<PAGE>
NOTE means any promissory note made by Borrower to the order of Fremont
concurrently herewith or at any time hereafter.
OBLIGATIONS means all loans, advances, debts, liabilities (including all
amounts charged to Borrower's loan account pursuant to any agreement
authorizing Fremont to charge Borrower's loan account), obligations, fees,
lease payments, guaranties, covenants and duties owing by Borrower to Fremont
of any kind and description (whether pursuant to or evidenced by the Loan
Documents, by any note or other instrument or by any other agreement between
Fremont and Borrower, and irrespective of whether for the payment of money),
whether direct or indirect, absolute or contingent, due or to become due, now
existing or hereafter arising, including any debt, liability or obligation
owing from Borrower to others which Fremont may obtain by assignment or
otherwise, and all interest thereon, including any interest that, but for the
provisions of the Bankruptcy Code, would have accrued, and all Fremont
Expenses which Borrower is required to pay or reimburse pursuant to the Loan
Documents, by law or otherwise.
PERSON means and includes natural persons, corporations, limited
partnerships, general partnerships, joint ventures, trusts, land trusts,
business trusts or other organizations, irrespective of whether they are
legal entities, and governments and agencies and political subdivisions
thereof.
PLAN means any plan described in ERISA Section 3(2) maintained for employees
of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
REFERENCE RATE means the variable rate of interest, per annum, published by
The Wall Street Journal as the "Prime Rate" and based on "the base rate on
corporate loans posted by at least 75% of the nation's 30 largest banks". The
Reference Rate is nothing more nor less than an index for determining the
interest rate payable under the terms of this Agreement. The Reference Rate
is not necessarily the best rate, or any other definition of rates, offered
by the banks that establish the rate or by Fremont. In the event The Wall
Street Journal ceases to publish the "Prime Rate", Fremont may substitute any
similar index for the Reference Rate.
TERM LOAN means any term loan made by Fremont to Borrower, evidenced by and
repayable in accordance with the terms and conditions of a Note.
1.2 CONSTRUCTION. Unless the context of this Agreement clearly requires
otherwise, references to the plural include the singular, references to the
singular include the plural, the term "including" is not limiting and the
term "or" has the inclusive meaning generally represented by the phrase
"and/or". The weeds HEREOF HEREIN, HEREBY, HEREUNDER, and similar terms in
this Agreement refer to this Agreement as a whole and not to any particular
provision of this Agreement. Section, subsection, clause, exhibit and
schedule references are to this Agreement unless otherwise specified. Any
reference in this Agreement or in any of the other Loan Documents to this
Agreement or any of the other Loan Documents shall include all alterations,
amendments, changes, extensions, modifications, renewals, replacements,
substitutions and supplements thereto and thereof.
1.3 ACCOUNTING TERMS. All accounting terms not specifically defined
herein shall be construed in accordance with generally accepted accounting
principles (GAAP) as in effect from time to time. When used herein, the term
FINANCIAL STATEMENTS shall include the notes and schedules thereto.
1.4 RIDERS, EXHIBITS, ETC. The Conditions Precedent Rider to this
Agreement and all of the other riders, exhibits, addenda and schedules to
this Agreement shall be deemed incorporated herein by reference.
1.5 CODE. Any terms used in this Agreement which are defined in the
Code shall be construed and defined as set forth in the Code unless otherwise
defined herein.
2. ADVANCES AND TERMS OF PAYMENT
2.1 LOANS.
A. REVOLVING ADVANCES; REVOLVING ADVANCE LIMIT. Upon the request
of Borrower, made at any time or from time to time during the term hereof,
and so long as no Event of Default has occurred and is continuing, Fremont
shall, in its sole and absolute discretion, make advances (the REVOLVING
ADVANCES) to Borrower in an amount up to 85% of the aggregate outstanding
amount of Eligible Accounts; PROVIDED, HOWEVER, that in no event shall the
aggregate amount of the outstanding Revolving Advances be greater than, at
any time, the sum of $1,000,000 (the REVOLVING ADVANCE LIMIT). Fremont may
reduce its advance rates on Eligible Accounts, reduce the Revolving Advance
Limit or establish reserves with respect to borrowing availability if Fremont
determines, in its sole discretion, that there has occurred, or is likely to
occur, an impairment of the prospect of repayment of all or any portion of
the Obligations, the value of the Collateral or the validity or priority of
Fremont's security interests in the Collateral. Without limiting the
foregoing, a permanent reserve against borrowing availability shall exist in
the amount of Fifty Thousand Dollars ($50,000).
B. TERM LOAN. Concurrently with the funding of the initial
Revolving Advance, Fremont will make a Term Loan to Borrower in the original
principal amount of $500,000, to be evidenced by and repayable in accordance
with the terms and conditions of a Note of even date herewith. Such Term Loan
and any other Term Loan subsequently made by Fremont to Borrower shall
constitute Obligations and shall be secured by the Collateral. The
occurrence of a default under such Note or under any Note made in respect of
any subsequent Term Loan shall constitute an Event of Default hereunder.
C. ADVANCE LIMIT. The sum of the Revolving Advance Limit -- the
principal amount of all Term Loans outstanding from time to time, if any, is
referred to herein as the ADVANCE LIMIT.
2.2 OVERADVANCES. All Revolving Advances made hereunder shall be
added to and deemed part of the Obligations when made. If, at any time and
for any reason, the aggregate amount of the outstanding Revolving Advances
exceeds the dollar or percentage limitations contained in SECTION 2.LA (an
OVERADVANCE), then Borrower shall, upon demand by Fremont, immediately pay to
Fremont, in cash, the amount of such excess.
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2.3 OVERADVANCE FEE. Without affecting Borrower's obligation to
immediately repay to Fremont the amount of each Overadvance in accordance
with the provisions of SECTION 2.2, in the event Fremont agrees to permit any
Overadvance to exist and continue and in consideration for permitting such
Overadvance to exist and continue, Fremont shall be entitled, in its sole
discretion, to charge Borrower a fee in an amount equal to Four Hundred Fifty
Dollars ($450) per day for each day any Overadvance exists or, alternatively,
such other fee as Fremont and Borrower may agree to at the time the
Overadvance is made or discovered.
2.4 AUTHORIZATION TO MAKE REVOLVING ADVANCES. Borrower hereby
authorizes Fremont to make Revolving Advances based upon telephonic or other
instructions received from anyone purporting to be an Authorized
Representative, or, at the discretion of Fremont without instructions from or
notice to Borrower, if such Revolving Advances are necessary to satisfy any
Obligations. All requests for Revolving Advances hereunder shall specify the
date on which the requested Revolving Advance is to be made (which day shall
be a day that Fremont is open for business) and the amount of the requested
Revolving Advance. Requests received after 11:00 a.m. Pacific time on any day
shall be deemed to have been made as of the opening of business on the
immediately following Business Day. All Revolving Advances made under this
Agreement shall be conclusively presumed to have been made to, at the request
of, and for the benefit of Borrower when deposited to the credit of Borrower
or otherwise disbursed in accordance with the instructions of Borrower or in
accordance with the terms and conditions of this Agreement.
2.5 INTEREST.
A. BASIC RATE; DEFAULT RATE. Except where specified to the
contrary in any Loan Document, the aggregate outstanding amount of all
Obligations shall bear interest at the rate of 3.5% per annum above the
Reference Rate. The aggregate outstanding amount of all Obligations shall
bear interest, from and after written notice by Fremont to Borrower of the
occurrence of an Event of Default and without constituting a waiver of any
such Event of Default, at the rate of 6.75% per annum above the Reference
Rate; PROVIDED HOWEVER, that in the event an Insolvency Proceeding is
commenced by or against Borrower, Fremont may charge such default rate of
interest without providing written notice thereof to Borrower. All interest
payable under the Loan Documents shall be computed on the basis of a three
hundred sixty (360) day year for the actual number of days elapsed, based on
the aggregate amount of the Obligations that are outstanding on each day.
Interest shall continue to accrue until all of the Obligations are paid in
full.
B. INITIAL RATE. The Reference Rate as of the date of this
Agreement is 8.5% per annum, and. therefore, the effective rate of interest
hereunder as of the date of this Agreement is 12.0% per annum. The interest
rate payable by Borrower under the terms of this Agreement shall be adjusted
in accordance with any change in the Reference Rate from time to time on the
date of any such change. All interest payable by Borrower shall be due and
payable on the first day of each calendar month during the term of this
Agreement.
C. MINIMUM INTEREST. Notwithstanding anything to the contrary
contained in the Loan Documents, Borrower shall pay Fremont a minimum annual
interest charge in respect of the Obligations equal to: $90,000 per Contract
Year. *
* FOR THE PURPOSES OF THIS PARAGRAPH, "CONTRACT YEAR" SHALL MEAN THAT
CERTAIN 12-MONTH PERIOD BEGINNING WITH THE DATE ON WHICH FREMONT FIRST
ADVANCES FUNDS TO BORROWER HEREUNDER (THE "INITIAL FUNDING DATE") AND ENDING
ON THE DATE IMMEDIATELY PRECEDING THE ONE-YEAR ANNIVERSARY OF THE INITIAL
FUNDING DATE. NOTWITHSTANDING THE PROVISIONS OF THIS PARAGRAPH, MINIMUM
INTEREST SHALL NOT APPLY IN ANY CONTRACT YEAR DURING WHICH AN EARLY
TERMINATION FEE IS PAID PURSUANT TO THE TERMS OF THIS AGREEMENT.
2.6 VERIFICATION AND COLLECTION OF ACCOUNTS. Fremont or Fremont's
designee may, at any time, with or without notice to Borrower, (a) notify
Account Debtors of Borrower that the Accounts have been assigned to Fremont
and that Fremont has a security interest in the Accounts; (b) contact Account
Debtors of Borrower, either in writing or by telephone, for the purpose of
verifying the validity, amount or any other matter relating to any Accounts;
and (c) collect the Accounts directly and charge the collection costs and
expenses to Borrower's loan account. Unless and until Fremont begins direct
collection of the Accounts or gives Borrower other written instructions,
Borrower shall collect all Accounts and the proceeds of other Collateral for
the benefit of Fremont, receive in trust all payments thereon as Fremont's
trustee and immediately deliver said payments to Fremont in their original
form as received by Borrower (subject to the terms of any lockbox, blocked
account or similar agreement entered into for the purpose of collection of
the Accounts).
2.7 CREDITING PAYMENTS. For the purpose of calculating the
availability of Revolving Advances under SECTION 2.1A, the receipt by Fremont
of any wire transfer of funds, check or other item of payment shall be
applied immediately to provisionally reduce the Obligations, but such receipt
shall not be considered a payment on account unless such wire transfer is of
immediately available federal funds and is made to the appropriate deposit
account of Fremont or unless and until such check or other item of payment is
honored when presented for payment. For the purpose of calculating interest
under SECTION 2.5A, the receipt by Fremont of any wire transfer of funds,
check or other item of payment shall be deemed to have occurred five (5)
Business Days after the date Fremont actually receives such item of payment.
In the event any check or other item of payment is not honored when presented
for payment, Borrower shall be deemed not to have made such payment.
Notwithstanding anything to the contrary contained herein, any wire transfer,
check or other item of payment received by Fremont after 11:00 a.m. Pacific
time shall be deemed to have been received by Fremont as of the opening of
business on the immediately following Business Day.
2.8 ANNUAL FACILITY FEE. Borrower shall pay Fremont an annual fee
(the ANNUAL FACILITY FEE) in the amount of $15,000. The Annual Facility Fee
shall be fully earned and is due and payable on the date that the initial
Revolving Advance hereunder and thereafter annually on the anniversary of the
date of this Agreement for the entire term of this Agreement, including all
renewal terms, or so long as any of the Obligations are outstanding.
2.9 LOAN ORIGINATION FEE. [Not Applicable]
2.10 UNUSED LINE FEE. [Not Applicable]
2.11 SERVICING FEE. [Not Applicable].
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2.12 MAINTENANCE FEE. [Not Applicable]
2.13 AUDIT FEE. Borrower shall pay Fremont an audit fee in an
amount equal to $600 per day plus out of-pocket expenses incurred by Fremont
for each audit or examination of Borrower performed by Fremont.
2.14 LATE REPORTING FEE. Borrower shall pay Fremont a fee in an
amount equal to Fifty Dollars ($50.00) per document per day for each Business
Day any report, financial statement or schedule required to be delivered to
Fremont by this Agreement is past due.
2.15 MISCELLANEOUS FEES. Borrower shall pay Fremont its customary
fees for wire transfers (including a premium for early and late transfers),
returned checks, letter of credit guarantees and any other services provided
by Fremont to Borrower that are incidental to this Agreement. Upon Borrower's
request, Fremont shall provide Borrower with a written schedule of the
amounts of all such miscellaneous fees.
2.16 MAXIMUM CHARGES. In no event shall interest on the Obligations
exceed the highest lawful rate in effect from time to time. It is not the
intention of the parties hereto to make an agreement which violates any
applicable state or federal usury laws. In no event shall Borrower pay or
Fremont accept or charge any interest which, together with any other charges
upon the principal or any portion thereof, exceeds the maximum lawful rate of
interest allowable under any applicable state or federal usury laws. Should
any provision of this Agreement or any existing or future Notes or Loan
Documents between the parties be construed to require the payment of interest
which, together with any other charges upon the principal or any portion
thereof, exceeds the maximum lawful rate of interest, then any such excess
shall he applied to the remaining principal balance, if any, and the
remainder refunded to Borrower.
2.17 MONTHLY STATEMENTS. Fremont shall render monthly statements to
Borrower of all Obligations, including statements of all principal, interest,
fees and Fremont Expenses charged, and such statements shall be conclusively
presumed to be correct and accurate and constitute an account stated between
Borrower and Fremont unless, within thirty (30) days after receipt thereof by
Borrower, Borrower shall deliver to Fremont, by registered or certified mail
or overnight courier service, at Fremont's address stated in SECTION 12,
written objection to Fremont's statement specifying the error or errors, if
any, contained in such statements.
2.18 PAYMENT MECHANICS. As an administrative convenience to
Borrower to ensure the timely payment of amounts owing by Borrower to Fremont
under this Agreement, Borrower hereby requests Fremont to advance for the
account of Borrower an amount each month sufficient to pay interest accrued
on the principal amount of the Obligations during the immediately preceding
month and all monthly principal installments or other payments due under a
Note or other Loan Document and amounts from time to time sufficient to pay
all fees and Fremont Expenses owing by Borrower under this Agreement.
Borrower authorizes Fremont, in Fremont's sole discretion, to make a
Revolving Advance for Borrower's account of a sum sufficient each month to
pay, on the due date thereof, all interest accrued on the principal amount of
the Obligations during the immediately preceding month and all monthly
principal installments or other payments due under a Note or other Loan
Document and sums from time to time sufficient to pay, on the due date
thereof, all fees and Fremont Expenses owing by Borrower under this
Agreement, and Fremont may apply the proceeds of each such Revolving Advance
to the payment of such interest, installments, fees and Fremont Expenses.
Each such Revolving Advance shall thereafter accrue interest at the rate then
applicable under this Agreement. Fremont, however, shall not be obligated to
make any such Revolving Advance and Borrower acknowledges that Fremont will
be particularly disinclined to do so if an Event of Default or an Overadvance
exists at the time of, or would result from the making of, such Revolving
Advance.
3. TERM OF AGREEMENT AND EARLY TERMINATION
3.1 TERM. This Agreement shall become effective in accordance with
SECTION 14.1 and shall continue in full force and effect for a term ending
three years after the date hereof and shall be deemed automatically renewed
for successive terms of one (1) year thereafter until terminated as of the
end of the initial term or any renewal term (each a TERM) by either party
giving the other written notice at least sixty (60) days prior to the end of
the then current Term.
3.2 EARLY TERMINATION. Borrower, subject to the payment of the
fee described below, may terminate this Agreement other than at the end of
the then current Term by giving Fremont prior written notice of its intention
to effect an early termination of this Agreement. Fremont may terminate this
Agreement at any time upon or after the occurrence of an Event of Default. In
view of the impracticability and extreme difficulty of ascertaining actual
damages and by mutual agreement of the parties as to a reasonable calculation
of Fremont's lost profits as a result of an early termination of this
Agreement, in either of the instances described in the preceding two
sentences, Borrower shall pay to Fremont, upon the effective date of such
early termination and in addition to all other Obligations, an early
termination fee (the EARLY TERMINATION FEE) in an amount equal to: (a) three
percent (3.0%) of the Advance Limit if such termination occurs at any time
during the first year of the initial Term; (b) two percent (2.0%) of the
Advance Limit if such termination occurs at any time during the second year
of the initial Term; and (c) one percent (1.0%) of the Advance Limit if such
termination occurs during the third year of the initial Term or during any
renewal Term. The Early Termination Fee shall be presumed to be the amount of
damages sustained by Fremont as the result of the early termination and
Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Fee shall be deemed included in the
Obligations. Notwithstanding anything herein to the contrary, if and to the
extent the Early Termination Fee constitutes interest under applicable law,
the Early Termination Fee, when added to all other interest contracted for,
charged or received under this Agreement or any other Loan Documents, shall
not exceed, and shall be limited to an amount which constitutes, interest at
the maximum lawful rate of interest allowable under applicable law.
3.3 EFFECT OF TERMINATION. Upon termination of this Agreement,
all of the Obligations shall be immediately due and payable in full. No
termination of this Agreement shall relieve or discharge Borrower of
Borrower's duties, obligations and covenants hereunder until all of the
Obligations have been fully and indefeasibly paid and satisfied, and
Fremont's continuing security interest in the Collateral shall remain in
effect until all of the Obligations have been fully and indefeasibly paid and
satisfied.
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4. CREATION OF SECURITY INTEREST
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to Fremont
a continuing security interest in all presently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt performance by Borrower of each
and all of its covenants and duties under the Loan Documents. Fremont's
security interest in the Collateral shall attach to all Collateral without
further act on the part of Fremont or Borrower. Other than sales of Inventory
to buyers in the ordinary course of business, Borrower has no authority,
express or implied, to dispose of any item or portion of the Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower shall, upon the request of Fremont, immediately endorse and assign
such Negotiable Collateral to Fremont and deliver physical possession of such
Negotiable Collateral to Fremont.
4.3 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. Borrower shall
execute and deliver to Fremont, concurrently with Borrower's execution and
delivery of this Agreement and at any time thereafter at the request of
Fremont, all financing statements, continuation financing statements, fixture
filings, security agreements, chattel mortgages, pledges, assignments,
endorsements of certificates of title, applications for title, affidavits,
reports, notices, schedules of accounts, letters of authority, and all other
documents that Fremont may reasonably request, in form satisfactory to
Fremont, to perfect and continue perfected Fremont's security interest in the
Collateral and in order to fully consummate all of the transactions
contemplated hereunder and under the other Loan Documents.
4.4 POWER OF ATTORNEY. Borrower hereby irrevocably designates,
makes, constitutes and appoints Fremont (and any of Fremont's officers,
employees or agents designated by Fremont) as Borrower's true and lawful
attorney-in-fact, and Fremont, or Fremont's agent, may, without notice to
Borrower and in either Borrower's or Fremont's name, but at the cost and
expense of Borrower, at such time or times as Fremont in its sole discretion
may determine: (a) demand payment of the Accounts from the Account Debtors,
enforce payment of the Accounts by legal proceedings or otherwise, and
generally exercise all of Borrower's rights and remedies with respect to the
collection of the Accounts; (b) take control, in any manner, of any item of
payment or proceeds relating to any Collateral; (c) prepare, file and sign
Borrower's name to a proof of claim in bankruptcy or similar document against
any Account Debtor or to any notice of lien, assignment or satisfaction of
lien or similar document in connection with any of the Collateral; (d) sign
Borrower's name on any of documents described in SECTION 4.3 or on any other
similar documents to be executed, recorded or filed in order to perfect or
continue perfected Fremont's security interest in the Collateral; (e) sign
Borrower's name on any invoices, bills of lading, freight bills, chattel
paper, documents, instruments or similar documents or agreements relating to
the Accounts, Inventory or other Collateral, drafts against Account Debtors,
schedules and assignments of Accounts, verifications of Accounts and notices
to Account Debtors; (f) send requests for verification of Accounts; (g)
endorse Borrower's name on any checks, notes, acceptances, money orders,
drafts or other items of payment or proceeds relating to any Collateral that
may come into Fremont's possession and deposit the same to the account of
Fremont for application to the Obligations; (h) do all other acts and things
necessary, in Fremont's determination, to fulfill Borrower's obligations
under this Agreement or any of the other Loan Documents; (i) at any time that
an Event of Default has occurred and is continuing, notify the post office
authorities to change the address for delivery of Borrower's mail to an
address designated by Fremont, to receive and open all mail addressed to
Borrower, and to retain all mail relating to the Collateral and forward all
other mail to Borrower; (j) at any time that an Event of Default has occurred
and is continuing, use the information recorded on or contained in any data
processing equipment and computer hardware and software relating to the
Accounts, Inventory, Equipment and any other Collateral and to which Borrower
has access; (k) at any time that an Event of Default has occurred and is
continuing, make, settle and adjust all claims under Borrower's policies of
insurance, make all determinations and decisions with respect to such
policies of insurance and endorse the name of Borrower on any check, draft,
instrument or other item of payment for the proceeds of such policies of
insurance; (l) at any time that an Event of Default has occurred and is
continuing, sll or assign any of the Accounts and other Collateral upon such
terms, for such amounts and at such time or times as Fremont deems advisable;
and (m) at any time that an Event of Default has occurred and is continuing,
settle, adjust or compromise disputes and claims respecting the Accounts
directly with Account Debtors, for amounts and upon terms that Fremont
determines to be reasonable, and, in furtherance thereof, execute and deliver
any documents and releases that Fremont determines to be necessary. The
appointment of Fremont as Borrower's attorney-in-fact and each and every one
of Fremont's rights and powers, being coupled with an interest, is
irrevocable until all of the Obligations have been hilly repaid and performed
and this Agreement has been terminated.
4.5 RIGHT TO INSPECT. Fremont, through any of its officers,
employees or agents, shall have the right at any time or times during
Borrower's usual business hours, or during the usual business hours of any
third party having control over any of Borrower's Books, to inspect
Borrower's Books in order to verify the amount or condition of, or any other
matter relating to, the Collateral or Borrower's financial condition. Fremont
also shall have the right at any time or times during Borrower's usual
business hours to inspect and examine the Inventory and the Equipment and to
check and test the same as to quality, quantity, value and condition. If an
Event of Default has occurred or if Fremont reasonably believes that an Event
of Default has occurred, Fremont may conduct any of the inspections
referenced in this SECTION 4.5 at any time without regard to Borrower's or
any third party's usual business hours.
5. REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to Fremont and
each such representation and warranty shall be deemed to be repeated with
each Revolving Advance made by Fremont and shall be conclusively presumed to
have been relied on by Fremont regardless of any investigation made or
information possessed by Fremont. The following representations and
warranties shall be cumulative and in addition to any and all other
representations and warranties which Borrower shall now or hereafter give, or
cause to be given, to Fremont.
5.1 NO PRIOR ENCUMBRANCES; SECURITY INTERESTS. Borrower has good
and indefeasible title to the Collateral, free and clear of liens, claims,
security interests or encumbrances, except for those permitted under SECTION
7.2.
5.2 ACCOUNTS. All of Borrower's Accounts constitute bona fide
existing obligations created by the sale and delivery of Inventory or the
rendition of services to Account Debtors in the ordinary course of Borrower's
business, and, in the case of Accounts created by the sale and delivery of
Inventory, the Inventory giving rise to such Accounts
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has been delivered to the Account Debtor. At the time of the creation of each
Eligible Account or the assignment thereof to Fremont, each such Eligible
Account is unconditionally owed to Borrower without defense, dispute, offset,
counterclaim or right of return or cancellation and Borrower has not received
notice of actual or imminent bankruptcy, insolvency or material impairment of
the financial condition of the Account Debtor regarding such Eligible Account.
5.3 ELIGIBLE INVENTORY. [Not Applicable]
5.4 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and
Equipment are not stored with a bailee, warehouseman, processor or similar
party unless Fremont has consented thereto in writing and are located only at
the following locations:
6950 SW Hampton Street, Suite 200, Portland, Oregon 97223; and
1745 McCandless Drive, Milpitas, California 95035.
5.5 INVENTORY RECORDS. Borrower keeps correct and accurate records
itemizing and describing the kind, type, quality and quantity of the
Inventory and Borrower's cost therefor.
5.6 LOCATION OF CHIEF EXECUTIVE OFFICE. The chief executive
office of Borrower is located at the address stated in the first paragraph of
this Agreement.
5.7 DUE INCORPORATION AND QUALIFICATION. Borrower is a
corporation duly organized and existing and in good standing under the laws
of the state of its incorporation and is qualified or licensed to do business
in, and is in good standing in, any state in which the failure to be
qualified or licensed and in good standing could have a material adverse
effect on Borrower's business or the Collateral.
5.8 FICTITIOUS NAME(S). Borrower is not conducting its business
at the present time under any trade or fictitious name(s). During the five
(5) years prior to the date of this Agreement, Borrower did not conduct
business under any trade or fictitious name(s).
5.9 PERMITS AND LICENSES. Borrower holds all licenses, permits,
franchises, approvals and consents as are required in the conduct of its
business and the ownership and operation of its properties.
5.10 DUE AUTHORIZATION; NO CONFLICT. The execution, delivery and
performance of the Loan Documents to which Borrower is a party are within
Borrower's corporate powers, have been duly authorized and are not in
conflict with nor constitute a breach of any provision contained in
Borrower's Articles or Certificate of Incorporation or Bylaws, nor will they
create a default under any material agreement to which Borrower is a party.
5.11 LITIGATION. There are no actions or proceedings pending by or
against Borrower before any court or administrative agency and Borrower has
no knowledge or notice of any pending, threatened or imminent litigation,
governmental investigations, or claims, complaints, actions or prosecutions
involving Borrower or any guarantor of the Obligations, except for ongoing
collection matters in which Borrower is the plaintiff and such matters as
have been disclosed to Fremont in writing.
5.12 TAXES. All assessments and taxes, whether real, personal or
otherwise, due or payable by, or imposed, levied or assessed against Borrower
or any of its property or in connection with Borrower's business have been
paid in full prior to delinquency or the expiration of any extension period.
5.13 NO MATERIAL ADVERSE CHANGE IN FINANCIAL CONDITION. All
financial statements relating to Borrower which have been or may hereafter be
delivered by Borrower to Fremont have been prepared in accordance with GAAP
and fairly present Borrower's financial condition as of the date thereof and
Borrower's results of operations for the period then ended. There has been no
material adverse change in the financial condition of Borrower since the date
of the most recent of such financial statements submitted to Fremont.
5.14 SOLVENCY. Borrower is solvent and able to pay its debts
(including trade debts) as they mature. No transfer of property is being made
by Borrower and no obligation is being incurred by Borrower in connection
with the transactions contemplated by this Agreement or the other Loan
Documents with the intent to hinder, delay or defer either present or future
creditors of Borrower.
5.15 ERISA. Neither Borrower, nor any ERISA Affiliate nor any Plan
is or has been in violation of any of the provisions of ERISA, any of the
qualification requirements of IRC Section 401(a), or any of the published
interpretations thereof. No lien upon the assets of Borrower has arisen with
respect to any Plan. No PROHIBITED TRANSACTION within the meaning of ERISA
Section 406 or IRC Section 4975(c) has occurred with respect to any Plan.
Neither Borrower nor any ERISA Affiliate has incurred any withdrawal
liability with respect to any Multiemployer Plan. Borrower and each ERISA
Affiliate have made all contributions required to be made by them to any Plan
or Multiemployer Plan when due. There is no accumulated funding deficiency in
any Plan, whether or not waived.
5.16 ENVIRONMENTAL LAWS AND HAZARDOUS MATERIALS. Borrower has
complied with all Environmental Laws. Except as previously disclosed to
Fremont in writing, Borrower has not caused or permitted any Hazardous
Materials to be located, incorporated, generated, stored, manufactured,
transported to or from, released, disposed of or used at, upon, under or
within any premises at which Borrower conducts its business, or in connection
with Borrower's business. To the best of Borrower's knowledge, no prior owner
or operator of any premises at which Borrower conducts its business has
caused or permitted any of the above to occur at, upon, under or within any
of such premises.
5.17 INTELLECTUAL PROPERTY. Borrower does not own or have rights as
licensee in or to any trademarks or patents or have any trademark or patent
applications pending, except as has been disclosed in writing to Fremont.
5.18 LABOR AND EMPLOYMENT DISPUTES. There are no pending
grievances, disputes or controversies with any union or other organization of
Borrower's employees, or pending threats of strikes or work stoppages, or
demands for collective bargaining by any union or other organization of
Borrower's employees.
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6. AFFIRMATIVE COVENANTS
Borrower covenants and agrees that during the term of this Agreement and until
payment in full of the Obligations, and unless Fremont shall otherwise consent
in writing, Borrower shall do all of the following:
6.1 ACCOUNTING SYSTEM. Borrower at all times shall maintain a
standard and modern system of accounting in accordance with GAAP with ledger
and account cards or computer tapes, disks, printouts and records pertaining
to the Collateral which contain information as may from time to time be
requested by Fremont. Borrower also shall keep proper books of account
showing all sales, claims and allowances on its Inventory.
6.2 COLLATERAL REPORTS. Borrower shall deliver to Fremont, no
later than the fifteenth day of each month during the term of this Agreement,
a detailed aging of the Accounts, a reconciliation statement and a summary
aging, by vendor, of all accounts payable and any book overdraft Borrower
shall deliver to Fremont, as Fremont may from time to time require,
collection reports, sales journals, invoices, original delivery receipts,
customers' purchase orders, shipping instructions, bills of lading and other
documentation respecting shipment arrangements. Absent such a request by
Fremont, copies of all such documentation shall be held by Borrower as
custodian for Fremont.
6.3 RETURNS. Returns and allowances, if any, as between Borrower
and its Account Debtors, shall be permitted by Borrower on the same basis and
in accordance with the usual and customary practices of Borrower as they
exist at the time of the execution and delivery of this Agreement. If any
Account Debtor returns any Inventory to Borrower, Borrower shall promptly
determine the reason for such return and, if Borrower accepts such return,
issue a credit memorandum (with a copy to be sent to Fremont) in the
appropriate amount to such Account Debtor. Borrower shall promptly notify
Fremont of all returns and recoveries and of all disputes and claims.
6.4 DESIGNATION OF INVENTORY. [Not Applicable]
6.5 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Borrower shall
deliver to Fremont: (a) as soon as available, but in any event within thirty
(30) days after the end of each month during each of Borrower's fiscal years,
a company prepared balance sheet and profit and loss statement covering
Borrower's operations during such period; and (b) as soon as available, but
in any event within ninety (90) days after the end of each of Borrower's
fiscal years, financial statements of Borrower for each such fiscal year,
certified by independent certified public accountants acceptable to Fremont.
All such annual financial statements shall include a balance sheet and profit
and loss statement, together with the accountants' letter to management.
Borrower shall also deliver Borrower's Form l0-Qs, 10-Ks or 8-Ks, and any
other filings made by Borrower with the Securities and Exchange Commission,
if any, as soon as the same become available, and any other report reasonably
requested by Fremont relating to the Collateral or the financial condition of
Borrower, including financial projections, and a certificate signed by the
chief financial officer of Borrower to the effect that all reports,
statements or computer prepared information of any kind or nature delivered
or caused to be delivered to Fremont under this SECTION 6.5 fairly present
the financial condition of Borrower and that there exists on the date of
delivery of such certificate to Fremont no condition or event which
constitutes an Event of Default. If Borrower is a parent company of one or
more subsidiaries or is a subsidiary of another company, then, in addition to
the financial statements referred to above, Borrower agrees to deliver
financial statements prepared on a consolidating basis so as to present
Borrower and each such related entity separately, and on a consolidated basis.
6.6 LITIGATION. Borrower shall promptly notify Fremont in writing
of any litigation, governmental investigations or criminal prosecutions
involving Borrower, other than collection matters in which Borrower is the
plaintiff.
6.7 TAX RETURNS, RECEIPTS. Borrower shall deliver to Fremont
copies of each of Borrower's federal income tax returns, and any amendments
thereto, within thirty (30) days after the filing thereof with the Internal
Revenue Service. Furthermore, Borrower shall deliver to Fremont, promptly
upon request by Fremont, satisfactory evidence of Borrower's payment of all
federal withholding taxes required to be paid by Borrower.
6.8 GUARANTOR TAX RETURNS. Borrower shall cause each guarantor of
the Obligations to deliver to Fremont copies of such guarantor's federal
income tax returns within thirty (30) days after the filing thereof with the
Internal Revenue Service.
6.9 TITLE TO EQUIPMENT. Upon Fremont's request, Borrower shall
immediately deliver to Fremont, properly endorsed, any and all evidences of
ownership of, or certificates of title or applications for title to, any
items of Equipment.
6.10 MAINTENANCE OF EQUIPMENT. Borrower shall keep and maintain the
Equipment in good operating condition and repair and shall make all necessary
replacements thereto so that the value and operating efficiency thereof shall
at all times be maintained and preserved. Borrower shall not permit any item
of Equipment to become a fixture to real estate or an accession to other
property, and the Equipment is now and shall at all times remain personal
property.
6.11 TAXES. All assessments and taxes, whether real, personal or
otherwise, due or payable by, or imposed, levied or assessed against Borrower
or any of its property or in connection with Borrower's business shall be
paid in full prior to delinquency or the expiration of. any extension period.
Borrower shall make due and timely payment or deposit of all federal, state
and local taxes, assessments or contributions required of it by law and will
execute and deliver to Fremont, on demand, appropriate certificates attesting
to the payment or deposit thereof. Borrower shall make timely payment or
deposit of all tax payments and withholding taxes required of it by
applicable laws, including those laws concerning F.I.C.A., F.U.T.A., state
disability and local, state and federal income taxes, and shall, upon
request, furnish Fremont with proof satisfactory to Fremont indicating that
Borrower has made such payments or deposits.
6.12 INSURANCE. Borrower, at its expense, shall keep and maintain
the Collateral insured against all risk of loss or damage from fire, theft,
vandalism, malicious mischief, explosion, sprinklers and all other hazards
and risks of physical damage included within the meaning of the term
"extended coverage" in such amounts as are ordinarily insured against by
other similar businesses. Borrower shall also keep and maintain comprehensive
general public
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liability insurance and property damage insurance, and insurance against loss
from business interruption, insuring against all risks relating to or arising
from Borrower's ownership and use of the Collateral and Borrower's other
assets and the operation of Borrower's business. All such policies of
insurance shall be in such form, with such companies and in such amounts as
may be satisfactory to Fremont. Borrower shall deliver to Fremont certified
copies of such policies of insurance and evidence of the payments of all
premiums therefor. All such policies of insurance (except those of public
liability and property damage) shall contain a Lender's Loss Payable
endorsement in a form satisfactory to Fremont, naming Fremont as loss payee
thereof (as its interests appear), and shall contain a waiver of warranties.
All proceeds payable under any such policy shall be payable to Fremont to be
applied to the Obligations.
6.13 NO OFFSETS OR COUNTERCLAIMS. All payments hereunder and under
the other Loan Documents made by or on behalf of Borrower shall be made
without offset or counterclaim, and Borrower hereby waives any right to
offset, against the repayment of the Obligations, any claims it may have
against Fremont.
6.14 FREMONT EXPENSES. Borrower shall immediately and without
demand reimburse Fremont for all sums expended by Fremont which constitute
Fremont Expenses and Borrower hereby authorizes and approves all Revolving
Advances and payments by Fremont for items constituting Fremont Expenses.
Borrower acknowledges that Fremont Expenses include, among other things, (a)
Fremont's reasonable attorneys fees and expenses incurred in defending or
otherwise representing Fremont concerning the Loan Documents or the
Obligations and (b) charges resulting from the dishonor of checks. Since
Fremont Expenses are a part of the Obligations which are secured by the
Collateral, Fremont shall not be required to discharge any lien or terminate
any security interest in the Collateral unless and until (y) Borrower and
Fremont execute a mutual general release of liability and indemnification in
favor of and acceptable to Fremont and (z) to the extent another financial
institution refinances the Obligations, such financial institution delivers
an agreement, acceptable to Fremont, to indemnify Fremont for loss arising
from checks delivered to Fremont for collection and payment of the
Obligations which are returned for non-payment or for any other reason.
6.15 COMPLIANCE WITH LAW. Borrower shall comply with the
requirements of all applicable laws, rules, regulations and orders of
governmental authorities relating to Borrower and the conduct of Borrower's
business, including the Fair Labor Standards Act and the Americans with
Disabilities Act.
6.16 LOCATION OF INVENTORY AND EQUIPMENT. Borrower shall keep the
Inventory and Equipment only at the locations identified in SECTION 5.4.
6.17 ENVIRONMENTAL LAWS AND HAZARDOUS MATERIALS. Borrower shall
not permit any lien under any Environmental Law to be filed against any of
the Collateral or any of Borrower's real property in which Fremont holds a
lien, and will promptly notify Fremont of any proceeding, inquiry or claim
relating to any alleged violation of any Environmental Law, or any alleged
loss, damage or injury resulting from any Hazardous Material. Fremont shall
have the right to join and participate in, as a party if it so elects, any
legal or administrative proceeding initiated against Borrower or any
guarantor of the Obligations with respect to any Hazardous Material or in
connection with any Environmental Law.
7. NEGATIVE COVENANTS
Borrower covenants and agrees that during the term of this Agreement and
until payment in full of the Obligations, Borrower will not do any of the
following without Fremont's prior written consent:
7.1 INDEBTEDNESS. Create, incur, assume, permit or otherwise
become liable with respect to any indebtedness outside of the ordinary and
usual course of Borrower's business, except (a) indebtedness set forth in
Borrower's latest financial statements submitted to Fremont prior to the date
of this Agreement and renewals or extensions of such indebtedness and (b) the
Obligations.
7.2 SECURITY INTERESTS. Create, incur, assume or permit to exist
any security interest, lien, pledge, mortgage or encumbrance on any
Collateral or on any of Borrower's real property in which Fremont holds a
lien, except (a) the security interests granted to Fremont by Borrower, (b)
the security interests disclosed in the UCC searches obtained by Fremont
prior to the funding of the initial Revolving Advance hereunder and (c) any
security interest which Borrower has disclosed in writing to Fremont and to
which Fremont has given its prior written consent.
7.3 EXTRAORDINARY TRANSACTIONS. Enter into any transaction not in
the ordinary and usual course of Borrower's business, including the sale,
lease or other disposition of, whether by sale or otherwise, any of
Borrower's assets other than sales of Inventory in the ordinary and usual
course of Borrower's business; or make any advance, loan or capital
contribution to any Person except in the ordinary and usual course of
Borrower's business.
7.4 CHANGE NAME. Borrower's name, business structure or identity,
or add any new fictitious name.
7.5 FUNDAMENTAL CHANGES. Enter into any acquisition, merger,
consolidation, reorganization or recapitalization, or reclassify its capital
stock, or liquidate, wind up or dissolve itself (or suffer any liquidation or
dissolution), or acquire by purchase or otherwise all or substantially all of
the assets, stock or other beneficial ownership interest of any other Person.
7.6 GUARANTY. Guaranty or otherwise become in any way liable with
respect to the obligations of any third party except by endorsement of
instruments or items of payment for deposit to the account of Borrower for
negotiation and delivery to Fremont.
7.7 RESTRUCTURE. Make any change in Borrower's capital structure
or in the principal nature of Borrower's business operations.
7.8 PREPAYMENTS. Prepay any indebtedness owing to any third party.
7.9 CHANGE OF OWNERSHIP. Cause, permit or suffer any transfer,
whether direct or indirect, of the ownership of * ten percent (10%) or more
of Borrower's outstanding capital stock or other beneficial ownership
interest in any single transaction or series of transactions.
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* TWENTY-FIVE PERCENT (25%)
7.10 COMPENSATION. Pay total compensation, including salaries,
withdrawals, fees, bonuses, commissions, drawing accounts, management fees or
other payments, whether directly or indirectly, in money or otherwise, during
any fiscal year to all of Borrower's executives, officers, shareholders,
affiliates, and directors (or any relatives thereof) in an aggregate amount
in excess of 110% of those paid in the prior fiscal year. *
* FREMONT HEREBY ACKNOWLEDGES THAT, FOR BORROWER'S FISCAL YEAR ENDING
SEPTEMBER 30, 1999, SUCH AGGREGATE AMOUNT OF TOTAL COMPENSATION SHALL BE
$300,000.
7.11 LOANS TO INSIDERS. Make any loans, advances or extensions of
credit to any officer, director, executive, employee or shareholder of
Borrower, or any relative of any of the foregoing, or to any entity which is
a subsidiary of, related to, affiliated with or has common shareholders,
officers or directors with Borrower, which when aggregated with all other
loans, advances or extensions of credit to any or all of the above Persons at
any time outstanding during the term of this Agreement, exceeds $10,000.
7.12 CAPITAL EXPENDITURES. Make any capital expenditure, or any
commitment therefor, in excess of $300,000 for any individual transaction or
where the aggregate amount of such capital expenditures, made or committed
for in any fiscal year, is in excess of $500,000.
7.13 CONSIGNMENTS. Consign any Inventory; or sell any Inventory
on bill and hold, sale on approval or other conditional terms of sale.
7.14 DISTRIBUTIONS. Make any distribution or declare or pay any
dividends (in cash or in stock) on, or purchase, acquire, redeem or retire
any of Borrower's capital stock, of any class, whether now or hereafter
outstanding.
7.15 ACCOUNTING METHODS. Modify or change its method of accounting
or enter into, modify or terminate any agreement currently existing or at any
time hereafter entered into with any third party accounting firm or service
bureau for the preparation or storage of Borrower's accounting records
without said accounting firm or service bureau agreeing to provide Fremont
information regarding the Collateral or Borrower's financial condition.
Borrower waives the right to assert a confidential relationship, if any, it
may have with any accounting firm or service bureau in connection with any
information requested by Fremont pursuant to or in accordance with this
Agreement, and agrees that Fremont may contact directly any such accounting
firm or service bureau in order to obtain such information.
7.16 SUSPENSION. Suspend or go out of business.
7.17 LOCATION OF CHIEF EXECUTIVE OFFICE. Relocate its chief
executive office to a new location unless Fremont is given thirty (30) days
prior written notice thereof.
8. EVENTS OF DEFAULT
The occurrence of any one or more of the following events shall constitute an
"Event of Default" under this Agreement:
8.1 FAILURE TO PAY. Borrower fails to pay when due and payable,
or when declared due and payable, any portion of the Obligations (whether
principal, interest, fees and charges due Fremont, reimbursement of Fremont
Expenses, or other amounts constituting Obligations);
8.2 FAILURE TO PERFORM. Borrower fails or neglects to perform,
keep or observe any term, provision, condition, representation, warranty,
covenant or agreement contained in this Agreement, in any of the other Loan
Documents or in any other present or future agreement between Borrower and
Fremont;
8.3 MISREPRESENTATION. Any misstatement or misrepresentation now
or hereafter exists in any warranty, representation, statement or report made
to Fremont by Borrower or any officer, employee, agent or director of
Borrower, or if any such warranty or representation is withdrawn by any of
them;
8.4 MISREPRESENTATION OF COLLATERAL. Any writing, document,
aging, certificate or other evidence of the Eligible Accounts or Eligible
Inventory shall be incomplete, incorrect or misleading at the time the same
is furnished to Fremont; or Borrower shall fail to immediately remit to
Fremont proceeds of Accounts and other Collateral, pursuant to the terms of
SECTION 2.6;
8.5 MATERIAL ADVERSE CHANGE. There is a material adverse change
in Borrower's business or financial condition;
8.6 MATERIAL IMPAIRMENT. There is a material impairment of the
prospect of repayment of any portion of the Obligations owing to Fremont or a
material impairment of the value or priority of Fremont's security interests
in the Collateral;
8.7 LEVY OR ATTACHMENT. Any material portion of Borrower's assets
is attached, seized, subjected to a writ or distress warrant, or is levied
upon, or comes into the possession of any judicial officer;
8.8 INSOLVENCY BY BORROWER. An Insolvency Proceeding is commenced
by Borrower;
8.9 INSOLVENCY AGAINST BORROWER. An Insolvency Proceeding is
commenced against Borrower;
8.10 INJUNCTION AGAINST BORROWER. Borrower is enjoined, restrained
or in any way prevented by court order from continuing to conduct all or any
material part of its business affairs;
8.11 GOVERNMENT LIEN. A notice of lien, levy or assessment is
filed of record with respect to any of Borrower's assets by the United States
government, or any department, agency or instrumentality thereof, or by any
state, county, municipal or other governmental agency, or any taxes or debts
owing at any time hereafter to any one or
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more of such entities becomes a lien, whether choate or otherwise, upon any
of Borrower's assets and the same is not paid on the payment date thereof;
8.12 JUDGMENT. A judgment is entered against Borrower;
8.13 CROSS DEFAULT TO MATERIAL AGREEMENTS. There is a default in
any material agreement to which Borrower is a party with one or more third
parties or by which Borrower or Borrower's property or assets are bound;
8.14 SUBORDINATED DEBT PAYMENTS. Borrower makes any payment on
account of indebtedness that has been contractually subordinated in right of
payment to the payment of the Obligations, except to the extent such payment
is permitted by the terms of the subordination agreement applicable to such
indebtedness;
8.15 LOSS OF GUARANTOR. Any guarantor of the Obligations dies,
terminates his/her/its guaranty, becomes the subject of an Insolvency
Proceeding, or contests his/her/its obligations under such a guaranty; or if
any such guaranty of the Obligations ceases to be valid or enforceable for
any reason;
8.16 ERISA VIOLATION. A PROHIBITED TRANSACTION within the meaning
of ERISA Section 406 or IRC Section 4975(c) shall occur with respect to a
Plan which could have a material adverse effect on the financial condition of
Borrower; any lien upon the assets of Borrower in connection with any Plan
shall arise; Borrower or any ERISA Affiliate shall completely or partially
withdraw from a Multiemployer Plan and such withdrawal could, in the opinion
of Fremont, have a material adverse effect on the financial condition of
Borrower; Borrower or any of its ERISA Affiliates shall fail to make full
payment when due of all amounts which Borrower or any of its ERISA Affiliates
may be required to pay to any Plan or any Multiemployer Plan as one or more
contributions thereto; Borrower or any of its ERISA Affiliates creates or
permits the creation of any accumulated funding deficiency, whether or not
waived; the voluntary or involuntary termination of any Plan which
termination could, in the opinion of Fremont, have a material adverse effect
on the financial condition of Borrower; or Borrower shall fail to notify
Fremont promptly and in any event within ten (10) days of the occurrence of
any event which constitutes an Event of Default under this clause or would
constitute such an Event of Default upon the exercise of Fremont's judgment;
or
8.17 CRIMINAL PROCEEDINGS. Criminal proceedings are instituted
against Borrower, any member of Borrower's senior management or any guarantor
of the Obligations that could result in the forfeiture or loss of Collateral
or a material impairment of the financial condition of Borrower or any
guarantor of the Obligations.
Notwithstanding anything contained in this SECTION 8 to the contrary, Fremont
shall refrain from exercising its rights and remedies and an Event of Default
shall not be deemed to have occurred by reason of the occurrence of any of
the events set forth in SECTIONS 8.7, 8.9, 8.11 or 8.12 of this Agreement if,
within ten (10) days from the date thereof, the same is released, discharged,
dismissed, bonded against or satisfied; PROVIDED, HOWEVER, Fremont shall not
be obligated to make Revolving Advances to Borrower during such period.
9. FREMONT'S RIGHTS AND REMEDIES
9.1 RIGHTS AND REMEDIES. Upon the occurrence of an Event of
Default, Fremont may, at its election, without notice of its election and
without demand, do any one or more of the following, all of which are
authorized by Borrower:
(a) Declare all Obligations, whether evidenced by this Agreement,
any of the other Loan Documents or otherwise, immediately due and payable in
full;
(b) Cease advancing money or extending credit to or for the
benefit of Borrower under this Agreement, any of the other Loan Documents or
any other agreement between Borrower and Fremont;
(c) Terminate this Agreement and any of the other Loan Documents
as to any future liability or obligation of Fremont, but without affecting
Fremont's rights and security interest in the Collateral and without
affecting the Obligations;
(d) Settle or adjust disputes and claims directly with Account
Debtors for amounts and upon terms which Fremont considers advisable and, in
such cases, Fremont will credit Borrower's loan account with only the net
amounts received by Fremont in payment of such disputed Accounts, after
deducting all Fremont Expenses incurred or expended in connection therewith;
(e) Cause Borrower to hold all returned Inventory in trust for
Fremont, segregate all returned Inventory from all other property of Borrower
or in Borrower's possession and conspicuously label said returned Inventory
as the property of Fremont;
(f) Without notice to or demand upon Borrower or any guarantor,
make such payments and do such acts as Fremont considers necessary or
reasonable to protect its security interest in the Collateral. Borrower
agrees to assemble the Collateral if Fremont so requires and to deliver or
make the Collateral available to Fremont at a place designated by Fremont.
Borrower authorizes Fremont to enter any premises where the Collateral is
located, to take and maintain possession of the Collateral, or any part of
it, and to pay, purchase, contest or compromise any encumbrance, charge or
lien that in Fremont's determination appears to be prior or superior to its
security interest and to pay all expenses incurred in connection therewith.
With respect to any of Borrower's owned premises, Borrower hereby grants
Fremont a license to enter into possession of such premises and to occupy the
same, without charge, in order to exercise any of Fremont's rights or
remedies provided herein, at law, in equity, or otherwise;
(g) Without notice to Borrower (such notice being expressly
waived) and without constituting a retention of any collateral in
satisfaction of an obligation (within the meaning of Section 9505 of the
Code), set off and apply to the Obligations any and all (i) balances and
deposits of Borrower held by Fremont (including any amounts received in a
lockbox or blocked account), or (ii) indebtedness at any time owing to or for
the credit or the account of Borrower held by Fremont;
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(h) Hold, as cash collateral, any and all balances and deposits of
Borrower held by Fremont (including any amounts received in a lockbox or
blocked account) to secure the Obligations;
(i) Ship, reclaim, recover, store, finish, maintain, repair,
prepare for sale, advertise for sale and sell (in the manner provided for
herein) the Collateral. Fremont is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, rights of use of
any name, trade secrets, trade names, trademarks, service marks, and
advertising matter, or any property of a similar nature, as it pertains to
the Collateral, in completing production of, advertising for sale and selling
any Collateral. Borrower's rights under all licenses and all franchise
agreements shall inure to Fremont's benefit;
(j) Sell the Collateral at either a public or private sale, or
both, by way of one or more contracts or transactions, for cash or on terms,
in such manner and at such places (including Borrower's premises) as Fremont
determines is commercially reasonable. It is not necessary that the
Collateral be present at any such sale;
(k) Fremont shall give notice of the disposition of the Collateral
as follows:
(1) Fremont shall give the Borrower and each holder of a
security interest in the Collateral who has filed with Fremont a written request
for notice, a notice in writing of the time and place of public sale or, if the
sale is a private sale or some other disposition other than a public sale is
to be made, then the time on or after which the private sale or other
disposition is to be made;
(2) The notice shall be personally delivered or mailed,
postage prepaid, to Borrower as provided in SECTION 12, at least five (5)
calendar days before the date fixed for the sale, or at least five (5)
calendar days before the date on or after which the private sale or other
disposition is to be made, unless the Collateral is perishable or threatens
to decline speedily in value. Notice to Persons other than Borrower claiming
an interest in the Collateral shall be sent to such addresses as they have
furnished to Fremont;
(3) If the sale is to he a public sale, Fremont shall also
give notice of the time and place by publishing a notice one time at least
five (5) calendar days before the date of the sale in a newspaper of general
circulation in the county in which the sale is to be held;
(l) Fremont may credit bid and purchase at any public sale;
(m) Any deficiency that exists after disposition of the Collateral
as provided above shall be paid immediately by Borrower. Any excess will be
remitted without interest by Fremont to the party or parties legally entitled
to such excess; and
(n) In addition to the foregoing. Fremont shall have all rights
and remedies provided by law and any rights and remedies contained in any
other Loan Documents. All such rights and remedies shall be cumulative.
9.2 NO WAIVER. No delay on the part of Fremont in exercising any
right, power or privilege under this Agreement shall operate as a waiver, nor
shall any single or partial exercise of any right, power or privilege under
this Agreement or otherwise, preclude other or further exercise of the right,
power, 0r privilege or the exercise of any other right, power or privilege.
10. TAXES AND EXPENSES REGARDING THE COLLATERAL
If Borrower fails to pay any monies (whether taxes, assessments, insurance
premiums or otherwise) due to third parties regarding the Collateral, or
fails to make any deposits or furnish any required proof of payment or
deposit, or fails to perform any of Borrower's other covenants under the
terms of this Agreement, then in its discretion and without prior notice to
Borrower, Fremont may do any or all of the following: (a) make any payment
which Borrower has failed to pay or any part thereof; (b) set up such
reserves in Borrower's loan account as Fremont deems necessary to protect
Fremont from the exposure created by such failure; (c) obtain and maintain
insurance policies of the type described in SECTION 6.12 and take any action
with respect to such policies as Fremont deems prudent; or (d) take any other
action deemed necessary by Fremont to preserve and protect its interests and
rights under this Agreement. Any payments made by Fremont shall not
constitute an agreement by Fremont to make similar payments in the future or
a waiver by Fremont of any Event of Default under this Agreement. Fremont
need not inquire as to, or contest the validity of, any such expense, tax,
security interest, encumbrance or lien and the receipt of notice for the
payment thereof shall be conclusive evidence that the same was validly due
and owing.
11. WAIVERS AND INDEMNIFICATIONS
11.1 WAIVERS. Borrower waives demand, protest, notice of
protest, notice of default or dishonor, notice of payment and nonpayment,
notice of any default, notice of nonpayment at maturity, notice of intention
to accelerate and notice of acceleration, so that Fremont may exercise any
and all rights and remedies under the Loan Agreement or any other Loan
Documents, or as otherwise provided at law or in equity, immediately upon the
occurrence of any Event of Default, without any further notice, grace or
opportunity to cure whatsoever. Borrower further waives notice prior to
Fremont's taking possession or control of the Collateral, any bond or
security which might be required by any court prior to allowing Fremont to
exercise any of Fremont's remedies, and the benefit of all valuation,
appraisement and exemption laws. Borrower agrees that Fremont may compromise,
settle or release without notice to Borrower any accounts, documents,
instruments, chattel paper or guaranties at any time held by Fremont on which
Borrower may in any way be liable.
11.2 NO MARSHALING. Borrower, on its own behalf and on behalf
of its successors and assigns, hereby expressly waives all rights, if any, to
require a marshaling of assets by Fremont or to require that Fremont first
resort to some or any portion of the Collateral before foreclosing upon,
selling or otherwise realizing on any other portion thereof.
11.3 FREMONT'S LIABILITY FOR COLLATERAL. So long as Fremont
complies with its obligations, if any, under Section 9207 of the Code,
Fremont shall not in any way or manner be liable or responsible for: (a) the
safekeeping of the Collateral; (b) any loss or damage thereto occurring or
arising in any manner or fashion from any
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cause; (c) any diminution in the value thereof; or (d) any act or default of
any carrier, warehouseman, bailee, forwarding agency or other Person. All
risk of loss, damage or destruction of the Collateral shall be borne by
Borrower.
11.4 INDEMNIFICATION. Borrower shall defend, indemnify and hold
harmless Fremont, its directors, officers, agents, employees, participants
and assigns, from and against any and all claims, suits, actions, causes of
action, debts, liabilities, damages, losses, obligations, charges, judgments
and expenses, including attorneys fees and costs, of any nature whatsoever,
in any way relating to or arising from the transactions contemplated by this
Agreement or any other Loan Document (including those relating to or arising
from any alleged or actual violation of any Environmental Law, or any loss,
damage or injury resulting from any Hazardous Material); PROVIDED that the
foregoing indemnification shall not extend to liabilities, damages, losses,
obligations, judgments and expenses proximately caused by the gross
negligence or willful misconduct of Fremont. This indemnification provision
shall survive the termination of this Agreement.
12. NOTICES
Unless otherwise provided in this Agreement, all notices or demands by any
party relating to this Agreement, the Loan Documents or any other agreement
entered into in connection herewith shall be in writing and (except for
financial statements and other informational documents which may be sent by
first-class mail, postage prepaid) shall be personally delivered or sent by
registered or certified mail, postage prepaid, return receipt requested, or
by receipted overnight delivery service to Borrower or to Fremont, as the
case may be, at their addresses set forth below:
IF TO BORROWER: EIP Microwave, Inc.
6950 SW Hampton Street, Suite 200
Portland, Oregon 97223
Attn: Mr. J. Bradford Bishop
IF TO FREMONT: FREMONT FINANCIAL CORPORATION
2020 Santa Monica Boulevard, Suite 500
Santa Monica, California 90404-2023
Attn: Regional Credit Manager
The parties hereto may change the address at which they are to receive
notices hereunder by notice in writing in the foregoing manner given to the
other. All notices or demands sent in accordance with this SECTION 12, other
than notices by Fremont in connection with Sections 9504 and 9505 of the
Code, shall be deemed received on the earlier of the date of actual receipt
or three (3) calendar days after the deposit thereof in the mail. Borrower
acknowledges and agrees that notices sent by Fremont in connection with
Sections 9504 or 9505 of the Code shall be deemed sent when deposited in the
mail or otherwise sent by Fremont in accordance with the delivery methods set
forth above.
13. DESTRUCTION OF BORROWER'S DOCUMENTS
All documents, schedules, invoices, agings or other papers delivered to
Fremont may be destroyed or otherwise disposed of by Fremont four (4) months
after they are delivered to or received by Fremont unless Borrower requests,
in writing, the return of said documents, schedules, invoices, agings or
other papers and makes arrangements, at Borrower's expense, for their return.
14. GENERAL PROVISIONS
14.1 EFFECTIVENESS. This Agreement and the other Loan Documents
shall be binding and deemed effective when executed by Borrower and Fremont
14.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and inure
to the benefit of the respective successors and assigns of each of the
parties; provided, however, that Borrower may not assign this Agreement or
any rights or duties hereunder without Fremont's prior written consent and
any prohibited assignment shall be void and of no effect as against Fremont.
No consent to an assignment by Fremont shall release Borrower from its
Obligations. Fremont and its successors and assigns may assign this Agreement
and any other Loan Document and its rights and duties hereunder and
thereunder. Fremont reserves the right to sell, assign, transfer, negotiate
or grant participations in all or any part of, or any interest in Fremont's
rights and benefits hereunder. In connection therewith, Fremont may disclose
all documents and information which Fremont now or hereafter may have
relating to Borrower or Borrower's business. Borrower expressly consents to
any assignment by Fremont to its wholly owned subsidiary, Fremont Funding
Inc., of certain of Fremont's rights hereunder and under the other Loan
Documents, including the beneficial interest in loans made by Fremont, and
any subsequent assignment by Fremont Funding Inc. to LaSalle National Bank
(or any successor trustee), as trustee of the Fremont Small Business Loan
Master Trust, of such rights.
14.3 SECTION HEADINGS. Headings and numbers have been set forth
herein for convenience only. Unless the contrary is compelled by the context,
everything contained in each paragraph applies equally to this entire
Agreement.
14.4 INTERPRETATION. Neither this Agreement nor any uncertainty or
ambiguity herein shall be construed or resolved against Fremont or Borrower,
whether under any rule of construction or otherwise. On the contrary, this
Agreement has been reviewed by all pasties and shall be construed and
interpreted according to the ordinary meaning of the words used so as to
fairly accomplish the purposes and intentions of all parties hereto.
14.5 SEVERABILITY OF PROVISIONS. Each provision of this Agreement
shall be severable from every other provision of this Agreement for the
purpose of determining the legal enforceability of any specific provision.
14.6 AMENDMENTS IN WRITING. Neither this Agreement nor any
provision hereof shall be amended, modified, waived or terminated orally or
by course of conduct or pattern of dealing, but only by a written agreement
signed by an authorized officer of Fremont. Any purported amendment,
modification, waiver or termination of this Agreement or any provision hereof
that is not in writing and signed by an authorized officer of Fremont shall
be void and of no effect.
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<PAGE>
14.7 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire agreement between the parties with respect to
the subject matter hereof. This Agreement, together with the other loan
Documents, supersedes all prior agreements, understandings and negotiations,
if any, which are merged into this Agreement and the other Loan Documents.
14.8 COUNTERPARTS. This Agreement may be executed in any number of
counterparts and by different parties on separate counterparts each of which,
when executed and delivered, shall be deemed to be an original and all of
which, when taken together, shall constitute but one and the same Agreement.
14.9 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the incurrence
or payment of the Obligations by Borrower or any guarantor of the Obligations
or the transfer by either or both of such parties to Fremont of any property
of either or both of such parties should for any reason subsequently be
declared to be void or voidable under any state or federal law relating to
creditors' rights, including provisions of the Bankruptcy Code relating to
fraudulent conveyances, preferences and other voidable or recoverable
payments of money or transfers of property (a VOIDABLE TRANSFER), and if
Fremont is required to repay or restore, in whole or in part, any such
Voidable Transfer, or elects to do so upon the reasonable advice of its
counsel. then, as to any such Voidable Transfer, or the amount thereof that
Fremont is required or elects to repay or restore, and as to all reasonable
costs, expenses and attorneys fees of Fremont related thereto, the liability
of Borrower or such guarantor automatically shall be revived, reinstated and
restored and shall exist as though such Voidable Transfer had never been made.
14.10 CONSULTATION WITH COUNSEL. Borrower and Fremont
acknowledge that they have been given the opportunity to consult with counsel
and other advisors of their choice prior to entering into this Agreement.
14.1 1 LIMITATION OF LIABILITY. No claim may be made by Borrower
or any other Person against Fremont or the officers, directors, employees or
agents of Fremont for any special, indirect, punitive or consequential
damages in respect of any claim for breach of contract or any other theory of
liability arising out of or related to the transactions contemplated by this
Agreement, or any act, omission or event occurring in connection therewith,
and Borrower hereby waives, releases and agrees not to sue upon any claim for
any such damages.
14.12 TELEFACSIMILE EXECUTION. Delivery of an executed
counterpart of this Agreement or any other Loan Document by telefacsimile
transmission shall be equally as effective as delivery of an executed hard
copy of the same. Any party delivering an executed counterpart of this
Agreement or any other Loan Document by telefacsimile transmission shall also
deliver an executed hard copy of the same, but the failure by such party to
deliver an executed hard copy shall not affect the validity, enforceability
and binding effect of this Agreement or such other Loan Document.
14.13 FINANCE LENDER LICENSE. Fremont is licensed as a Finance
Lender by the California Department of Corporations, file number 603 2362.
15. CHOICE OF LAW AND VENUE
THE VALIDITY OF THIS AGREEMENT, ITS CONSTRUCTION, INTERPRETION, AND
ENFORCEMENT AND THE RIGHTS OF THE PARTIES HERETO SHALL BE DETERMINED UNDER,
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF
CALIFORNIA; PROVIDED HOWEVER THAT THE LAWS OF THE STATE IN WHICH THE
COLLATERAL IS LOCATED SHALL GOVERN WITH RESPECT TO (A) THE CREATION OF LIENS
ON COLLATERAL LOCATED IN SUCH STATE AND (B) THE METHOD, MANNER AND PROCEDURE
FOR FORECLOSURE OF FREMONT'S LIENS UPON ANY PORTION OF THE COLLATERAL LOCATED
IN SUCH STATE AND THE ENFORCEMENT IN SUCH STATE OF FREMONT'S OTHER REMEDIES
WITH RESPECT TO THE COLLATERAL LOCATED IN SUCH STATE.
THE PARTIES AGREE THAT ALL ACTIONS OR PROCEEDINGS ARISING IN CONNECTION WITH
THIS AGREEMENT SHALL BE TRIED AND LITlGATED ONLY IN THE STATE COURTS LOCATED
IN THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, THE FEDERAL COURTS WHOSE
VENUE INCLUDES THE COUNTY OF LOS ANGELES, STATE OF CALIFORNIA, OR, AT THE
SOLE OPTION OF FREMONT, IN ANY OTHER COURT IN WHICH FREMONT SHALL INITIATE
LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER
THE MATTER IN CONTROVERSY. THE PARTIES EXPRESSLY SUBMIT AND CONSENT IN
ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR PROCEEDING COMMENCED IN ANY
SUCH COURT, AND THE PARTIES HEREBY WAIVE ANY OBJECTION WHICH EITHER MAY HAVE
BASED UPON LACK OF PERSONAL JURISDICTION AND HEREBY CONSENT TO THE GRANTING
OF SUCH LEGAL OR EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY ANY SUCH COURT.
FURTHERMORE, BORROWER AND FREMONT EACH WAIVES, TO THE EXTENT PERMITTED UNDER
APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO ASSERT THE DOCTRINE OF "FORUM NON
CONVENIENS" OR TO OBJECT TO VENUE TO THE EXTENT ANY PROCEEDING IS BROUGHT IN
ACCORDANCE WITH THIS SECTION 15.
16. WAIVER OF JURY TRIAL
BORROWER AND FREMONT HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF
ANY CLAIM OR CAUSE OF ACTION BASED UPON OR ARISING OUT OF THIS AGREEMENT OR
ANY OF THE OTHER LOAN DOCUMENTS OR ANY OF THE TRANSACTIONS CONTEMPLATED
HEREIN OR THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS, BREACH OF DUTY
CLAIMS AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. BORROWER AND FREMONT
REPRESENT THAT EACH HAS REVIEWED THIS WAIVER AND EACH KNOWINGLY AND
VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION WITH LEGAL
COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE FILED AS
A WRITTEN CONSENT TO A TRIAL BY THE COURT.
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<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed at Fremont's place of business in Santa Monica, California.
BORROWER: FREMONT:
EIP MICROWAVE, INC., FREMONT FINANCIAL CORPORATION,
a Delaware corporation a California corporation
Signed By: /S/ WILLIAM J. STANNERS, JR. Signed By: /S/ DAVID R. KLAGES
---------------------------- --------------------
Print Name: William J. Stanners, Jr. Print Name: David R. Klages
Title/Capacity: CFO, Assistant Secretary Title/Capacity: Vice President
15
<PAGE>
CONDITIONS PRECEDENT RIDER TO LOAN AND SECURITY AGREEMENT
BETWEEN
FREMONT FINANCIAL CORPORATION
AND
EIP MICROWAVE, INC.
This CONDITIONS PRECEDENT RIDER TO LOAN AND SECURITY AGREEMENT
(hereinafter referred to as this "Rider") dated August 4, 1998, is hereby
made a part of and incorporated into that certain Loan and Security Agreement
(hereinafter referred to, together with all supplements and riders thereto
and amendments thereof, as the "Loan Agreement") dated the date hereof
between FREMONT FINANCIAL CORPORATION, a California Corporation (hereinafter
referred to as "Fremont"), and EIP MICROWAVE, INC. a Delaware corporation
(hereinafter referred to as "Borrower").
1. All capitalized terms contained in this Rider, unless otherwise
defined herein, shall have the meanings ascribed to such terms in the Loan
Agreement.
2. At the request of Borrower, certain of the Loan Documents have been
executed as of the date of this Rider even though all conditions precedent to
Fremont's funding have not been satisfied. The execution of the Loan Documents
prior to the satisfaction of all conditions is being done as an accommodation
to Borrower and shall in no way obligate Fremont to make loans or advances to
Borrower unless all conditions precedent are fully and completely satisfied.
3. As used herein, the term "Guarantor" shall refer to the following
person: J. Bradford Bishop.
4. As conditions precedent to the making of any of the loans described
in the Loan Documents, each of the following conditions shall be satisfied to
the satisfaction of Fremont unless waived by Fremont in writing:
a. No Event of Default shall exist;
b. Borrower shall have executed and delivered, or caused to be
executed and delivered, each of the Loan Documents and all other
instruments, documents, agreements, waivers, financing statements,
assignments, deeds of trusts mortgages and subordination agreements as in
the opinion of Fremont may be necessary to give effect to the Loan
Agreement, the transactions contemplated thereby or the perfection of
Fremont's security interest in the Collateral;
c. Guarantor shall have executed and delivered, or caused to be
executed and delivered, a Continuing Guaranty, in form and substance
acceptable to Fremont, and all other instruments, documents, agreements,
waivers, financing statements, deeds of trust, mortgages and subordination
agreements as in the opinion of Fremont may be necessary to give effect to
such Continuing Guaranty or the transactions contemplated thereby;
c-1. Fremont and Mr. James N. Cutler Jr. shall have entered into a
Subordination and Intercreditor Agreement.
d. Fremont shall have received from Borrower's and Guarantor's
counsel an opinion letter in form and substance acceptable to Fremont in
its sole discretion;
e. Borrower shall have executed, and Fremont shall have filed, all
financing statements deemed necessary or desirable to Fremont to perfect
Fremont's security interest in the Collateral, and Fremont shall have
received assurances satisfactory to it that such security interests are
duly perfected, first priority security interests;
f. Borrower shall have delivered to Fremont evidence satisfactory to
Fremont that the Collateral has been insured in such amounts as may be
acceptable to Fremont, in its sole discretion, and in compliance with the
provisions of the Loan Agreement and that Fremont shall be named as lender
loss payee on endorsements in form and substance satisfactory to Fremont
which shall be issued in conjunction with all such policies of insurance;
g. Borrower shall have caused to be delivered to Fremont a copy of
its Articles or Certificate of Incorporation certified by the Secretary of
State of Delaware and a copy of its By-Laws certified by its corporate
secretary as of the date of the Loan Agreement, together with a Good
Standing Certificate for Borrower issued by the Secretary of State of
California;
h. Since April 30, 1998, there shall not have occurred any material
adverse change in the business, financial condition or results of
operations of Borrower or the existence or value of any of the Collateral;
i. At the time of the initial funding under the Loan Documents, the
amount of the revolving loan availability described in Section 2.1 of the
Loan Agreement shall exceed by an amount of not less than $350,000 the sum
of (a) the amount of Borrower's indebtedness to the Existing Secured
Lender(s) plus (b) the initial Annual Facility Fee of $15,000 described in
Section 2.8 of the Loan Agreement, plus (c) the amount of Borrower's past
due trade payables (past due trade payables being those which are more than
ninety (90) days past the original invoice date) and other past due
obligations of Borrower (including book overdrafts and delinquent payroll
taxes);
j. All financing statements in favor of the following parties with
respect to any of the Collateral shall have been terminated, and Fremont
shall have received assurances satisfactory to it that such parties'
security interests in the Collateral have been terminated: Silicon Valley
Bank, John F. Bishop, J. Bradford Bishop, and John F. Bishop and Ann R.
Bishop, Trustees of the Bishop Family Trust;
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<PAGE>
k. Fremont shall have received a duly executed landlord waiver
agreement, in form and substance satisfactory to Fremont, with respect to
each leased property where Borrower keeps Inventory or Equipment;
l. Fremont shall have completed its "takeover" audit of Borrower and
the results thereof shall be satisfactory to Fremont, in its sole
discretion.
m. Borrower's failure to fulfill, or cause to be fulfilled, each of
the foregoing conditions precedent to the satisfaction of Fremont on or
before August 31, 1998, shall relieve Fremont of any obligation to
consummate the transactions contemplated by the Loan Documents.
5. The terms and conditions of this Rider are incorporated in
and made a part of the Loan Agreement.
IN WITNESS WHEREOF, this Rider has been executed by the parties hereto
as of the date first written above.
BORROWER: FREMONT:
EIP MICROWAVE, INC., FREMONT FINANCIAL CORPORATION,
A Delaware corporation a California corporation
Signed By: /S/ WILLIAM J. STANNERS, JR. Signed By: /S/ DAVID R. KLAGES
---------------------------- -------------------
Print Name: William J. Stanners, Jr. Print Name: David R. Klages
Title/Capacity: CFO, Assistant Secretary Title/Capacity: Vice President
17
<PAGE>
CUTLER WORKING CAPITAL FACILITY
SUBORDINATED LOAN AGREEMENT
THIS SUBORDINATED LOAN AGREEMENT (this "AGREEMENT") is entered into as of
July 20, 1998, among EIP MICROWAVE, INC., a Delaware corporation (the
"COMPANY"), and JAMES N. CUTLER, JR. (the "LENDER").
R E C I T A L S
A. The Company desires to obtain the commitment of the Lender to advance
up to a maximum of $500,000 to the Company, and the Lender is willing to make
such commitment on the terms and conditions set forth in this Agreement.
B. As a condition to the initial advance of any funds by the Lender to
the Company, the Company is required to issue to the Lender a subordinated note
evidencing the obligation of the Company to repay such advances and interest
thereon, and to issue a warrant certificate evidencing the right of the Lender
to acquire shares of common stock of the Company, and to grant a security
interest in the assets of the Company to the Lender, in each case, on the terms
and subject to the conditions set forth in this Agreement.
C. The Lender is willing to subordinate his right to repayment of the
advances made to the Company by the Lender and interest thereon to the rights of
the holders of any senior indebtedness of the Company with a financial
institution and to any seller financing in connection with a strategic
acquisition by the Company, in each case, whether currently existing or created
in the future.
A G R E E M E N T
NOW, THEREFORE, the parties hereto agree as follows:
SECTION 1. DEFINITIONS
1.1 DEFINITIONS. As used in this Agreement, the following terms shall
have the following meanings:
"ADVANCE" means an advance by the Lender to the Company pursuant to
Section 2.
"AFFILIATE" means, with respect to any specified Person, any other Person
directly or indirectly controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" (including, with correlative meanings, the terms "controlled by" and
'"under common control with"), as used with respect to any Person shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether in the capacity
of officer or director of such Person, through the ownership of securities, by
agreement or otherwise.
<PAGE>
"BORROWING" means a borrowing consisting of advances made on the same day
by the Lender.
"BUSINESS DAY" means the date of the year on which banks are not required
or authorized to close in California or Oregon.
"CLOSING DATE" means the date on which the conditions set forth in
Section 3 applicable to the making of the initial advances under this Agreement
have been fulfilled and such initial advances are made.
"COMMITMENT" has the meaning specified in Section 2.1.
"COMMITMENT TERMINATION DATE" means July 1, 1999, subject to a one year
extension if both parties mutually agree and the Company is not in default of
its obligations under the Note.
"COMMON STOCK" means, with respect to the Company, the Common Stock, par
value $0.01, of the Company.
"DEFAULT" means any event which is, or after notice or passage of time
would be, a Event of Default.
"DOCUMENTS" means this Agreement, the Note, the Warrant, the Security
Agreement, and any other subordination agreements or other agreements relating
to the Note, the Warrant or this Agreement whether entered into on the date
hereof or hereafter, collectively, together with any exhibits, schedules or
other attachments thereto.
"INDEBTEDNESS" means, with respect to any Person, the aggregate amount of
the following: (a) all obligations for borrowed money; (b) all obligations
evidenced by bonds, debentures, notes or other similar instruments; (c) all
obligations to pay the deferred purchase price of property or services, except
trade payables, accrued commissions and other similar accrued current
liabilities in respect of such obligations, in any case, not overdue, arising in
the ordinary course of business; (d) all capitalized lease obligations; (e) all
obligations or liabilities of others secured by a Lien on any asset owned by
such Person or Persons whether or not such obligation or liability is assumed;
(f) all obligations of such Person or Persons, contingent or otherwise, in
respect of any letters of credit or bankers' acceptances; and (g) all
guaranties.
"LIEN" means any mortgage, pledge, lien, encumbrance or claim affecting
title or resulting in a charge against real or personal property, or security
interest of any kind (including, without limitation, any conditional sale or
other title retention agreement, any lease in the nature thereof, any option or
other agreement to sell and any financing statement under the Uniform Commercial
Code or equivalent statute of any jurisdiction).
"MATURITY DATE" means July 1, 1999, subject to a one year extension if both
parties mutually agree and the Company is not in default of its obligations
under the Note.
"PERMITTED LIEN" means any financing statement on file on the date hereof,
and any continuations thereof, securing the Company's existing obligations on
the date hereof, any Lien
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<PAGE>
securing any Senior Indebtedness or any lease and any other Liens approved in
writing by the Lender.
"PERSON" means an individual, partnership, corporation, trust or
unincorporated organization or a government or agency or political division
thereof.
"SENIOR INDEBTEDNESS" means any Indebtedness of the Company from the
extension of credit by a financial institution or any seller financing in
connection with a strategic acquisition by the Company, in each case, whether
currently existing or created in the future.
SECTION 2. AMOUNTS AND TERMS OF THE ADVANCES
2.1 ADVANCES. The Lender agrees, on the terms and conditions set forth in
this Agreement, to make Advances to the Company from time to time on any
Business Day during the period from July 1, 1998 until the Commitment
Termination Date in an aggregate amount not to exceed at any time outstanding
$500,000 (the "COMMITMENT"). Each Borrowing shall be in an aggregate amount not
less than $10,000 or an integral multiple of $10,000 in excess thereof. Amounts
borrowed by the Company and prepaid pursuant to Section 2.4 may be reborrowed
under this Section 2.1.
2.2 MAKING THE ADVANCES. Each Borrowing shall be made on notice, given
not later than 5:00 P.M. on the third Business Day prior to the date of the
proposed Borrowing, by the Company to the Lender. Such notice of a Borrowing (a
"NOTICE OF BORROWING") shall be sent by facsimile to the Lender, specifying
therein the requested date of such Borrowing and the aggregate amount of such
Borrowing. The Lender shall, before 5:00 P.M. on the date of such Borrowing,
make such Borrowing available to the Company at its address, upon fulfillment of
the applicable conditions set forth in Section 3.
2.3 REDUCTION OF THE COMMITMENTS. The Commitment of the Lender shall be
reduced to zero on the Commitment Termination Date.
2.4 REPAYMENT AND PREPAYMENT OF ADVANCES. The Company shall repay the
principal amount of each Advance owing to the Lender on the Maturity Date. The
Company may prepay the outstanding principal amounts of the Advances, in whole
or in part, together with accrued interest to the date of such prepayment on the
principal amount prepaid; PROVIDED, HOWEVER, that each partial prepayment shall
be in an aggregate principal amount not less than $10,000 or an integral
multiple of $10,000 in excess thereof.
2.5 INTEREST. The Company shall pay interest on the unpaid principal
amount of each Advance owing to the Lender from the date of such Advance until
such principal amount shall be paid in full, at the prime rate published from
time to time by The Wall Street Journal, plus two percent (2%) per annum.
Interest shall be payable on the first Business Day of each calendar month
during the term of this Agreement and on the Maturity Date.
2.6 PAYMENTS AND COMPUTATIONS. The Company shall make each payment
hereunder not later than 5:00 P.M. on the date when due in U.S. dollars to the
Lender at its address referred to herein. All computations of interest shall be
made on the basis of a year of 365 days for the
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<PAGE>
actual number of days (including the first day but excluding the last day)
occurring for which interest is payable. Whenever any payment hereunder
shall be stated to be due on a day other than a Business Day, such payment
shall be made on the next succeeding Business Day, and such extension of time
shall in such case be included in the computation of payment of interest.
SECTION 3. CONDITIONS
3.1 CONDITIONS PRECEDENT TO INITIAL ADVANCES. The obligation of the
Lender to make its initial advance is subject to the conditions precedent that
the Lender shall have received the following, each dated the Closing Date
(unless otherwise specified), in form and substance satisfactory to the Lender:
(a) A Subordinated Note for the Lender, duly executed by the
Company, in substantially the form of EXHIBIT A (the "NOTE"), and in a
principal amount equal to the Commitment of the Lender.
(b) A Warrant Certificate for the Lender, duly executed by the
Company, in substantially the form of EXHIBIT B hereto (the
"Warrant"), and for 100,000 shares of Common Stock (the "WARRANT
SHARES").
(c) A Security Agreement, duly executed by the Company, in
substantially the form of EXHIBIT C hereto (the "SECURITY AGREEMENT"),
together with proper Financing Statements (Form UCC-1) for filing
under the Uniform Commercial Code of all jurisdictions as may be
necessary or, in the opinion of the Lender, desirable or required to
perfect the security interests created by the Security Agreement.
3.2 ADDITIONAL CONDITIONS PRECEDENT TO EACH ADVANCE. It shall be an
additional condition precedent to each Advance under this Agreement, before and
after giving effect thereto and the application of the proceeds therefrom:
(a) The representations and warranties of the Company contained in
Section 4 of this Agreement are correct on and as of the date of such
Advance as though made on and as of such date.
(b) No event has occurred and is continuing, or would result from
such Advance that constitutes a Default.
The giving of each notice of Borrowing and the receipt of the proceeds of each
Advance referred to therein, shall each constitute a representation and warranty
by the Company that each of the statements in Section 3.2(a) and (b) shall be
true as of the date of such Advance.
SECTION 4. REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants as follows:
4.1 ORGANIZATION, STANDING AND QUALIFICATION. The Company is a
corporation duly incorporated, validly existing and in good standing under the
laws of the State of Delaware. The
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<PAGE>
Company has all requisite power and authority to enter into and perform all
of its obligations under the Documents, to issue and perform all of its
obligations under the Note and the Warrant and to carry out the transactions
contemplated hereby and thereby.
4.2 AUTHORIZATION OF AGREEMENT AND OTHER DOCUMENTS. The Company has taken
all corporate actions necessary to authorize it to enter into and perform all of
its obligations under the Documents to which it is a party, to issue and perform
all of its obligations under the Note and the Warrant and to consummate the
transactions contemplated hereby and thereby. The Documents and the Note and
the Warrant are legal, valid and binding obligations of the Company, enforceable
against it in accordance with their respective terms.
4.3 NO VIOLATION. Neither the execution or delivery of the Documents nor
the issuance or delivery of the Note or the Warrant nor the performance by the
Company of its obligations under the Documents or the Note or the Warrant nor
the consummation of the transactions contemplated hereby and thereby, will (a)
violate any provision of the certificate of incorporation and bylaws of the
Company; (b) violate any statute, law, rule or regulation or any judgment,
order, regulation or rule of any court or governmental authority to which the
Company or any of its properties may be subject; (c) permit or cause the
acceleration of the maturity of any debt or obligation of the Company; or (d)
violate, or be in conflict with, or constitute a default under, or permit the
termination of or require the consent of any Person under, or result in the
creation of any Lien upon any property of the Company under, any mortgage,
indenture, loan agreement, note, debenture or other agreement for borrowed money
or any other agreement to which the Company is a party or by which the Company
or its properties may be bound.
4.4 USE OF PROCEEDS. The net proceeds from the Advances hereunder will be
used for operating the Company's business and such other lawful purposes as the
Company shall determine.
4.5 FINANCIAL STATEMENTS. The books of account and related records of the
Company fairly reflect in all material respects and reasonable detail all of the
assets, liabilities and transactions of the Company in accordance with generally
accepted accounting principles. The audited balance sheet of the Company as at
September 30, 1997, and the audited statement of income for the fiscal year then
ended as well as the unaudited balance sheet of the Company as at March 31,
1998, and the unaudited statement of income for the six months ended March 31,
1998, as delivered to the Lender, are in accord with the books and records of
the Company and present fairly in all material respects the financial condition
and results of operations of the Company as at September 30, 1997 and March 31,
1998, respectively, and for the periods therein referred to, in accordance with
generally accepted accounting principles. Since March 31, 1998, the Company has
not suffered any material adverse change in its properties, business, prospects,
operations, earnings, assets, liabilities or condition (financial or otherwise).
4.6 FULL DISCLOSURE. None of the Documents or any document contemplated
hereby or thereby, or the financial statements referred to in Section 4.5
contain any untrue statement of a material fact or omit to state a material fact
necessary to make the statements contained therein, in light of the
circumstances under which they were made not misleading.
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4.7 LITIGATION. There is no action, proceeding or investigation pending,
or to the knowledge of the Company after due inquiry, threatened, against or
affecting the Company in any court or before any governmental authority or
arbitration board or tribunal, foreign or domestic, and there is no such action
pending to restrain, enjoin, prevent the consummation of or otherwise challenge
any of the Documents or the issuance of the Note or the Warrant or the other
transactions contemplated hereby or thereby. The Company is not subject to any
judgment, order, decree, rule or regulation of any court, governmental authority
or arbitration board or tribunal.
4.8 TITLE TO AND CONDITION OF PROPERTIES. Except for the Permitted Liens,
the Company has good and marketable title to all assets used in its business
free and clear of all Liens. The Company enjoys peaceful and undisturbed
possession under all leases to which it is a party as lessee. All leases and
other agreements to which the Company is a party are valid and binding and in
full force and effect, no default has occurred or is continuing thereunder and
no consent need be obtained from any Person in respect of any such lease or
agreement in connection with the transactions contemplated hereby. All tangible
assets, plants and facilities of the Company are in acceptable condition and
repair and are proper for the uses to which they are being put; and none of such
facilities and assets is in need of maintenance or repair, except for routine
maintenance and repair.
4.9 TAXES. All tax returns required to be filed by the Company have been
filed, and all taxes, assessments, fees and other charges due or claimed to be
due from the Company which are due and payable have been paid. The Company does
not know of any actual or proposed additional tax assessments for any fiscal
period against the Company or of any basis therefor. None of the Company's tax
returns are under audit, and no waivers of the statute of limitations or
extensions of time with respect to any tax returns have been granted by the
Company.
SECTION 5. REPRESENTATIONS AND WARRANTIES OF THE LENDER
The Lender hereby represents and warrants that:
5.1 PURCHASE ENTIRELY FOR OWN ACCOUNT. The Note and the Warrant will be
acquired and the Warrant Shares that the Lender may purchase upon exercise of
the Warrant will be acquired for investment for the Lender's own account, not as
a nominee or agent, and not with a view to the resale or distribution of any
part thereof. The Lender has no present intention of selling, granting any
participation in, or otherwise distributing the same.
5.2 DISCLOSURE OF INFORMATION. The Lender believes he has received all
the information he considers necessary or appropriate for deciding whether to
acquire the Note and the Warrant and/or purchase the Warrant Shares. The Lender
has had an opportunity to ask questions and receive answers from the Company
regarding the terms and conditions of the offering of the Note, Warrant and the
Warrant Shares.
5.3 INVESTMENT EXPERIENCE. The Lender is an investor in securities of
companies in the development stage and acknowledges that he is able to fend for
himself, and bear the economic risk of his investment and has such knowledge and
experience in financial or business
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matters that he is capable of evaluating the merits and risks of the
investment in the Note, the Warrant and the Warrant Shares.
5.4 RESTRICTED SECURITIES. The Lender understands that the Note, the
Warrant and the Warrant Shares are "restricted securities" under the federal
securities laws inasmuch as they are being acquired from the Company in a
transaction not involving a public offering and that under such laws and
applicable regulations such securities may be resold without registration under
the Securities Act of 1933, as amended (the "ACT") only in certain limited
circumstances. In this connection, the Lender represents that he is familiar
with Rule 144 promulgated under the Act, as presently in effect, and understands
the resale limitations imposed thereby and by the Act.
5.5 LEGENDS. The Lender acknowledges that the Note, the Warrant and the
certificates evidencing the Warrant Shares may bear one or all of the following
legends:
(a) "THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY
HOLDER FOR INVESTMENT AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD,
TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT AS MAY BE AUTHORIZED UNDER THE
SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS PROMULGATED
THEREUNDER."
(b) Any legend required by the laws any applicable state.
SECTION 6. COVENANTS OF THE COMPANY
So long as any obligations under the Note remain unpaid and outstanding,
the Company covenants and agrees for the benefit of the Lender as follows:
6.1 LIMITATION ON RESTRICTED PAYMENTS AND ADDITIONAL INDEBTEDNESS. The
Company shall not, directly or indirectly: (a) declare or pay any dividend or
make any distribution in respect of any capital stock; or (b) purchase, redeem
or otherwise acquire or retire for value any capital stock. The Company will
not, directly or indirectly, create, incur, guarantee or otherwise become or
remain directly or indirectly liable with respect to any Indebtedness other than
(a) Indebtedness reflected on the balance sheet of the Company as of March 31,
1998, (b) the Indebtedness represented by the Note, (c) the Senior Indebtedness,
(d) up to $2,000,000 in the aggregate in other Indebtedness at any time
outstanding, and (e) such other Indebtedness approved in writing by the Lender.
6.2 RESTRICTIONS ON LIENS. The Company will not create or suffer to exist
any Liens upon any assets of the Company, other than the Permitted Liens.
6.3 COMPLIANCE WITH LAWS. The Company shall comply in all material
respects with all statutes, ordinances, rules, regulations, judgements, orders
and directives to which it is subject, and obtain and keep in effect in all
material respects all licenses, permits, franchises and other governmental
authorizations as to the ownership or operation of its properties or the
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conduct of its businesses. The Company shall pay prior to delinquency all
taxes, assessments and governmental levies.
6.4 NO MERGER, ETC. The Company shall not consolidate or merge with or
into, or sell, lease, convey or otherwise dispose of all or substantially all of
its assets to, any Person.
6.5 INSURANCE. The Company shall maintain liability, casualty and other
insurance with reputable insurers in such amounts and against such risks as is
carried by responsible companies engaged in similar businesses and owning
similar assets.
SECTION 7. COVENANTS OF THE LENDER
7.1 SUBORDINATION. The Lender agrees to subordinate the payment of all
obligations by the Company under the Note to the Company's obligations under any
Senior Indebtedness and any seller financing in connection with a strategic
acquisition by the Company, on such reasonable terms and conditions as are
required by the lender of such Senior Indebtedness.
SECTION 8. INDEMNIFICATION AND CONTRIBUTION
8.1 INDEMNIFICATION. The Company hereby agrees, without limitation as to
time, to indemnify the Lender and its agents and Affiliates (collectively, the
"INDEMNIFIED PARTIES") against, and hold him harmless from, all loss, claims,
damages, liabilities, costs (including the costs of preparation and attorneys'
fees and expenses) (collectively, "LOSSES") incurred by him and arising out of
or in connection with this Agreement or the other Documents or the transactions
contemplated hereby or thereby (or any other document or instrument executed
herewith or pursuant hereto or thereto), whether or not any Indemnified Party is
a formal party to any proceeding, other than to the extent, and only to the
extent, that any Losses directly result from action on the part of any
Indemnified Party which is finally determined to constitute either gross
negligence or willful misconduct. The Company agrees to reimburse any
Indemnified Party promptly for all such Losses as they are incurred by such
Indemnified Party. The obligations of the Company to each Indemnified Party
hereunder shall be separate obligations and the Company's liability to any such
Indemnified Party hereunder shall not be extinguished solely because any other
Indemnified Party is not entitled to indemnity hereunder. The obligations of
the Company under this Section 8.1 shall survive the payment or prepayment of
the Note, at maturity, upon acceleration, redemption or otherwise, any transfer
of the Note by the Lender, and the termination of this Agreement and the other
Documents.
8.2 PROCEDURE FOR INDEMNIFICATION. In case any action shall be brought
against any Indemnified Party with respect to which indemnity may be sought
against the Company hereunder, such Indemnified Party shall promptly notify the
Company in writing and it shall, if it so desires, assume the defense thereof,
including the employment of counsel reasonably satisfactory to such Indemnified
Party and payment of all reasonable fees and expenses. The failure to so notify
the Company shall not affect any obligation it may have to any Indemnified Party
under this letter or otherwise except to the extent the Company is materially
adversely affected by such failure. Each Indemnified Party shall have the right
to employ separate counsel in such action and participate in the defense
thereof, but the fees and expenses of such counsel shall be at the expense of
the Indemnified Party unless: (i) the Company has agreed in writing to
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pay such expenses; or (ii) the Company has failed to assume the defense and
employ counsel or (iii) the named parties to any such action (including any
impleaded parties) include any Indemnified Party and the Company, and such
Indemnified Party shall have been advised by counsel that there may be one or
more legal defenses available to it which are inconsistent with or additional
to those available to the Company, PROVIDED that, if such Indemnified Party
notifies the Company in writing that it elects to employ separate counsel in
the circumstances described in clauses (i), (ii) or (iii) above, the Company
shall not have the right to assume the defense of such action or proceeding.
The Company shall not be liable for any settlement of any such action
affected without its written consent (which shall not be unreasonably
withheld). The Company agrees that it will not, without the Indemnified
Party's prior consent, which shall not be unreasonably withheld, settle or
compromise any pending or threatened claim, action or suit in respect of
which indemnification or contribution may be sought hereunder unless the
foregoing contains an unconditional release of the Indemnified Parties from
all liability and obligation arising therefrom.
8.3 CONTRIBUTION. If the indemnification provided for in Sections 8.1 and
8.2 is unavailable to any Indemnified Party in respect of any Losses referred to
therein, then the Company, in lieu of indemnifying such Persons, shall
contribute to the amount paid or payable by such Persons as a result of such
Losses in such proportion as is appropriate to reflect the fault of the Company,
and the Lender and the other Indemnified Parties in connection with the actions
which resulted in such Losses as well as any other relevant equitable
considerations. The amount paid or payable by any such Person as a result of the
Losses referred to above shall be deemed to include, subject to the limitations
set forth in Sections 8.1 and 8.2, any legal or other fees or expenses
reasonably incurred by such Person in connection with any investigation, lawsuit
or legal or administrative action or proceeding. The parties hereto agree that
it would not be just and equitable if contribution pursuant to this Section 8.3
were determined by pro rata allocation or by any other method of allocation
which does not take account of the equitable considerations referred to in this
paragraph.
SECTION 9. DEFAULTS AND REMEDIES
9.1 EVENTS OF DEFAULT. An "EVENT OF DEFAULT" occurs if:
(a) the Company defaults in the payment of any principal on the Note
when the same becomes due and payable;
(b) the Company defaults in the payment of interest on the Note when
the same becomes due and payable and the Default continues for a period of five
days after notice thereof to the Company;
(c) the Company fails to comply in any material respect with any of
the agreements, covenants, or provisions of this Agreement, the Note, or the
Documents and the Default continues for a period of 30 days after notice thereof
to the Company;
(d) if any of the representations or warranties of the Company made
in or in connection with any of the Documents are untrue in any material respect
as of the date such representations and warranties are made;
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(e) an event of default occurs under any material loan agreement,
note, mortgage, indenture or instrument under which there may be issued or by
which there may be acquired or evidenced any material Indebtedness of the
Company, whether such Indebtedness now exists or shall be created hereafter; and
the obligation to pay such Indebtedness is accelerated by the lender thereof;
(f) a final judgment or final judgments for the payment of money in
an amount in excess of $100,000 are entered by a court of competent jurisdiction
against the Company and such judgment remains undischarged for a period of 30
days;
(g) the Company pursuant to or within the meaning of any bankruptcy
law or any similar federal or state law (1) commences a voluntary action, (2)
consents to the entry of an order for relief against it in an involuntary case,
(3) consents to the appointment of any custodian, receiver, trustee, assignee,
liquidator or similar official of the Company or for all or substantially all of
its property, (4) makes a general assignment for the benefit of its creditors,
or (5) generally is unable to pay its debts as the same become due; or
(h) a court of competent jurisdiction enters an order or decree under
any bankruptcy law or any similar federal of state law that: (1) is for relief
against the Company in an involuntary case against it, (2) appoints any
custodian, receiver, trustee, assignee, liquidator or similar official of the
Company or for all or substantially all of its property, or (3) grants the
liquidation of the Company, and the order or decree remains unstayed and in
effect for 30 days.
9.2 ACCELERATION OF NOTE. If an Event of Default (other than an Event of
Default described in clauses (g) and (h) of Section 9.1) occurs and is
continuing, the Lender by notice to the Company, may declare the unpaid
principal of and any accrued interest on the Note to be due and payable.
Immediately upon such declaration, the principal and interest shall be due and
payable. If an Event of Default described in clause (g) or (h) of Section 9.1
occurs, all principal and interest shall IPSO FACTO become and be immediately
due and payable without any declaration or other act on the part of the Lender.
9.3 OTHER REMEDIES. If an Event of Default occurs and is continuing, the
Lender may pursue any available remedy to collect the payment of principal or
interest on the Note or to enforce the performance of any provision of the Note
or this Agreement. A delay or omission by the Lender exercising any right or
remedy accruing upon an Event of Default shall not impair the right or remedy or
constitute a waiver of or acquiescence in the Event of Default. All remedies
are cumulative to the extent permitted by law.
9.4 WAIVER OF PAST DEFAULTS. The Lender by written notice to the Company
may waive an existing Default or Event of Default and its consequences.
9.5 EXPENSES AND FEES. The Company agrees to promptly pay all reasonable
fees, costs and expenses (including attorneys' fees) incurred by the Lender
prior to execution of this Agreement (up to a maximum of $1000) in connection
with the preparation, review and negotiation of this Agreement, the Note, the
Warrant or the other Documents. In addition, the Company agrees to promptly pay
all reasonable fees, costs and expenses (including attorneys'
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fees) incurred by the Lender in any action to enforce this Agreement, the
Note, the Warrant or the other Documents or to collect any payments due from
the Company under this Agreement, the Note, the Warrant or the other
Documents.
SECTION 10. MISCELLANEOUS
10.1 NOTICES. All notices and other communications provided for or
permitted hereunder shall be made by hand delivery, first class mail,
telecopier, or overnight air courier guaranteeing next day delivery (a) if to
the Lender, at his address set forth on the signature page; or (b) if to the
Company, at its address set forth on the signature page. Any such notices and
communications shall be deemed to have been duly given at the time delivered by
hand, if personally delivered; five business days after being deposited in the
mail, postage prepaid, if mailed; when receipt acknowledged, if telecopied; and
the next business day after timely delivery to the courier, if sent by overnight
air courier guaranteeing next day delivery. The parties may change the addresses
to which notices are to be given by giving five days' prior notice of such
change in accordance herewith.
10.2 COUNTERPARTS; HEADINGS; ENTIRE AGREEMENT; SEVERABILITY; SUCCESSORS AND
ASSIGNS. This Agreement may be executed in any number of counterparts and by
the parties hereto in separate counterparts, each of which when so executed
shall be deemed to be an original and all of which taken together shall
constitute one and the same agreement. The headings in this Agreement are for
convenience of reference only and shall not limit or otherwise affect the
meaning hereof. This Agreement, together with the other Documents and the Note,
are intended by the parties as a complete statement of the agreement and
understanding of the parties hereto in respect of the subject matter contained
herein and therein. There are no restrictions or undertakings, other than those
set forth or referred to herein and therein. This Agreement, together with the
other Documents and the Note, supersedes all prior agreements and understandings
between the parties with respect to such subject matter. In the event that any
one or more of the provisions contained herein, or the application thereof in
any circumstances, is held invalid, illegal or unenforceable in any respect for
any reason, the validity, legality and enforceability of any such provision in
every other respect and of the remaining provisions hereof shall not be in any
way impaired or affected, it being intended that all rights and privileges of
the Lender shall be enforceable to the fullest extent permitted by law. This
Agreement shall inure to the benefit of and be binding upon the successors and
assigns of each of the parties.
10.3 AMENDMENT AND WAIVER. This Agreement may be amended, modified or
supplemented, and waivers or consents to departure from the provisions hereof
may be granted provided that the same are in writing and signed by the Company
and the Lender.
10.4 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the internal laws of the State of Oregon.
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IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first set forth above.
THE COMPANY
EIP MICROWAVE, INC.
1745 McCandless Drive
Milpitas, CA 95035-8024
Fax Number: (408) 945-6312
By: /s/ J. BRADFORD BISHOP
-------------------------------------
J. Bradford Bishop
Chairman and Chief Executive Officer
THE LENDER
/s/ JAMES N. CUTLER, JR.
--------------------------------
James N. Cutler, Jr.
6950 S.W. Hampton Street
Suite 200
Portland, OR 97223
Fax Number: (503) 624-0115
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EIP MICROWAVE, INC.
SECURITY AGREEMENT
This Security Agreement (the "SECURITY AGREEMENT") is made and entered
into as of July 20, 1998, by and between EIP MICROWAVE, INC., a Delaware
corporation ("COMPANY"), and JAMES N. CUTLER, JR. (the "LENDER").
RECITALS
WHEREAS, the Lender has entered into a Subordinated Loan Agreement (the
"LOAN AGREEMENT"; unless otherwise noted, capitalized terms used herein without
definition have the meanings assigned thereto in the Loan Agreement) dated as of
July 20, 1998 between the Company and the Lender; and
WHEREAS, the execution, delivery and performance of this Security
Agreement is a condition to the making of advances by the Lender under the Loan
Agreement.
NOW, THEREFORE, in consideration of the premises and for good and
valuable consideration, the Company and the Lender agree as follows:
1. SECURITY INTEREST. As security for the obligations described in
Section 2 hereof, the Company hereby grants to the Lender, a security interest
in and lien on all of the Company's right, title and interest in and to the
following collateral (the "COLLATERAL"): (i) all Accounts, Inventory,
Equipment, General Intangibles, fixtures, tax refunds, letters of credit and
documents of title; (ii) all now owned and hereafter acquired real estate and
leasehold and other interests in real property together with all purchase
options and other rights related to such leaseholds or other interests;
(iii) all deposit accounts (general or special and whether collected or
uncollected) with credits and other claims against any financial institutions
with which the Company maintains deposits; (iv) all insurance proceeds of or
relating to any of the foregoing; (v) all of the Company's now owned or
hereafter acquired chattel paper, documents and instruments; (vi) all of the
Company's books and records relating to any of the foregoing; and (vii) all
accessions and additions to, substitutions for, and replacements, products and
proceeds of any of the foregoing.
"ACCOUNTS" shall mean all now owned or hereafter acquired accounts,
contract rights, chattel paper, instruments, documents, claims to insurance, and
other rights to payment for goods sold or leased by the Company or for services
rendered by the Company.
"EQUIPMENT" shall mean all of the Company's now owned or hereafter
acquired goods and other tangible property (other than Inventory) used or
useable by the Company in its business, wherever the same are located,
including, without limitation, fixtures, furniture, machinery, equipment,
computer hardware, vehicles and trade fixtures, together with any and all
accessories, parts, supplies and appurtenances thereto, substitutions, renewals
and improvements therefor and replacements thereof.
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"GENERAL INTANGIBLES" shall mean all choses in action, general intangibles,
causes of action and all other intangible personal property of the Company of
every kind and nature (other than Accounts) now owned or hereafter acquired by
the Company. Without in any way limiting the generality of the foregoing,
General Intangibles specifically include contracts and contract rights, all
corporate or other business records, deposits (whether collected or
uncollected), security deposits, inventions, designs, patents, patent
applications, trademarks, trade names, trade secrets, trade styles, service
marks, goodwill, copyrights, registrations, licences, franchises, computer
software and firmware and all licenses therefore, insurance policies and tax
refund claims owned by the Company and all letters of credit, guarantee claims,
security interests or other security held by or granted to the Company to
secure payment by an account debtor of any Accounts.
"INVENTORY" shall mean all goods, inventory, merchandise and other personal
property, including, without limitation, goods in transit, wherever located and
whether now owned or hereafter acquired by the Company which are or may at any
time be held for sale or lease, furnished under or incident to any contract or
held as raw materials, work in progress, finished goods, supplies or materials
used or consumed in the Company's businesses, and all such property the sale or
other disposition of which has given rise to Accounts and which has been
returned to or repossessed or stopped in transit by the Company.
2. OBLIGATIONS. The security interest hereby granted shall secure the
due and punctual payment and performance by the Company of its indebtedness,
liabilities and obligations to the Lender under the Note and any and all other
obligations of the Company under this Security Agreement, including without
limitation: (i) the due and punctual payment in full (and not merely the
collectibility) of the principal and the premium, if any, and the interest on
the Note, in each case when due and payable, according to the terms of the Note,
whether at maturity, by acceleration or otherwise, regardless of the extent
allowed as a claim in any proceeding in respect of the bankruptcy,
reorganization or insolvency of the Company (a "REORGANIZATION"); and (ii) the
due and punctual payment in full (and not merely the collectibility) of all
other sums and charges which may at any time be due and payable in accordance
with or under the terms of the Note, regardless of the extent allowed as a claim
in any Reorganization.
3. SPECIAL WARRANTIES AND COVENANTS OF THE COMPANY. The Company hereby
represents, warrants and covenants to the Lender that:
(a) The address specified in on the signature page hereto is the
chief executive office and the place of business of the Company.
(b) The Company is (or with respect to Collateral acquired after the
date hereof, will be) the sole owner of the Collateral; the security interest
hereunder in the Collateral is a valid and enforceable security interest in that
Collateral and, upon the filing of financing statements, will be duly perfected
as to all Collateral in which a security interest can be perfected by the filing
of a financing statement and there are no security interests in, liens or
encumbrances on, adverse claims of title to, or any other interest whatsoever
in, the Collateral or any portion thereof, except the Permitted Liens (as
defined in the Loan Agreement).
(c) The Company will defend the Collateral against all claims and
demands of all persons at any time claiming the same or any interest therein.
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(d) The Company will promptly execute and deliver to the Lender such
financing statements, certificates and other documents and instruments, and will
give any notices to third parties, as may be necessary to enable the Lender to
perfect or from time to time continue perfection of the security interest
granted herein, or to protect the Collateral against the rights, claims or
interests of third parties, including, without limitation, such financing
statements, certificates, notices and other documents as may be necessary to
perfect a security interest in any additional Collateral hereafter acquired by
the Company or in any replacements or proceeds thereof.
(e) The Company will maintain all Collateral only in California or
Oregon.
(f) The Company has not, in the conduct of its business, been known
as or used any other corporate or fictitious name.
(g) The Company will promptly upon the Lender's request deliver to
the Lender records and schedules that show the status, condition and location of
the Collateral, including accounts receivable aging reports and will promptly
notify the Lender in writing of any event or change of law, regulation, business
practice or business condition that may adversely affect the value of the
Collateral. The Lender shall have the right to review and verify such records,
schedules and notices, including the right to contact account debtors of the
Company to confirm balances owing on and the terms of Accounts, and the Company
will reimburse the Lender for all costs incurred thereby.
(h) The Lender shall have the right at any time to make any payments
and do any other acts the Lender may deem necessary to protect its security
interest in the Collateral, including, without limitation, the rights to pay,
purchase, contest or compromise any encumbrance, charge or lien that in the
judgment of the Lender appears to be prior to or superior to the security
interest granted hereunder, and appear in and defend any action or proceeding
purporting to affect its security interest in and/or the value of the
Collateral, and in exercising any such powers or authority, the right to pay all
expenses incurred in connection therewith, including fees and expenses of
counsel for the Lender. The Company hereby agrees to reimburse the Lender for
all payments made and expenses incurred under this Security Agreement, which
amounts shall be secured under this Security Agreement, and agrees it shall be
bound by any payment made or act taken by the Lender hereunder. The Lender shall
have no obligation to make any of the foregoing payments or perform any of the
foregoing acts.
4. RIGHTS OF LENDER. Upon the occurrence of any Event of Default, the
Lender may declare all of the Obligations to be immediately due and payable and
the Lender shall then have the rights and remedies of a Lender under the Uniform
Commercial Code and under all other applicable laws, including, without
limitation, the right to take possession of the Collateral and, in addition
thereto, the right to enter upon any premises on which the Collateral or any
part thereof may be situated and remove the same therefrom. The Lender may
require the Company to make the Collateral (to the extent the same is movable)
available to the Lender at a place to be designated by the Lender which is
reasonably convenient to the Company and the Lender. Unless the Collateral is
perishable or threatens to decline speedily in value or is of a type customarily
sold on a recognized market, the Lender will give the Company at least ten (10)
days' prior written notice, at the last address for notices to the Company
specified in accordance with Section 10 hereof, of the time and place of any
public sale thereof or of the time after which any private sale or any other
intended disposition thereof
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is to be made. Each such notice shall be deemed to meet all requirements
hereunder and under applicable law (including the Uniform Commercial Code)
that reasonable notification be given of the time and place of such sale or
other disposition. After deducting all costs and expenses of collection,
storage, custody, sale or other disposition and delivery (including legal
costs and attorneys' fees) and all other charges against the Collateral, the
residue of the proceeds of any such sale or disposition shall be applied to
the payment of the Obligations of the Company; and the surplus, if any, shall
be paid to whomever may be lawfully entitled to receive the same.
In the event the proceeds of any sale, lease or other disposition of the
Collateral hereunder are insufficient to pay all of the Obligations in full, the
Company will be liable for the deficiency, together with interest thereon, and
the costs and expenses of collection of such deficiency, including (to the
extent permitted by law), without limitation, reasonable attorneys' fees,
expenses and disbursements.
5. RIGHT OF LENDER TO USE AND OPERATE COLLATERAL, ETC. Upon the
occurrence of any Event of Default and during the continuance of any Event of
Default, but subject to the provisions of the Uniform Commercial Code or other
applicable law, the Lender shall have the right and power to take possession of
all or any part of the Collateral, and to exclude the Company and all persons
claiming under the Company wholly or partly therefrom, and thereafter to hold,
store, and/or use, operate, manage and control the same. Upon any such taking of
possession, the Lender may, from time to time, at the expense of the Company,
make all such repairs, replacements, alterations, additions and improvements to
any of the Collateral as the Lender may deem proper. In any such case, the
Lender shall have the right to manage and control the Collateral and to carry on
the business and to exercise all rights and powers of the Company, in respect
thereto as the Lender shall deem best, including the right to enter into any and
all such agreements with respect to the operation of the Collateral or any part
thereof as the Lender may see fit; and the Lender shall be entitled to collect
and receive all issues, profits, fees, revenues and other income of the same and
every part thereof. Such issues, profits, fees, revenues and other income shall
be applied to pay the expenses of the Lender and of operating the Collateral and
of conducting the Company's business, and of all maintenance, repairs,
replacements, alterations, additions and improvements, and to make all payments
which the Lender may be required or may elect to make, if any, for taxes,
assessments, insurance and other charges upon the Collateral or any part
thereof, and all other payments which the Lender may be required or authorized
to make under any provision of this Security Agreement (including legal costs
and attorneys' fees). The remainder of such issues, profits, fees, revenues and
other income shall be applied to the payment of the Obligations. Without
limiting the generality of the foregoing, the Lender shall have the right to
pply for and have a receiver appointed by a court of competent jurisdiction in
any action taken by Lender to enforce their rights and remedies hereunder in
order to manage, protect and preserve the Collateral and continue the operation
of the business of the Company and to collect all revenues and profits thereof
and apply the same to the payment of all expenses and other charges of such
receivership including the compensation of the receiver and to the payment of
the Obligations as aforesaid until a sale or other disposition of such
Collateral shall be finally made and consummated
6. COLLECTION OF ACCOUNTS, ETC. Upon the occurrence and during the
continuance of any Event of Default, the Lender may notify or may require the
Company to notify account debtors on any or all of the Company's Accounts,
whether now existing or hereafter arising, to make payment directly to the
Lender, and the Lender may take possession of all proceeds of any accounts in
the Company's possession, and may take any other steps which the Lender deems
necessary or advisable
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to collect any or all such Accounts or other Collateral or proceeds thereof.
Without limiting the generality of the foregoing, upon the occurrence and
during the continuance of any Event of Default: (a) the Lender shall have
the right to receive, endorse, assign and/or deliver in their name or the
name of the Company any and all checks, drafts and other instruments for the
payment of money relating to the Accounts, and the Company hereby waives
notice of presentment, protest and nonpayment of any instrument so endorsed;
(b) the Company hereby constitutes the Lender or their designee as its
attorney-in-fact with power to endorse the Company's name upon any notes,
acceptances, checks, drafts, money orders or other evidences of payment or
Collateral that may come into Lender' possession; to sign the Company's name
on any invoice or bill of lading relating to any of the Company's accounts,
drafts against customers, assignments and verifications of such accounts and
notices to customers; to notify the Post Office authorities to change the
address for delivery of mail addressed to the Company to such address as the
Lender may designate; and to do all other acts and things necessary to carry
out this agreement. All acts of said attorney or designee are hereby
ratified and approved, and said attorney or designee shall not be liable for
any acts of omission or commission, nor for any error of judgment or mistake
of fact or law; this power being coupled with an interest is irrevocable
until this Security Agreement terminates in accordance with its terms; (c)
the Lender may, without notice to or consent from the Company, in their
reasonable business judgment, sue upon or otherwise collect, extend the time
of payment, or compromise or settle for cash, credit or otherwise upon any
terms, any of the Company's Accounts or any securities, instruments or
insurance applicable thereto and/or release the obligor thereon; and (d) the
Lender are authorized and empowered to accept the return of the goods
represented by any of the Company's Accounts, without notice to or consent by
the Company, all without discharging or in any way affecting the Company's
liability thereunder.
7. WAIVERS, ETC. The Company hereby waives presentment, demand, notice,
protest and, except as otherwise provided herein, all other demands and notices
in connection with this Security Agreement or the enforcement of the Lender'
rights hereunder or in connection with any Obligations or any Collateral; the
Company consents to and waives notice of the granting of renewals, extensions of
time for payment or other indulgence to any account debtor in respect of any
account receivable, the addition or release of persons primarily or secondarily
liable on any account receivable or other Collateral, the acceptance of partial
payments on any obligation or on any account receivable or other Collateral
and/or the settlement or compromise thereof. No delay on the part of any Lender
in exercising any right hereunder shall operate as a waiver of such right or of
any other right hereunder. Any waiver of any such right on any one occasion
shall not be construed as a bar to or waiver of any such right on any such
future occasion. The Company further waives any right it may now or hereafter
have to notice (other than any requirement of notice provided herein) or to a
judicial hearing prior to the exercise of any right or remedy provided by this
Security Agreement to the Lender and waives its right, if any, to set aside or
invalidate any sale duly consummated in accordance with the foregoing provisions
hereof on the grounds (if such be the case) that the sale was consummated
without a prior judicial hearing. The Company hereby waives the right to plead
any statute of limitations as a defense to any indebtedness or obligations
hereunder or secured hereby to the full extent permitted by law. The Company's
waivers under this section have been made voluntarily, intelligently and
knowingly.
8. AUTHORITY OF THE LENDER. The Lender shall have and be entitled to
exercise all powers hereunder which are specifically granted to the Lender by
the terms hereof together with such powers as are reasonably incident thereto.
The Lender may perform any of its duties hereunder or in
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connection with the Collateral by or through agents or employees and shall be
entitled to retain counsel and to act in reliance upon the advice of counsel
concerning all such matters. Neither any Lender nor any attorney or agent of
the Lender shall be liable to the Company for any action taken or omitted to
be taken by it or them hereunder, except for its or their own gross
negligence or willful misconduct, nor shall the Lender be responsible for the
validity, effectiveness or sufficiency hereof or of any document or security
furnished pursuant hereto. The Lender and its attorneys and agents shall be
entitled to rely on any communication, instrument or document believed by it
or them to be genuine and correct and to have been signed or sent by the
proper person or persons. The Company agrees to indemnify and hold harmless
the Lender and any other person from and against any and all costs, expenses
(including fees and expenses of counsel), claims or liability incurred by the
Lender or such person hereunder, unless such claim or liability shall be due
to willful misconduct or gross negligence on the part of the Lender or such
person.
9. TERMINATION, ETC. This Security Agreement and the security interest
in the Collateral created hereby shall terminate only when all of the
Obligations have been paid, performed and discharged in full. No waiver by any
Lender or by any other holder of Obligations of any default shall be effective
unless in writing nor operate as a waiver of any other default or of the same
default on a future occasion.
10. NOTICES. All notices, consents and other communications under this
Security Agreement shall be in writing and shall be deemed to have been duly
given when (a) delivered by hand, (b) sent by telecopier (with receipt
confirmed), provided that a copy is mailed by registered mail, return receipt
requested, or (c) when received by the addressee, if sent by Express Mail,
Federal Express or other express delivery service (receipt requested), in each
case to the appropriate addresses and telecopier numbers set forth on the
signature page (or to such other addresses and telecopier numbers as a party may
designate as to itself by notice to the other parties).
11. MISCELLANEOUS. This Security Agreement shall inure to the benefit
of and be binding upon the Lender and the Company and their respective
successors and assigns. In the event any of the Obligations are transferred,
the Lender may assign its rights and duties hereunder to the transferee or
transferees of the Obligations. In case any provision of this Security
Agreement shall be invalid, illegal or unenforceable, the validity, legality and
enforceability of the remaining provisions shall not in any way be affected or
impaired thereby. This Security Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts. Each
counterpart bearing, and each set of counterparts collectively bearing, the
signatures of all parties shall be an original, but all the counterparts
together shall constitute one and the same instrument The terms of this
Security Agreement may not be altered, modified, amended, supplemented or
terminated in any manner whatsoever except by written instrument signed by the
Company and the Lender.
12. GOVERNING LAW; WAIVER OF RIGHTS, REPRESENTATION BY COUNSEL, WAIVER OF
DAMAGES, ETC.
(a) This Agreement and (unless otherwise provided) all amendments hereof
and waivers and consents hereunder shall be governed by the internal law of the
State of Oregon, without regard to the conflicts of law principles thereof.
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(b) The Company waives all rights of notice and hearing of any kind prior
to the exercise by the Lender of their rights from and after the occurrence of
an Event of Default to repossess the Collateral with judicial process or to
replevy, attach or levy upon the Collateral or other security for the
Obligations. The Company waives the posting of any bond otherwise required of
the Lender in connection with any judicial process or proceeding to obtain
possession of, replevy, attach or levy upon the Collateral or other security for
the Obligations to enforce any judgment or other court order entered in favor of
the Lender, or to enforce by specific performance, temporary restraining order,
preliminary or permanent injunction this Security Agreement or any other
agreement or document between the Company and the Lender.
(c) Each party hereto acknowledges that it has been represented by counsel
and/or has had an opportunity to seek the advice of counsel in connection with
this Security Agreement and the transactions contemplated by this Security
Agreement. Accordingly, any rule of law or any legal decision that would
require interpretation of any claimed ambiguities in this Security Agreement
against the party that drafted it has no application and is expressly waived.
The provisions of this Security Agreement shall be interpreted in a reasonable
manner to effect the intent of the parties hereto.
(d) Notwithstanding anything to the contrary elsewhere in this Security
Agreement, no party (or its agents) shall, in any event, be liable to the other
party (or its agents) for any consequential damages, including, but not limited
to, loss of revenue or income, cost of capital, or loss of business reputation
or opportunity relating to the breach or alleged breach of this Security
Agreement. Each party agrees that it will not seek punitive damages as to any
matter under, relating to or arising out of this Security Agreement.
IN WITNESS WHEREOF, the parties hereto have executed and delivered this
Agreement as of the date first set forth above.
THE COMPANY
EIP MICROWAVE, INC.
1745 McCandless Drive
Milpitas, CA 95035-8024
Fax Number: (408) 945-6312
By: /s/ J. BRADFORD BISHOP
----------------------------
J. Bradford Bishop
Chairman and Chief Executive Officer
THE LENDER
/s/ JAMES N. CUTLER, JR.
------------------------------
James N. Cutler, Jr.
6950 S.W. Hampton Street
Suite 200
Portland, OR 97223
Fax Number: (503) 624-0115
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY THE HOLDER FOR INVESTMENT
AND MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT AS MAY BE AUTHORIZED UNDER THE SECURITIES ACT OF 1933 AND THE RULES AND
REGULATIONS PROMULGATED THEREUNDER.
EIP MICROWAVE, INC.
WARRANT CERTIFICATE
July 20, 1998
THIS WARRANT CERTIFICATE (this "WARRANT CERTIFICATE"), certifies that JAMES
N. CUTLER, JR., or the registered assigns thereof ("HOLDER"), is the owner of
100,000 warrants (the "Warrants"), each of which entitles Holder to purchase, as
and when described herein, one share of Common Stock, $0.01 par value
(collectively, the "WARRANT SHARES" or individually a "WARRANT SHARE"), of EIP
Microwave, Inc., a Delaware corporation (the "COMPANY"), at a purchase price of
$0.52 per share, during the term of this Warrant Certificate, subject to
adjustment as provided in Section 6 hereof.
1. THE WARRANTS. Each of the Warrants entitles Holder to purchase one
(1) fully paid and nonassessable Warrant Share (such number being subject to
adjustment as provided in Section 6 hereof) on the terms and conditions herein
set forth.
2. PURCHASE PRICE. The purchase price (the "PURCHASE PRICE") of the
Warrant Shares covered by the Warrant shall be $0.52 per Warrant Share.
3. TERM OF THE WARRANTS. The term of the Warrants shall commence on the
date hereof and all rights to purchase any of the Warrant Shares hereunder shall
cease at 11:59 P.M. on July 1, 2000 (the "EXPIRATION DATE"), subject to earlier
termination as provided herein. Except as may otherwise be provided in this
Warrant Certificate, the Warrants granted hereunder may be exercised, to the
extent provided in Section 5.1 hereof, at any time preceding the Expiration Date
or expiration pursuant to Section 5.2 hereof. The purchase price of the Warrant
Shares as to which the Warrants shall be exercised shall be paid in full at the
time or exercise in cash or by check. Holder shall not have any rights of a
holder of any of the Warrant Shares covered by the Warrants with respect to any
shares of the Company's Common Stock not actually issued and delivered to
Holder.
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4. NONTRANSFERABILITY.
4.1 GENERAL RESTRICTION ON TRANSFER. Except as otherwise expressly
provided in this Section 4, Holder shall not sell, pledge, assign, hypothecate,
encumber, alienate or otherwise transfer or dispose of ("TRANSFER") any or all
of the Warrants or any interest therein.
4.2 PERMITTED TRANSFERS. Notwithstanding Section 4.1 hereof, Holder
may Transfer any or all of the Warrants either (a) to an Affiliate (as that term
is defined in Rule 144(a) promulgated under the Securities Act of 1933, as
amended) of Holder provided that, prior to such transfer, (i) the Company has
received from Holder written notice of such proposed transfer and (ii) the
transferee with respect to such transfer has agreed in writing (and the Company
has received a copy of such writing) to be subject to the restrictions on
transfer contained herein or (b) upon and in accordance with the Company's prior
written consent; PROVIDED, HOWEVER, that Holder shall in no event Transfer any
or all of the Warrants (or any interest therein) at any time except in
compliance with applicable federal and state securities laws. Any transferee
under this Section 4.2 shall take the Warrant(s) transferred to such transferee
subject to the restrictions on transfer set forth in this Section 4.
4.3 PROHIBITED TRANSFERS; NULL AND VOID. Any attempt to Transfer in
violation of this Section 4 shall be null and void, and neither the Company nor
any transfer agent shall give any effect in the Company's records to any such
attempt to Transfer.
5. EXERCISABILITY AND EXPIRATION.
5.1 EXERCISABILITY. The Warrants (until expiration or termination)
shall be exercisable only to the extent of 20,000 Warrants after the Holder has
advanced $100,000 to the Company pursuant to the Subordinated Loan Agreement
dated as of July 20, 1998 between the Company and the Holder, and to the extent
of an additional 20,000 Warrants after each additional advance of $100,000 by
the Holder to the Company pursuant thereto.
5.2 EXPIRATION. In addition to any other event causing an expiration
or termination of this Warrant Certificate, these Warrants shall expire and all
rights to purchase any or all of the Warrant Shares shall cease (to the extent
not theretofore terminated or expired as herein provided) upon the effective
date of (a) the dissolution or liquidation of the Company, (b) a merger,
consolidation, acquisition of property or shares, separation or reorganization
of the Company, with one or more entities, corporate or otherwise, as a result
of which the Company is not the surviving entity, (c) a sale of substantially
all of the property or shares of the Company to another entity, corporate or
otherwise, or (d) a "reverse" merger by which the Company is acquired but is the
surviving entity. The Company shall cause written notice to be given to Holder
of any such proposed transaction not less than fifteen (15) days prior to the
anticipated effective date thereof, and Holder shall have the right to exercise
these Warrants at any time prior to the effective date of (i) the termination of
the Warrants, or (ii) such proposed transaction, whichever is earlier.
6. ADJUSTMENTS FOR STOCK SPLITS, CONSOLIDATIONS, ETC. The number and
class of shares subject to this Warrant Certificate shall be proportionately
adjusted in the event of any change or increase or decrease in the number of
issued shares of the Company's Common Stock,
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without receipt of consideration by the Company, which result from a split-up
or consolidation of shares, payment of a share dividend, a recapitalization,
combination of shares or other like capital adjustment, so that, upon
exercise of this Warrant Certificate, Holder shall receive the number and
class of shares it would have received had it been the holder of the number
of shares of Common Stock in the Company, for which this Warrant Certificate
is being exercised, on the date of such change or increase or decrease in the
number of issued shares of Common Stock in the Company. Subject to any
required action by its stockholders, if the Company shall be a surviving
entity in any reorganization, merger or consolidation (except a "reverse"
merger under Section 5(d) hereof), this Warrant Certificate shall be
proportionately adjusted so as to apply to the securities to which the holder
of the number of shares of Common Stock in the Company subject to this
Warrant Certificate would have been entitled upon the effectiveness of such
reorganization, merger or consolidation. Adjustments under this Section 6
shall be made by the Board of Directors or a committee thereof, whose
determination with respect thereto shall be final and conclusive. No
fractional share shall be issued under this Warrant Certificate or upon any
such adjustment.
7. METHOD OF EXERCISING WARRANTS. Subject to the terms and conditions of
this Warrant Certificate, this Warrant Certificate may be exercised by Holder
(a) by giving written notice to the Secretary of the Company stating the number
of the Warrant Shares with respect to which this Warrant Certificate is being
exercised and (b) tendering payment of the Purchase Price for each of the
Warrant Shares to be purchased. The Purchase Price for all of the Warrant
Shares to be purchased upon any exercise under this Warrant Certificate must be
paid in full upon such exercise. Payment shall be made in cash or such other
form of consideration as the Board of Directors may permit. Holder's exercise
notice provided for above shall be accompanied by (i) this Warrant Certificate
(for appropriate endorsement by the Company to reflect such exercise), (ii) a
completed and executed Investor's Certificate in substantially the form attached
hereto as EXHIBIT A, and (iii) such other agreements and documents as may be
reasonably requested by the Company. As soon as practicable after the exercise
of this Warrant Certificate and compliance in full by Holder with this
Section 7, Holder shall be entitled to receive a stock certificate evidencing
ownership of the Warrant Shares purchased. The certificate or certificates for
the shares as to which the Warrants shall have been so exercised shall be
registered in the name of the person so exercising the Warrants and shall be
delivered, as provided above, to or upon the written order of the person so
exercising the Warrants. In the event the Warrants shall be exercised by any
person other than the Holder in accordance with the terms hereof, such notice
shall be accompanied by appropriate proof of the right of such person to
exercise the Warrants. All of the Warrant Shares that shall be purchased upon
the exercise of the Warrants as provided herein shall be fully paid and
nonassessable. Holder shall not be entitled to the privileges of share
ownership as to any shares of the Company's Common Stock not actually issued and
delivered to Holder. Holder hereby certifies that all shares of Common Stock in
the Company purchased or to be purchased by it pursuant to the exercise of this
Warrant Certificate are being, or are to be, acquired by Holder for investment,
and not with a view to the distribution thereof.
8. GENERAL. The Company shall at all times during the term of the
Warrants reserve and keep available such number of shares of Common Stock as
will be sufficient to satisfy the requirements of this Warrant Certificate,
shall pay all original issue and transfer taxes with respect to the issue and
transfer of shares pursuant hereto and all other fees and expenses
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necessarily incurred by the Company in connection therewith, and will from
time to time use its best efforts to comply with all laws and regulations,
which, in the opinion of counsel for the Company, shall be applicable thereto.
IN WITNESS WHEREOF, the Company has executed and delivered this Warrant
Certificate as of the date first set forth above.
THE COMPANY
EIP MICROWAVE, INC.
1745 McCandless Drive
Milpitas, CA 95035-8024
Fax Number: (408) 945-6312
By: /s/ J. BRADFORD BISHOP
-------------------------------------
J. Bradford Bishop
Chairman and Chief Executive Officer
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<PAGE>
EXHIBIT A TO THE
WARRANT CERTIFICATE
INVESTOR'S CERTIFICATE
Date: _____________ ___, 199__
I, the undersigned, hereby certify that all of the shares of common stock
of EIP Microwave, Inc. (the "COMPANY") being purchased by me pursuant to the
exercise on this date of certain warrants granted to me by the Company
(evidenced by the warrant certificate issued to me by the Company on July 20,
1998) are being acquired by me for investment and not with a view to the
distribution thereof. I hereby reconfirm the representations and warranties
contained in Section 5 of the Subordinated Loan Agreement dated as of July 20,
1998 between the Company and the undersigned, with respect to all such shares of
the Company's common stock.
Signature
-------------------------------
James N. Cutler, Jr.
5
<PAGE>
THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933; THEY HAVE BEEN ACQUIRED BY HOLDER FOR INVESTMENT AND
MAY NOT BE PLEDGED, HYPOTHECATED, SOLD, TRANSFERRED OR OTHERWISE DISPOSED OF
EXCEPT IN ACCORDANCE WITH SECTION 9 AND EXCEPT AS MAY BE AUTHORIZED UNDER THE
SECURITIES ACT OF 1933 AND THE RULES AND REGULATIONS PROMULGATED THEREUNDER.
EIP MICROWAVE, INC.
SUBORDINATED CONVERTIBLE PROMISSORY NOTE
US$200,000 July 20, 1998
FOR VALUE RECEIVED, EIP MICROWAVE, INC., a Delaware corporation ("EIP"),
hereby promises to pay to the order of CASCADE MICROWAVE INVESTMENTS LLC, an
Oregon limited liability company ("Holder"), the principal sum of TWO HUNDRED
THOUSAND DOLLARS ($200,000), together with interest, all as set forth below.
1. PRINCIPAL. The outstanding principal amount of this Subordinated
Convertible Promissory Note (the "Note") shall become due and payable on June
30, 2000 (the "Maturity Date").
2. INTEREST. Interest on the unpaid principal balance of the Note from
time to time outstanding shall bear interest at the rate of 8% per annum, which
interest shall be due and payable on the Maturity Date. All interest shall be
computed based on a 360-day year and paid for the actual number of days elapsed,
including the first day and excluding the last day.
3. TIME AND MANNER OF PAYMENT. All payments under this Note shall be
made to Holder not later than 12:00 noon (Pacific time) on the date such
payments shall be due, at Holder's address, or at such other location as Holder
may designate in writing. Any payment received after such time shall be deemed
to have been paid on the immediately succeeding business day. All payments
shall be made to Holder in lawful money of the United States of America and in
immediately available funds, without any deduction whatsoever, including,
without limitation, any deduction for set-off, recoupment, counterclaim or
taxes.
4. PREPAYMENTS--OPTIONAL AND MANDATORY. EIP may, at its option and upon
thirty days' prior written notice, prepay the unpaid principal balance of this
Note, in whole or in part, together with accrued interest thereon, without
penalty.
5. MAXIMUM RATE OF INTEREST. The rate of interest payable on this Note
shall in no event exceed the maximum rate permissible under applicable law. If
the rate of interest payable on this Note is ever reduced as a result of the
foregoing sentence and at any time thereafter the maximum rate permitted by
applicable law shall exceed the rate of interest provided in this Note, then the
rate provided for in this Note shall be increased to the maximum rate provided
by
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<PAGE>
applicable law for such period as is required so that the total amount of
interest received by Holder is that which would have been received by Holder
but for the operation of the preceding sentence.
6. SUBORDINATION. Holder agrees to subordinate the payment of all
obligations by EIP under the Note to EIP's obligations under any Senior
Indebtedness, on such reasonable terms and conditions as are required by the
lender of such Senior Indebtedness. "Senior Indebtedness" means any
indebtedness of EIP from the extension of credit by a financial institution or
any seller financing in connection with a strategic acquisition by EIP, in each
case, whether currently existing or created in the future.
7. CONVERSION.
(a) RIGHT OF CONVERSION. Each of EIP and Holder (severally and not
jointly) shall have the right from time to time to convert the unpaid principal
amount hereunder, in whole or in part, into fully paid and nonassessable shares
of Common Stock, $0.01 par value, of EIP (the "Common Stock"), PROVIDED,
FURTHER, that such right shall only be exercisable on and after October 1, 1998.
Any such principal amount shall be convertible into the number of fully paid and
nonassessable shares of Common Stock determined by dividing such principal
amount by $1.00, such number of shares to be subject to adjustment as set forth
in Section 7(e). EIP shall not be required to pay any interest, whether or not
accrued, on the principal amount so converted.
(b) CONVERSION MECHANICS. Before any unpaid principal amount
hereunder may be converted into Common Stock, EIP or Holder (as applicable)
shall give written notice to the other that it elects to convert a specified
amount of unpaid principal represented by this Note. EIP shall, as soon as
practicable thereafter, issue and deliver to Holder certificates in the name of
Holder for the number of full shares of Common Stock to which Holder shall be
entitled to receive, together with cash in lieu of any fraction of a share as
provided below. Conversion shall be deemed to have been made as of the date
immediately following the date of such notice, and Holder shall be treated for
all purposes as the record holder of the shares of Common Stock issuable on
conversion on such date. No fractional shares of Common Stock shall be issued
on conversion of any unpaid principal amount. If any fractional interest in a
share of Common Stock would otherwise be deliverable on the conversion of any
unpaid principal amount, EIP shall, in lieu of delivering the fractional share
for that fractional interest, adjust the fractional interest by payment to
Holder of an amount in cash equal (computed to the nearest cent) to the current
market value of the fractional interest, as determined in good faith by the
Board of Directors of EIP.
(c) SUFFICIENT AUTHORIZED COMMON STOCK. EIP shall at all times
reserve and keep available, out of its authorized but unissued shares of Common
Stock, solely for the purpose of effecting conversion of unpaid principal
hereunder, the full number of shares of Common Stock deliverable on conversion
of all unpaid principal amounts permitted hereunder. EIP shall from time to
time, in accordance with applicable law, increase the authorized amount of its
Common Stock if at any time the authorized number of shares of Common Stock
remaining unissued shall not be sufficient to permit the conversion of the
unpaid principal amounts permitted hereunder.
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<PAGE>
(d) EXPIRATION. The conversion rights under this Note shall expire
on the earlier of (i) the Maturity Date or (ii) the effective date of (A) the
dissolution or liquidation of EIP, (B) a merger, consolidation, acquisition
of property or shares, separation or reorganization of EIP, with one or more
entities, corporate or otherwise, as a result of which EIP is not the
surviving entity, (C) a sale of substantially all of the property or shares
of EIP to another entity, corporate or otherwise, or (D) a "reverse" merger
by which EIP is acquired but is the surviving entity. EIP shall cause
written notice to be given to Holder of any such proposed transaction not
less than fifteen (15) days prior to the anticipated effective date thereof.
(e) ADJUSTMENTS FOR STOCK SPLITS, CONSOLIDATIONS, ETC. The number
and class of shares subject to this conversion right shall be proportionately
adjusted in the event of any change or increase or decrease in the number of
issued shares of the Common Stock, without receipt of consideration by EIP,
which result from a split-up or consolidation of shares, payment of a share
dividend, a recapitalization, combination of shares or other like capital
adjustment, so that, upon conversion of the principal amount hereof, Holder
shall receive the number and class of shares it would have received had it been
the holder of the number of shares of Common Stock, for which the unpaid
principal amount hereof is being converted, on the date of such change or
increase or decrease in the number of issued shares of Common Stock. Subject to
any required action by its stockholders, if EIP shall be a surviving entity in
any reorganization, merger or consolidation (except a "reverse" merger under
Section 7(d)(ii)(D) hereof), the number of shares of Common Stock issuable upon
conversion of the principal amount hereof shall be proportionately adjusted so
as to apply to the securities to which the holder of such number of shares of
Common Stock would have been entitled upon the effectiveness of such
reorganization, merger or consolidation. Adjustments under this Section 7(e)
shall be made by the Board of Directors or a committee thereof, whose
determination with respect thereto shall be final and conclusive.
8. EVENTS OF DEFAULT. If any of the following events (each an "Event of
Default") shall occur and be continuing:
(a) EIP shall fail to pay any principal on this Note as and when due;
or EIP shall fail to pay any other amount due and payable under this Note;
(b) an involuntary case shall be commenced against EIP or any of its
subsidiaries under any applicable bankruptcy, insolvency or similar law now or
hereafter in effect, and shall not be dismissed within sixty (60) days of its
commencement, or EIP or any of its subsidiaries shall admit or stipulate to the
allegations made therein, or a court having jurisdiction in the premises shall
enter a decree or order for relief in respect of EIP or any of its subsidiaries
in any such involuntary case or appointing a receiver, liquidator, assignee,
custodian, trustee, sequestrator (or similar official) of EIP or any of its
subsidiaries or for any substantial part of its property or ordering the winding
up or liquidation of its affairs, and such decree or order shall remain unstayed
and in effect for a period of thirty (30) days;
(c) EIP or any of its subsidiaries shall commence a voluntary case
under any applicable bankruptcy, insolvency or other similar law now or
hereafter in effect, or shall consent to the entry of an order for relief in an
involuntary case under any such law or shall apply for or consent to the
appointment of or taking possession by a receiver, liquidator, assignee,
trustee, custodian, sequestrator (or similar official) of EIP or any substantial
part of its property, or shall
4
<PAGE>
make any general assignment for the benefit of creditors or shall fail
generally to pay its debts as they become due; or
(d) any writ or warrant of attachment, or similar process, shall be
entered or filed against EIP or any of its subsidiaries or any of their
respective assets and shall remain unvacated, unbonded, unstayed, unsatisfied or
unsettled for a period of thirty (30) days or in any event later than five (5)
days prior to the date of any proposed sale thereunder;
then, in any such event, Holder may declare this Note, and all other present and
future obligations of EIP or any of its subsidiaries to Holder, to be due and
payable, whereupon this Note and all such other obligations shall become and be
forthwith due and payable, without presentment, demand, protest, notice of
dishonor or other notice of any kind, all of which are hereby expressly waived
by EIP and its subsidiaries; PROVIDED, HOWEVER, that the occurrence of any Event
of Default described in clause (b) or (c) shall make this Note and all other
obligations of EIP or any of its subsidiaries to Holder immediately due and
payable, without presentment, demand, protest, notice of dishonor or other
notice of any kind, all of which are hereby expressly waived by EIP (on behalf
of itself and its subsidiaries).
9. NONTRANSFERABILITY.
(a) Except as otherwise expressly provided in this Section 9, Holder
shall not sell, pledge, assign, hypothecate, encumber, alienate or otherwise
transfer or dispose of ("TRANSFER") this Note or any interest therein.
(b) Notwithstanding Section 9(a) hereof, Holder may Transfer the Note
either (i) to an Affiliate (as that term is defined in Rule 144(a) promulgated
under the Securities Act of 1933, as amended) of Holder provided that, prior to
such transfer, (A) EIP has received from Holder written notice of such proposed
transfer and (B) the transferee with respect to such transfer has agreed in
writing (and EIP has received a copy of such writing) to be subject to the
restrictions on transfer contained herein or (ii) upon and in accordance with
EIP's prior written consent; PROVIDED, HOWEVER, that Holder shall in no event
Transfer the Note (or any interest therein) at any time except in compliance
with applicable federal and state securities laws. Any transferee under this
Section 9(b) shall accept this Note subject to the restrictions on transfer set
forth in this Section 9.
(c) Any attempt to Transfer in violation of this Section 9 shall be
null and void, and neither EIP nor any transfer agent shall give any effect in
EIP's records to any such attempt to Transfer.
10. MISCELLANEOUS.
(a) EIP agrees to pay to Holder all costs and expenses, including,
without limitation, reasonable attorneys' fees and expenses, incurred by Holder
in connection with the collection and enforcement of this Note and the exercise
and enforcement of any of the rights, powers or remedies of Holder. Any such
costs and expenses shall be payable on demand, with interest at the rate set
forth in Section 2.
4
<PAGE>
(b) This Note shall be binding upon and, subject to the next
sentence, inure to the benefit of EIP, Holder and their successors and permitted
assigns. EIP may not assign any of its rights or obligations hereunder without
the prior written consent of Holder.
(c) This Agreement shall be governed by, and construed and enforced
in accordance with, the internal laws of the State of California (irrespective
of its conflicts or choice of law principles).
(d) The headings contained in this Note are for reference purposes
only and shall not affect in any way the meaning or interpretation of this Note.
Section, subsection, clause, schedule, exhibit, preamble, recital and party
references are to this Note unless otherwise specified. Neither party, nor its
respective counsel, shall be deemed the drafter of this Note for purposes of
construing the provisions hereof, and all provisions of this Note shall be
construed according to their fair meaning, and not strictly for or against any
party.
(e) EIP expressly waives any presentment, demand, protest, notice of
dishonor or any other notice of any kind in connection with this Note now or
hereafter required by applicable law.
IN WITNESS WHEREOF, the undersigned has executed this Note as of the date
first above written.
EIP
EIP MICROWAVE, INC.
1745 McCandless Drive
Milpitas, CA 95035-8024
Fax Number: (408) 945-6312
By: /s/ J. BRADFORD BISHOP
-----------------------------
J. Bradford Bishop
Chairman and Chief Executive Officer
ACCEPTED AND AGREED:
HOLDER
CASCADE MICROWAVE
INVESTMENTS, LLC
By: /s/ RICHARD D. AKERMAN
-------------------------------
Name: Richard D. Akerman
Title:
5
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of EIP Microwave, Inc (the "Company") of our report dated
December 18, 1998, relating to the consolidated financial statements of the
Company and subsidiary appearing in the Company's Annual Report on Form 10-KSB
for the year ended September 30, 1998. Our report contains an explanatory
paragraph regarding the Company's ability to continue as a going concern.
/s/ BDO Seidman, LLP
BDO Seidman, LLP
San Jose, California
January 12, 1999
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference in the Registration
Statement on Form S-8 of EIP Microwave, Inc. (the "Company") of our report dated
November 20, 1997, relating to the financial statements of the Company and
subsidiary appearing in the Company's Annual Report on Form 10-KSB for the year
ended September 30, 1998. Our report contains an explanatory paragraph
regarding the Company's ability to continue as a going concern.
/s/ Meredith, Cardozo, Lanz and Chiu LLP
Meredith, Cardozo, Lanz and Chiu LLP
San Jose, California
January 12, 1999
<TABLE> <S> <C>
<PAGE>
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<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> SEP-30-1998
<PERIOD-START> OCT-01-1997
<PERIOD-END> SEP-30-1998
<CASH> 67
<SECURITIES> 5
<RECEIVABLES> 663
<ALLOWANCES> 0
<INVENTORY> 704
<CURRENT-ASSETS> 1,570
<PP&E> 950
<DEPRECIATION> 491
<TOTAL-ASSETS> 2,087
<CURRENT-LIABILITIES> 2,121
<BONDS> 0
0
0
<COMMON> 72
<OTHER-SE> 4,185
<TOTAL-LIABILITY-AND-EQUITY> 2,393
<SALES> 3,715
<TOTAL-REVENUES> 3,715
<CGS> 3,827
<TOTAL-COSTS> 3,827
<OTHER-EXPENSES> 3,798
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 271
<INCOME-PRETAX> (4,181)
<INCOME-TAX> (4,181)
<INCOME-CONTINUING> (4,181)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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