<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE
SECURITIES AND EXCHANGE ACT OF 1934.
FOR THE TRANSITION PERIOD FROM ____TO ____ .
COMMISSION FILE NUMBER: 0-10370
ANDATACO, INC.
--------------------------
formerly IPL Systems, Inc.
(Exact name of Registrant as specified in its charter)
MASSACHUSETTS 04-2511897
------------------------- ----------------
(State or jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
10140 MESA RIM RD., SAN DIEGO, CALIFORNIA 92121
(Address of principal executive offices and Zip Code)
(619) 453-9191
(Registrant's Telephone Number, including area code)
Indicate by a check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities and Exchange Act
of 1934 during the preceding 12 months (or for such shorter periods that the
Registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes [X] No [ ]
As of June 5, 1998 there were 23,819,399 shares of the Registrant's common
stock, $0.01 par value, issued and outstanding.
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ANDATACO, INC.
FORM 10-Q INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
PART I. FINANCIAL INFORMATION
Item 1.Consolidated Financial Statements*
Consolidated Balance Sheet at April 30, 1998 (unaudited)
and October 31, 1997 3
Consolidated Statement of Operations (unaudited) for the
three-month and six-month periods ended April 30, 1998 and 1997 4
Consolidated Statement of Cash Flows (unaudited) for the
six-month periods ended April 30, 1998 and 1997 5
Notes to Consolidated Financial Statements (unaudited) 6
Item 2.Management's Discussion and Analysis of Financial Condition
and Results of Operations 8
PART II. OTHER INFORMATION
Item 4.Submission of Matters to a Vote of Security Holders 13
Item 6.Exhibits and Reports on Form 8-K 13
Signatures
</TABLE>
* On April 8, 1998, the Company held its Annual Meeting of Shareholders. At the
meeting, the shareholders approved the amendment of the Company's Articles
of Organization to change the name of IPL Systems, Inc. to Andataco, Inc.
Concurrent with that change, the Company also changed the name of its wholly
owned subsidiary ANDATACO to ANDATACO of California.
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM 1: CONSOLIDATED FINANCIAL STATEMENTS
ANDATACO, INC.
CONSOLIDATED BALANCE SHEET
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1998 1997
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash $ 20,000 $ 41,000
Accounts receivable, net 10,695,000 10,846,000
Inventories 6,247,000 7,458,000
Other current assets 452,000 353,000
------------ ------------
Total current assets 17,414,000 18,698,000
Goodwill, net 6,829,000 7,665,000
Equipment and improvements, net 3,804,000 3,599,000
Other assets 51,000 27,000
------------ ------------
$ 28,098,000 $ 29,989,000
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $ 6,857,000 $ 7,660,000
Accrued expenses 3,592,000 4,202,000
Deferred revenue 2,220,000 1,554,000
Current portion of note payable -- 113,000
------------ ------------
Total current liabilities 12,669,000 13,529,000
------------ ------------
Long-term liabilities:
Bank line of credit 6,106,000 6,500,000
Note payable, less current portion -- 28,000
Shareholder loan 5,196,000 5,196,000
------------ ------------
Total long-term liabilities 11,302,000 11,724,000
------------ ------------
Shareholders' equity:
Common stock 238,000 238,000
Additional paid in capital 10,107,000 10,107,000
Accumulated deficit (6,218,000) (5,609,000)
------------ ------------
Total shareholders' equity 4,127,000 4,736,000
------------ ------------
$ 28,098,000 $ 29,989,000
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
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ANDATACO, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(Unaudited)
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<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
----------------------------------- -----------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales $ 20,996,000 $ 21,540,000 $ 42,756,000 $ 47,037,000
Cost of sales 14,325,000 16,953,000 29,300,000 36,458,000
------------ ------------ ------------ ------------
Gross profit 6,671,000 4,587,000 13,456,000 10,579,000
------------ ------------ ------------ ------------
Operating expenses:
Selling, general and
administrative 6,037,000 4,459,000 12,438,000 9,669,000
Rent expense to shareholder 83,000 83,000 166,000 166,000
Research and development 473,000 150,000 914,000 614,000
------------ ------------ ------------ ------------
Total operating expenses 6,593,000 4,692,000 13,518,000 10,449,000
------------ ------------ ------------ ------------
Income (loss) from operations 78,000 (105,000) (62,000) 130,000
Interest expense 139,000 111,000 288,000 345,000
Interest expense to shareholder 117,000 117,000 234,000 228,000
------------ ------------ ------------ ------------
Loss before income
tax provision (178,000) (333,000) (584,000) (443,000)
Income tax provision 11,000 6,000 25,000 6,000
------------ ------------ ------------ ------------
Net loss $ (189,000) $ (339,000) $ (609,000) $ (449,000)
============ ============ ============ ============
Loss per share:
Basic $ (0.01) $ (0.02) $ (0.03) $ (0.03)
============ ============ ============ ============
Diluted $ (0.01) $ (0.02) $ (0.03) $ (0.03)
============ ============ ============ ============
Shares used in computing
net loss per share:
Basic 23,819,399 18,078,381 23,819,399 18,078,381
============ ============ ============ ============
Diluted 23,819,399 18,078,381 23,819,399 18,078,381
============ ============ ============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
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ANDATACO, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(Unaudited)
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<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
----------------------------------
1998 1997
------------ ------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (609,000) $ (449,000)
Adjustments to reconcile net loss to cash
provided by (used in) operating
activities:
Depreciation and amortization 769,000 300,000
Amortization of goodwill 836,000 --
Changes in assets and liabilities:
Accounts receivable 151,000 161,000
Inventories 913,000 374,000
Other assets (123,000) (192,000)
Accounts payable (803,000) (1,136,000)
Accrued expenses (610,000) 704,000
Deferred revenue 666,000 101,000
------------ ------------
Net cash provided by (used in) operating activities 1,190,000 (137,000)
------------ ------------
Cash flows from investing activities:
Payments for purchases of property and equipment (676,000) (301,000)
------------ ------------
Net cash used in investing activities (676,000) (301,000)
------------ ------------
Cash flows from financing activities:
Payments under bank line of credit agreement, net (394,000) (53,000)
Proceeds from shareholder loan -- 269,000
Payments on note payable (141,000) (108,000)
------------ ------------
Net cash (used in) provided by financing activities (535,000) 108,000
------------ ------------
Net change in cash (21,000) (330,000)
Cash at beginning of period 41,000 765,000
------------ ------------
Cash at end of period $ 20,000 $ 435,000
============ ============
</TABLE>
See notes to unaudited consolidated financial statements.
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ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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NOTE 1 - BASIS OF PRESENTATION
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
reported amounts of revenue and expenses during the reporting period. Actual
results could differ from those estimates.
The accompanying unaudited consolidated financial statements of ANDATACO, Inc.
("ADT" or the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission regarding interim
financial reporting. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements and should be read in conjunction with the Consolidated
Financial Statements and notes thereto included in the Company's annual report
on Form 10-K for the year ended October 31, 1997. In the opinion of management,
the accompanying unaudited consolidated financial statements contain all
adjustments, consisting of only normal recurring items, necessary for a fair
presentation of the Company's financial position as of April 30, 1998 and its
results of operations for the three-month and six-month periods ended April 30,
1998 and 1997. The interim financial information contained herein is not
necessarily indicative of the results to be expected for any other interim
period or the full fiscal year ending October 31, 1998.
NOTE 2- BUSINESS COMBINATION
On June 3, 1997 (the "Closing Date"), ADT (formerly IPL Systems, Inc.) completed
a business combination with ANDATACO of California (formerly ANDATACO), whereby
ANDATACO of California was merged with a wholly-owned subsidiary of ADT (the
"Merger"). Under the terms of the merger agreement, the shareholders of ANDATACO
of California were issued a total of 18,078,381 shares of ADT Class A Common
Stock in exchange for all outstanding shares of capital stock of ANDATACO of
California. Although as a legal matter the Merger resulted in ANDATACO of
California becoming a wholly-owned subsidiary of ADT, for financial reporting
purposes the Merger was treated as a recapitalization of ANDATACO of California
and an acquisition of ADT by ANDATACO of California (reverse acquisition). The
financial reporting requirements of the Securities and Exchange Commission
require that the financial statements reported by ADT subsequent to the Merger
be those of ANDATACO of California, which include the results of operations of
ADT from the Closing Date.
The acquisition of ADT by ANDATACO of California was accounted for using the
purchase method. Accordingly, the purchase price was allocated to the estimated
fair market value of identifiable tangible and intangible assets acquired and
liabilities assumed. Based upon an independent valuation, the Company allocated
$2,400,000 to acquired in-process research and development for which there is no
future alternative use and $400,000 to existing proprietary technology for which
technological feasibility had been established. As required by generally
accepted accounting principles, the amount allocated to in-process research and
development was recorded as a one-time charge to operations and the amount
allocated to existing technology was amortized over its estimated useful life.
The excess of the purchase price over the identifiable net assets acquired of
$8,362,000 was recorded as goodwill and is being amortized on a straight-line
basis over its estimated useful life of five years.
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<PAGE> 7
ANDATACO, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3 - NET LOSS PER SHARE
The Company has adopted Statement of Financial Accounting Standard (FAS) No.128,
"Earnings Per Share." Basic earnings per share ("EPS") is calculated by dividing
the income available to common shareholders by the weighted average number of
common shares outstanding for the period, without consideration for common stock
equivalents. Diluted EPS is computed by dividing the income available to common
shareholders by the weighted average number of common shares outstanding for the
period in addition to the weighted average number of common stock equivalents
outstanding for the period. Net income remains the same for the calculations of
basic EPS and diluted EPS. The denominator for the diluted EPS calculation
differs from that of basic EPS by the number of common stock equivalents
outstanding for each period. The Company has restated EPS for prior periods
concurrent with the adoption of FAS 128. The number of shares of the Company's
common stock outstanding immediately before the Merger has been treated as
issued at the Merger date. Shares issuable upon exercise of outstanding stock
options have been excluded from the diluted EPS computation as their effect
would be antidilutive.
NOTE 4 - INVENTORIES
<TABLE>
<CAPTION>
APRIL 30, OCTOBER 31,
1998 1997
------------ ------------
(Unaudited)
<S> <C> <C>
Inventories are comprised of the following:
Purchased components $ 4,864,000 $ 5,541,000
Work in progress 288,000 125,000
Finished goods 1,095,000 1,792,000
------------ ------------
$ 6,247,000 $ 7,458,000
============ ============
</TABLE>
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<PAGE> 8
ITEM 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following discussion should be read in conjunction with the unaudited
consolidated financial statements included elsewhere within this quarterly
report. Fluctuations in annual and quarterly results may occur as a result of
factors affecting demand for the Company's products such as the timing of the
Company's and competitors' new product introductions and upgrades. Due to such
fluctuations, historical results and percentage relationships are not
necessarily indicative of the operating results for any future period.
The discussion contained in this report may contain forward-looking statements
based on the current expectations of the Company's management. Such statements
are subject to certain risks and uncertainties that could cause actual results
to differ materially from those projected. Factors that could cause or
contribute to such differences include, but are not limited to, fluctuations in
the Company's operating results, continued new product introductions by the
Company, market acceptance of the Company's new product introductions, new
product introductions by competitors, technological changes in the computer
storage industry and other factors referred to herein including, but not limited
to, the factors discussed below and in the Company's Form 10-K. Readers are
cautioned not to place undue reliance on these forward-looking statements which
speak only as of the date hereof. The Company undertakes no obligation to
publicly release the result of any revisions to these forward-looking statements
which may be made to reflect events or circumstances occurring after the date
hereof or to reflect the occurrence of unanticipated events.
OVERVIEW
ADT designs, manufactures, and distributes storage solutions based on its
Application-Specific Architecture ("ASA") for Windows NT and UNIX environments.
The Company develops products to meet the individual performance and
availability profiles of storage-intensive applications in its target markets.
The Company's open-architecture solutions include Redundant Array of Independent
Disks ("RAID") and RAID-ready disk arrays; tape backup and restore products; and
web storage management and other storage management utilities, remote mirroring
and disaster recovery software. These products support multiple server
platforms, including Sun Microsystems, Hewlett-Packard, Silicon Graphics, Inc.
and various NT systems. The Company distributes internally developed products,
as well as products from other manufacturers through direct, indirect and
original equipment manufacturer ("OEM") sales and service channels throughout
the world. The Company backs its products with maintenance and technical
support. In addition it provides customized consulting services programs.
The GigaRAID Series is a family of RAID and RAID-ready disk and tape storage
systems that are combined with the Company's proprietary, award-winning modular
packaging architecture, Enterprise Storage Packaging ("ESP"), to create complete
storage solutions. The GigaRAID/HA provides high performance and availability
for OLTP/Database applications characterized by small block/random data
processing. The GigaRAID/FT is fully-redundant and configurable for either large
block, sequential applications such as video, data-warehousing, and seismic
analysis, or small block, random applications such as OLTP/Database, financial,
and technology development. Late in the second quarter of fiscal 1998 the
Company introduced the GigaRAID/FC fibre channel products. The new GigaRAID/FC
Series offers high availability, performance and capacity within server-based
enterprise network environments, including high performing SCSI and Fibre
products for the gas exploration, technology development, video,data warehouse
and OLTP/Database environments. Other GigaRAID Series products,including the
GigaRAID/SX, offer high performance and availability for certain data warehouse,
seismic processing and video applications characterized by large block,
sequential processing.
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<PAGE> 9
Historically, the reseller business or the sale of third party mass storage
products accounted for the majority of the Company's revenues, representing 100%
of revenues in fiscal 1995 and declining to 37.2% and 34.6% in fiscal 1996 and
1997, respectively. Although the Company plans to continue to sell third party
products, management's strategy is to focus increased resources on the design,
development, manufacturing and marketing of GigaRAID products. For the six
months ended April 30, 1998 and 1997, revenue from sales of GigaRAID products
represented 57.9% and 39.7% of total revenue, respectively.
RESULTS OF OPERATIONS
The following table sets forth items in the Company's statement of operations as
a percentage of net sales for the periods presented. The data has been derived
from the unaudited condensed consolidated financial statements.
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
April 30, April 30,
----------------------------- -----------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 68.2 78.7 68.5 77.5
------------ ------------ ------------ ------------
Gross profit 31.8 21.3 31.5 22.5
Operating expenses:
Selling, general and administrative 28.8 20.7 29.1 20.6
Rent expense to shareholder 0.4 0.4 0.4 0.4
Research and development 2.3 0.7 2.1 1.3
------------ ------------ ------------ ------------
Total operating expenses 31.5 21.8 31.6 22.3
------------ ------------ ------------ ------------
Income (loss) from operations 0.3 (0.5) (0.1) 0.2
Interest expense 1.2 1.1 1.2 1.2
------------ ------------ ------------ ------------
Loss before income tax provision (0.9) (1.6) (1.3) (1.0)
Provision for income taxes 0.1 -- 0.1 -_
------------ ------------ ------------ ------------
Net loss (1.0)% (1.6)% (1.4)% (1.0)%
============ ============ ============ ============
</TABLE>
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<PAGE> 10
Results of Operations - Second Quarter of Fiscal 1998 compared to Second Quarter
of Fiscal 1997
Sales. Sales for the three months ended April 30, 1998 were $20,996,000, a
decrease of 2.5% from sales of $21,540,000 for the same period in the prior
year. The decrease was primarily attributable to a decrease in sales of older
mass storage products including RAID Liteand RAPID-Tape, as well as lower sales
in the GigaRAID 8000/3000 series of JBOD Disk and JBOT Tape. Mass storage
product sales were $1,116,000 in the second quarter of fiscal 1998 compared to
$6,675,000 in the second quarter of fiscal 1997. This decrease was partially
offset by an increase in newer GigaRAID product sales including GigaRAID FT and
GigaRAID FC. Sales of newer GigaRAID products were $12,229,000 in the second
quarter of fiscal 1998 compared to $7,835,000 in the second quarter of fiscal
1997. The decrease in older mass storage product sales is in line with the
Company's strategy to focus increased resources on newer GigaRAID products which
produce higher margins. This is consistent with the Company's transition towards
"owned solutions" - strategic technologies designed in-house to create
technical, time-to-market and gross margin advantages. By combining internal
technology with selected products manufactured by its distribution and
development partners, the Company provides a strong, sophisticated product line
targeted to fast-growing segments of the open systems storage market.
Gross Profit. Notwithstanding the decline in sales, gross profit in the second
quarter of fiscal year 1998 was $6,671,000, representing approximately 31.8% of
revenues, compared to $4,587,000 in the second quarter of fiscal 1997,
representing approximately 21.3% of sales. The increase in gross profit
percentage was due primarily to the shift in product mix from quarter to
quarter. The Company's newer GigaRAID product family sales accounted for 58.2%
of revenues for the second quarter of fiscal 1998 as compared to 36.4% of
revenues in the second quarter of fiscal 1997. The Company's GigaRAID product
family has a higher average gross margin as compared to mass storage and other
third party products. In addition, there was a reduction in costs of components
used to manufacture products in the second quarter of fiscal 1998 compared to
the second quarter of fiscal 1997.
Selling, General and Administrative. Selling, general and administrative
("SG&A") expenses consist primarily of the salaries, commissions and benefits of
sales, marketing and customer support personnel and administrative and corporate
services personnel, as well as consulting, advertising, promotion, and certain
Merger related expenses (i.e., goodwill amortization). SG&A expenses were
$6,037,000 and $4,459,000 for the three months ended April 30, 1998 and 1997,
respectively. The increase in the current period's SG&A expenses over such
expenses incurred in the comparable period of the prior fiscal year primarily
represents the addition of sales executives and technical service, marketing and
management personnel intended to increase sales of the Company's products in all
channels. In addition, the increase in SG&A expenses was due to $418,000 of
goodwill amortization resulting from the Merger and an increase in depreciation
expense of approximately $207,000 related to the addition of fixed assets from
the Merger.
Research and Development. Research and development expenses consist primarily of
salaries, employee benefits, overhead and outside contractors. Such expenses
were $473,000 and $150,000 for the quarters ended April 30, 1998 and 1997,
respectively. The level of research and development expenses is in line with the
Company's strategy to continue to focus increased resources on design and
development of in-house products and differentiating technologies for which it
believes there is a need in the market. However, there can be no assurance that
product development programs invested in by the Company will be successful or
that products resulting from such programs will achieve market acceptance.
Interest Expense. The increase in interest expense of $28,000 or 25.2%, in the
second quarter of fiscal 1998 over the comparable period in fiscal 1997 is
primarily due to an increase in the outstanding portion of the Company's bank
line of credit.
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<PAGE> 11
Results of Operations - First Six Months of Fiscal 1998 compared to First Six
Months of Fiscal 1997
Sales. Sales for the six months ended April 30, 1998 were $42,756,000, a
decrease of 9.1% from sales of $47,037,000 for the same period in the prior
year. The decrease was primarily attributable to a decrease in sales of older
mass storage products including RAID Lite and RAPID-Tape, as well as lower sales
in the GigaRAID 8000/3000 series of JBOD Disk and JBOT Tape. Mass storage
integrated product sales were $3,092,000 in the first six months of fiscal 1998
compared to $12,711,000 in the first six months of fiscal 1997. In addition,
third-party product sales decreased by $2,146,000 to $12,778,000 in the first
six months of fiscal 1998 compared to $14,924,000 in the first six months of
fiscal 1997. Although the Company experienced an increase in sales of GigaRAID
products of $6,088,000 over the same period in 1997, such increase was more than
offset by the decrease in the sales of older mass storage and other third-party
products. The decrease in older mass storage and third-party product sales is in
line with the Company's strategy to focus increased resources on the GigaRAID
product family which produce higher margins. This is consistent with the
Company's transition towards "owned solutions" - strategic technologies designed
in-house to create technical, time-to-market and gross margin advantages. By
combining internal technology with selected products manufactured by its
distribution and development partners, the Company provides a strong,
sophisticated product line targeted to fast-growing segments of the open systems
storage market.
Gross Profit. Notwithstanding the decline in sales, gross profit for the first
six months of fiscal year 1998 was $13,456,000, representing approximately 31.5%
of revenues, compared to $10,579,000 in the first six months of fiscal 1997,
representing approximately 22.5% of sales. The increase in gross profit
percentage was due primarily to the shift in product mix from period to period.
The Company's GigaRAID product family sales accounted for 57.9% of revenues for
the first six months of fiscal 1998 as compared to 39.7% of revenues in the
first six months of fiscal 1997. The Company's GigaRAID product family has a
higher average gross margin as compared to older mass storage and other third
party products. In addition, there was a reduction in costs of components used
to manufacture products in the first six months of fiscal 1998 compared to the
comparable period in fiscal 1997.
Selling, General and Administrative. SG&A expenses were $12,438,000 and
$9,669,000 for the six months ended April 30, 1998 and 1997, respectively. The
increase in the current period's SG&A expenses over such expenses incurred in
the comparable period of the prior fiscal year primarily represents the addition
of key sales executives and technical service, marketing and and management
personnel intended to increase sales of the Company's products in all channels.
In addition, the increase in SG&A was due to $836,000 of goodwill amortization
resulting from the Merger and an increase in depreciation expense of
approximately $409,000 related to the addition of fixed assets from the Merger.
Research and Development. Research and development expenses were $914,000 and
$614,000 for the first six months ended April 30, 1998 and 1997, respectively.
The level of research and development expenses is in line with the Company's
strategy to continue to focus increased resources on design and development of
in-house products and differentiating technologies for which it believes there
is a need in the market. However, there can be no assurance that product
development programs invested in by the Company will be successful or that
products resulting from such programs will achieve market acceptance.
Interest Expense. The decrease in interest expense of $51,000 or 8.9%, in the
first six months of fiscal 1998 over the comparable period in fiscal 1997 is
primarily due to the reduction in the outstanding portion of the Company's bank
line of credit.
LIQUIDITY AND CAPITAL RESOURCES
During the first six months of fiscal 1998, the Company generated $1,190,000 of
cash from operating activities. Included in this net change was a decrease of
$913,000 in inventories, and a reduction in trade accounts receivable of
$151,000, partially offset by a reduction in accounts payable of $803,000.
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<PAGE> 12
Offsetting cash generated from operations was the reduction in the outstanding
portion of the Company's bank line of credit of $394,000 and payments for
purchases of capital equipment of $676,000.
On April 30, 1998, the Company replaced its existing credit facility with a new
facility with a new financial institution. The new credit facility permits the
Company to borrow the lesser of $15,000,000 or a percentage of eligible accounts
receivable and inventory ($9,755,000 available at April 30, 1998). As of April
30, 1998, the Company had $6,106,000 outstanding under this credit line. The
credit facility expires on April 30, 2001; consequently borrowings under this
line have been classified as long term.
The shareholder loan from the president and principal shareholder is unsecured,
due in June 2004, with interest payable monthly at 9 percent per annum. This
loan is subordinate to the bank line of credit.
The Company is currently satisfying all working capital and capital expenditure
requirements through internally generated cash flows from operations and
borrowings available on its credit facility. Management believes that its
financial position and available borrowings on its credit facility will be
sufficient to meet the operating requirements of its business for a period of at
least twelve months.
INCOME TAXES
Prior to the consummation of the Merger, ANDATACO of California elected to be
taxed under Subchapter S of the Internal Revenue Code of 1986, as amended, and
consequently all federal income taxes and most state taxes were paid directly by
its shareholders.
Concurrent with the Merger, ANDATACO of California changed its taxpayer status
from a Subchapter S Corporation to a Subchapter C Corporation. Effective with
that change, the Company transferred the amount of its accumulated deficit at
that date to additional paid in capital. Therefore, the Company's accumulated
deficit at April 30, 1998 includes losses solely incurred by the Company since
the Merger.
Because of the change in taxpayer status to a Subchapter C Corporation, the
Company is subject to federal and state income taxes. The tax provision is
calculated giving effect to the change of ANDATACO of California from a
Subchapter S Corporation to a Subchapter C Corporation, and the resultant
adjustments for federal and state income taxes, as if ANDATACO of California had
been taxed as a C Corporation rather than an S Corporation since inception. The
Company has recorded deferred tax assets and liabilities due to its change in
taxpayer status to a Subchapter C Corporation. The Company has recorded a
valuation allowance in full for deferred tax assets which, more likely than not,
will not be realized based on recent operating results.
The income tax provision recorded for the six-month period ended April 30, 1998
represents minimum state taxes for the period. No income tax provision or
benefit was recorded for the six-month period ended April 30, 1998 due to net
loss incurred during this period, which loss has not resulted in the recording
of an income tax benefit due to a full valuation allowance also being recorded.
No pro forma calculation of income tax is presented because as a Subchapter C
Corporation the Company would not have been liable for income taxes due to
losses sustained, which losses have not resulted in the recording of an income
tax benefit due to a full valuation allowance also being recorded.
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<PAGE> 13
PART II - OTHER INFORMATION
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On April 8, 1998, the Company held its Annual Meeting of Shareholders. At the
meeting, the shareholders approved management's slate of directors and all four
additional proposals with the following vote distribution:
<TABLE>
<CAPTION>
Broker
Item Affirmative Negative Withheld Non-Vote
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Election of Board of Directors
Harris Ravine 22,580,685 -- 59,511 --
W. David Sykes 22,580,685 -- 59,511 --
Cornelius McMullan 22,584,735 -- 55,461 --
Melville Straus 22,584,335 -- 55,861 --
Other Matters
1)Amend the Company's Articles
of Organization to change name
of Company to Andataco, Inc. 22,542,271 63,825 34,100 1,179,203
2)Amend the bylaws to set the
number of authorized shares
at 40,000,000 22,424,659 184,747 30,790 1,179,203
3)Increase the number of shares
issuable under the Company's
1997 Equity Incentive Plan 19,372,103 188,998 41,930 4,216,368
4)Reappoint Price Waterhouse LLP
as independent auditors for fiscal
year 1998 22,587,331 34,700 18,165 1,179,203
</TABLE>
ITEM 6: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.1 Loan Agreement dated as of April 30, 1998 between Wells Fargo
Bank and the Company.
11.1 Computation of Loss per Common Share
27.1 Financial Data Schedule
(b) Reports on Form 8-K
None
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<PAGE> 14
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Andataco, Inc.
Date: June 15, 1998 By:/s/ Harris Ravine
-------------------------------
Harris Ravine
Chief Executive Officer
(on behalf of registrant and as
its principal executive officer)
Date: June 15, 1998 By:/s/ Richard A. Hudzik
-------------------------------
Richard A. Hudzik
Vice President of Finance and
Chief Financial Officer
(on behalf of registrant and as
its principal financial officer)
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<PAGE> 1
Exhibit 10.1
LOAN AGREEMENT
--------------
(LINE OF CREDIT
L/C SUBFEATURE)
This Loan Agreement (this "Agreement") is entered into as of April
30, 1998 by and between Wells Fargo Bank, National Association ("Lender") and
anDATAco of California, Inc., a California corporation ("Borrower").
W I T N E S S E T H:
WHEREAS, Borrower has requested that Lender enter into certain
financing arrangements with Borrower pursuant to which Lender may make loans and
provide other financial accommodations to Borrower; and
WHEREAS, Lender is willing to make such loans and provide such
financial accommodations on the terms and conditions set forth herein;
NOW, THEREFORE, in consideration of the mutual conditions and
agreements set forth herein, and for other good and valuable consideration, the
receipt and sufficiency of which is hereby acknowledged, the parties hereto
agree as follows:
SECTION 1. DEFINITIONS
All terms used herein which are defined in Article 1 or Article 9 of
the Uniform Commercial Code shall have the meanings given therein unless
otherwise defined in this Agreement. Any accounting term used herein unless
otherwise defined or set forth in this Agreement shall have the meanings
customarily given to such term in accordance with GAAP. For purposes of this
Agreement, the following terms shall have the respective meanings given to them
below:
1.1 "Accounts" shall mean all present and future rights of Borrower
to payment of or goods sold or leased for services rendered, which are not
evidenced by instruments or chattel paper, and whether or not earned by
performance.
1.2 Intentionally omitted.
1.3 "Availability Reserves" shall mean, as of any date of
determination, such amounts as Lender may from time to time establish and
revise, in the exercise of Lender's reasonable discretion from the perspective
of a secured creditor, reducing the amount of Revolving Loans and Letters of
Credit which would otherwise be available to Borrower under the lending
formula(s) provided for herein: (a) to reflect events, conditions, contingencies
or risks which, as determined by Lender in the exercise of Lender's reasonable
discretion from the perspective of a secured creditor, do or may affect either
(i) the Collateral or its value, (ii) the assets, business or prospects of
Borrower or any Obligor, or (iii) the security interests and other rights of
Lender in the Collateral (including the enforceability, perfection and priority
thereof), or (b) to reflect Lender's good faith belief that any collateral
report or financial information furnished by or on behalf of Borrower or any
Obligor to Lender is or may have been incomplete, inaccurate or misleading in
any material respect, or (c) in respect of any state of facts which Lender
determines in good faith constitutes an Event of Default or may, with notice or
passage of time or both, constitute an Event of Default.
1.4 "Borrowing Base" shall mean the sum of:
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<PAGE> 2
(A) Eighty-five percent (85%) of the Net Amount of Eligible
Accounts; plus
(B) the lesser of (i) the sum of twenty-five percent (25%) of
the Value of Eligible Inventory, or (ii) an amount equal to
$2,500,000; less
(C) any Availability Reserves.
1.5 "Cash Collateral Account" shall have the meaning set forth in
Section 6.1 hereof.
1.6 "Change in Control" shall mean (a) any transaction or series of
related transactions in which any person or entity or two or more persons or
entities (other than Guarantor or W. David Sykes) acting in concert acquire
beneficial ownership (within the meaning of Rule 13d-3 of the Securities and
Exchange Commission under the Securities Exchange Act of 1934, as amended),
directly or indirectly, of voting stock of Borrower (or other securities
convertible into such voting stock) representing twenty-five percent (25%) or
more of the combined voting power of all voting stock of Borrower, or (b) any
event or circumstance constituting a "change in control" or other similar
occurrence under documentation evidencing or governing any indebtedness of
Borrower of $100,000 or more which results in an obligation of Borrower to
prepay, purchase, offer to purchase, redeem or defease all or a portion of such
indebtedness.
1.7 "Collateral" shall mean all the property in which Borrower or an
Obligor grants or is required to grant to Lender a security interest or lien, as
described in Section 5 hereof.
1.8 "Eligible Accounts" shall mean Accounts created by Borrower
which are and continue to be acceptable to Lender based on the criteria set
forth below. In general, Accounts shall be Eligible Accounts if:
(a) such Accounts arise from the actual and bona fide sale and
delivery of goods by Borrower or rendition of services by Borrower in the
ordinary course of Borrower's business which transactions are completed in
accordance with the terms and provisions contained in any documents related
thereto;
(b) such Accounts are not unpaid more than ninety (90) days
after the date of the original invoice thereto (other than as set forth in
Section 1.8(q) below);
(c) such Accounts comply with the terms and conditions
applicable thereto contained in the Security Agreement executed in connection
therewith;
(d) such Accounts do not arise from sales on consignment,
guaranteed sale, sale and return, sale on approval, or other terms under which
payment by the account debtor may be conditional or contingent;
(e) the chief executive office of the account debtor with
respect to such Accounts is located in the United States of America, or, at
Lender's option, if: (i) the account debtor has delivered to Borrower an
irrevocable letter of credit issued or confirmed by a bank satisfactory to
Lender, sufficient to cover such Account, in form and substance satisfactory to
Lender and, if required by Lender, the original of such letter of credit has
been delivered to Lender or Lender's agent and the issuer thereof notified of
the assignment of the proceeds of such letter of credit to Lender, or (ii) such
Account is subject to credit insurance payable to Lender issued by an insurer
and on terms and in an amount acceptable to Lender, or (iii) the account debtor
resides in a province of Canada which recognizes Lender's perfection and
enforcement rights as to Accounts by reason of the filing of a UCC-1 in the
state of Borrower's chief executive office, or (iv) such Account is otherwise
acceptable in all respects to Lender (subject to such lending formula with
respect thereto as Lender may determine);
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<PAGE> 3
(f) such Accounts do not consist of progress billings, bill and
hold invoices or retainage invoices;
(g) the account debtor with respect to such Accounts has not
asserted a counterclaim, defense or dispute and does not have any right of
setoff against such Accounts;
(h) there are no facts, events or occurrences which would impair
the validity, enforceability or collectibility of such Accounts or reduce the
amount payable or delay payment thereunder;
(i) such Accounts are subject to the first priority, valid and
perfected security interest of Lender and any goods giving rise thereto are not,
and were not at the time of the sale thereof, subject to any liens except those
permitted in this Agreement;
(j) neither the account debtor nor any officer, employee or
agent of the account debtor with respect to such Accounts is an officer,
employee or agent of or affiliated with Borrower directly or indirectly by
virtue of family membership, ownership, control, management or otherwise;
(k) the account debtors with respect to such Accounts are not
(i)(A) any foreign government (other than the following Canadian provinces:
Alberta, British Columbia, Manitoba, Ontario, Saskatchewan and Yukon Territory),
(B) the United States of America, or (C) any State or any political subdivision,
department, agency or instrumentality thereof (collectively "Local Entities" and
individually a "Local Entity") to the extent the aggregate Accounts of all such
Local Entities are greater than $250,000, provided, however, that no such
Accounts of Local Entities shall be Eligible Accounts if an Event of Default has
occurred and remains in effect, unless, (ii) if the account debtor is the United
States of America or any Local Entity, upon Lender's request, the Federal
Assignment of Claims Act of 1940, as amended, or any similar State or local law,
if applicable, has been complied with in a manner satisfactory to Lender;
(l) there are no proceedings or actions which are threatened or
pending against any account debtor with respect to such Accounts from such
account debtor which might result in any material adverse change in any such
account debtor's financial condition;
(m) such Accounts of a single account debtor or its affiliates
do not constitute more than twenty (20%) of all otherwise Eligible Accounts (but
the portion of the Accounts not in excess of such percentage may be deemed
Eligible Accounts);
(n) such Accounts are not owed by any account debtor who has
Accounts unpaid more than ninety (90) days after the date of the original
invoice therefor and which constitute more than thirty-five (35%) percent of the
total Accounts from such account debtor;
(o) such Accounts are owed by account debtors whose total
indebtedness to Borrower does not exceed the credit limit with respect to such
account debtors as determined by Lender from time to time (but the portion of
the Accounts not in excess of such credit limit may still be deemed Eligible
Accounts);
(p) such Accounts are owed by account debtors deemed
creditworthy at all times by Lender, as determined by Lender; and
(q) such Accounts arise from maintenance contracts and are not
unpaid more than thirty (30) days after the date of the original invoice
thereto, provided that such Accounts shall only remain Eligible Accounts if
Borrower provides Lender with weekly agings of such maintenance contracts
beginning 90 days from the date hereof.
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<PAGE> 4
General criteria for Eligible Accounts may be established and revised from time
to time by Lender in the exercise of Lender's reasonable discretion from the
perspective of a secured creditor. Any Accounts which are not Eligible Accounts
shall nevertheless be part of the Collateral.
1.9 "Eligible Inventory" shall mean Inventory owned by Borrower
which is and remains acceptable to Lender for lending purposes and is located at
one of the addresses set forth in Schedule I to this Agreement; provided
however, that if any such location is owned by a party other than Borrower,
Lender shall have obtained from the owner thereof an agreement relative to
Lender's rights with respect to such Inventory, in form and content satisfactory
to Lender; and provided further that in no event however shall Eligible
Inventory include: (a) work-in-process; (b) inventory subject to a security
interest or lien in favor of any person other than Lender, except those
permitted in this Agreement; and (c) inventory which is not subject to the first
priority, valid and perfected security interest of Lender. General criteria for
Eligible Inventory may be established and revised from time to time by Lender in
the exercise of Lender's reasonable discretion from the perspective of a secured
creditor. Any Inventory which is not Eligible Inventory shall nevertheless be
part of the Collateral.
1.10 "Equipment" shall mean all of Borrower's now owned and
hereafter acquired equipment, machinery, computers and computer hardware and
software (whether owned or licensed), vehicles, tools, furniture, fixtures, all
attachments, accessions and property now or hereafter affixed thereto or used in
connection therewith, and substitutions and replacements thereof, wherever
located.
1.11 "Event of Default" shall mean the occurrence or existence of
any event or condition described in Section 10.1 hereof.
1.12 "GAAP" shall mean generally accepted accounting principles in
the United States of America as in effect from time to time as set forth in the
opinions and pronouncements of the Accounting Principles Board and the American
Institute of Certified Public Accountants and the statements and pronouncements
of the Financial Accounting Standards Boards which are applicable to the
circumstances as of the date of determination consistently applied, except that,
for purposes of Section 8.10 hereof, GAAP shall be determined on the basis of
such principles in effect on the date hereof and consistent with those used in
the preparation of the audited financial statements delivered to Lender prior to
the date hereof.
1.13 "Guarantor" shall mean Andataco, Inc., a Massachusetts
corporation, which as of the date hereof is the owner of 100% of the capital
stock of Borrower.
1.14 "Guaranty" shall have the meaning set forth in Section 2.4.
1.15 "General Intangibles" shall mean general intangibles
(including, but not limited to, tax and duty refunds, registered and
unregistered patents, trademarks, service marks, copyrights, trade names,
applications for the foregoing, trade secrets, goodwill, processes, drawings,
blueprints, customer lists, licenses, whether as licensor or licensee, choses in
action and other claims and existing and future leasehold interests in
equipment).
1.16 "Information Certificate" shall mean the Information
Certificate of Borrower constituting Exhibit A hereto containing material
information with respect to Borrower, its business and assets provided by or on
behalf of Borrower to Lender in connection with the preparation of this
Agreement and the other Loan Documents and the financing arrangements provided
for herein.
1.17 "Inventory" shall mean all of Borrower's now owned and
hereafter existing or acquired raw materials, work in process, finished goods
and all other inventory of whatsoever kind or nature, wherever located.
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<PAGE> 5
1.18 "Letters of Credit" shall mean commercial or standby letters of
credit issued by Lender from time to time under the Line of Credit.
1.19 "Letter of Credit Agreement" shall have the meaning set forth
in Section 2.2(c) hereof.
1.20 "Letter of Credit Obligations" shall mean at any time, the
aggregate amount available to be drawn, plus amounts drawn and not yet
reimbursed, under Letters of Credit.
1.21 "Line of Credit" shall mean a revolving line of credit under
which Lender agrees to make Revolving Loans and issue Letters of Credit, subject
to the terms and conditions of this Agreement.
1.22 "Line of Credit Note" shall have the meaning set forth in
Section 2.1 hereof.
1.23 "Loan Documents" shall mean, collectively, this Agreement and
all notes, guarantees (including the Guaranty), security agreements,
subordination agreements, and other agreements, documents and instruments now or
at any time hereafter executed and/or delivered by Borrower or any Obligor in
connection with this Agreement, as the same now exist or may hereafter be
amended, modified, supplemented, extended, renewed, restated or replaced.
1.24 "Maximum Amount" shall mean the amount of $15,000,000.
1.25 "Net Amount of Eligible Accounts" shall mean the gross amount
of Eligible Accounts less (a) sales, excise or similar taxes included in the
amount thereof and (b) returns, discounts, claims, credits and allowances of any
nature at any time issued, owing, granted, outstanding, available or claimed
with respect thereto.
1.26 "Obligor" shall mean any guarantor (including the Guarantor),
endorser, acceptor, surety or other person liable on or with respect to the Line
of Credit or who is the owner of any property which is security for the Line of
Credit, or any of them, other than Borrower.
1.27 "Permitted Liens" means:
(a) liens for unpaid taxes, fees, assessments or other
governmental charges or levies which are not yet delinquent or for which
adequate reserves have been set aside and are being contested in good faith by
appropriate proceedings and have not proceeded to judgment, provided that, by
reason of nonpayment of the obligations secured by such liens, no property of
Borrower is subject to risk of loss or forfeiture;
(b) liens and security interests (i) upon or in any equipment
acquired or held by Borrower to secure the purchase price of such equipment or
indebtedness incurred solely for the purpose of financing the acquisition of
such equipment and in an amount not greater than the purchase price thereof or
(ii) existing on such equipment at the time of its acquisition, provided that in
any such event (A) the lien and security interest is confined solely to the
property so acquired and improvements thereon, and the proceeds of such
equipment, and (B) the aggregate amount of indebtedness secured by such liens
and security interests does not exceed at any time outstanding $100,000;
(c) liens consisting of leases or subleases and licenses and
sublicenses of real property granted to others in the ordinary course of
Borrower's business not interfering in any material respect with the business of
Borrower and any interest or title of a lessor or licensor under any such lease
or license, as applicable;
-5-
<PAGE> 6
(d) liens securing claims or demands of materialmen, mechanics,
carriers, warehousemen, landlords and other like persons or entities that arise
by operation of law, provided that the payment thereof is not yet required;
(e) liens incurred or deposits made in the ordinary course of
Borrower's business in connection with worker's compensation, unemployment
insurance, social security and similar legislation;
(f) easements, reservations, rights-of-way, restrictions, minor
defects or irregularities in title and other similar charges or encumbrances
affecting real property not interfering in any material respect with the
ordinary conduct of Borrower's business;
(g) any interest or title of a lessor in equipment subject to
any capital lease permitted under Section 8.10(b) hereof; and
(h) any liens arising from the filing of any financing
statements relating to true leases permitted under Section 9.9 hereof.
1.28 "Records" shall mean all of Borrower's present and future books
of account of every kind or nature, purchase and sale agreements, invoices,
ledger cards, bills of lading and other shipping evidence, statements,
correspondence, memoranda, credit files and other data relating to the
Collateral or any account debtor, together with the tapes, disks, diskettes and
other data and software storage media and devices, file cabinets or containers
in or on which the foregoing are stored (including any rights of Borrower with
respect to the foregoing maintained with or by any other person).
1.29 "Revolving Loans" shall mean advances made by Lender to
Borrower on a revolving basis under the Line of Credit, as set forth in Section
2.1 hereof.
1.30 "Rights to Payment" shall mean all Accounts, General
Intangibles, contract rights, chattel paper, documents, instruments, letters of
credit, bankers acceptances and guaranties, and all present and future liens,
security interests, rights, remedies, title and interest in, to and in respect
of Accounts and other Collateral, and shall include without limitation, (a)
rights and remedies under or relating to guaranties, contracts of suretyship,
letters of credit and credit and other insurance related to the Collateral, (b)
rights of stoppage in transit, replevin, repossession, reclamation and other
rights and remedies of an unpaid vendor, lienor or secured party, (c) goods
described in invoices, documents, contracts or instruments with respect to, or
otherwise representing or evidencing, Accounts or other Collateral, including
without limitation, returned, repossessed and reclaimed goods, and (d) deposits
by and property of account debtors or other persons securing the obligations of
account debtors, monies, securities, credit balances, deposits, deposit accounts
and other property of Borrower now or hereafter held or received by or in
transit to Lender or any of its affiliates or at any other depository or other
institution from or for the account of Borrower, whether for safekeeping,
pledge, custody, transmission, collection or otherwise.
1.31 "Tangible Net Worth" shall mean, at any time, the aggregate of
total stockholders' equity plus subordinated debt less any intangible assets.
1.32 "Value" shall mean, as determined by Lender in good faith, with
respect to Inventory, the lower of (a) cost computed on a first-in-first-out
basis in accordance with GAAP, or (b) market value.
SECTION 2. CREDIT FACILITIES
2.1 Line of Credit
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<PAGE> 7
(a) Lending Formula. Subject to and upon the terms and
conditions contained herein, Lender agrees to make Revolving Loans (pursuant to
this Section 2.1) and issue Letters of Credit (pursuant to Section 2.2 hereof)
under a line of credit (the "Line of Credit") from time to time in amounts
requested by Borrower up to an aggregate outstanding principal amount equal to
the lesser of: (i) the Maximum Amount; or (ii) the Borrowing Base.
(b) Reduction of Lending Formula. Lender may, in its reasonable
discretion from the perspective of a secured creditor, from time to time, upon
not less than five (5) days prior notice to Borrower, (i) reduce the lending
formula with respect to Eligible Accounts to the extent that Lender determines
that: (A) the dilution with respect to the Accounts for any period (based on the
ratio of (1) the aggregate amount of reductions in Accounts other than as a
result of payments in cash to (2) the aggregate amount of total sales) has
increased in any material respect or may be reasonably anticipated to increase
in any material respect above historical levels, or (B) the general
creditworthiness of account debtors has declined, or (ii) reduce the lending
formula with respect to Eligible Inventory to the extent that Lender, subsequent
to its review of the appraisal to be provided to Lender by Borrower pursuant to
Section 4.1 and the field review of Borrower's Records to be conducted by Lender
pursuant to Section 4.1, determines that: (A) the number of days of the turnover
of the Inventory for any period has changed in any material respect, or (B) the
liquidation value of the Eligible Inventory, or any category thereof, has
decreased, or (C) the nature and quality of the Inventory has deteriorated. In
determining whether to reduce the lending formula(s), Lender may consider
events, conditions, contingencies or risks which are also considered in
determining Eligible Accounts, Eligible Inventory or in establishing
Availability Reserves.
(c) Overadvance. In the event that the outstanding amount of any
component of the Revolving Loans, or the aggregate amount of the outstanding
Revolving Loans and Letter of Credit Obligations, exceed the amounts available
under the lending formulas, the sublimits for Letters of Credit set forth in
Section 2.2(b) or the Maximum Amount, as applicable, such event shall not limit,
waive or otherwise affect any rights of Lender in that circumstance or on any
future occasions and Borrower shall, upon demand by Lender, which may be made at
any time or from time to time, immediately repay to Lender the entire amount of
any such excess(es) for which payment is demanded.
(d) Line of Credit Note. Borrower's obligation to repay
Revolving Loans made under the Line of Credit shall be evidenced by a promissory
note executed by Borrower, substantially in the form of Exhibit B hereto.
2.2 Letters of Credit.
(a) Issuance. Subject to, and upon the terms and conditions
contained herein, at the request of Borrower, Lender agrees from time to time
during the term of this Agreement to issue Letters of Credit for the account of
Borrower containing terms and conditions acceptable to Lender, provided however
that no Letter of Credit shall have an expiration date beyond the maturity date
of the Line of Credit set forth in Section 11.1 hereof.
(b) Letter of Credit Sublimits. No Letters of Credit shall be
issued unless, on the date of the proposed issuance of any Letter of Credit, the
Revolving Loans available to Borrower (subject to the Maximum Amount and
Availability Reserves) are equal to 100% of the face amount of such Letters of
Credit. Except in Lender's discretion, the amount of all Letter of Credit
Obligations shall not at any time exceed $500,000.
(c) Letter of Credit Agreement. Each Letter of Credit shall be
subject to the additional terms and conditions of the Letter of Credit Agreement
and related documents, if any, required by Lender in connection with the
issuance thereof (each, a "Letter of Credit Agreement"). Each draft paid by
Lender under a Letter of Credit shall be deemed a Revolving Loan under the Line
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<PAGE> 8
of Credit and shall be repaid by Borrower in accordance with the terms and
conditions of this Agreement applicable to such Revolving Loans; provided
however, that if the Line of Credit is not available, for any reason whatsoever,
at the time any draft is paid by Lender, or if Revolving Loans are not available
under the Line of Credit at such time due to any limitation on borrowings set
forth herein, then the full amount of such draft shall be immediately due and
payable, together with interest thereon, from the date such amount is paid by
Lender to the date such amount is fully repaid by Borrower, at the rate of
interest applicable to Revolving Loans. In such event, Borrower agrees that
Lender, at Lender's sole discretion, may debit Borrower's deposit account with
Lender for the amount of any such draft.
2.3 Availability Reserves. All Revolving Loans and Letters of Credit
otherwise available to Borrower pursuant to the lending formula(s) or sublimits,
and subject to the Maximum Amount and other applicable limits hereunder shall be
subject to Lender's continuing right to establish and revise Availability
Reserves.
2.4 Guaranties. All indebtedness of Borrower to Lender pursuant to
this Agreement shall be guaranteed by Guarantor in the principal amount of
Fifteen Million Dollars ($15,000,000), as evidenced by and subject to the terms
of a guaranty in form and substance satisfactory to Lender (the "Guaranty").
2.5 Subordination of Debt. All obligations of Borrower to W. David
Sykes shall be subordinated in right of repayment to all obligations of Borrower
to Lender, as evidenced by and subject to the terms of a subordination agreement
in form and substance satisfactory to Lender.
SECTION 3. INTEREST AND FEES
3.1 Interest. The outstanding principal balance of Revolving Loans
shall bear interest at the rate(s) set forth in the Line of Credit Note.
3.2 Letter of Credit Fees. Borrower shall pay to Lender fees upon
the issuance or amendment of each Letter of Credit and upon the payment by
Lender of each draft under any Letter of Credit determined in accordance with
Lender's Commercial Finance Division's standard fees and charges in effect at
the time any Letter of Credit is issued or amended or any draft is paid. In
addition, Borrower shall pay to Lender a fee equal to 2.00% per annum on the
average daily amount available to be drawn during each month under outstanding
Letters of Credit, which fee shall be due and payable in arrears on the first
(1st) day of each month.
3.3 Unused Line Fee. Borrower shall pay to Lender monthly an unused
line fee for the Line of Credit equal to a rate per annum of one quarter of one
percent (.25%) of the average unused portion of the Line of Credit during the
immediately preceding month (or part thereof) while this Agreement is in effect
and for so long thereafter as any of the Revolving Loans or Letter of Credit
Obligations are outstanding, which fee shall be payable on the first day of each
month in arrears.
3.4 Computation and Payment. Interest (and fees computed on a per
annum basis) shall be computed on the basis of a 360-day year, actual days
elapsed. Interest shall be payable at times and places set forth in the Line of
Credit Note.
SECTION 4. CONDITIONS PRECEDENT
4.1. Initial Credit. The obligation of Lender to extend the initial
credit contemplated by this Agreement is subject to the fulfillment to Lender's
satisfaction of all of the following conditions:
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<PAGE> 9
(a) Approval of Lender Counsel. All legal matters incidental to
the extension of credit by Lender shall be satisfactory to counsel of Lender.
(b) Documentation. Lender shall have received, in form and
substance satisfactory to Lender, each of the following, duly executed:
(i) This Agreement
(ii) The Line of Credit Note
(iii) The Letter of Credit Agreement
(iv) UCC-1 Financing Statement(s)
(v) Security Agreement(s)
(vi) Lock Box Agreement
(vii) The Guaranty
(viii) The subordination agreement required by Section 2.5
hereof.
(ix) With respect to each of Borrower and Guarantor, such
documentation as Lender may reasonably require to
establish the due organization, valid existence and
good standing of such party, its qualification to
engage in business in each jurisdiction in which it
is engaged in business or required to be so
qualified, its authority to execute, deliver and
perform any Loan Document to which it is a party, the
identity, authority and capacity of each responsible
official thereof authorized to act on its behalf,
including without limitation, copies of its articles
of incorporation and amendments thereto certified by
the Secretary of State (or the equivalent) of its
jurisdiction of formation, bylaws and amendments
thereto certified by a responsible official of such
party, certificates of good standing and/or
qualification to engage in business, certified copies
of corporate resolutions, incumbency certificates,
and the like; and
(x) Such other documents as Lender may require under any
other Section of this Agreement.
(c) Financial Condition. Since the consolidated financial
statement of Guarantor and its subsidiaries dated January 31, 1998 heretofore
delivered by Borrower to Lender, there shall have been no material adverse
change, as determined by Lender, in the financial condition, operation or
business of Borrower, nor any material decline, as determined by Lender, in the
market value of any collateral required hereunder or a substantial or material
portion of the assets of Borrower.
(d) Insurance. Borrower shall have delivered to Lender evidence
of insurance coverage on all Borrower's property, in form, substance, amounts,
covering risks and issued by companies satisfactory to Lender, and where
required by Lender, with loss payable endorsements in favor of Lender.
(e) Appraisal. Lender shall have obtained, at Borrower's cost,
an appraisal of all Inventory, issued by an appraiser acceptable to Lender and
in form, substance and reflecting values satisfactory to Lender, in its
discretion.
(f) Security Interests. Lender shall have received evidence, in
form and substance satisfactory to Lender, that Lender has valid perfected and
first priority security interests in and liens upon the Collateral and any other
property which is intended to be security for the Line of Credit or the
liability of any Obligor in respect thereof, subject only to the security
interests and liens permitted herein or in the other Loan Documents.
(g) Field Review. Lender shall have completed a field review of
the Records and such other information with respect to the Collateral as Lender
may require to determine the amount of Revolving Loans available to Borrower,
the results of which shall be satisfactory to Lender.
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<PAGE> 10
(h) Other Documents. Lender shall have received, in form and
substance satisfactory to Lender, all consents, waivers, acknowledgments and
other agreements from third persons which Lender may deem necessary or desirable
in order to permit, protect and perfect its security interests in and liens upon
the Collateral or to effectuate the provisions or purposes of this Agreement and
the other Loan Documents, including without limitation, acknowledgments by
lessors, mortgagees and warehousemen of Lender's security interests in the
Collateral, waivers by such persons of any security interests, liens or other
claims by such persons to the Collateral and agreements permitting Lender access
to, and the right to remain on, the premises to exercise its rights and remedies
and otherwise deal with the Collateral.
(i) Opinion. Lender shall have received, in form and substance
satisfactory to Lender, such opinion letters of counsel to Borrower with respect
to the Loan Documents and such other matters as Lender may reasonably request.
(j) Accounts. Borrower shall have opened bank accounts with
Lender of a type mutually acceptable to Borrower and Lender including, without
limitation, the Cash Collateral Account.
(k) Availability. Borrower shall have a minimum of $750,000 of
availability for Revolving Loans in addition to the amount paid or to be paid to
Borrower's prior lender to retire Borrower's line of credit with such prior
lender and bringing all other obligations to a current status satisfactory to
Lender.
(l) Prior Credit Facilities. Borrower shall have provided Lender
written evidence that Borrower's prior credit facilities with Imperial Bank have
been or will be concurrently terminated and that all security interests and
liens securing such credit facilities, if any, have been or will be concurrently
terminated.
(m) Date of Initial Extension of Credit. The conditions
precedent specified in Sections 4.1(a)-(l) shall have been fulfilled to Lender's
satisfaction by May 15, 1998.
4.2. Subsequent Credit. The obligation of Lender to make the initial
and each subsequent extension of credit requested by Borrower hereunder shall be
subject to the fulfillment to Lender's satisfaction of each of the following
conditions:
(a) Compliance. The representations and warranties contained
herein and each of the other Loan Documents shall be true on and as of the date
of the signing of this Agreement and on the date of each extension of credit by
Lender pursuant hereto, with the same effect as though such representations and
warranties had been made on and as of each such date, and on each such date, (i)
no material adverse change, as determined by Lender, shall have occurred in the
financial condition, operation or business of Borrower since the audited
consolidated financial statement of Guarantor and its subsidiaries dated January
31, 1998 delivered by Borrower to Lender, and (ii) no Event of Default as
defined herein, and no condition, event or act which with the giving of notice
or the passage of time or both would constitute such an Event of Default, shall
have occurred and be continuing or shall exist or would result from such
extension of credit.
(b) Documentation. Lender shall have received all additional
documents which may be required in connection with such extension of credit.
SECTION 5. GRANT OF SECURITY INTEREST
As security for all indebtedness of Borrower to Lender pursuant to
this Agreement, Borrower grants to Lender security interests of first priority
in the following property and interests in property,
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whether now owned or hereafter acquired or existing, and wherever located: all
Rights to Payment, Inventory, Equipment and Records, and all products and
proceeds of any of the foregoing, in any form, including without limitation,
insurance proceeds and all claims against third parties for loss or damage to or
destruction of any or all of the foregoing.
All of the foregoing shall be evidenced by and subject to the terms of such
documents as Lender shall reasonably require, all in form and substance
satisfactory to Lender. Borrower shall reimburse Lender, immediately upon
demand, for all costs and expenses incurred by Lender in connection with any of
the foregoing security, including without limitation filing and recording fees
and costs of environmental studies, appraisals, audits and title insurance.
SECTION 6. COLLECTION AND ADMINISTRATION
6.1 Cash Collateral Account.
(a) Cash Collateral Account. Borrower shall, at Borrower's
expense and in the manner requested by Lender from time to time, direct that
remittances and all other collections and proceeds of Accounts and other
Collateral shall be deposited into a lock box account maintained in Lender's
name. In connection therewith, Borrower shall execute such lockbox agreement as
Lender shall require. Borrower shall maintain with Lender, and Borrower hereby
grants to Lender a security interest in, a non-interest bearing deposit account
over which Borrower shall have no control ("Cash Collateral Account") and into
which the proceeds of all Borrower's Rights to Payment shall be deposited
immediately upon their receipt other than Rights to Payment consisting of the
proceeds of equity financing transactions.
(b) Calculations/Clearance Charge. For purposes of calculating
the amount of the Revolving Loans and Letters of Credit available to Borrower,
such payments will be applied (conditional upon final collection) to the Line of
Credit on the business day of receipt by the Commercial Finance Division of
interbranch advices of deposit, if such advices are received within sufficient
time (in accordance with Lender's usual and customary practices as in effect
from time to time) to credit Borrower's loan account on such day, and if not,
then on the next business day. Lender shall be entitled to charge Borrower for
one (1) business day of "clearance" at the Prime Rate-based interest rate then
applicable to the Line of Credit on all proceeds of Rights to Payment deposited
into the Cash Collateral Account, whether or not such proceeds are applied to
reduce the outstanding principal balance of any or all the Loans. This clearance
charge is acknowledged to constitute an integral part of the pricing of the
Loans, and shall apply whether or not the amount of proceeds deposited exceeds
the outstanding principal balance of any or all of the Loans.
(c) Immediate Deposit. Borrower and all of its affiliates,
subsidiaries, shareholders, directors, employees or agents shall, acting as
trustee for Lender, receive, as the property of Lender, any monies, checks,
notes, drafts, or any other payment relating to and/or proceeds of Accounts or
other Collateral which come into their possession or under their control and
immediately upon receipt thereof, shall deposit or cause the same to be
deposited in the Cash Collateral Account, or remit the same or cause the same to
be remitted, in kind, to Lender. In no event shall the same be commingled with
Borrower's own funds.
6.2 Statements. Lender shall render to Borrower each month a
statement setting forth the balance in Borrower's loan account(s) maintained by
Lender for Borrower pursuant to the provisions of this Agreement, including
principal, interest, fees, costs and expenses. Each such statement shall be
subject to subsequent adjustment by Lender but shall, absent manifest errors or
omissions, be considered correct and deemed accepted by Borrower and
conclusively binding upon Borrower as an account stated except to the extent
that Lender receives a written notice from Borrower of any specific exceptions
of Borrower thereto within thirty (30) days after the date such statement has
been mailed by Lender. Until such time as Lender shall have rendered to Borrower
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<PAGE> 12
a written statement as provided above, the balance in Borrower's loan account(s)
shall be presumptive evidence of the amounts due and owing to Lender by
Borrower.
6.3 Payments. All amounts due under any of the Loan Documents shall
be payable to the Cash Collateral Account as provided in Section 6.1 hereof or
such other place as Lender may designate from time to time. Lender may apply
payments received or collected from Borrower or for the account of Borrower
(including, without limitation, the monetary proceeds of collections or of
realization upon any Collateral) to the Line of Credit, whether or not then due,
in such order and manner as Lender determines. At Lender's option, all
principal, interest, fees, costs, expenses and other charges provided for in
this Agreement or the other Loan Documents may be charged directly to the loan
account(s) of Borrower. Borrower shall make all payments due Lender free and
clear of, and without deduction or withholding for or on account of, any setoff,
counterclaim, defense, duties, taxes, levies, imposts, fees, deductions,
withholding, restrictions or conditions of any kind. If after receipt of any
payment of, or proceeds of Collateral applied to the payment of, any of
Borrower's obligations to Lender under this Agreement, Lender is required to
surrender or return such payment or proceeds to any person or entity for any
reason, then the obligations intended to be satisfied by such payment or
proceeds shall be reinstated and continue and this Agreement shall continue in
full force and effect as if such payment or proceeds had not been received by
Lender. Borrower shall be liable to pay to Lender, and does hereby indemnify and
hold Lender harmless for the amount of any payments or proceeds surrendered or
returned. This Section 6.3 shall remain effective notwithstanding any contrary
action which may be taken by Lender in reliance upon such payment or proceeds.
This Section 6.3 shall survive the payment of Borrower's obligations under the
Loan Documents and the termination of this Agreement.
6.4 Use of Proceeds. Borrower shall use the initial proceeds of the
Revolving Loans provided by Lender to Borrower hereunder only for: (a) payments
to each of the persons listed in the disbursement order furnished by Borrower to
Lender on or about the date hereof; and (b) costs, expenses and fees in
connection with the preparation, negotiation, execution and delivery of this
Agreement and the other Loan Documents. All other Revolving Loans made or
Letters of Credit provided by Lender to Borrower pursuant to the provisions
hereof shall be used by Borrower only for general operating, working capital and
other proper corporate purposes of Borrower not otherwise prohibited by the
terms of this Agreement. None of the proceeds will be used, directly or
indirectly, for the purpose of purchasing or carrying any margin security or for
the purposes of reducing or retiring any indebtedness which was originally
incurred to purchase or carry any margin security or for any other purpose which
might cause any of the Revolving Loans to be considered a "purpose credit"
within the meaning of Regulation U of the Board of Governors of the Federal
Reserve System, as amended.
SECTION 7. REPRESENTATIONS AND WARRANTIES
Borrower makes the following representations and warranties to
Lender, which representations and warranties shall survive the execution of this
Agreement and shall continue in full force and effect until the full and final
payment, and satisfaction and discharge, of all obligations of Borrower to
Lender subject to this Agreement.
7.1 Legal Status. Borrower is a corporation duly organized and
existing and in good standing under the laws of the State of California.
Guarantor is a corporation duly organized and existing in good standing under
the laws of the Commonwealth of Massachusetts. Each of Borrower and Guarantor is
qualified or licensed to do business, and is in good standing as a foreign
corporation, if applicable, in all jurisdictions (other than those set forth on
Schedule 7.1 attached hereto) in which such qualification or licensing is
required or in which the failure to so qualify or to be so licensed could have a
material adverse effect on Borrower or Guarantor, as the case may be.
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<PAGE> 13
7.2 Authorization and Validity. The Loan Documents have been duly
authorized, and upon their execution and delivery in accordance with the
provisions hereof will constitute legal, valid and binding agreements and
obligations of Borrower or the party which executes the same, enforceable in
accordance with their respective terms, except as enforcement may be limited by
applicable bankruptcy, insolvency, reorganization, moratorium or other similar
laws now or hereafter in effect affecting creditors' rights generally and by
general equitable principles relating to the granting of specific performance
and other equitable remedies as a matter of judicial discretion.
7.3 No Violation; No Approvals. The execution, delivery and
performance by each of Borrower and Guarantor of each of the Loan Documents to
which it is a party do not (a) violate any provision of any law or regulation,
or (b) contravene any provision of the Articles of Incorporation or By-Laws of
such party, or (c) result in a breach of or default under any contract,
obligation, indenture or other instrument to which Borrower or Guarantor, as
applicable, is a party or by which it may be bound, or (d) require the consent
or approval of any Federal or state governmental authority.
7.4 No Claims. There are no pending, or to the best of Borrower's
knowledge threatened, actions, claims, investigations, suits or proceedings
before any governmental authority, arbitrator, court or administrative agency
which reasonably could be expected to have a material adverse effect on the
financial condition or operation of Borrower other than those disclosed by
Borrower to Lender in the Information Certificate and other than those set forth
on Schedule 7.4 attached hereto.
7.5 Correctness of Financial Statement. The consolidated financial
statement of Guarantor and its subsidiaries dated January 31, 1998, heretofore
delivered by Borrower to Lender is complete and correct and presents fairly the
financial condition of Guarantor and its subsidiaries, including Borrower;
discloses all liabilities of Guarantor and its subsidiaries, including Borrower,
that are required to be reflected or reserved against under GAAP, whether
liquidated or unliquidated, fixed or contingent; and has been prepared in
accordance with generally accepted accounting principles consistently applied.
Since the date of such financial statement there has been no material adverse
change in the financial condition of Borrower, nor has Borrower mortgaged,
pledged or granted a security interest in or encumbered any of its assets or
properties except as disclosed by Borrower to Lender in writing in the
Information Certificate or as permitted by this Agreement.
7.6 Income Tax Returns. Except as set forth in the Information
Certificate, Borrower (a) has paid all income tax when due and payable each
year, and (b) has no knowledge of any pending assessments or adjustments of its
income tax payable with respect to any year.
7.7 No Subordination. There is no agreement, indenture, contract or
instrument to which Borrower is a party or by which Borrower may be bound that
requires the subordination in right of payment of any of Borrower's obligations
subject to this Agreement to any other obligation of Borrower.
7.8 Permits, Franchises. Borrower possesses, and will hereafter
possess, all permits, memberships, franchises, contracts and licenses required
and rights to all trademarks, trade names, if any, patents, and fictitious names
necessary to enable it to conduct the business in which it is now engaged in
compliance with applicable law, excluding any such of the foregoing the failure
of which to possess would not reasonably be expected to have a material adverse
effect on Borrower's financial condition, business or operations.
7.9 ERISA. Borrower is in compliance in all material respects with
all applicable provisions of the Employee Retirement Income Security Act of
1974, as amended or recodified from time to time ("ERISA"); Borrower has not
violated any provision of any defined employee pension benefit plan (as defined
in ERISA) maintained or contributed to by Borrower (each, a "Plan"); no
Reportable Event as defined in ERISA has occurred and is continuing with respect
to any Plan
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<PAGE> 14
initiated by Borrower; Borrower has met its minimum funding requirements under
ERISA with respect to each Plan; and each Plan will be able to fulfill its
benefit obligations as they come due in accordance with the Plan documents and
under generally accepted accounting principles.
7.10 Other Obligations; Compliance with laws; Other liens. Borrower
is not in default on any obligation for borrowed money, any purchase money
obligation or any other material lease, commitment, contract, instrument or
obligation. Borrower is in compliance in all material respects with all
requirements of all laws, rules, regulations and orders of any governmental
authority applicable to Borrower or its business not otherwise addressed by
provisions of this Section 7. There are no security interests in or liens upon
the Collateral or any other property which is intended to be security for the
Line of Credit or the liability of any Obligor in respect thereof, other than
security interests and liens permitted herein or in the other Loan Documents.
7.11 Environmental Matters. Except as disclosed by Borrower to
Lender in writing prior to the date hereof, Borrower is in compliance in all
material respects with all applicable Federal or state environmental, hazardous
waste, health and safety statutes and any rules or regulations adopted pursuant
thereto, which govern or affect any of Borrower's operations and/or properties,
including without limitation, the Comprehensive Environmental Response,
Compensation and Liability Act of 1980, the Superfund Amendments and
Reauthorization Act of 1986, the Federal Resource Conservation and Recovery Act
of 1976, the Federal Toxic Substances Control Act and the California Health and
Safety Code, as any of the same may be amended, modified or supplemented from
time to time. None of the operations of Borrower is the subject of any Federal
or state investigation evaluating whether any remedial action involving a
material expenditure is needed to respond to a release of any toxic or hazardous
waste or substance into the environment. Borrower has no material contingent
liability in connection with any release of any toxic or hazardous waste or
substance into the environment.
SECTION 8. AFFIRMATIVE COVENANTS
Borrower covenants that so long as Lender remains committed to
extend credit to Borrower pursuant to the terms of this Agreement or any
liabilities (whether direct or contingent, liquidated or unliquidated) of
Borrower to Lender under any of the Loan Documents remain outstanding, and until
payment in full of all obligations of Borrower subject hereto, Borrower shall:
8.1 Punctual Payments. Punctually pay all principal, interest, fees
or other liabilities due under any of the Loan Documents at the times and place
and in the manner specified therein, and immediately upon demand by Lender, the
amount by which the outstanding principal balance of Revolving Loans and/or
Letter of Credit Obligations at any time exceeds any limitation applicable
thereto.
8.2 Records and Premises. Maintain proper books and records in which
true and complete entries shall be made of all dealings or transactions of or in
relation to Collateral and the business of Borrower in accordance with GAAP.
From time to time as requested by Lender, at the cost and expense of Borrower,
allow Lender or its designee complete access to all of Borrower's premises
during normal business hours and after notice to Borrower, or at any time and
without notice to Borrower if an Event of Default exists or has occurred and is
continuing, for the purposes of inspecting, verifying and auditing the
Collateral and all of Borrower's books and records, including, without
limitation, the Records, and promptly furnish to Lender such copies of such
books and records or extracts therefrom as Lender may request, and allow Lender
during normal business hours to use such of Borrower's personnel, equipment,
supplies and premises as may be reasonably necessary for the foregoing, and if
an Event of Default exists or has occurred and is continuing, for the collection
of Accounts and realization of other Collateral.
8.3 Collateral Reporting. Borrower shall provide Lender with the
following documents in a form satisfactory to Lender:
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<PAGE> 15
(a) so long as Borrower's average daily availability for
Revolving Loans is equal to or greater than $1,000,000, on or before the fifth
(5th) day after and as of the end of each week, a schedule of Accounts,
including without limitation weekly sales, credit and adjustment journals and
cash receipts; provided, however, that should Borrower's average daily
availability for Revolving Loans at any time be less than $1,000,000, Borrower
shall provide Lender on or before 10 a.m. each day, a schedule of Accounts,
including without limitation daily sales, credit and adjustment journals and
cash receipts. If at any time pursuant to the foregoing provision Borrower is
required to provide daily Accounts information, Lender may, at its sole option,
agree to permit Borrower to reinstate weekly reporting provided that Borrower
shall have (i) established a sufficient historical trend of minimum availability
(i.e., not less than four (4) weeks of average availability for Revolving Loans
equal to or exceeding $1,000,000) and (ii) a cash budget acceptable to Lender
reflecting that such minimum availability is projected to continue for not less
than six months thereafter;
(b) on or before the fifth (5th) day after and as of the end of
each month (or more frequently as Lender may request), (i) perpetual inventory
reports and (ii) inventory reports by category;
(c) on or before the tenth (10th) day after and as of the end of
each month (or more frequently as Lender may request), (i) agings of accounts
receivable, and (ii) agings of accounts payable;
(d) upon Lender's request, (i) copies of customer statements and
credit memos, remittance advices and reports, and copies of deposit slips and
bank statements, (ii) copies of shipping and delivery documents, and (iii)
copies of purchase orders, invoices and delivery documents for Inventory and
Equipment acquired by Borrower;
(e) upon Lender's request, Borrower shall, at its expense, no
more than once in any twelve (12) month period, but at any time or times as
Lender may request on or after an Event of Default, deliver or cause to be
delivered to Lender written reports or appraisals as to the Collateral in form,
scope and methodology acceptable to Lender and by an appraiser acceptable to
Lender, addressed to Lender or upon which Lender is expressly permitted to rely;
and
(f) such other reports as to the Collateral as Lender shall
request from time to time. If any of Borrower's records of the Collateral are
prepared or maintained by an accounting service, contractor, shipper or other
agent, Borrower hereby irrevocably authorizes such service, contractor, shipper
or agent to deliver such records, reports, and related documents to Lender and
to follow Lender's instructions with respect to further services at any time
that an Event of Default exists or has occurred and is continuing.
8.4 Financial Statements. Provide to Lender all of the following, in
form and detail satisfactory to Lender:
(a) not later than ninety (90) days after and as of the end of
each fiscal year, an unqualified, audited consolidated financial statement of
Guarantor and its subsidiaries (including Borrower), prepared in accordance with
GAAP, consistently applied, by a certified public accountant acceptable to
Lender (and for these purposes, Price Waterhouse LLP is an acceptable certified
public accountant), to include balance sheet, income statement and statement of
cash flows;
(b) not later than thirty (30) days after and as of the end of
each fiscal month, a consolidated financial statement of Guarantor and its
subsidiaries (including Borrower), prepared in accordance with GAAP,
consistently applied, by Guarantor to include balance sheet, income statement
and statement of cash flows;
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<PAGE> 16
(c) promptly after the same are available, and in any event
within fifteen (15) days after filing with the Securities and Exchange
Commission, copies of each annual report, proxy or financial statement or other
report or communication sent to the stockholders of Guarantor, and reports and
registration statements which Guarantor may file or be required to file with the
Securities and Exchange Commission under Sections 13 or 15(d) of the Securities
Exchange Act of 1934, as amended (including without limitation, Guarantor's
periodic Form 10-Q statements), and which are not otherwise required to be
delivered to Lender pursuant to other provisions of this Section 8.4;
(d) within five (5) days of the release thereof, copies of all
press releases, public statements and filings with any governmental authority,
whether by Borrower or Guarantor, and not otherwise required to be delivered to
Lender pursuant to other provisions of this Section 8.4;
(e) contemporaneously with each annual and quarterly financial
statement of Borrower required hereby, a certificate of the president or chief
financial officer of Borrower that the financial statements delivered pursuant
thereto are accurate and that there exists no Event of Default nor any
condition, act or event which with the giving of notice or the passage of time
or both would constitute an Event of Default; and
(f) as soon as practicable and in any event by the last day of
each fiscal year of Borrower, a plan and financial forecast for Borrower's next
succeeding fiscal year including, without limitation, (i) a forecasted balance
sheet, statement of income and statement of cash flows for such fiscal year,
(ii) forecasted balance sheets, statements of income and statements of cash
flows for each fiscal month of such fiscal year; and as soon as practicable, all
material amendments, updates and revisions, if any, to the information provided
pursuant to this paragraph; and
(g) from time to time such other information as Lender may
reasonably request, which may include, without limitation, budgets, forecasts,
projections and other information respecting the Collateral and the business of
Borrower.
8.5 Compliance. Preserve and maintain all licenses, permits,
governmental approvals, rights, privileges and franchises necessary for the
conduct of its business; conduct its business in an orderly and regular manner;
and comply with the provisions of all documents pursuant to which Borrower is
organized and/or which govern Borrower's continued existence and with the
requirements of all laws, rules, regulations and orders of any governmental
authority applicable to Borrower or its business. Notwithstanding anything to
the contrary contained in this Section 8, Borrower shall become qualified or
licensed to do business, and shall achieve the status of good standing as a
foreign corporation, if applicable, in the jurisdictions set forth on Schedule
7.1 attached hereto, within sixty (60) days from the date hereof.
8.6 Insurance. Maintain and keep in force insurance of the types and
in amounts customarily carried in lines of business similar to Borrower's,
including but not limited to fire, extended coverage, public liability, property
damage and workers' compensation, carried with companies and in amounts
satisfactory to Lender, and deliver to Lender from time to time at Lender's
request schedules setting forth all insurance then in effect. At its option,
Lender may apply any insurance proceeds received by Lender at any time to the
cost of repairs or replacement of Collateral and/or to payment of the Borrower's
Obligations to Lender under this Agreement, whether or not then due, in any
order and in such manner as Lender may determine or hold such proceeds as cash
collateral for such Obligations.
8.7 Facilities. With the exception of normal wear and tear, keep all
Borrower's properties useful or necessary to Borrower's business in good repair
and condition, and from time to time make necessary repairs, renewals and
replacements thereto so that Borrower's properties shall be fully and
efficiently preserved and maintained.
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<PAGE> 17
8.8 Taxes and Other Liabilities. Pay and discharge when due any and
all indebtedness, obligations, assessments and taxes, both real or personal,
including without limitation, Federal and state income taxes and state and local
property taxes and assessments, except such (a) as Borrower may in good faith
contest or as to which a bona fide dispute may arise, and (b) for which Borrower
has made provision, to Lender's satisfaction, for eventual payment thereof in
the event Borrower is obligated to make such payment.
8.9 Litigation. Promptly give notice in writing to Lender of any
litigation pending or threatened in writing against Borrower with a claim in
excess of $100,000.
8.10 Financial Condition. Maintain Borrower's financial condition as
follows:
(a) Tangible Net Worth not at any time during any period
specified below less than the amount set forth opposite such period, to be
measured as of the end of each fiscal quarter of Borrower, commencing with the
fiscal quarter ending July 31, 1998:
<TABLE>
<CAPTION>
Period Minimum Tangible Net Worth
------ --------------------------
<S> <C>
July 31, 1998 through October 30, 1998 $ 1,800,000.00
October 31, 1998 through January 30, 1999 2,100,000.00
January 31, 1999 through April 29, 1999 2,400,000.00
April 30, 1999 through July 30, 1999 2,700,000.00
July 31, 1999 through October 30, 1999 3,000,000.00
October 31, 1999 through January 30, 2000 3,300,000.00
January 31, 2000 through April 29, 2000 3,600,000.00
April 30, 2000 through July 30, 2000 3,900,000.00
July 31, 2000 through October 30, 2000 4,200,000.00
October 31, 2000 and thereafter 4,500,000.00
</TABLE>
(b) Capital expenditures, inclusive of capitalized lease
expenditures, not greater than $7,000,000 in any fiscal year.
8.11 Notice to Lender. Promptly (but in no event more than five (5)
days after the occurrence of each such event or matter) give written notice to
Lender in reasonable detail of: (a) the occurrence of any Event of Default, or
any condition, event or act which with the giving of notice or the passage of
time or both would constitute such an Event of Default; (b) the occurrence and
nature of any Reportable Event or Prohibited Transaction, each as defined in
ERISA, or any funding deficiency with respect to any Plan; and (c) any
termination or cancellation of any insurance policy which Borrower is required
to maintain, or any loss through liability or property damage, or through fire,
theft or any other cause affecting Borrower's property. Provide not less than
thirty (30) days prior written notice to Lender of any change in the name or the
organizational structure of Borrower.
8.12 Further Assurances. At the request of Lender at any time and
from time to time, duly execute and deliver, or cause to be duly executed and
delivered, such further agreements, documents and instruments, and do or cause
to be done such further acts as may be necessary or proper to evidence, perfect,
maintain and enforce the security interests and the priority thereof in the
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<PAGE> 18
Collateral and to otherwise effectuate the provisions or purposes of this
Agreement or any of the other Loan Documents, at Borrower's expense. Lender may
at any time and from time to time request a certificate from an officer of
Borrower representing that all conditions precedent to the making of Revolving
Loans and issuing Letters of Credit contained herein are satisfied. In the event
of such request by Lender, Lender may, at its option, cease to make any further
Revolving Loans or provide any further Letters of Credit until Lender has
received such certificate and, in addition, Lender has determined that such
conditions are satisfied. Where permitted by law, Borrower hereby authorizes
Lender to execute and file one or more UCC financing statements signed only by
Lender.
8.13 Year 2000 Compliant. Borrower shall perform such acts as may be
reasonably necessary to reasonably ensure that Borrower and any business in
which Borrower owns a substantial interest become Year 2000 Compliant within a
reasonable time. Such acts shall include, without limitation, Borrower's
performance of a reasonable review and assessment of its material systems. With
respect to Borrower's customers, suppliers and vendors that are material to
Borrower's business, Borrower shall make a reasonable effort to (i) assess the
risks posed to Borrower's business by the failure of any such entity that is
material to Borrower's business to become Year 2000 Complaint within a
reasonable time, (ii) make reasonable inquiries or other reasonable assessment
of such entities as to whether they will become Year 2000 Complaint within a
reasonable time, and (iii) develop a reasonable plan for dealing with such
entities which do not become Year 2000 Compliant within a reasonable time. As
used in this paragraph, "Year 2000 Compliant" shall mean, in regard to any
entity, that all software, hardware, firmware, equipment, goods or systems
material to the business operations or financial condition of such entity will
properly perform date sensitive functions before, during, and after the year
2000.
8.14 Landlord Waiver. Notwithstanding anything to the contrary
contained in this Section 8, Borrower shall obtain, within 30 days of the date
hereof, a fully-executed landlord waiver concerning Borrower's location at 10140
Mesa Rim Road, San Diego, California 92121 in the form provided to Borrower by
Lender prior to the date hereof, which shall include, without limitation, a
legal description of the premises and notarizations of the signatures thereto.
In the event that Borrower fails to comply with the foregoing sentence and such
failure to comply continues for 60 days after the date hereof, such failure to
comply shall constitute an Event of Default hereunder.
8.15 Seagate Subordination Agreement. Notwithstanding anything to
the contrary contained in this Section 8, Borrower acknowledges that Lender
deems inadequate the Lien Subordination Agreement delivered to Lender by Seagate
Technology, Inc. ("Seagate") as of the date hereof and that Lender will attempt
to obtain a replacement lien subordination agreement from Seagate in form and
substance satisfactory to Lender. Borrower agrees (a) to cooperate and assist
Bank in obtaining such replacement lien subordination agreement and (b) that if
Lender is unable to obtain an acceptable lien subordination agreement from
Seagate within sixty (60) days of the date hereof, Lender shall have the option
to either (i) establish from time to time a reserve against the Borrowing Base
in an amount equal to any and all obligations then owing by Borrower to Seagate,
provided however, that in no event shall such reserve exceed $250,000 during the
first 12 months following the date of Lender's election to establish such
reserve, or (ii) terminate the Line of Credit, in which case the Line of Credit
shall be terminated effective on the date which is thirty (30) days subsequent
to written notice from Lender to Borrower thereof. In the event of any such
termination of the Line of Credit and payment in full of all obligations owing
under the Loan Documents, Borrower shall not be required to pay Lender the early
termination fee referenced in Section 11.1(c) hereof.
8.16 Imperial Bank Termination Statements. Notwithstanding anything
to the contrary contained in this Section 8, Borrower shall provide to Lender
immediately following Lender's extension of the initial credit contemplated by
this Agreement termination statements in form and substance satisfactory to, and
for such jurisdictions required by, Lender executed by Imperial Bank.
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SECTION 9. NEGATIVE COVENANTS
Borrower further covenants that so long as Lender remains committed
to Borrower pursuant to the terms of this Agreement or any liabilities (whether
direct or contingent, liquidated or unliquidated) of Borrower to Lender under
any of the Loan Documents remain outstanding, and until payment in full of all
obligations of Borrower subject hereto, Borrower will not without the Lender's
prior written consent:
9.1 Other Indebtedness. Create, incur, assume or permit to exist any
indebtedness or liabilities resulting from borrowings, loans or advances,
whether secured or unsecured, matured or unmatured, liquidated or unliquidated,
joint or several, except (a) the liabilities of Borrower to Lender and any other
liabilities of Borrower existing as of, and disclosed to Lender prior to, the
date hereof in the Information Certificate or in Schedule 9.1 attached hereto
and (b) indebtedness secured by Permitted Liens. Make any prepayment on any
indebtedness or liability resulting from borrowing, loans or advances permitted
pursuant to the foregoing sentence.
9.2 Merger, Consolidation, Transfer of Assets. Merge into or
consolidate with any corporation or other entity; undergo a recapitalization;
make any substantial change in the conduct or nature of Borrower's business;
acquire all or substantially all of the assets of any corporation or other
entity; nor sell (including in any sale-leaseback transaction), lease, transfer
or otherwise dispose of all or a substantial or material part of its assets
except in the ordinary course of business.
9.3 Guaranties. Guarantee or become liable in any way as surety,
endorser (other than as endorser of negotiable instruments for deposit or
collection in the ordinary course of business), accommodation endorser or
otherwise for, nor pledge or hypothecate any assets of Borrower as security for,
any liabilities or obligations of any other person or entity, except as
disclosed in the Information Certificate.
9.4 Loans, Advances, Investments. Make any loans or advances to or
investments in any person or entity, except advances to employees in the
ordinary course of business not to exceed $100,000 outstanding at any time.
9.5 Dividends, Distributions. Declare or pay any dividend or
distribution either in cash, stock or any other property on Borrower's stock now
or hereafter outstanding, or redeem, retire, repurchase or otherwise acquire any
shares of any class of Borrower's stock now or hereafter outstanding, except for
the repurchase of Borrower's capital stock from officers, directors, employees
or consultants of Borrower upon termination of their employment with or
rendering of service to Borrower provided that, as of the date of such
repurchase, no Event of Default shall have occurred and be continuing or would
occur upon the giving of notice, passage of time or both, or after giving effect
to any such repurchase.
9.6 Pledge of Assets. Mortgage, pledge, grant or permit to exist a
security interest in, or lien upon, any of its assets of any kind, now owned or
hereafter acquired, except (a) Permitted Liens and (b) any of the foregoing in
favor of Lender and except as set forth in the Information Certificate.
9.7 New Collateral Location. Open any new location unless Borrower
(a) gives Lender thirty (30) days prior written notice of the intended opening
of any such new location, and (b) executes and delivers, or causes to be
executed and delivered, to Lender such agreements, documents, and instruments as
Lender may deem reasonably necessary or desirable to protect its interests in
the Collateral at such location, including without limitation, UCC-1 financing
statements.
9.8 Transactions with Affiliates. Enter into any transaction of any
kind with any affiliate of Borrower, other than (a) any such transactions
presently in effect and disclosed to Lender in writing and (b) other
transactions after the date hereof on terms at least as favorable to Borrower
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<PAGE> 20
as would be the case in an arm's-length transaction between unrelated parties of
equal bargaining power.
9.9 Lease Expenditures. Incur operating lease expenses in any
fiscal year in excess of an aggregate of $5,000,000.
SECTION 10. EVENTS OF DEFAULT
10.1 Events of Default. In addition to the Event of Default
described in Section 8.14, the occurrence of any of the following shall
constitute an "Event of Default" under this Agreement:
(a) Borrower shall fail to pay when due any principal,
interest, fees or other amounts payable under any of the Loan Documents.
(b) Any financial statement or certificate (including the
Information Certificate) furnished to Lender in connection with, or any
representation or warranty made by Borrower or any other party under this
Agreement or any other Loan Document shall prove to be incorrect, false or
misleading in any material respect when furnished or made.
(c) Any default in the performance of or compliance with any
obligation, agreement or other provision contained in Sections 6.1, 6.3, 8.3,
8.4, 8.9, 8.10, 8.11 or 9 of this Agreement, or any other default in the
performance of or compliance with any obligation, agreement or other provision
contained in this Agreement (other than those described in Sections 10.1(a) and
10.1(b)) which shall continue for more than ten (10) days after the occurrence
thereof (or, in the event that such default is not reasonably susceptible of
being cured within such ten (10) day period, which shall continue for more than
thirty (30) days after the occurrence thereof).
(d) Any default in the payment or performance of any
obligation, or any defined event of default, under the terms of any contract or
instrument (other than any of the Loan Documents) pursuant to which Borrower or
any Obligor has incurred any debt or other liability to any person or entity,
including Lender, and, if the debt or other liability is owed to a party other
than Lender, the amount thereof exceeds $100,000.
(e) Any default in the payment or performance of any
obligation, or any defined event of default, under any of the Loan Documents
other than this Agreement.
(f) The filing of a notice of judgment lien against Borrower or
any Obligor; or the recording of any abstract of judgment against Borrower or
any Obligor in any county in which Borrower or such Obligor has an interest in
real property; or the service of a notice of levy and/or of a writ of attachment
or execution, or other like process, against the assets of Borrower or any
Obligor; or the entry of a judgment against Borrower or any Obligor; and with
respect to any of the foregoing, the amount in dispute is in excess of $100,000,
and such notice of judgment lien, abstract, levy, writ of attachment or
execution or other like process is not stayed, bonded or released within thirty
(30) days (provided, however, that notwithstanding any contrary provision of
this Agreement or any other Loan Document, Lender shall have no obligation to
advance funds to Borrower under this Agreement during such thirty (30) day
period).
(g) Borrower or any Obligor shall become insolvent, or shall
suffer or consent to or apply for the appointment of a receiver, trustee,
custodian or liquidator of itself or any of its property, or shall generally
fail to pay its debts as they become due, or shall make a general assignment for
the benefit of creditors; Borrower or any Obligor shall file a voluntary
petition in bankruptcy, or seeking reorganization, in order to effect a plan or
other arrangement with creditors or any other relief under the Bankruptcy Reform
Act, Title 11 of the United States Code, as amended or recodified from time to
time ("Bankruptcy Code"), or under any state or federal law granting relief to
debtors, whether now or hereafter in effect; or any involuntary petition or
proceeding pursuant to the Bankruptcy Code or any other applicable state or
federal law relating to bankruptcy,
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reorganization or other relief for debtors is filed or commenced against
Borrower or any Obligor, or Borrower or any Obligor shall file an answer
admitting the jurisdiction of the court and the material allegations of any
involuntary petition; or Borrower or any Obligor shall be adjudicated a
bankrupt, or an order for relief shall be entered by any court of competent
jurisdiction under the Bankruptcy Code or any other applicable state or federal
law relating to bankruptcy, reorganization or other relief for debtors.
(h) There shall exist or occur any event or condition which
Lender reasonably believes from the perspective of a secured creditor impairs,
or is substantially likely to impair, the prospect of payment or performance by
Borrower of its obligations under any of the Loan Documents.
(i) The dissolution or liquidation of Borrower or any guarantor
hereunder; or Borrower or any such guarantor, or any of their directors or
stockholders, shall take action seeking to effect the dissolution or liquidation
of Borrower or such guarantor.
(j) A Change in Control shall occur.
(k) Any Obligor revokes or terminates (or attempts or purports
to revoke or terminate) its guarantee, endorsement or other agreement in favor
of Lender. Any creditor of Borrower which has executed a subordination in favor
of Lender revokes or terminates (or attempts or purports to revoke or terminate)
such subordination.
(l) The indictment or threatened indictment of Borrower or any
Obligor under any criminal statute, or commencement or threatened commencement
of criminal or civil proceedings against Borrower or any Obligor, pursuant to
which statute or proceedings the penalties or remedies sought or available
include forfeiture of any of the property of Borrower or such Obligor.
(m) Any member of Borrower's Senior Management shall cease, for
any reason, to be employed by Borrower on a full-time basis and such member
shall not have been replaced by a person acceptable to Lender within 120 days.
Senior Management means W. David Sykes, Harris Ravine and Richard A. Hudzik.
10.2 Remedies. If an Event of Default shall occur, (a) any
indebtedness of Borrower under any of the Loan Documents, any term thereof to
the contrary notwithstanding, shall at Lender's option and without notice become
immediately due and payable without presentment, demand, protest or notice of
dishonor, all of which are hereby expressly waived by Borrower; (b) the
obligation, if any, of Lender to permit further borrowings hereunder shall
immediately cease and terminate; and (c) Lender shall have all rights, powers
and remedies available under each of the Loan Documents, or accorded by law,
including without limitation the right to resort to any or all security for any
credit accommodation from Lender subject hereto and to exercise any or all of
the rights of a beneficiary or secured party pursuant to applicable law. All
rights, powers and remedies of Lender in connection with each of the Loan
Documents may be exercised at any time by Lender and from time to time after the
occurrence of an Event of Default, are cumulative and not exclusive, and shall
be in addition to any other rights, powers or remedies provided by law or
equity.
SECTION 11. TERM OF AGREEMENT AND MISCELLANEOUS
11.1 Term.
(a) Maturity Date. This Agreement and the other Loan Documents
shall become effective as of the date set forth on the first page hereof and
shall continue in full force and effect for a term ending on the date three (3)
years from the date hereof. Upon the date of termination of the Loan Documents,
Borrower shall pay to Lender, in full, all outstanding and unpaid obligations
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under this Agreement and the other Loan Documents and shall furnish cash
collateral to Lender in such amounts as Lender determines are reasonably
necessary to secure Lender from loss, cost, damage or expense, including
attorneys' fees and legal expenses, in connection with any contingent
obligations, including issued and outstanding Letters of Credit and checks or
other payments provisionally credited to the obligations and/or as to which
Lender has not yet received final payment. Interest shall be due until and
including the next business day, if the amounts so paid by Borrower to the bank
account designated by Lender are received in such bank account later than 12:00
noon, California time.
(b) Continuing Obligations. No termination of this Agreement or
the other Loan Documents shall relieve or discharge Borrower of its respective
duties, obligations and covenants under this Agreement or the other Loan
Documents until all Borrower's obligations under this Agreement and the other
Loan Documents have been fully and finally discharged and paid, and Lender's
continuing security interest in the Collateral and the rights and remedies of
Lender hereunder, under the other Loan Documents and applicable law, shall
remain in effect until all such obligations have been fully and finally
discharged and paid.
(c) Early Termination Fee. If for any reason (other than as set
forth in Section 11.1(d)) this Agreement is terminated prior to the end of the
then current term of this Agreement, in view of the impracticality and extreme
difficulty of ascertaining actual damages and by mutual agreement of the parties
as to a reasonable calculation of Lender's lost profits as a result thereof,
Borrower agrees to pay to Lender, upon the effective date of such termination,
an early termination fee in the amount set forth below if such termination is
effective in the period indicated:
Amount Period
------ ------
(i) 2% of Maximum Amount Date hereof to and including
the first anniversary date
hereof.
(ii) 1% of Maximum Amount First anniversary date hereof
to and including the second
anniversary date hereof.
(iii) No fee Second anniversary date hereof
to and including third
anniversary date hereof.
Such early termination fee shall be presumed to be the amount of damages
sustained by Lender as a result of such early termination and Borrower agrees
that it is reasonable under the circumstances currently existing.
(d) No Early Termination Fee. No early termination fee shall be
payable in any of the following circumstances:
(1) if a commercial lending group or division of
Wells Fargo Bank (other than the Commercial Finance Division or the
workout group), extends credit to Borrower, which credit refinances
and/or replaces in full the credit facilities granted under this
Agreement;
(2) the credit facilities granted under this
Agreement are assigned or otherwise transferred to a commercial
finance company that is not affiliated with Wells Fargo Bank and
such credit facilities are thereafter refinanced and/or replaced;
(3) if Borrower (A) meets the financial tests set
forth below during the first twelve months of the effectiveness of
this Agreement, (B) receives an offer
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<PAGE> 23
from another commercial bank to refinance and/or replace in full the
credit facilities granted under this Agreement and (C) does not
receive a similar offer from a commercial lending group or division
of Wells Fargo Bank (other than the Commercial Finance Division or
the workout group) within thirty days of Borrower's notice to Lender
of such other commercial bank's offer. Such financial tests shall
consist of: (1) Borrower having a ratio of total debt to Tangible
Net Worth less than 4.00 to 1.00, (2) Borrower having a "current
ratio" equal to or greater than 1.25 to 1.00, with "current ratio"
defined as total current assets divided by total current
liabilities, and (3) Borrower being profitable (i.e., having net
income after taxes in excess of $0) for the fiscal year ended
October 31, 1998 and for the fiscal quarter ending January 31, 1999;
or
(4) If Borrower pays in full the Line of Credit and
all other obligations under this Agreement and the other Loan
Documents in connection with the termination of the Line of Credit
pursuant to Section 8.15 hereof.
11.2 No Waiver. No delay, failure or discontinuance of Lender in
exercising any right, power or remedy under any of the Loan Documents shall
affect or operate as a waiver of such right, power or remedy; nor shall any
single or partial exercise of any such right, power or remedy preclude, waive or
otherwise affect any other or further exercise thereof or the exercise of any
other right, power or remedy. Any waiver, permit, consent or approval of any
kind by Lender of any breach of or default under any of the Loan Documents must
be in writing and shall be effective only to the extent set forth in such
writing.
11.3 Notices. All notices, requests and demands which any party is
required or may desire to give to any other party under any provision of this
Agreement must be in writing delivered to each party at the following address:
BORROWER: anDATAco of California, Inc.
10140 Mesa Rim Road
San Diego, California 92121
Attention: Richard A. Hudzik
Telecopier: (619) 458-1613
Telephone: (619) 453-9191
with a copy to: Cooley Godward, LLP
4365 Executive Drive, Suite 1100
San Diego, California 92121-2128
Attn: Jeremy Glaser, Esq.
Telecopier: (619) 453-3559
Telephone: (619) 550-6000
LENDER: WELLS FARGO BANK, NATIONAL ASSOCIATION
Commercial Finance Division
245 South Los Robles Avenue, Suite 600
Pasadena, CA 91101
Attention: anDATAco Account Officer
Telecopier: (626) 844-9063
Telephone: (626) 685-9900
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
mail, upon the earlier of the date of receipt or three (3) days after deposit in
the U.S. mail, first class and postage prepaid; and (c) if sent by telecopy,
upon receipt.
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11.4 Costs, Expenses and Attorneys' Fees. Borrower shall pay to
Lender immediately upon demand the full amount of all payments, advances,
charges, costs and expenses, including reasonable attorneys' fees (to include
outside counsel fees and all allocated costs of Lender's in-house counsel),
incurred by Lender in connection with (a) the negotiation and preparation of
this Agreement and each other of the Loan Documents, Lender's continued
administration hereof and thereof, and the preparation of any amendments and
waivers hereto and thereto, (b) Lender's due diligence review of Borrower,
including without limitation, all appraisal fees, audit fees, the cost of
background checks and the cost of credit reports, (c) all out-of-pocket expenses
and costs heretofore and from time to time hereafter incurred by Lender during
the course of periodic field examinations of the Collateral and Borrower's
operations, plus a per diem charge for Lender's examiners in the field and
office at Lender's Commercial Finance Division's rate in effect from time to
time, (d) the enforcement of Lender's rights and/or the collection of any
amounts which become due to Lender under any of the Loan Documents, and (e) the
prosecution or defense of any action in any way related to any of the Loan
Documents, including without limitation any action for declaratory relief, and
including any of the foregoing incurred in connection with any bankruptcy
proceeding relating to Borrower.
11.5 Successors, Assignment and Confidentiality.
(a) Binding Effect. This Agreement and the other Loan Documents
shall be binding on and inure to the benefit of the heirs, executors,
administrators, legal representatives, successors and assigns of the parties;
provided however, that Borrower may not assign or transfer its interest
hereunder without the prior written consent of Lender.
(b) Participations and Assignments. Lender reserves the right to
sell, assign, transfer, negotiate or grant participations in all or any part of,
or any interest in, Lender's rights and benefits under each of the Loan
Documents.
(c) Confidentiality. Subject to the following sentence, Lender
may disclose all documents and information which Lender now has or may hereafter
acquire relating to any credit extended by Lender to Borrower, Borrower or its
business, any Obligor or the business of any Obligor, or any Collateral required
hereunder in connection with any sale, assignment or transfer of all or any part
of any interest in Lender's rights and benefits under each of the Loan
Documents, or the granting of any participation interest in all or any part of
such rights and benefits. Lender agrees to hold any confidential information
that it may receive from Borrower pursuant to this Agreement in confidence,
except for disclosure: (i) to legal counsel and accountants for Borrower or
Lender; (ii) to other professional advisors to Borrower or Lender, provided that
the recipient has been informed in advance of the confidential nature of such
information, (iii) to regulatory officials having jurisdiction over Lender; (iv)
as required by law or legal process or in connection with any legal proceeding
or litigation involving Lender and Borrower or any affiliate of Borrower, and
(v) to another financial institution in connection with a disposition or
proposed disposition to that financial institution of all or part of Lender's
interests hereunder or a participation interest in the Line of Credit Note,
provided that the recipient has been informed in advance of the confidential
nature of such information and has agreed with Lender to keep such confidential
information in confidence in accordance with the terms hereof. For purposes of
the foregoing, "confidential information" shall mean any information respecting
Borrower reasonably considered by Borrower to be confidential, other than (A)
information previously filed with any governmental authority or agency and
available to the public, (B) information previously published in any public
medium from a source other than, directly or indirectly, Lender, and (C)
information previously disclosed by Borrower to any third party not associated
with Borrower without a confidentiality agreement or obligation substantially
similar to this Section 11.5. Nothing in this Section 11.5 shall be construed to
create or give rise to any fiduciary duty on the part of Lender to Borrower.
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<PAGE> 25
11.6 Entire Agreement, Conflicts, Amendment. This Agreement and each
other of the Loan Documents constitute the entire agreement between Borrower and
Lender with respect to any extension of credit by Lender subject hereto and
supersede all prior negotiations, communications, discussions and correspondence
concerning the subject matter hereof. In the event of any actual irreconcilable
conflict between the provisions of this Agreement and those of any other Loan
Document, the provisions of this Agreement shall control and govern; provided
that the inclusion of supplemental rights or remedies in favor of Lender in any
other Loan Document shall not be deemed a conflict with this Agreement. This
Agreement may be amended or modified only by a written instrument executed by
each party hereto.
11.7 No Third Party Beneficiaries. This Agreement is made and
entered into for the sole protection and benefit of the parties hereto and their
respective permitted successors and assigns, and no other person or entity shall
be a third party beneficiary of, or have any direct or indirect cause of action
or claim in connection with, this Agreement or any other of the Loan Documents
to which it is not a party.
11.8 Time. Time is of the essence of each and every provision of
this Agreement and each other of the Loan Documents.
11.9 Severability of Provisions. If any provision of this Agreement
shall be prohibited by or invalid under applicable law, such provision shall be
ineffective only to the extent of such prohibition or invalidity without
invalidating the remainder of such provision or any remaining provisions of this
Agreement.
11.10 Governing Law. This Agreement shall be governed by and
construed in accordance with the laws of the State of California.
11.11 Indemnity by Borrower. Borrower agrees to indemnify, save and
hold harmless Lender and its directors, officers, agents, attorneys and
employees (collectively, the "Indemnitees") from and against: (a) Any and all
claims, demands, actions or causes of action that are asserted against any
Indemnitee if the claim, demand, action or cause of action arises out of or
relates to the relationship between Borrower and Lender under any of the Loan
Documents or the transactions contemplated thereby; (b) Any and all
administrative or investigative proceedings by any governmental agency or
authority arising out of or related to any claim, demand, action or cause of
action described in clause (a) above; and (c) Any and all liabilities, losses,
costs or expenses (including reasonable attorneys' fees and disbursements and
other professional services) that any Indemnitee suffers or incurs as a result
of the assertion of any of the foregoing; provided that no Indemnitee shall be
entitled to indemnification for any loss caused by its own or its employees' or
agents' gross negligence or willful misconduct. Each Indemnitee is authorized to
employ counsel in enforcing its rights hereunder and in defending against any
claim, demand, action, cause of action or administrative or investigative
proceeding covered by this Section 11.11; provided that the Indemnitees as a
group may retain only one law firm to represent them with respect to any such
matter unless there is, under applicable standards of professional conduct,
conflict on any significant issue between the positions of any two or more
Indemnitees. Any obligation or liability of Borrower to any Indemnitee under
this Section 11.11 shall be and hereby is covered and secured by the Loan
Documents and the collateral referred to in Section 5 and shall survive the
expiration or termination of this Agreement and the repayment of the Line of
Credit and the payment and performance of all other obligations owed to Lender.
11.12 Nonliability of Lender. Borrower acknowledges and agrees that:
(a) Any inspections of Collateral made by Lender are for
purposes of administration of the Line of Credit only and Borrower is not
entitled to rely upon the same;
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<PAGE> 26
(b) By accepting or approving anything required to be observed,
performed, fulfilled or given to Lender pursuant to the Loan Documents,
including any certificate, financial statement, insurance policy or other
document, Lender shall not be deemed to have warranted or represented the
sufficiency, legality, effectiveness or legal effect of the same, or of any
term, provision or condition thereof, and such acceptance or approval thereof
shall not constitute a warranty or representation to anyone with respect thereto
by Lender;
(c) The relationship between Borrower and Lender in connection
with this Agreement and the other Loan Documents is, and shall at all times
remain, solely that of a borrower and lender; Lender shall not under any
circumstance be construed to be a partner or joint venturer of Borrower; Lender
shall not under any circumstances be deemed to be in a relationship of
confidence or trust or a fiduciary relationship with Borrower, or to owe any
fiduciary duty to Borrower as a result of the transactions arising under this
Agreement and the other Loan Documents; Lender does not undertake or assume any
responsibility or duty to Borrower to select, review, inspect, supervise, pass
judgment upon or inform Borrower of any matter in connection with its property,
any collateral held by Lender or the operations of Borrower; Borrower shall rely
entirely upon its own judgment with respect to such matters; and any review,
inspection, supervision, exercise of judgment or supply of information
undertaken or assumed by Lender in connection with such matters is solely for
the protection of Lender and neither Borrower nor any other person or entity is
entitled to rely thereon; and
(d) Lender shall not be responsible or liable to any person or
entity for any loss, damage, liability or claim of any kind relating to injury
or death to persons or damage to property caused by the actions, inaction or
negligence of Borrower and Borrower hereby indemnifies and holds Lender harmless
from any such loss, damage, liability or claim.
11.13 Arbitration.
(a) Arbitration. Upon the demand of any party, any Dispute shall
be resolved by binding arbitration (except as set forth in (e) below) in
accordance with the terms of this Agreement. A "Dispute" shall mean any action,
dispute, claim or controversy of any kind, whether in contract or tort,
statutory or common law, legal or equitable, now existing or hereafter arising
under or in connection with, or in any way pertaining to, any of the Loan
Documents, or any past, present or future extensions of credit and other
activities, transactions or obligations of any kind related directly or
indirectly to any of the Loan Documents, including without limitation, any of
the foregoing arising in connection with the exercise of any self-help,
ancillary or other remedies pursuant to any of the Loan Documents. Any party may
by summary proceedings bring an action in court to compel arbitration of a
Dispute. Any party who fails or refuses to submit to arbitration following a
lawful demand by any other party shall bear all costs and expenses incurred by
such other party in compelling arbitration of any Dispute.
(b) Governing Rules. Arbitration proceedings shall be
administered by the American Arbitration Association ("AAA") or such other
administrator as the parties shall mutually agree upon in accordance with the
AAA Commercial Arbitration Rules. All Disputes submitted to arbitration shall be
resolved in accordance with the Federal Arbitration Act (Title 9 of the United
States Code), notwithstanding any conflicting choice of law provision in any of
the Loan Documents. The arbitration shall be conducted at a location in
California selected by the AAA or other administrator. If there is any
inconsistency between the terms hereof and any such rules, the terms and
procedures set forth herein shall control. All statutes of limitation applicable
to any Dispute shall apply to any arbitration proceeding. All discovery
activities shall be expressly limited to matters directly relevant to the
Dispute being arbitrated. Judgment upon any award rendered in an arbitration may
be entered in any court having jurisdiction; provided however, that nothing
contained herein shall be deemed to be a waiver by any party that is a bank of
the protections afforded to it under 12 U.S.C. Section 91 or any similar
applicable state law.
-26-
<PAGE> 27
(c) No Waiver; Provisional Remedies, Self-Help and Foreclosure.
No provision hereof shall limit the right of any party to exercise self-help
remedies such as setoff, foreclosure against or sale of any real or personal
property collateral or security, or to obtain provisional or ancillary remedies,
including without limitation injunctive relief, sequestration, attachment,
garnishment or the appointment of a receiver, from a court of competent
jurisdiction before, after or during the pendency of any arbitration or other
proceeding. The exercise of any such remedy shall not waive the right of any
party to compel arbitration or reference hereunder.
(d) Arbitrator Qualifications and Powers; Awards. Arbitrators
must be active members of the California State Bar or retired judges of the
state or federal judiciary of California, with expertise in the substantive laws
applicable to the subject matter of the Dispute. Arbitrators are empowered to
resolve Disputes by summary rulings in response to motions filed prior to the
final arbitration hearing. Arbitrators (i) shall resolve all Disputes in
accordance with the substantive law of the state of California, (ii) may grant
any remedy or relief that a court of the state of California could order or
grant within the scope hereof and such ancillary relief as is necessary to make
effective any award, and (iii) shall have the power to award recovery of all
costs and fees, to impose sanctions and to take such other actions as they deem
necessary to the same extent a judge could pursuant to the Federal Rules of
Civil Procedure, the California Rules of Civil Procedure or other applicable
law. Any Dispute in which the amount in controversy is $5,000,000 or less shall
be decided by a single arbitrator who shall not render an award of greater than
$5,000,000 (including damages, costs, fees and expenses). By submission to a
single arbitrator, each party expressly waives any right or claim to recover
more than $5,000,000. Any Dispute in which the amount in controversy exceeds
$5,000,000 shall be decided by majority vote of a panel of three arbitrators;
provided however, that all three arbitrators must actively participate in all
hearings and deliberations.
(e) Judicial Review. Notwithstanding anything herein to the
contrary, in any arbitration in which the amount in controversy exceeds
$25,000,000, the arbitrators shall be required to make specific, written
findings of fact and conclusions of law. In such arbitrations (A) the
arbitrators shall not have the power to make any award which is not supported by
substantial evidence or which is based on legal error, (B) an award shall not be
binding upon the parties unless the findings of fact are supported by
substantial evidence and the conclusions of law are not erroneous under the
substantive law of the state of California, and (C) the parties shall have in
addition to the grounds referred to in the Federal Arbitration Act for vacating,
modifying or correcting an award the right to judicial review of (1) whether the
findings of fact rendered by the arbitrators are supported by substantial
evidence, and (2) whether the conclusions of law are erroneous under the
substantive law of the state of California. Judgment confirming an award in such
a proceeding may be entered only if a court determines the award is supported by
substantial evidence and not based on legal error under the substantive law of
the state of California.
(f) Real Property Collateral; Judicial Reference.
Notwithstanding anything herein to the contrary, no Dispute shall be submitted
to arbitration if the Dispute concerns indebtedness secured directly or
indirectly, in whole or in part, by any real property unless (i) the holder of
the mortgage, lien or security interest specifically elects in writing to
proceed with the arbitration, or (ii) all parties to the arbitration waive any
rights or benefits that might accrue to them by virtue of the single action rule
statute of California, thereby agreeing that all indebtedness and obligations of
the parties, and all mortgages, liens and security interests securing such
indebtedness and obligations, shall remain fully valid and enforceable. If any
such Dispute is not submitted to arbitration, the Dispute shall be referred to a
referee in accordance with California Code of Civil Procedure Section 638 et
seq., and this general reference agreement is intended to be specifically
enforceable in accordance with said Section 638. A referee with the
qualifications required herein for arbitrators shall be selected pursuant to the
AAA's selection procedures. Judgment upon the decision rendered by a referee
shall be entered in the court in which such proceeding was commenced in
accordance with California Code of Civil Procedure Sections 644 and 645.
-27-
<PAGE> 28
(g) Miscellaneous. To the maximum extent practicable, the AAA,
the arbitrators and the parties shall take all action required to conclude any
arbitration proceeding within 180 days of the filing of the Dispute with the
AAA. No arbitrator or other party to an arbitration proceeding may disclose the
existence, content or results thereof, except for disclosures of information by
a party required in the ordinary course of its business, by applicable law or
regulation, or to the extent necessary to exercise any judicial review rights
set forth herein. If more than one agreement for arbitration by or between the
parties potentially applies to a Dispute, the arbitration provision most
directly related to the Loan Documents or the subject matter of the Dispute
shall control. This arbitration provision shall survive termination, amendment
or expiration of any of the Loan Documents or any relationship between the
parties.
-28-
<PAGE> 29
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed as of the day and year first written above.
ANDATACO OF CALIFORNIA, INC., WELLS FARGO BANK,
a California corporation NATIONAL ASSOCIATION
By: /s/ Richard A. Hudzik By: /s/ Michael P.Baranowski
--------------------------- ---------------------------
Title: Chief Financial Officer Title: Vice President
------------------------- ------------------------
-29-
<PAGE> 1
Exhibit 11.1
ANDATACO, INC.
COMPUTATION OF LOSS PER COMMON SHARE
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Basic EPS Computation
Net loss $ (189) $ (339) $ (609) $ (449)
------------ ------------ ------------ ------------
Weighted average shares outstanding 23,819 18,078 23,819 18,078
------------ ------------ ------------ ------------
Shares used in computing basic
loss per share 23,819 18,078 23,819 18,078
------------ ------------ ------------ ------------
Basic loss per share $ (0.01) $ (0.02) $ (0.03) $ (0.03)
============ ============ ============ ============
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
------------------------------- -------------------------------
1998 1997 1998 1997
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Diluted EPS Computation
Net loss $ (189) $ (339) $ (609) $ (449)
------------ ------------ ------------ ------------
Weighted average shares outstanding 23,819 18,078 23,819 18,078
Common stock equivalents from the
issuance of options and warrants using
the treasury stock method -- -- -- --
------------ ------------ ------------ ------------
Shares used in computing diluted
loss per share 23,819 18,078 23,819 18,078
------------ ------------ ------------ ------------
Diluted loss per share $ (0.01) $ (0.02) $ (0.03) $ (0.03)
============ ============ ============ ============
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM UNAUDITED
CONSOLIDATED FINANCIAL STATEMENTS FOR THE THREE MONTHS ENDED AND AS OF APRIL 30,
1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-START> FEB-01-1998
<PERIOD-END> APR-30-1998
<CASH> 20,000
<SECURITIES> 0
<RECEIVABLES> 10,695,000
<ALLOWANCES> 0
<INVENTORY> 6,247,000
<CURRENT-ASSETS> 17,414,000
<PP&E> 3,804,000
<DEPRECIATION> 0
<TOTAL-ASSETS> 28,098,000
<CURRENT-LIABILITIES> 12,669,000
<BONDS> 0
0
0
<COMMON> 238,000
<OTHER-SE> 3,889,000
<TOTAL-LIABILITY-AND-EQUITY> 28,098,000
<SALES> 20,996,000
<TOTAL-REVENUES> 20,996,000
<CGS> 14,325,000
<TOTAL-COSTS> 6,593,000
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 256,000
<INCOME-PRETAX> (178,000)
<INCOME-TAX> 11,000
<INCOME-CONTINUING> (189,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (189,000)
<EPS-PRIMARY> 0.01
<EPS-DILUTED> 0.01
</TABLE>
