<PAGE>1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-Q
__X___ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
Commission File Number: 0-8354
nSTOR TECHNOLOGIES, INC.
(Exact name of Registrant as specified in its Charter)
Delaware 95-2094565
(State of other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
450 Technology Park
Lake Mary, FL 32746
(Address of principal executive office)
(407) 829-3500
(Registrant's telephone number)
100 Century Blvd.
West Palm Beach, FL 33417
(Former name, former address and former fiscal year, if
changed since last report)
Indicate by check mark whether the Registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing
requirements for the past 90 days. Yes X No _____
Number of shares outstanding of the Registrant's Common Stock,
par value $.05 per share, as of July 31, 1998: 18,834,546
<PAGE> 2
PART 1. FINANCIAL INFORMATION
Item 1. Financial Statements
The condensed financial statements included herein have been
prepared by the Registrant, without audit, pursuant to the rules
and regulations of the Securities and Exchange Commission.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted
pursuant to such rules and regulations; however, the Registrant
believes that the disclosures are adequate to make the
information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the
financial statements and the notes thereto included in the
Registrant's annual report on Form 10-K for the year ended
December 31, 1997.
The condensed financial statements for the interim periods
included herein, which are unaudited, include, in the opinion of
management, all adjustments (consisting only of normal recurring
adjustments) necessary to present fairly the financial position
and results of operations of the Registrant for the periods
presented. The results of operations for interim periods should
not be considered indicative of results to be expected for the
full year.
<PAGE> 3
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED BALANCE SHEETS
(dollars in thousands)
Jun. 30, Dec. 31,
ASSETS (Note 3) 1998 1997
---------------- --------- ---------
Current assets:
Cash and cash equivalents:
Unrestricted $ 20 $ 61
Restricted 1,024 1,024
Accounts receivable (Note 2) 3,445 3,863
Inventories (Note 2) 3,182 3,577
Deferred loan costs 314 -
Prepaid expenses and other 339 262
------- -------
Total current assets 8,324 8,787
Property and equipment, net (Note 2) 2,092 2,060
Goodwill and other intangible assets,
net (Note 2) 6,197 5,915
------- -------
$16,613 $16,762
======= =======
LIABILITIES
-----------
Current liabilities:
Borrowings (Note 3) $ 3,424 $ 3,445
Accounts payable and other 3,892 6,568
Royalty liability 208 208
------- -------
Total current liabilities 7,524 10,221
Long-term debt (Note 3) 5,573 1,504
------- -------
Total liabilities 13,097 11,725
------- -------
Commitments and contingencies
STOCKHOLDERS' EQUITY
--------------------
Preferred stock, $.01 par; shares
authorized 1,000,000; outstanding 3,500
shares of 8% Cumulative Convertible
Preferred Stock, Series B (Note 6) - -
Common stock, $.05 par; shares authorized
40,000,000; outstanding 18,670,477 934 934
Additional paid-in capital 35,014 30,499
Deficit (32,432) (26,396)
------- -------
Total stockholders' equity 3,516 5,037
------- -------
$16,613 $16,762
======= =======
_______
See accompanying notes to consolidated financial statements.
<PAGE> 4
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(dollars in thousands, except per share data)
Three Months Six Months
Ended June 30, Ended June 30,
---------------------- ----------------------
1998 1997 1998 1997
---------- ---------- ---------- ----------
Sales $ 5,738 $ 5,574 $ 9,344 $14,577
Cost of sales 4,727 3,957 7,685 9,849
------- ------- ------- -------
Gross profit 1,011 1,617 1,659 4,728
------- ------- ------- -------
Operating expenses:
Selling, general and
administrative 2,500 2,169 4,693 4,147
Research and development
nStor 432 762 933 1,424
Borg Adaptive Technologies
(Note 5) 149 - 216 -
------- ------- ------- -------
Total research and
development 581 762 1,149 1,424
Depreciation and
amortization 349 194 630 374
------- ------- ------- -------
Total operating expenses 3,430 3,125 6,472 5,945
------- ------- ------- -------
Loss from operations (2,419) (1,508) (4,813) (1,217)
Interest income 24 39 40 70
Interest expense (319) (27) (481) (45)
------- ------- ------- -------
Net loss ( 2,714) ( 1,496) ( 5,254) ( 1,192)
Preferred stock dividends
(Note 6) (782) - (782) -
------- ------- ------- -------
Net loss applicable to
common stock ($ 3,496) ($1,496) ($ 6,036) ($ 1,192)
======= ======= ======= =======
Loss per common share ($ .19) ($ .08) ($ .32) ($ .06)
======= ======= ======= =======
Average number of common
shares outstanding 18,670,477 18,670,477 18,670,477 18,670,477
========== ========== ========== ==========
_______
See accompanying notes to consolidated financial statements.
<PAGE> 5
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(dollars in thousands)
Addi-
Common Stock Preferred Stock tional
----------------- --------------- Paid-In
Shares Amount Shares Amount Capital Deficit Total
---------- ------ ------ ------ ------- ------- -------
Balances, December
31, 1997 18,670,477 $934 - - $30,499 ($26,396) $ 5,037
Net loss for the
six months ended
June 30, 1998 - - - ( 5,254) ( 5,254)
Issuance of
Convertible
Preferred Stock,
Series B through
Reg D offering,
less $255 of
issuance cost 3,500 - 3,245 3,245
Preferred stock
dividend 722 (782) (60)
Common stock
warrants
issued in
connection with:
Long term debt 400 400
Acquisition 148 148
---------- ---- ------ ------ ------- ------- -------
Balances, June
30, 1998 18,670,477 $934 3,500 - $35,014 ($32,432) $ 3,516
========== ==== ===== ====== ======= ======= =======
_______
See accompanying notes to consolidated financial statements.
<PAGE>6
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months
Ended June 30,
-------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) ($ 5,254) ($1,192)
Adjustments to reconcile net (loss)
to net cash used by operating activities:
Depreciation and amortization 630 374
Provision for uncollectible accounts
receivable 225 -
Amortization of deferred loan costs 86 -
Changes in assets and liabilities net
of effects from acquisition:
Decrease in accounts receivable 193 576
Decrease (increase) in inventories 395 (3,202)
(Increase) in prepaid expenses and other (77) (74)
(Decrease) in accounts payable and other
current liabilities (2,736) (1,083)
-------- --------
Net cash used by operating activities (6,538) (4,601)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (417) (571)
Cash paid for acquisition (379) -
-------- --------
Net cash used by investing activities (796) (571)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings 20,619 2,767
Repayment of borrowings (16,571) (717)
Increase in restricted cash and cash equivalents - (1,000)
Issuance of preferred stock, net of issuance
costs of $255 3,245 -
-------- --------
Net cash provided by financing activities 7,293 1,050
-------- --------
Net (decrease) in unrestricted cash and
cash equivalents during the period (41) (4,122)
Unrestricted cash and cash equivalents at the
beginning of the period 61 4,619
--------- ---------
Unrestricted cash and cash equivalents at the
end of the period $ 20 $ 497
========= =========
_______
See accompanying notes to consolidated financial statements.
<PAGE> 7
nSTOR TECHNOLOGIES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS, (continued)
(in thousands)
Six Months
Ended June 30,
-------------------
1998 1997
-------- --------
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Acquisition (Note 5):
Fair value of assets acquired $ 527 $ -
Warrant issued to seller (148) -
-------- --------
Cash paid $ 379 $ -
======== ========
NON-CASH FINANCING ACTIVITIES:
Preferred stock dividend (Note 6)
Amortization of conversion discount $ 722 $ -
======== ========
Deferred loan costs (Note 7)
Deferred loan costs, arising from
issuance of warrants under
subordinated loans $ 314 $ -
======== ========
_______
See accompanying notes to consolidated financial statements.
<PAGE> 8
nSTOR TECHNOLOGIES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of nStor
Technologies, Inc. and all wholly-owned subsidiaries (collectively,
the "Company"). Significant intercompany balances and transactions
have been eliminated in consolidation.
Business
The Company is principally engaged as a manufacturer and supplier of
information storage solutions, including external RAID (Redundant
Array of Independent Disks) subsystems and data storage enclosures,
storage management hardware and software as well as digital media
products.
Use of Estimates
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to
make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the
reported amounts of revenues and expenses during the reporting
period. Actual results could differ from those estimates.
Revenue Recognition
Sales revenue is recognized upon shipment provided that there are
no significant post-sale obligations and the collectibility is
reasonably assured. During the periods presented in the
accompanying consolidated Statements of Operations, there were no
significant post-sales obligations except for normal warranty
costs.
Warranty Costs
Warranty costs are provided on the basis of estimated net future
costs related to products sold.
Research and Development Costs
Research and development costs are expensed as incurred.
Reclassifications
Certain prior years' amounts have been reclassified to conform to
the current year's presentations. These reclassifications had no
impact on operating results previously reported.
<PAGE> 9
Loss Per Common Share
The effect of potentially dilutive common share equivalents is
anti-dilutive
due to the net loss and therefore is not reflected on the Statement of
Operations.
(2) BALANCE SHEET COMPONENTS (in thousands)
Substantially all assets are pledged as collateral for
indebtedness. See Note 3 to Consolidated Financial Statements.
June 30, Dec.31,
1998 1997
------ ------
Accounts Receivable
Trade receivables $3,563 $4,218
Less allowance for
doubtful accounts (260) (500)
------ ------
3,303 3,718
Other receivables 142 145
------ ------
$3,445 $3,863
====== ======
Inventories
Raw materials $2,797 $3,299
Work-in-process 298 -
Finished goods 87 278
------ ------
$3,182 $3,577
====== ======
Inventories are stated at the lower of cost or market, with cost
being determined based on the first-in, first-out (FIFO) method.
Reserves are recorded as necessary to reduce obsolete inventory to
estimated net realizable value.
<PAGE> 10
2) BALANCE SHEET COMPONENTS (in thousands), cont.
June 30, Dec.31,
1998 1997
------ ------
Property and Equipment
Computer equipment $1,150 $ 809
Computer software 944 907
Furniture, fixtures
and office equipment 285 286
Leasehold improvements 332 283
Other 243 232
------ ------
2,954 2,517
Less accumulated depreciation (862) (457)
------ ------
$2,092 $2,060
====== ======
Property and equipment are stated at cost. Depreciation is
provided under the straight-line method over the estimated useful
lives, principally three to five years.
Goodwill and Other Intangible Assets
Goodwill $6,038 $6,038
Intellectual assets 811 347
Other 43 -
------ ------
6,892 6,385
Less accumulated amortization (695) (470)
------ ------
$6,197 $5,915
====== ======
The goodwill, representing the excess purchase price over the
fair value of assets acquired, is carried at cost and amortized on a
straight line basis over fifteen years, the estimated useful life.
Intellectual assets consisting of trademarks and proprietary
technology are carried at cost and are being amortized on a
straight-line basis over ten to fifteen years, the estimated useful
life.
<PAGE> 11
(3) BORROWINGS
Current
The Company's short-term borrowings consisted of:
(In thousands)
June 30, Dec.31,
1998 1997
------ ------
Asset based revolving bank credit facility
(the "Revolver" - repaid August 4, 1998) $2,824 $3,245
Loan from director 400 -
Other 200 200
------ ------
Total short-term borrowings $3,424 $3,445
====== ======
The Revolver bore interest, payable monthly, based on LIBOR plus 3%
(8.65% at June 30, 1998), was guaranteed by the Company and matured
on July 31, 1998, as extended. Advances under the Revolver were
collateralized by substantially all assets of the Company,
including approximately $1.0 million reflected as Restricted Cash at
June 30, 1998. The loan agreement provided for certain
restrictions on the payment of dividends, the incurrence of
additional indebtedness and capital expenditures, and required
minimum working capital, tangible net worth and other financial
covenants. The Company had not consistently been in compliance
with certain financial covenants which resulted in amendments to
the Revolver in December 1997 and February 1998. Among other
modifications, the amendments waived compliance with the financial
covenants and reduced the original maximum loan amount from $7.0
million to $3.0 million as of June 30, 1998, with gradual reductions
to $2.4 million thereafter until maturity on July 31, 1998.
On August 3, 1998, the Company secured a new revolving line of credit
with another financial institution (the "new Revolver"). The credit
facility consists of loans against the Company's eligible accounts
receivable for an amount equal to the lesser of $5.0 million or 80% of
the Company's eligible accounts receivable as defined, less certain
reserves. The new Revolver bears interest, payable monthly, based on
prime plus 2%, is guaranteed by the Company and matures on August 3,
2000. The Company pays a facility fee equal to 1% per annum on the
total facility of $5.0 million. Advances under the new Revolver are
collateralized by substantially all assets of the Company, including
$.5 million in cash collateral. The loan agreement provides for
certain covenants with respect to the maintenance of a specific
current ratio, net worth and limitation of operating losses as well as
restrictions on the incurrence of additional debt and capital
expenditures.
Proceeds of $1.5 million from the new Revolver were used to repay and
replace the Company's previous Revolver, which expired on July 31,
1998.
<PAGE> 12
(3)
BORROWINGS, cont.
Long Term Debt
The Company's long term debt consisted of:
(In thousands)
June 30, Dec.31,
1998 1997
------ ------
Subordinated loans $5,000 $ 950
Convertible notes 573 554
------ ------
Total long-term borrowings $5,573 $1,504
====== ======
Subordinated Loans
At December 31, 1997, the Company's long-term debt included $950,000
due from H. Irwin Levy, a director and principal stockholder of the
Company, under a Promissory Note which provided that the Company could
borrow up to $1.0 million (the "Director Loan"). During the six
months ended June 30, 1998, Mr. Levy advanced an additional net amount
of $1,450,000 (consisting of $3,315,000 advanced, less $1,865,000
repaid). Of this amount, $400,000 was repaid on July 10, 1998 and is
included in current borrowings. In connection with the remaining
$1,050,000, on March 5, 1998 an Amended and Restated Loan Agreement
was executed, increasing the Director Loan to $2.0 million. In March
1998, three private investors loaned the Company an aggregate of an
additional $3.0 million (together with the $2.0 million Director Loan,
hereinafter referred to as the Subordinated Loans). The Subordinated
Loans bear interest at 10% per annum, payable monthly, mature on
September 5, 1999, are subordinated to the new Revolver and are
collateralized by substantially all of the Company's assets. Amounts
advanced by Mr. Levy in excess of his portion of the Subordinated
Loans are pursuant to an unsecured line of credit for up to $1.0
million through December 31, 1998 which bears interest at 10% per
annum.
In connection with the Director Loan, the Company issued warrants to
Mr. Levy to purchase 65,000 shares of the Company's common stock at an
exercise price of $2.35 per share, exercisable on the dates of grant,
and expiring on September 16, 2000. In connection with the
Subordinated Loans, warrants were issued to purchase an aggregate of
1,666,668 shares of the Company's common stock (including 666,666 to
Mr. Levy) at an exercise price of $1.50 per share, exercisable on the
date of grant, and expiring on March 5, 2001.
During the second quarter of 1998, Mr. Levy sold participation
interests in $750,000 of his Subordinated Loans to unrelated private
investors (including
249,999 warrants).
Convertible Notes
The Convertible Notes have a face amount of $400,000, have been
discounted based on an effective interest rate of 12%, include
accrued interest of $210,000 and $206,000 at June 30, 1998 and
December 31, 1997, respectively, mature in 2000 and are convertible
into 160,000 shares of common stock of the Company (based on one
common share for each $2.50 of face amount).
<PAGE> 13
(4) INCOME TAXES
As of December 31, 1997, there were unused net operating loss
carryforwards (the "NOL's") for regular federal income tax purposes
of approximately $8.4 million principally expiring in 2012, for
which no financial statement benefit had been recognized. In
addition, the Company has research and development tax credit
carryforwards of approximately $637,000 which expire from 2002
through 2012 and in conjunction with the Alternative Minimum Tax
("AMT") rules, the Company has available AMT credit carryforwards
of approximately $238,000, at December 31, 1997, which may be used
indefinitely to reduce regular federal income taxes.
(5) ACQUISITIONS
Effective April 23, 1998, the Company acquired all the outstanding
common stock of Borg Adaptive Technologies, Inc., a privately
owned company headquartered in Boulder, Colorado, and the developer of
Adaptive RAID, a patented next-generation RAID technology. The
purchase price consisted of $379,000 in cash, including acquisition
costs, and warrants to purchase 400,000 shares of the Company's common
stock at $1.38 per share exercisable on May 1, 1998 and expiring on
December 26, 2000, valued at $148,000. In accordance with the
purchase agreement, the sellers (currently
employees of the Company) of Borg Adaptive Technologies, Inc. shall
receive a royalty payment equal to 5% of the gross sales, as defined,
of a certain product for as long as the product is sold. The Company
is not obligated to continue development or sale of the product if
sales of such product are not sufficiently profitable, as determined
by the Company in its sole discretion.
Pursuant to piggyback registration rights granted in the warrants, on
June 24, 1998, the Company registered with the Securities and Exchange
Commission on Form S-3 Registration Statement the shares of common
stock issuable to the sellers of Borg Adaptive Technologies, Inc. upon
exercise of their warrants.
The acquisition was accounted for under the purchase method of
accounting with assets acquired (principally intellectual assets)
recorded at estimated fair values as of the effective acquisition date
and the operating results of the acquired business included in the
Company's consolidated financial statements effective April 23, 1998.
(6) 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B
Effective April 14, 1998, the Company received $3.5 million in cash
(including $1.0 million from Mr. Levy) less $.3 million in issuance
costs from a private placement of 8% Cumulative Convertible Preferred
Stock, Series B (the "Convertible Preferred Stock"). The Convertible
Preferred Stock is convertible into common stock, on various dates
through April 2000, at a conversion price equal to the lesser of $1.44
per share or 77% of the market price at the date of conversion. At
closing, the Company issued warrants to purchase 280,000 shares of
the Company's common stock (including 80,000 to Mr. Levy),
exercisable at any time through April 2001 at an exercise price of
$1.50 per share. The Company has accrued $60,000 in preferred stock
dividends for the three and six month periods ended June 30,1998.
<PAGE> 14
(6) 8% CUMULATIVE CONVERTIBLE PREFERRED STOCK, SERIES B, cont.
In March 1997, the Securities and Exchange Commission Staff (the
"Staff") announced its position on accounting for preferred stock
which is convertible into common stock at a discount from market
rate at the date of issuance. The Staff's position is that a
preferred stock dividend should be recorded for the difference
between the conversion price and the quoted market price of common
stock at the date of issuance. To comply with this position, the
Company has recorded $722,000 as an additional preferred stock
dividend on its
Statement of Operations for the three and six month periods ended June
30, 1998.
In July 1998, $100,000 of Convertible Preferred Stock was converted
into 164,065 shares of the Company's common stock.
(7) DEFERRED LOAN COSTS
In connection with the Subordinated Loans (see Note 3 to the
Consolidated Financial Statements), the Company issued 1,666,668
warrants valued at $400,000, which are being amortized on a pro-rata
basis over the life of the loans through September 5, 1999. The
amortization of these loan costs resulted in $86,000 in additional
interest expense on the Statement of Operations for the three and six
month periods ended June 30, 1998.
(8) SUBSEQUENT EVENTS
On July 7, 1998, the Company borrowed $1.0 million from a private
investor under an 8% Convertible Subordinated Debenture (the
"Debenture"), which matured on August 7, 1998, and has been extended
through September 18, 1998. The Debenture is convertible into shares
of preferred stock with an 8% dividend rate, which in turn will be
convertible into shares of the Company's common stock based on a fixed
conversion rate.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
With the exception of discussion regarding historical information,
"Management's Discussion and Analysis of Financial Condition and
Results of Operations" contains forward looking statements. Such
statements are based on current expectations subject to
uncertainties and other factors which may involve known and unknown
risks that could cause actual results of operations to differ
materially from those projected or implied. Further, certain
forward looking statements are based upon assumptions about future
events which may not prove to be accurate.
<PAGE> 15
Risks and uncertainties inherent in forward looking statements
include, but are not limited to, the Company's future cash flows
and ability to obtain sufficient financing, timing and volume of
sales orders, level of gross margins and operating expenses, lack
of market acceptance of the Company's new product lines, price
competition, conditions in the technology industry and the economy
in general, as well as legal proceedings. The economic risk
associated with materials cost fluctuations and inventory
obsolescence is significant to the Company. The Company's ability
to manage its inventories through procurement and utilization of
component materials could have a significant impact on future
results of operations or financial condition. Historical results
are not necessarily indicative of the operating results for any
future period.
Subsequent written and oral forward looking statements attributable
to the Company or persons acting on its behalf are expressly
qualified in their entirety by cautionary statements in this Form
10-Q and in other reports filed by the Company with the Securities
and Exchange Commission. The following discussion should be read
in conjunction with the Consolidated Financial Statements and the
Notes thereto included elsewhere in this filing.
The Company is principally engaged as a manufacturer and supplier of
information storage solutions, including external RAID subsystems and
data storage enclosures, storage management hardware and software as
well as digital media products.
Effective June 30, 1998, the Company completed a workforce reduction
to align operating expenses with the current sales expectations for
the balance of the year, as well as, eliminate inefficient and
redundant positions. All costs associated with the expense reduction
(approximately $64,000) have been accrued as of June 30, 1998 and
primarily consist of severance costs associated with the workforce
reduction.
On July 1, 1998, the Company announced that it will strategically
focus on its core strengths in storage technology. As a result, the
Company is executing an orderly transition to phase out of all
non-storage related businesses, including its memory division and
its Integrated Systems Division.
Three Months Ended June 30, 1998 vs. June 30, 1997
Sales
Net sales for the three months ended June 30, 1998 were $5.7 million
compared to $5.6 million for the three months ended June 30, 1997,
an increase of .1 million or 2.9%.
During the three months ended June 30, 1998 the Company continued to
expand its sales distribution channels through the addition of new
distributors and value - added resellers.
<PAGE> 16
Cost of Sales / Gross Margins
Gross margins decreased to 17.6% in the second quarter of 1998,
compared to 29% in the second quarter of 1997. The Company's gross
margins are dependent, in part, on product mix, which fluctuates
from time to time. The decrease is primarily attributable to
increased sales level of products with overall lower margins, an
additional inventory valuation reserve for discontinued products and
cash flow difficulties from the first quarter of 1998 which
extended into early second quarter 1998, limiting the Company's
ability purchase product on a cost effective basis.
Operating Expenses
Selling, General & Administrative
Selling, general and administrative expenses were $2.5
million and $2.2 million in the second quarters of 1998 and 1997,
respectively, an increase of $.3 million or 15%. This increase
primarily represents an additional provision for an uncollectible
receivable
resulting from the termination of a distributor agreement, accrued
severance costs associated with a workforce reduction and the
additional cost of certain sales management and their related
overhead.
Selling and marketing costs primarily consist of salaries,
commissions and related benefits, expenses in connection with
tradeshows, conferences and seminars, facilities expenses and other
miscellaneous costs allocated to those personnel. General and
administrative costs primarily consist of general corporate expenses,
executive officers, accounting and facilities costs
allocated to those personnel.
The company does not expect selling, general and administrative
expenses to significantly increase in the near future, except to the
extent that sales commissions and other marketing costs may increase
due to an increase in sales revenue.
Research and Development
Research and development expenses were $.6 million and
$.8 million in the second quarters of 1998 and 1997, respectively,
a decrease of $.2 million or 23.8%. The overall decrease was mainly
due to the reorganization and absorption of previously acquired
engineering activities into the existing research and development staff,
partially offset by increased engineering staffing and related overhead
from the most recent acquisition of Borg Adaptive Technologies, Inc ("Borg").
Research and development costs are expensed as incurred and may
fluctuate considerably from time to time depending on a variety of
factors. These costs are substantially incurred in advance of related
revenues, or in certain situations, may not result in generating
revenues. Management anticipates an increase in these expenses for
the remainder of fiscal 1998 primarily brought about by the Borg
acquisition, which will require certain additional development and
integration into the Company's existing product line.
<PAGE> 17
Depreciation and Amortization
Depreciation and amortization increased $.2 million over the second
quarter of 1997 due to the capitalization of completed software
development, leasehold improvements and test equipment placed in
service by March 31, 1998.
Interest Expense
Interest expense for the three months ended June 30, 1998 increased
$.2 million over the same period of the prior year as a result of the
increase in borrowings and the amortization of loan costs arising from
the Subordinated Loans. (see Notes 3 & 7 to the Consolidated
Financial Statements)
Preferred Stock Dividends
In March 1997, the Securities and Exchange Commission Staff (the
"Staff") announced its position on accounting for preferred stock
which is convertible into common stock at a discount from market
rate at the date of issuance. The Staff's position is that a
preferred stock dividend should be recorded for the difference
between the conversion price and the quoted market price of common
stock at the date of issuance. To comply with this position, the
Company has recorded $722,000 as an additional preferred stock
dividend on its
Statement of Operations for the three and six month period ended June
30, 1998. The Company has also recorded the 8% dividend for the
Convertible Preferred Stock in the amount of $60,000 for the three and
six month periods ended June 30, 1998.
In July 1998, $100,000 of Convertible Preferred Stock was converted
into 164,065 shares of the Company's common stock.
Future operating results attributable to common stockholders will
reflect the 8% preferred stock dividend. In addition, approximately
$.3 million is expected to be recorded in the third quarter of 1998 as
an additional preferred stock dividend to reflect the final
amortization of the aforementioned conversion discount.
Six Months Ended June 30, 1998 vs. June 30, 1997
Sales
Net sales for the six months ended June 30, 1998 were $9.3 million
compared to $14.6 million for the six months ended June 30, 1997,
a decrease of $5.3 million or 36%. The decrease in net sales is
primarily attributable to the first quarter of 1998 with net sales
of $3.6 million compared to $9.0 million in the first quarter of
1997, a reduction of $5.4 million. The reduction in net sales was
principally due to the following: (i) entering 1997 with a
significantly higher backlog of sales orders than were in place
entering 1998; (ii) delay in customer deliveries and in some cases,
missed sales orders caused by the Company's inability to meet
customer production schedules brought about by cash flow
difficulties; and (iii) lost sales opportunities while reorganizing
and training the Company's sales force.
<PAGE> 18
During the three months ended June 30, 1998 the Company continued to
expand its sales distribution channels through the addition of new
distributors and value - added resellers.
Cost of Sales / Gross Margins
Gross margins decreased to 17.8% in the first six months of 1998,
compared to 32.4% in the first six months of 1997. The Company's
gross margins are dependent, in part, on product mix, which
fluctuates from time to time. The decrease is primarily attributable
to a decreased sales level of products with overall higher margins, an
increase in an inventory valuation reserve for discontinued products
and
cash flow difficulties for the first quarter of 1998, which limited
the Company's ability to purchase products in the most cost efficient
manner.
Operating Expenses
Selling, General & Administrative
Selling, general and administrative expenses were
$4.7 million and $4.2 million in the first six months of 1998 and
1997, respectively, an increase of $.5 million or 13.2%.
The provision for uncollectible accounts receivable increased by $.2
million compared to the first six months of 1997 resulting from the
termination of a
distributor agreement. The remaining increase of
$.3 million was principally due to accrued severance cost associated
with a workforce reduction and additional cost of certain sales
management
and their related overhead over the comparable period in 1997.
Research and Development
Research and development expenses were $1.1 million and
$1.4 million in the first six months of 1998 and 1997, respectively,
a decrease of $.3 or 19.3%. The overall decrease was mainly due to the
reorganization and absorption of the previously acquired engineering
activities into the existing research and development staff, partially
offset by the increased engineering staffing and related overhead from
the recent Borg acquisition.
Depreciation and Amortization
Depreciation and amortization increased $.3 million over the first six
months of 1997 due to the capitalization of completed software
development, leasehold improvements and test equipment placed in
service by March 31, 1998.
Interest Expense
Interest expense for the six months ended June 30, 1998 increased $.4
million over the same period of the prior year as a result of the
increase in borrowings and the amortization of loan costs arising from
the Subordinated Loans. (See Note 3 & 7 to the Consolidated Financial
Statements).
<PAGE> 19
Preferred Stock Dividends
In March 1997, the Securities and Exchange Commission Staff (the
"Staff") announced its position on accounting for preferred stock
which is convertible into common stock at a discount from market
rate at the date of issuance. The Staff's position is that a
preferred stock dividend should be recorded for the difference
between the conversion price and the quoted market price of common
stock at the date of issuance. To comply with this position, the
Company has recorded $722,000 as an additional preferred stock
dividend on its
Statement of Operations for the three and six month period ended June
30, 1998. The Company has also recorded the 8% dividend for the
Convertible Preferred Stock in the amount of $60,000 for the three and
six month periods ended June 30, 1998.
In July 1998, $100,000 0f Convertible Preferred Stock was converted
into 164,065 shares of the Company's common stock.
Future operating results attributable to common stockholders will
reflect the 8% preferred stock dividend. In addition, approximately
$.3 million is expected to be recorded in the third quarter of 1998 as
an additional preferred stock dividend to reflect the final
amortization of the aforementioned conversion discount.
Liquidity and Capital Resources
Net cash used by operating activities amounted to $6.5 million and
$4.6 million for the six months ended June 30, 1998 and 1997,
respectively. The most significant uses of cash for the 1998
period were the $4.3 million loss from operations (before
depreciation, amortization and provision for bad debts)and the
reduction of accounts payable and other liabilities of $2.7 million,
partially offset by a reduction in accounts receivable and inventories
of approximately $.6 million. The most significant uses of cash for
the 1997 comparable period were an increase in inventories of $3.2
million, a decrease in accounts payable and other liabilities of $1.1
million and the loss from operations of $.8 (before depreciation and
amortization)
Net cash used by investing activities was approximately $.8 million
and $.6 million for the six months ended June 30, 1998 and 1997,
respectively. In 1998, the use of cash was attributable to
investments in
property and equipment and the acquisition of Borg, while in 1997, the
use of cash was attributable to an investment in property and
equipment.
Net cash provided by financing activities for the six months
ended June 30, 1998 was $7.3 million and primarily consisted of net
borrowings of $4.1 million under the Subordinated Loans (see Note 3 to
Consolidated Financial Statements), $3.2 in net proceeds from the
issuance of the Convertible Preferred Stock (See the following
discussion
and Note 6 to Consolidated Financial Statements)and a net short-term
loan of $.4 million by H. Irwin Levy, less net reductions of $.4
million under the Revolver.
<PAGE> 20
In May 1997, the Company obtained an asset based revolving bank
credit facility (the "Revolver") under which the Company could
borrow up to $7.0 million. In the months that followed, the Company
was not in compliance with certain financial covenants of the Revolver
resulting in amendments to the Revolver in December 1997 and
February 1998, in which the bank waived compliance with those
covenants and the maximum borrowings were reduced to $3.0 million
as of June 30, 1998, with gradual reductions to $2.4 million
thereafter until maturity on July 31, 1998. The Revolver bore
interest, payable monthly, at LIBOR plus 3%, was guaranteed by the
Company and was collateralized by
substantially all assets of the Company, including approximately
$1.0 million reflected as Restricted Cash at June 30, 1998. The
outstanding balance under the Revolver at June 30, 1998 was
$2.8 million and there was $.2 million of additional availability at
that time.
On August 3, 1998, the Company secured a new revolving line of credit
with another financial institution (the "new Revolver"). The new
Revolver consists of loans against the Company's eligible accounts
receivable for an amount equal to the lesser of $5.0 million or 80% of
the Company's eligible accounts receivable as defined, less certain
reserves. The new Revolver bears interest, payable monthly, based on
prime plus 2%, is guaranteed by the Company and matures on August 3,
2000. The Company pays a facility fee equal to 1% per annum on the
total facility of $5.0 million. Advances under the new Revolver are
collateralized by substantially all assets of the Company, including
$.5 million in cash collateral. The loan agreement provides for
certain covenants with respect to the maintenance of a specific
current ratio, net worth and limitation of operating losses as well as
restrictions on the incurrence of additional debt and capital
expenditures.
Proceeds of $1.5 million from the new Revolver were used to repay and
replace the Company's previous Revolver, which expired on July 31,
1998.
In September 1997, H. Irwin Levy agreed to loan up to $1.0 million
to the Company (the "Director Loan"). The Director Loan was
subordinated to the Revolver and was collateralized by
substantially all assets of the Company and as of December 31, 1997
had an outstanding principal balance of $950,000. During the six
months ended June 30, 1998, Mr. Levy advanced an additional net amount
of $1,450,000 (consisting of $3,315,000 advanced, less $1,865,000
repaid). Of this amount, $400,000 was repaid on July 10, 1998 and is
included in current borrowings. In connection with the remaining
$1,050,000, on March 5, 1998 an Amended and Restated Loan Agreement
was executed, increasing the Director Loan to $2.0 million. In March
1998, three private investors loaned the Company an aggregate of an
additional $3.0 million (together with the $2.0 million Director Loan,
hereinafter referred to as the Subordinated Loans). The Subordinated
Loans bear interest at 10% per annum, payable monthly, mature on
September 5, 1999, are subordinated to the new Revolver and are
collateralized by substantially all of the Company's assets. Amounts
advanced by Mr. Levy in excess of his portion of the Subordinated
Loans are pursuant to an unsecured revolving line of credit for up to
$1.0 million through December 31, 1998 which bears interest at 10% per
annum.
In April 1998, the Company received $3.5 million in cash (including
$1.0 million from Mr. Levy) less issuance costs of $.3 million from a
private placement of 8% Convertible Preferred Stock (see Note 6 to
Consolidated Financial
Statements).
<PAGE> 21
On July 7, 1998, the Company borrowed $1.0 million from a private
investor under an 8% Convertible Subordinated Debenture (the
"Debenture"), which matured on August 7, 1998, and has been extended
through September 18, 1998. The Debenture is convertible into shares
of preferred stock with an 8% dividend rate, which in turn will be
convertible into shares of the Company's common stock based on a fixed
conversion rate.
Management believes that proceeds already received from the
Subordinated Loans, Convertible Preferred Stock and the Debenture,
together with amounts expected to be available under the new Revolver
and Mr. Levy's unsecured line of credit will be sufficient to satisfy
the Company's working capital needs for the remainder of 1998, as
presently contemplated. There can be no assurance, however, that the
Company may not require additional capital beyond its current
forecasted needs nor that any such additional required funds would be
available on terms acceptable to the Company, if at all, at such time
or times required by the Company.
Effect of Inflation
Inflation has not had an impact on the Company's operations and the
Company does not expect that it will have a material impact in
1998.
Other
Year 2000 issues pertain to the inability of certain computerized
information systems to properly recognize date-sensitive information
as the year 2000 approaches. Systems that do not recognize such
information could generate erroneous data or cause systems to fail.
The Company is presently reviewing the potential impact of Year 2000
compliance issues on its information systems and business operations,
and has preliminarily determined that any costs, problems or
uncertainties
associated with the potential consequences of Year 2000 issues are
not expected to have a material impact on its future operations or
financial condition.
Part II - OTHER INFORMATION
Item 1. Legal Proceedings
In June 1996, a Complaint was filed in the Supreme Court of the
State of New York, County of Nassau, against the Company and its
Chairman. The plaintiffs claim to have contractual and proprietary
interests in the prospect of a transaction to purchase certain net
assets acquired by the Company and seek compensatory damages plus
punitive damages.
In August 1996, a Complaint was filed in the same Court making
similar allegations against a subsidiary, R. Daniel Smith, the
subsidiary's president at that time and Intelligent Manufacturing
Systems, Inc., a
company for which Mr. Smith was the Chief Executive Officer and
sole shareholder. In this action, the plaintiffs seek compensatory
damages plus punitive damages for alleged breach of contract.
<PAGE> 22
Both cases are currently in discovery. Counsel for the Company
believes that the Company has good defenses to both claims and that
it will not incur any material liability. The Company is unaware
of any facts that would support any of the plaintiffs' claims and,
accordingly, the Company believes that the claims are without
merit.
In June 1998, a Complaint was filed in the Supreme Court of the State
of New York by AIBC Investment Services Corp. ("the Plaintiff"), which
claims that the Company, its wholly-owned subsidiary and Mr. Smith
(the "Defendants") breached an agreement wherein the Plaintiff was
allegedly engaged as placement agent in connection with raising funds
for the Defendants. The Plaintiff seeks damages in the amount of not
less than $262,500 plus interest, warrants to purchase the Company's
common stock at a price to be determined and punitive damages. The
case is in the initial stages of discovery and the Company believes
that the claims are without merit.
From time to time, the Company is subject to legal proceedings and
other claims arising in the ordinary course of business. In the
opinion of management, the Company is not a party to any litigation
the outcome of which would have a material adverse effect on its
business or operations.
Item 2. Changes in Securities and Use of Proceeds.
Effective April 14, 1998, the Company issued and sold in a
private placement to certain accredited investors a total of 3,500
shares of Series A Preferred Stock at a purchase price of $1,000 per
share, resulting in gross proceeds to the Company of $3.5 million.
The shares of Series A Preferred Stock were convertible into shares of
the Company's common stock at the lesser of a fixed conversion price
or a percentage of the market value of the common stock. In
connection with the sale of the Series A Preferred Stock, the Company
issued warrants to purchase 280,000 shares of the Company's common
stock (including 80,000 warrants to Mr. Levy), exercisable at any time
through April 2001 at an exercise price of $1.50 per share.
On June 1, 1998, the Company created a new class of Preferred
Stock designated Series B Preferred Stock, which is identical to the
Series A Preferred Stock originally issued with the single exception
that the Series B Preferred Stock may, under certain limited
circumstances, be redeemed by the Company for cash in the amount of
130% of the purchase price of the Series B Preferred Stock. The
Series B Preferred Stock is convertible into common stock, at any time
through April 16, 2000, at a conversion price equal to the lesser of
$1.44 per share or 77% of the market price for the common stock on the
date of conversion. On April 16, 2000, all outstanding shares of
Series B Preferred Stock will automatically convert to shares of
common stock at the same conversion price.
On June 9, 1998, each holder of the Series A Preferred Stock
exchanged their shares of Series A Preferred Stock for an equal number
of shares of Series B Preferred Stock and, on June 12, 1998, the
Company filed a Certificate of Elimination with the Secretary of State
of Delaware to formally eliminate the Series A Preferred Stock.
On July 7, 1998, the Company borrowed $1 million for a private,
accredited investor pursuant to an 8% Convertible Subordinated
Debenture (the "Debenture") which matures on September 18, 1998. At
maturity, the debenture is convertible, at the Company's option, into
shares of a newly created Series A Preferred Stock, which preferred
stock will, in turn, be convertible into shares of the Company's
common stock at a fixed conversion rate.
<PAGE> 23
The securities issued in connection with the Director Loan and
the Subordinated Loans, the Series A Preferred Stock, the Series B
Preferred Stock, the warrants issued in connection with the Series A
Preferred Stock, and the Debenture were all issued pursuant to the
exemption from registration provided by Section 4(2) of the Securities
Act of 1933, as amended.
The new Revolver provides that the Company may not, without the
prior written consent of its lender, declare or pay cash dividends on
any of its stock, other than its preferred stock.
Item 4. Submission of Matters to a Vote of Security Holders.
On June 8, 1998, the Company held its annual meeting of
stockholders. At that meeting, the stockholders: elected seven
directors; amended the Company's Restated Certificate of Incorporation
to increase the authorized number of shares of commons stock from 24
million to 40 million; ratified the April 1998 approval of the Board
of Directors of the sale of 3,500 shares of Series A Preferred Stock
and the related issuance of warrants to acquire 280,000 shares of
common stock, including the issuance at below market prices of more
than 20% of the common stock outstanding, the issuance of more than 5%
of the common stock to all officers, directors and key employees, in
the aggregate, in any one year, and the issuance of more than 10% of
the common stock to all officers, directors and key employees, in the
aggregate, in a five year period; and ratified the Company's selection
of BDO Seidman as the Company's independent certified public
accountants.
The seven directors who were elected at the annual meeting are
listed below, together with a tabulation of the votes coast with
respect to each matter voted upon:
Matter For Against Abstain Not Voted
Election of Directors:
Michael L. Wise 15,061,655 163,987
Bernard R. Green 15,063,655 162,013
H. Irwin Levy 15,058,754 166,888
Mark F. Levy 15,056,954 168,688
Richard Reiss, Jr. 15,063,754 163,888
R. Daniel Smith 15,063,754 163,888
Joseph D. Weingard 15,063,754 163,888
Amendment to Certificate 14,943,442 273,334 8,866
of Incorporation
Ratification of Sale 9,602,891 193,655 64,355 5,364,641
of Preferred Stock
Ratification of 15,190,205 27,494 7,843
Selection of
Accountants
<PAGE> 24
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits
Exhibit
Number Description
3.1 Certificate of Elimination of the Designation of the
Series A Preferred Stock of the Company*
3.2 Certificate of Amendment to Restated Certificate of
Incorporation of the Company*
4.1 Form of Share Exchange Agreement dated June 9, 1998
between the Company and holders of the Series A Preferred
Stock whereby such holders exchanged their Series A Preferred
Stock for Series B Preferred Stock*
4.2 8% Convertible Subordinated Debenture dated June 7,
1998 issued by the Company to Maurice Halperin, as amended on
August 7, 1998
10.1 Loan and Security Agreement dated August 3, 1998 by and
among the Company, nStor Corporation, Inc. and Finova Capital
Corporation
27 Financial Data Schedule
*Incorporated by reference to the Exhibits to Amendment No. 1 to
the Company's Registration Statement on Form S-3 (File No. 333-52787)
filed with the Securities and Exchange Commission on June 22, 1998.
(b) Reports on Form 8-K.
No reports on Form 8-K were filed during the quarter for
which this report is being filed.
<PAGE> 25
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
nSTOR TECHNOLOGIES, INC.
(Registrant)
/s/ Larry J. Calise
August 12, 1998 _______________________________
Larry J. Calise,
Principal Financial and
Accounting Officer
<PAGE> 26
EXHIBIT INDEX
4.2 8% Convertible Subordinated Debenture dated June 7,
1998 issued by the Company to Maurice Halperin, as amended on August
7, 1998
10.1 Loan and Security Agreement dated August 3, 1998 by and
among the Company, nStor Corporation, Inc. and Finova Capital
Corporation
27 Financial Data Schedule
26
THIS DEBENTURE AND THE SHARES OF PREFERRED STOCK OF NSTOR
TECHNOLOGIES, INC. INTO WHICH THIS DEBENTURE IS CONVERTIBLE (THE
"SHARES"), HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED ("THE ACT"), NOR UNDER ANY STATE SECURITIES LAW
AND MAY NOT BE PLEDGED, SOLD, ASSIGNED OR TRANSFERRED UNTIL (i) A
REGISTRATION STATEMENT WITH RESPECT THERETO IS EFFECTIVE UNDER
THE ACT AND ANY APPLICABLE STATE SECURITIES LAW OR (ii) THE
COMPANY RECEIVES AN OPINION OF COUNSEL TO THE HOLDER OF THIS
DEBENTURE OR THE SHARES, WHICH COUNSEL IS SATISFACTORY TO THE
COMPANY, THAT THE DEBENTURE OR THE SHARES MAY BE PLEDGED, SOLD,
ASSIGNED OR TRANSFERRED WITHOUT AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE ACT OR APPLICABLE STATE SECURITIES LAW.
THIS DEBENTURE IS NEGOTIABLE, SECURED AND SUBORDINATED TO ANY AND
ALL DEBTS OF THE COMPANY AS PROVIDED BELOW.
NSTOR TECHNOLOGIES, INC.
(a Delaware corporation)
8% Convertible Subordinated Debenture
Amount: $1,000,000 Dated: July 7, 1998
NSTOR TECHNOLOGIES, INC., a Delaware corporation
("Company"), for value received, hereby promises to pay to
MAURICE HALPERIN or to his order or to such persons as he may
designate from time to time ("Holder") in lawful money of the
United States of America, upon Holder's presentation and
surrender of this 8% Convertible Subordinated Debenture
("Debenture") at the principal office of the Company: (i) the
principal sum of One Million Dollars ($1,000,000) on August 7,
1998, 10:00 a.m., local time ("Maturity"), and (ii) interest on
the unpaid principal of this Debenture at the rate of eight
percent (8%) per annum, payable at Maturity. Payment shall be
subject to conversion as provided in Section 1 hereof and to the
terms and conditions of this Debenture.
This Debenture may not be prepaid by the Company prior to
Maturity.
1. Mandatory Conversion by the Company.
a. The Company shall be required, on or prior to
Maturity, to convert all of the then outstanding principal amount
of this Debenture, and any accrued and unpaid interest, into
shares of convertible preferred stock, $.01 par value per share,
of the Company ("Preferred Stock"), at a conversion ratio of One
Thousand Dollars ($1,000) per share of Preferred Stock ("Stated
Value"). The number of shares to be issued upon such conversion
shall equal: (the principal amount of this Debenture plus accrued
and unpaid interest on such amount through the Date of
Conversion)/Conversion Price. (For example, if the total
principal amount of this Debenture, plus accrued interest of
$6,000, were to be converted, the number of shares of Preferred
Stock to be issued would equal 1,006,000/1,000, or 1,006.)
b. In order to exercise the conversion privilege, the
Company shall deliver the attached Notice (which must be fully
completed and executed) during regular business hours to the
Holder. Promptly upon receipt of the Notice, the Holder shall
surrender for conversion this Debenture, accompanied by proper
assignments for transfer, unless the shares of Preferred Stock
issuable upon conversion are to be issued in the same name as the
Holder. As promptly as practicable after the surrender of this
Debenture, the Company shall deliver or cause to be delivered to
the Holder, at the address indicated in the Notice, a
certificate(s) for the number of fully paid and non-assessable
shares of Preferred Stock issuable upon conversion of this
Debenture.
c. Conversion shall be deemed to have been effected
immediately prior to the close of business on the date that this
Debenture is surrendered (the "Date of Conversion"). At the Date
of Conversion, the rights of the Holder hereunder shall cease and
the person(s) in whose name(s) any certificate(s) for shares of
Preferred Stock shall have been issued upon conversion
("Certificate Holders") shall be deemed to have become the
holder(s) of record of the shares represented thereby. If the
stock transfer books of the Company shall be closed on the Date
of Conversion, Certificate Holders shall be deemed to have become
shareholder(s) of record on the next succeeding day on which the
Company's stock transfer books are open.
d. Certificates evidencing the shares of Preferred
Stock issued upon conversion of this Debenture shall bear a
legend (to the extent applicable) similar to the legend on the
face of this Debenture.
e. No fractional shares of Preferred Stock shall be
issued upon conversion of this Debenture. In the event that the
principal amount and interest to be converted would result in the
issuance of a fractional share of Preferred Stock, such
fractional shares, on an aggregate basis, shall be disregarded
and the number of shares of Preferred Stock issuable upon
conversion shall be, on an aggregate basis, the next higher
number of whole shares.
f. The issuance of a certificate(s) for shares of
Preferred Stock upon conversion of this Debenture shall be made
without charge to the Holder for any documentary tax (other than
Federal or state taxes, if appropriate), expense or related cost
in respect to the issuance of such certificate(s).
h. The Preferred Stock shall be convertible into
shares of Common Stock of the Company, par value $.05 per share
("Common Stock"), at a fixed conversion ratio of $0.60 per share
of Common Stock, i.e., each share of Preferred Stock, Stated
Value $1,000 per share, shall be convertible into 1,667 shares of
Common Stock.
i. After conversion of this Debenture into shares of
Preferred Stock, the Company shall promptly file a registration
statement with the United States Securities and Exchange
Commission, under the Securities Act of 1933, as amended ("Act"),
covering the shares of Common Stock issuable upon conversion of
the Preferred Stock, and shall use its best efforts to have such
registration statement declared effective.
2. No Avoidance. The Company shall not, by amendment of
its Articles of Incorporation or through any reorganization,
transfer of assets, consolidation, merger, dissolution, issuance
or sale of securities or any other voluntary action, nor shall
the Holder by any action, avoid or seek to avoid the performance
of any of the provisions of this Debenture.
3. Subordination. Indebtedness evidenced by this
Debenture shall be subordinate in interest, and in right of
payment as to principal and accrued interest, to the payment of
any and all "Senior Indebtedness." "Senior Indebtedness" shall
mean: (i) all indebtedness owed to any lender, whether or not
secured, including, without limitation all indebtedness under
revolving lines of credit and term loans; (ii) all obligations to
reimburse any bank or other person in respect of amounts paid
under letters of credit, acceptance or other similar instruments;
(iii) purchase money financing incurred in connection with the
purchase by the Company of goods, fixtures, equipment or
inventory; (iv) capital lease obligations; (v) liens prior in
interest to this Debenture by operation of law; (vi) all other
indebtedness which does not provide that it is to rank pari passu
with or subordinate to this Debenture; and (vii) all deferrals,
renewals, extensions and refundings of, and amendments,
modifications and supplements to any of the Senior Indebtedness
described above.
4. Default. In the event that the Company: (i) fails to
make any payment of principal or interest hereunder when due and
such default shall continue for thirty (30) days after written
notice thereof has been delivered to the Company; (ii) files a
petition or is subject to proceedings for protection under any
bankruptcy, receivership, reorganization or insolvency laws;
(iii) makes a general assignment of all or substantially all of
its assets for the benefit of its creditors; (iv) has a trustee
or receiver appointed for the Company, its assets or a
substantial portion of its assets; (v) is adjudicated by a court
of competent jurisdiction to be insolvent or bankrupt; or (vi)
fails to observe any of the covenants or agreements on the part
of the Company contained in this Debenture continuing (without
being waived or cured) for a period of thirty (30) days after
receipt from Holder of written notice of such failure (unless the
issue of whether such failure has been cured is being contested
in good faith by the Company); then the Holder may, by written
notice to the Company, declare the outstanding principal amount
of this Debenture to be immediately due and payable, whereupon
the outstanding principal amount hereof shall become and be
immediately due and payable, along with any accrued but unpaid
interest.
5. Covenants of the Company. The Company covenants and
agrees that during the period within which the conversion rights
represented by this Debenture may be exercised, the Company shall
at all times reserve and keep available out of its authorized but
unissued shares of Preferred Stock, solely for the purpose of
effecting the conversion of this Debenture, such number of shares
of Preferred Stock as shall from time to time be sufficient to
effect the conversion of this Debenture; and if at any time the
number of authorized but unissued shares of Preferred Stock shall
be insufficient to effect the conversion of this Debenture, the
Company shall immediately take such corporate action as may be
necessary to increase the authorized but unissued shares of
Preferred Stock to such number of shares as shall be sufficient
for such purpose.
6. Negotiability. This Debenture is negotiable. It may
be sold, assigned or transferred by the Holder without the prior
written consent of the Board of Directors of the Company. Upon
the death of the Holder, the Holder's administrator, executor,
heir or legatee shall have, upon written notice to the Company,
all rights and interests of the Holder in this Debenture. Any
sale, assignment, transfer or succession (due to death of the
Holder) shall be made in compliance with all applicable Federal
and state securities laws, and upon any such event, the Company
may issue a substitute Debenture in the name of the new Holder
and representing the then outstanding principal and unpaid
accrued interest.
7. Registration.
a. The Holder by his acceptance of this Debenture
acknowledges that he is aware that this Debenture and the shares
of Preferred Stock issuable to him by the Company upon conversion
of this Debenture have not been registered under the Act, or the
securities laws of any state or other jurisdiction.
b. The Holder warrants and represents to the Company
that he has acquired this Debenture, and, upon conversion of the
Debenture, he will be acquiring Preferred Stock, for investment
and not with a view to or for sale in connection with any
distribution of this Debenture or such Preferred Stock or with
any intention of distributing or selling this Debenture or such
Preferred Stock.
8. Shareholder Rights. The Holder shall have no rights as
a shareholder of the Company with respect to shares issuable upon
conversion of this Debenture until conversion and delivery to the
Holder of such shares, and then only with respect to shares so
delivered. The Company may conclusively deem the person(s) named
as the Holder of this Debenture on the first page hereof as the
sole owner of this Debenture, and shall not be bound by any
notice to the contrary. Notwithstanding anything herein to the
contrary, no person other than the Holder, or his successor in
interest under the provisions of Section 6 above, shall have any
interest or legal or equitable right under this Debenture.
9. Severability. In case any provision of this Debenture
is held invalid, illegal or unenforceable by a court of competent
jurisdiction, the validity, legality and enforceability of the
remaining provisions shall not in any way be effected or impaired
thereby.
10. Choice of Law; Venue and Jurisdiction; Legal
Proceedings. This Debenture shall be governed by and construed
in accordance with the laws of the State of Florida, without
reference to choice of law principles, and the sole jurisdiction
and venue for any claim, suit, or proceeding brought in
connection with this Debenture shall be Palm Beach County,
Florida. In any suit, action or proceeding arising out of or in
connection with this Debenture, the prevailing party shall be
entitled to an award of the reasonable attorneys' fees and
disbursements incurred by such party in connection therewith.
11. Business Day. If any interest payment date, Date of
Conversion, Redemption date or the Maturity date under this
Debenture shall not be a business day in the State of Florida,
payment may be made on the next succeeding day that is a business
day, and shall be deemed hereunder as made on such interest
payment date, Date of Conversion, Redemption date or Maturity
date, notwithstanding any other provisions contained in this
Debenture.
12. Notices. Unless otherwise provided herein, all
demands, notices, consents, requests and other communications
hereunder shall be in writing and shall be deemed to have been
given when delivered in person or mailed first class,
postage-paid, addressed (i) if to the Company, to the Company's
principal business office in the State of Florida, and (ii) if to
the Holder, at the last address for the Holder listed on the
records of the Company.
13. Modification. This Debenture represents the entire
understanding of the parties hereto relating to the subject
matter hereof, and supersedes any and all other prior agreements
between the parties. The terms and provisions of this Debenture
cannot be modified or amended orally or by course of dealing or
conduct, or in any other manner, except in a writing signed by
the party against whom enforcement is sought.
14. Binding Effect. This Debenture shall be binding on and
inure to the benefit of the respective parties hereto and their
successors and assigns.
15. Captions. Section captions are provided for the
convenience of the parties and are not intended to affect the
interpretation, performance or enforcement of this Debenture.
16. Compliance With Law. It is the responsibility of the
Holder ensure that all payments received by the Holder comply
with all tax, securities and other applicable laws, rules, and
regulations of all applicable authorities, and to provide the
Company with any written consents or other documents necessary
for compliance with such laws, rules and regulations.
IN WITNESS WHEREOF, the Company has caused this Debenture to
be signed by its authorized officer and its corporate seal to be
affixed hereto, as of this 7th day of July, 1998.
NSTOR TECHNOLOGIES, INC.,
a Delaware corporation
[Corporation Seal] By: MARK LEVY
Its: VICE PRESIDENT
Amendment No. 1 to 8% Convertible Subordinated Debenture
This Amendment No. 1 to 8% Convertible Subordinated
Debenture is made as of the 6th day of August, 1998 between nStor
Technologies, Inc. (the "Company") and Maurice Halperin (the
"Investor").
WHEREAS, the Company has issued to the Investor an 8%
Covertible Subordinated Debenture dated July 7, 1998 in the
amount of $1,000,000 (the "Debenture");
WHEREAS, the Investor is the holder of the Debenture on the
date hereof; and
WHEREAS, the Company and the Investor desire to amend the
Debenture as set forth herein;
NOW THEREFORE, for good and valuable consideration, the
receipt and sufficiency of which is hereby acknolwedged, the
Company and the Investor agree as follows:
1. The two operative paragraphs immediately preceding
numbered paragraph 1 of the Debenture shall read in their
entirety as follows:
NSTOR TECHNOLOGIES, INC., a Delaware corporation
("Company"), for value received, hereby promises to pay to
MAURICE HALPERIN or to his order or to such persons as he may
designate from time to time ("Holder") in lawful money of the
United States of America, upon Holder's presentation and
surrender of this 8% Convertible Subordinated Debenture
("Debenture") at the principal office of the Company: (i) the
principal sum of One Million Dollars ($1,000,000) on September
18, 1998, 10:00 a.m., local time ("Maturity"), and (ii) interest
on the unpaid principal of this Debenture at the rate of eight
percent (8%) per annum, payable at Maturity. Payment shall be
subject to conversion as provided in Section 1 hereof and to the
terms and conditions of this Debenture.
Subject to the conversion privilege provided in Section
1 hereof, this Debenture may not be prepaid by the Company prior
to Maturity.
2. Prior to Maturity, the Investor agrees not to transfer
or otherwise negotiate the Debenture to any other person.
3. Other than as set forth herein, the Debenture shall
remain in full force and effect accordance with its terms.
Dated: August 7, 1998
NSTOR TECHNOLOGIES, INC., The Investor
a Delaware corporation
By: MARK LEVY MAURICE HALPERIN
By: Jim Scutti,
Its: VICE PRESIDENT Attorney-in-Fact
LOAN AND SECURITY AGREEMENT
nSTOR TECHNOLOGIES, INC.
Administration Building
100 Century Boulevard
West Palm Beach, Florida 33417
nSTOR CORPORATION, INC.
450 Technology Park
Lake Mary, Florida 32746
95-2094565 and 59-3379673
Borrower Fed ID Tax No.
$5,000,000
Credit Limit
August 3, 1998
Date
FINOVA BUSINESS CREDIT
THIS LOAN AND SECURITY AGREEMENT (collectively with the Schedule
to Loan Agreement (the "Schedule") attached hereto, the
"Agreement") dated the date set forth on the cover page, is
entered into by and between the borrower named on the cover page
(jointly and severally, the "Borrower"), whose address is set
forth on the cover page and FINOVA Capital Corporation
("FINOVA"), whose address is 111 West 40th Street, 14th Floor,
New York, NY 10018.
1. DEFINITIONS.
1.1 Defined Terms. As used in this Agreement, the
following terms have the definitions set forth below:
"ADA" has the meaning set forth in Section 4.1(z) hereof.
"Additional Sums" has the meaning set forth in Section 2.9(a)
hereof.
"Affiliate" means any Person controlling, controlled by or under
common control with Borrower. For purposes of this definition,
"control" means the possession, directly or indirectly, of the
power to direct or cause direction of the management and policies
of any Person, whether through ownership of common or preferred
stock or other equity interests, by contract or otherwise.
Without limiting the generality of the foregoing, each of the
following shall be an Affiliate: any officer, director, employee
or other agent of Borrower, any shareholder that owns or controls
5% or more of any class of equity securities (including any
equity securities issuable upon the exercise of any option or
convertible security) or partnership or limited liability company
interests of that person or any of its affiliates, member or
subsidiary of Borrower, and any other Person with whom or which
Borrower has common officers or directors.
"Agreement" has the meaning set forth in the preamble.
"Applicable Law" has the meaning set forth in Section 8.2(a)
hereof.
"Applicable Usury Law" has the meaning set forth in Section
2.9(b) hereof.
"Assignment of Life Insurance" has the meaning set forth in
Section 4.1(u) hereof.
"Blocked Account" has the meaning set forth in Section 2.10(c)
hereof.
"Business Day" means any day on which commercial banks in New
York, New York is open for business.
"Capital Expenditures" means all expenditures made and
liabilities incurred for the acquisition of any fixed asset or
improvement, replacement, substitution or addition thereto which
has a useful life of more than one year and including, without
limitation, those arising in connection with Capital Leases.
"Capital Lease" means any lease of property by Borrower that, in
accordance with GAAP, should be capitalized for financial
reporting purposes and reflected as a liability on the balance
sheet of Borrower.
"Closing Date" means the date of the initial advance made by
FINOVA pursuant to this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect
in the State of Arizona from time to time.
"Collateral" has the meaning set forth in Section 3.1 hereof.
"Collateral Monitoring Fee" has the meaning set forth in the
Schedule.
"Current Assets" at any date means the amount at which the
current assets of Borrower would be shown on a balance sheet of
Borrower as at such date, prepared in accordance with GAAP,
provided that amounts due from Affiliates and investments in
Affiliates shall be excluded therefrom.
"Current Liabilities" at any date means the amount at which the
current liabilities of Borrower would be shown on a balance sheet
of Borrower as at such date, prepared in accordance with GAAP.
"Deposit Accounts" has the meaning set forth in Section 9105 of
the Code.
"Dominion Account" has the meaning set forth in Section 2.10(c)
hereof.
"Eligible Inventory" means Inventory which FINOVA, in its
Permitted Discretion, deems Eligible Inventory, based on such
considerations as FINOVA may from time to time deem appropriate.
Without limiting the generality of the foregoing, no Inventory
shall be Eligible Inventory unless, in FINOVA's Permitted
Discretion, such Inventory (i) consists of raw materials and
finished goods, in good, new and salable condition which are not
obsolete or unmerchantable, and are not comprised of work in
process, packaging materials or supplies; (ii) meets all
standards imposed by any governmental agency or authority; (iii)
conforms in all respects to the warranties and representations
set forth herein; (iv) is at all times subject to FINOVA's duly
perfected, first priority security interest; and (v) is situated
at a location in compliance with Section 5.16 hereof.
"Eligible Receivables" means Receivables arising in the ordinary
course of Borrower's business from the sale of goods or rendition
of services, which FINOVA, in its Permitted Discretion, shall
deem eligible based on such considerations as FINOVA may from
time to time deem appropriate. Without limiting the foregoing, a
Receivable shall not be deemed to be an Eligible Receivable if
(i) the account debtor has failed to pay the Receivable within a
period of ninety (90) days after invoice date, to the extent of
any amount remaining unpaid after such period; (ii) the account
debtor has failed to pay more than 25% of all outstanding
Receivables owed by it to Borrower within ninety (90) days after
invoice date; (iii) the account debtor is an Affiliate of
Borrower; (iv) the goods relating thereto are placed on
consignment, guaranteed sale, "bill and hold," "COD" or other
terms pursuant to which payment by the account debtor may be
conditional; (v) the account debtor is not located in the United
States or Canada, unless the Receivable is supported by a letter
of credit or other form of guaranty or security, in each case in
form and substance satisfactory to FINOVA; (vi) the account
debtor is the United States or any department, agency or
instrumentality thereof or any State, city or municipality of the
United States; (vii) Borrower is or may become liable to the
account debtor for goods sold or services rendered by the account
debtor to Borrower; (viii) the account debtor's total obligations
to Borrower exceed 15% of all Eligible Receivables, to the extent
of such excess; (ix) the account debtor disputes liability or
makes any claim with respect thereto (up to the amount of such
liability or claim), or is subject to any insolvency or
bankruptcy proceeding, or becomes insolvent, fails or goes out of
a material portion of its business; (x) the amount thereof
consists of late charges or finance charges; (xi) the amount
thereof consists of a credit balance more than ninety (90) days
past due; (xii) the face amount thereof exceeds $10,000, unless
accompanied by evidence of shipment of the goods relating thereto
satisfactory to FINOVA in its Permitted Discretion; (xiii) the
invoice constitutes a progress billing on a project not yet
completed, except that the final billing at such time as the
matter has been completed and delivered to the customer may be
deemed an Eligible Receivable; or (xiv) the amount thereof is not
yet represented by an invoice or bill issued in the name of the
applicable account debtor.
"Equipment" means all of Borrower's present and hereafter
acquired machinery, molds, machine tools, motors, furniture,
equipment, furnishings, fixtures, trade fixtures, motor vehicles,
tools, parts, dyes, jigs, goods and other tangible personal
property (other than Inventory) of every kind and description
used in Borrower's operations or owned by Borrower and any
interest in any of the foregoing, and all attachments,
accessories, accessions, replacements, substitutions, additions
or improvements to any of the foregoing, wherever located.
"Environmental Costs" has the meaning set forth in Section 8.2(b)
hereof.
"ERISA" means the Employment Retirement Income Security Act of
1974, as amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not
incorporated and whether or not foreign) which is or may
hereafter become a member of a group of which Borrower is a
member and which is treated as a single employer under ERISA
Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section
7.1 of this Agreement.
"Examination Fee" has the meaning set forth in the Schedule.
"Excess Availability" means, as of the date of determination
thereof, the amount by which the average daily total principal
balance of the Revolving Credit Loans facility which Borrower
would be permitted to have outstanding over the prior 30 days,
based on the formulas and reserves set forth in the Schedule,
exceeds the sum of the Receivable Loans and the Inventory Loans
then actually outstanding, such excess then being reduced by an
amount necessary to provide for the payment of all accounts
payable of Borrower which are more than 30 days past due date and
all book overdrafts.
"Facility Fee" has the meaning set forth in the Schedule.
"FINOVA Affiliate" has the meaning set forth in Section 9.22
hereof.
"GAAP" means 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 the financial covenants set forth in
this Agreement, 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.
"General Intangibles" means all general intangibles of Borrower,
whether now owned or hereafter created or acquired by Borrower,
including, without limitation, all choses in action, causes of
action, corporate or other business records, Deposit Accounts,
inventions, designs, drawings, blueprints, Trademarks, Licenses
and Patents, names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security
and other deposits, rights in all litigation presently or
hereafter pending for any cause or claim (whether in contract,
tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against FINOVA, rights to
purchase or sell real or personal property, rights as a licensor
or licensee of any kind, royalties, telephone numbers,
proprietary information, purchase orders, and all insurance
policies and claims (including without limitation credit,
liability, property and other insurance) tax refunds and claims,
computer programs, discs, tapes and tape files, claims under
guaranties, security interests or other security held by or
granted to Borrower to secure payment of any of the Receivables
by an account debtor, all rights to indemnification and all other
intangible property of every kind and nature (other than
Receivables).
"Guarantor(s)" has the meaning set forth in the Schedule.
"Hazardous Substance" has the meaning set forth in Section 8.2(a)
hereof.
"Indebtedness" means all of Borrower's present and future
obligations, liabilities, debts, claims and indebtedness,
contingent, fixed or otherwise, however evidenced, created,
incurred, acquired, owing or arising, whether under written or
oral agreement, operation of law or otherwise, and includes,
without limiting the foregoing (i) the Obligations, (ii)
obligations and liabilities of any Person secured by a lien,
claim, encumbrance or security interest upon property owned by
Borrower, even though Borrower has not assumed or become liable
therefor, (iii) obligations and liabilities created or arising
under any lease (including Capital Leases) or conditional sales
contract or other title retention agreement with respect to
property used or acquired by Borrower, even though the rights and
remedies of the lessor, seller or lender are limited to
repossession, (iv) all unfunded pension fund obligations and
liabilities and (v) deferred taxes.
"Initial Term" has the meaning set forth on the Schedule.
"Insurance Collateral" has the meaning set forth in Section
4.1(u) hereof.
"Inventory" means all of Borrower's now owned and hereafter
acquired goods, merchandise or other personal property, wherever
located, to be furnished under any contract of service or held
for sale or lease, all raw materials, work in process, finished
goods and materials and supplies of any kind, nature or
description which are or might be used or consumed in Borrower's
business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such goods,
merchandise or other personal property, and all documents of
title or other documents representing them.
"Inventory Loans" has the meaning set forth in the Schedule.
"IRC" means the Internal Revenue Code of 1986, as amended, and
the regulations thereunder.
"Life Insurance Policy" has the meaning set forth in Section
4.1(u) hereof.
"Loans" has the meaning set forth in Section 2.2 hereof.
"Loan Documents" means, collectively, this Agreement, any note or
notes executed by Borrower and payable to FINOVA, and any other
present or future agreement entered into in connection with this
Agreement, together with all alterations, amendments, changes,
extensions, modifications, refinancings, refundings, renewals,
replacements, restatements, or supplements, of or to any of the
foregoing.
"Loan Party" means Borrower, each Guarantor, each Subordinating
Creditor and each other party (other than FINOVA) to any Loan
Document.
"Loan Reserves" means, as of any date of determination, such
amounts as FINOVA may from time to time establish and revise in
good faith reducing the amount of Revolving Credit Loans and
Letters of Credit which would otherwise be available to Borrower
under the lending formula(s) provided in the Schedule: (a) to
reflect events, conditions, contingencies or risks which, as
determined by FINOVA in good faith, do or may affect either (i)
the Collateral or any other property which is security for the
Obligations or its value, (ii) the assets, business or prospects
of Borrower or any Guarantor or (iii) the security interests and
other rights of FINOVA in the Collateral (including the
enforceability, perfection and priority thereof) or (b) to
reflect FINOVA's good faith belief that any collateral report or
financial information furnished by or on behalf of Borrower or
any Guarantor to FINOVA is or may have been incomplete,
inaccurate or misleading in any material respect or (c) in
respect of any state of facts which FINOVA determines in good
faith constitutes an Event of Default or may, with notice or
passage of time or both, constitute an Event of Default."
"Loan Year" means each twelve month period commencing on the
Closing Date.
"Maximum Interest Rate" has the meaning set forth in Section
2.9(b) hereof.
"Multiemployer Plan" means a "multiemployer plan" as defined in
ERISA Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which
covers employees of Borrower or any ERISA Affiliate.
"Net Worth" at any date means the Borrower's net worth as
determined in accordance with GAAP.
"Obligations" means all present and future loans, advances,
debts, liabilities, obligations, covenants, duties and
indebtedness at any time owing by Borrower to FINOVA, whether
evidenced by this Agreement, any note or other instrument or
document, whether arising from an extension of credit, opening of
a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect
(including, without limitation, those acquired by assignment and
any participation by FINOVA in Borrower's debts owing to others),
absolute or contingent, due or to become due, including, without
limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, Examination Fee, letter of credit
fees, Collateral Monitoring Fee, Closing Fee, Facility Fee,
Termination Fee, Minimum Interest Charge and any other sums
chargeable to Borrower hereunder or under any other agreement
with FINOVA.
"Operating Cash Flow/Actual" means, for any period, Borrower's
net income or loss (excluding the effect of any extraordinary
gains or losses), determined in accordance with GAAP, plus or
minus each of the following items, to the extent deducted from or
added to the revenues of Borrower in the calculation of net
income or loss: (i) depreciation; (ii) amortization and other
non-cash charges; (iii) interest expense paid or accrued; (iv)
total federal and state income tax expense determined as the
accrued liability of Borrower in respect of such period,
regardless of what portion of such expense has actually been paid
by Borrower during such period; and (v) Management Fees paid, to
the extent permitted hereunder, and after deduction for each of
(a) federal and state income taxes, to the extent actually paid
during such period; (b) any non-cash income; and (c) all actual
Capital Expenditures made during such period and not financed.
"Overadvance" has the meaning set forth in Section 2.3.
"Overline" has the meaning set forth in Section 2.3.
"PBGC" means the Pension Benefit Guarantee Corporation.
"Permitted Discretion" means FINOVA's judgment exercised in good
faith based upon its consideration of any factor which FINOVA
believes in good faith: (i) will or could adversely affect the
value of any Collateral, the enforceability or priority of
FINOVA's liens thereon or the amount which FINOVA would be likely
to receive (after giving consideration to delays in payment and
costs of enforcement) in the liquidation of such Collateral; (ii)
suggests that any collateral report or financial information
delivered to FINOVA by any Person on behalf of the Borrower is
incomplete, inaccurate or misleading in any material respect;
(iii) materially increases the likelihood of a bankruptcy,
reorganization or other insolvency proceeding involving the
Borrower, any Loan Party or any of the Collateral, or (iv)
creates or reasonably could be expected to create an Event of
Default. In exercising such judgment, FINOVA may consider such
factors already included in or tested by the definition of
Eligible Receivables or Eligible Inventory, as well as any of the
following: (i) the financial and business climate of the
Borrower's industry and general macroeconomic conditions, (ii)
changes in collection history and dilution with respect to the
Receivables, (iii) changes in demand for, and pricing of,
Inventory, (iv) changes in any concentration of risk with respect
to Receivables and/or Inventory, and (v) any other factors that
change the credit risk of lending to the Borrower on the security
of the Receivables and Inventory. The burden of establishing
lack of good faith hereunder shall be on the Borrower.
"Person" means any individual, sole proprietorship, partnership,
joint venture, trust, unincorporated organization, association,
corporation, limited liability company, government, or any agency
or political division thereof, or any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained
for employees of Borrower or any ERISA Affiliate, other than a
Multiemployer Plan.
"Preferred Stock Dividends" has the meaning set forth in the
Schedule.
"Prepared Financials" means the balance sheets of Borrower as of
the date set forth in the Schedule in the section entitled
'Reporting Requirements' , and as of each subsequent date on
which audited balance sheets are delivered to FINOVA from time to
time hereunder, and the related statements of operations, changes
in stockholder's equity and changes in cash flow for the periods
ended on such dates.
"Prime Rate" has the meaning set forth in the Schedule.
"Prohibited Transaction" means any transaction described in
Section 406 of ERISA which is not exempt by reason of Section 408
of ERISA, and any transaction described in Section 4975(c) of the
IRC which is not exempt by reason of Section 4975(c)(2) of the
IRC.
"Property" has the meaning set forth in Section 8.2(a) hereof.
"Receivable Loans" has the meaning set forth on the Schedule.
"Receivables" means all of Borrower's now owned and hereafter
acquired accounts (whether or not earned by performance),
proceeds of any letters of credit naming Borrower as beneficiary,
contract rights, chattel paper, instruments, documents and all
other forms of obligations at any time owing to Borrower, all
guaranties and other security therefor, whether secured or
unsecured, all merchandise returned to or repossessed by
Borrower, and all rights of stoppage in transit and all other
rights or remedies of an unpaid vendor, lienor or secured party.
"Renewal Term" has the meaning set forth on the Schedule.
"Reportable Event" means a reportable event described in Section
4043 of ERISA or the regulations thereunder, a withdrawal from a
Plan described in Section 4063 of ERISA, or a cessation of
operations described in Section 4068(f) of ERISA.
"Revolving Credit Loans" has the meaning set forth in the
Schedule.
"Revolving Credit Limit" has the meaning set forth in the
Schedule.
"Revolving Interest Rate" has the meaning set forth in the
Schedule.
"Schedule" has the meaning set forth in the preamble.
"Subordinated Debt" means liabilities of Borrower the repayment
of which is subordinated, to the payment and performance of the
Obligations, pursuant to a subordination agreement acceptable to
FINOVA.
"Subordinating Creditor" has the meaning set forth in the
Schedule.
"Term Loans" has the meaning set forth in the Schedule.
"Termination Fee" has the meaning set forth in Section 9.2(d)
hereof.
"Total Facility" has the meaning set forth in Section 2.1 hereof.
"Trademarks, Copyrights, Licenses and Patents" means all of
Borrower's right, title and interest in and to, whether now owned
or hereafter acquired: (i) trademarks, trademark registrations,
trade names, trade name registrations, and trademark or trade
name applications, including without limitation such as are
listed on the Schedule attached hereto and made a part hereof, as
the same may be amended from time to time, and (a) renewals
thereof, (b) all income, royalties, damages and payments now and
hereafter due and/or payable with respect thereto, including
without limitation, damages and payments for past or future
infringements thereof, (c) the right to sue for past, present and
future infringements thereof, (d) all rights corresponding
thereto throughout the world, and (e) the goodwill of the
business operated by Borrower connected with and symbolized by
any trademarks or trade names; (ii) copyrights, copyright
registrations and copyright applications, including without
limitation such as are listed on the Schedule attached hereto and
made a part hereof, as the same may be amended from time to time,
and (a) renewals thereof, (b) all income, royalties, damages and
payments now and hereafter due and/or payable with respect
thereto, including without limitation, damages and payments for
past or future infringements thereof, (c) the right to sue for
past, present and future infringements thereof, and (d) all
rights corresponding thereto throughout the world; (iii) license
agreements, including without limitation such as are listed on
the Schedule attached hereto and made a part hereof, and the
right to prepare for sale, sell and advertise for sale any
Inventory now or hereafter owned by Borrower and now or hereafter
covered by such licenses; and (iv) patents and patent
applications, registered or pending, including without limitation
such as are listed on the Schedule attached hereto, together with
all income, royalties, shop rights, damages and payments thereto,
the right to sue for infringements thereof, and all rights
thereto throughout the world and all reissues, divisions,
continuations, renewals, extensions and continuations-in-part
thereof.
1.2 Other Terms. All accounting terms used in this
Agreement, unless otherwise indicated, shall have the meanings
given to such terms in accordance with GAAP. All other terms
contained in this Agreement, unless otherwise indicated, shall
have the meanings provided by the Code, to the extent such terms
are defined therein.
2. LOANS; INTEREST RATE AND OTHER CHARGES.
2.1 Total Facility. Upon the terms and conditions set
forth herein and provided that no Event of Default or event
which, with the giving of notice or the passage of time, or both,
would constitute an Event of Default, shall have occurred and be
continuing, FINOVA shall, upon Borrower's request, make advances
to Borrower from time to time in an aggregate outstanding
principal amount not to exceed the Total Facility amount (the
"Total Facility") set forth on the Schedule hereto, subject to
deduction of reserves for accrued interest and such other
reserves as FINOVA deems proper from time to time, and less
amounts FINOVA may be obligated to pay in the future on behalf of
Borrower. The Schedule is an integral part of this Agreement and
all references to "herein", "herewith" and words of similar
import shall for all purposes be deemed to include the Schedule.
2.2 Loans. Advances under the Total Facility ("Loans" and
individually, a "Loan") shall be comprised of the amounts shown
on the Schedule.
2.3 Overlines; Overadvances. If at any time or for any
reason the outstanding amount of advances (including all Letters
of Credit) extended or issued pursuant hereto exceeds any of the
dollar limitations ("Overline") or percentage limitations
("Overadvance") in the Schedule, then Borrower shall, upon
FINOVA's demand, immediately pay to FINOVA, in cash, the full
amount of such Overline or Overadvance which, at FINOVA's option,
may be applied to reduce the outstanding principal balance of the
Loans and/or cash collateralize all or any part of any
outstanding Letters of Credit. Without limiting Borrower's
obligation to repay to FINOVA on demand the amount of any
Overline or Overadvance, Borrower agrees to pay FINOVA interest
on the outstanding principal amount of any Overline or
Overadvance, on demand, at the rate set forth on the Schedule and
applicable to the Revolving Credit Loans.
2.4 Intentionally omitted.
2.5 Loan Account. All advances made hereunder (including
without limitation all advances made by FINOVA under or in
connection with any Letter of Credit) shall be added to and
deemed part of the Obligations when made. FINOVA may from time
to time charge all Obligations of Borrower to Borrower's loan
account with FINOVA.
2.6 Interest; Fees. Borrower shall pay FINOVA interest on
the average daily outstanding balance of the Obligations at the
per annum rate set forth on the Schedule. Borrower shall also
pay FINOVA the fees set forth on the Schedule.
2.7 Default Interest Rate. Upon the occurrence and during
the continuation of an Event of Default, Borrower shall pay
FINOVA interest on the daily outstanding balance of the
Obligations and any L/C Fee at a rate per annum which is two
percent (2%) in excess of the rate which would otherwise be
applicable thereto pursuant to the Schedule.
2.8 Examination Fee. Borrower agrees to pay to FINOVA the
Examination Fee in the amount set forth on the Schedule in
connection with each audit or examination of Borrower performed
by FINOVA prior to or after the date hereof. Without limiting
the generality of the foregoing, Borrower shall pay to FINOVA an
initial Examination Fee in an amount equal to the amount set
forth on the Schedule. Such initial Examination Fee shall be
deemed fully earned at the time of payment and due and payable
upon the closing of this transaction, and shall be deducted from
any good faith deposit paid by Borrower to FINOVA prior to the
date of this Agreement.
2.9 Excess Interest.
(a) The contracted for rate of interest of the loan
contemplated hereby, without limitation, shall consist of the
following: (i) the interest rate set forth on the Schedule,
calculated and applied to the balance of the Obligations in
accordance with the provisions of this Agreement; (ii) interest
after an Event of Default, calculated and applied to the amount
of the Obligations in accordance with the provisions hereof; and
(iii) all Additional Sums (as herein defined), if any. Borrower
agrees to pay an effective contracted for rate of interest which
is the sum of the above-referenced elements. The Examination
Fee, attorneys fees, expert witness fees, letter of credit fees,
collateral monitoring fees, closing fees, facility fees,
Termination Fees, Minimum Interest Charges, other charges, goods,
things in action or any other sums or things of value paid or
payable by Borrower (collectively, the "Additional Sums"),
whether pursuant to this Agreement or any other documents or
instruments in any way pertaining to this lending transaction, or
otherwise with respect to this lending transaction, that under
any applicable law may be deemed to be interest with respect to
this lending transaction, for the purpose of any applicable law
that may limit the maximum amount of interest to be charged with
respect to this lending transaction, shall be payable by Borrower
as, and shall be deemed to be, additional interest and for such
purposes only, the agreed upon and "contracted for rate of
interest" of this lending transaction shall be deemed to be
increased by the rate of interest resulting from the inclusion of
the Additional Sums.
(b) It is the intent of the parties to comply with the
usury laws of the State of Arizona (the "Applicable Usury Law").
Accordingly, it is agreed that notwithstanding any provisions to
the contrary in this Agreement, or in any of the documents
securing payment hereof or otherwise relating hereto, in no event
shall this Agreement or such documents require the payment or
permit the collection of interest in excess of the maximum
contract rate permitted by the Applicable Usury Law (the "Maximum
Interest Rate"). In the event (a) any such excess of interest
otherwise would be contracted for, charged or received from
Borrower or otherwise in connection with the loan evidenced
hereby, or (b) the maturity of the Obligations is accelerated in
whole or in part, or (c) all or part of the Obligations shall be
prepaid, so that under any of such circumstances the amount of
interest contracted for, shared or received in connection with
the loan evidenced hereby, would exceed the Maximum Interest
Rate, then in any such event (1) the provisions of this paragraph
shall govern and control, (2) neither Borrower nor any other
Person now or hereafter liable for the payment of the Obligations
shall be obligated to pay the amount of such interest to the
extent that it is in excess of the Maximum Interest Rate, (3) any
such excess which may have been collected shall be either applied
as a credit against the then unpaid principal amount of the
Obligations or refunded to Borrower, at FINOVA's option, and (4)
the effective rate of interest shall be automatically reduced to
the Maximum Interest Rate. It is further agreed, without
limiting the generality of the foregoing, that to the extent
permitted by the Applicable Usury Law; (i) all calculations of
interest which are made for the purpose of determining whether
such rate would exceed the Maximum Interest Rate shall be made by
amortizing, prorating, allocating and spreading during the period
of the full stated term of the loan evidenced hereby, all
interest at any time contracted for, charged or received from
Borrower or otherwise in connection with such loan; and (ii) in
the event that the effective rate of interest on the loan should
at any time exceed the Maximum Interest Rate, such excess
interest that would otherwise have been collected had there been
no ceiling imposed by the Applicable Usury Law shall be paid to
FINOVA from time to time, if and when the effective interest rate
on the loan otherwise falls below the Maximum Interest Rate, to
the extent that interest paid to the date of calculation does not
exceed the Maximum Interest Rate, until the entire amount of
interest which would otherwise have been collected had there been
no ceiling imposed by the Applicable Usury Law has been paid in
full. Borrower further agrees that should the Maximum Interest
Rate be increased at any time hereafter because of a change in
the Applicable Usury Law, then to the extent not prohibited by
the Applicable Usury Law, such increases shall apply to all
indebtedness evidenced hereby regardless of when incurred; but,
again to the extent not prohibited by the Applicable Usury Law,
should the Maximum Interest Rate be decreased because of a change
in the Applicable Usury Law, such decreases shall not apply to
the indebtedness evidenced hereby regardless of when incurred.
2.10 Principal Payments; Proceeds of Collateral.
(a) Principal Payments. Except where evidenced by notes or
other instruments issued or made by Borrower to FINOVA
specifically containing payment provisions which are in conflict
with this Section 2.10 (in which event the conflicting provisions
of said notes or other instruments shall govern and control),
that portion of the Obligations consisting of principal payable
on account of Loans shall be payable by Borrower to FINOVA
immediately upon the earliest of (i) the receipt by FINOVA or
Borrower of any proceeds of any of the Collateral, to the extent
of said proceeds, (ii) the occurrence of an Event of Default in
consequence of which FINOVA elects to accelerate the maturity and
payment of such loans, or (iii) any termination of this Agreement
pursuant to Section 9.2 hereof; provided, however, that any
Overadvance or Overline shall be payable on demand pursuant to
the provisions of Section 2.3 hereof.
(b) Collections. Until FINOVA notifies Borrower to the
contrary, Borrower may make collection of all Receivables for
FINOVA and shall receive all such payments or sums as trustee of
FINOVA and immediately deliver all such payments or sums to
FINOVA in their original form, duly endorsed in blank or cause
the same to be deposited into a Blocked Account or Dominion
Account. FINOVA or its designee may, at any time, notify account
debtors that the Receivables have been assigned to FINOVA and of
FINOVA's security interest therein, and may collect the
Receivables directly and charge the collection costs and expenses
to Borrower's loan account. Borrower agrees that, in computing
the charges under this Agreement, all items of payment shall be
deemed applied by FINOVA on account of the Obligations three (3)
Business Days after receipt by FINOVA of good funds which have
been finally credited to FINOVA's account, whether such funds are
received directly from Borrower or from the Blocked Account bank
or the Dominion Account bank, pursuant to Section 2.10(c) hereof,
and this provision shall apply regardless of the amount of the
Obligations outstanding or whether any Obligations are
outstanding; provided, that if any such good funds are received
after 12:00 p.m. noon (New York time) on any Business Day or at
any time on any day not constituting a Business Day, such funds
shall be deemed received on the immediately following Business
Day. FINOVA is not, however, required to credit Borrower's
account for the amount of any item of payment which is
unsatisfactory to FINOVA in its Permitted Discretion and FINOVA
may charge Borrower's loan account for the amount of any item of
payment which is returned to FINOVA unpaid.
(c) Establishment of a Lockbox Account or Dominion Account.
Unless Borrower shall be otherwise directed by FINOVA in writing,
Borrower shall cause all proceeds of Collateral to be deposited
into a lockbox account, or such other "blocked account" as FINOVA
may require (each, a "Blocked Account") pursuant to an
arrangement with such bank as may be selected by Borrower and be
acceptable to FINOVA which proceeds, unless otherwise provided
herein, shall be applied in payment of the Obligations in such
order as FINOVA determines in its Permitted Discretion. Borrower
shall issue to any such bank an irrevocable letter of instruction
directing said bank to transfer such funds so deposited to
FINOVA, either to any account maintained by FINOVA at said bank
or by wire transfer to appropriate account(s) of FINOVA. All
funds deposited in a Blocked Account shall immediately become the
sole property of FINOVA and Borrower shall obtain the agreement
by such bank to waive any offset rights against the funds so
deposited. FINOVA assumes no responsibility for any Blocked
Account arrangement, including without limitation, any claim of
accord and satisfaction or release with respect to deposits
accepted by any bank thereunder. Alternatively, FINOVA may
establish depository accounts in the name of FINOVA at a bank or
banks for the deposit of such funds (each, a "Dominion Account")
and Borrower shall deposit all proceeds of Receivables and all
cash proceeds of any sale of Inventory or, to the extent
permitted herein, Equipment or cause same to be deposited, in
kind, in such Dominion Accounts of FINOVA in lieu of depositing
same to Blocked Accounts, and, unless otherwise provided herein,
all such funds shall be applied by FINOVA to the Obligations in
such order as FINOVA determines in its Permitted Discretion.
(d) Payments Without Deductions. Borrower shall pay
principal, interest, and all other amounts payable hereunder, or
under any other Loan Document, without any deduction whatsoever,
including, but not limited to, any deduction for any setoff or
counterclaim.
(e) Monthly Accountings. FINOVA shall provide Borrower
monthly with an account of advances, charges, expenses and
payments made pursuant to this Agreement. Such account shall be
deemed correct, accurate and binding on Borrower and an account
stated (except for reverses and reapplications of payments made
and corrections of errors discovered by FINOVA), unless Borrower
notifies FINOVA in writing to the contrary within thirty (30)
days after each account is rendered, describing the nature of any
alleged errors or admissions.
2.11 Application of Collateral. Except as otherwise
provided herein, FINOVA shall have the continuing and exclusive
right to apply or reverse and re-apply any and all payments to
any portion of the Obligations in such order and manner as FINOVA
shall determine in its Permitted Discretion. To the extent that
Borrower makes a payment or FINOVA receives any payment or
proceeds of the Collateral for Borrower's benefit which is
subsequently invalidated, declared to be fraudulent or
preferential, set aside or required to be repaid to a trustee,
debtor in possession, receiver or any other party under any
bankruptcy law, common law or equitable cause, or otherwise,
then, to such extent, the Obligations or part thereof intended to
be satisfied shall be revived and continue as if such payment or
proceeds had not been received by FINOVA.
2.12 Application of Payments. The amount of all payments or
amounts received by FINOVA with respect to the Loan shall be
applied to the extent applicable under this Agreement: (i) first,
to accrued interest through the date of such payment, including
any Default Interest; (ii) then, to any late fees, overdue risk
assessments, Examination Fee and expenses, collection fees and
expenses and any other fees and expenses due to FINOVA hereunder;
and (iii) last, the remaining balance, if any, to the unpaid
principal balance of the Loan; provided however, while an Event
of Default exists under this Agreement, or under any other Loan
Document, each payment hereunder shall be (1) held as cash
collateral to secure Obligations relating to any Letters of
Credit or other contingent obligations arising under the Loan
Documents and/or (2) applied to amounts owed to FINOVA by
Borrower as FINOVA in its Permitted Discretion may determine. In
calculating interest and applying payments as set forth above:
(a) interest shall be calculated and collected through the date a
payment is actually applied by FINOVA under the terms of this
Agreement; (b) interest on the outstanding balance shall be
charged during any grace period permitted hereunder; (c) at the
end of each month, all accrued and unpaid interest and other
charges provided for hereunder shall be added to the principal
balance of the Loan; and (d) to the extent that Borrower makes a
payment or FINOVA receives any payment or proceeds of the
Collateral for Borrower's benefit that is subsequently
invalidated, set aside or required to be repaid to any other
Person, then, to such extent, the Obligations intended to be
satisfied shall be revived and continue as if such payment or
proceeds had not been received by FINOVA and FINOVA may adjust
the Loan balances as FINOVA, in its Permitted Discretion, deems
appropriate under the circumstances.
3. SECURITY.
3.1 Security Interest in the Collateral. To secure the
payment and performance of the Obligations when due, Borrower
hereby grants to FINOVA a first priority security interest
(subject only to Permitted Encumbrances) in all of Borrower's now
owned or hereafter acquired or arising Inventory, Equipment,
Receivables, life insurance policies and the proceeds thereof,
Trademarks, Copyrights, Licenses and Patents, Investment Property
(as defined in Section 9-115 of the Code) and General
Intangibles, including, without limitation, all of Borrower's
Deposit Accounts, money, any and all property now or at any time
hereafter in FINOVA's possession (including claims and credit
balances), and all proceeds (including proceeds of any insurance
policies, proceeds of proceeds and claims against third parties),
all products and all books and records and computer data related
to any of the foregoing (all of the foregoing, together with all
other property in which FINOVA may be granted a lien or security
interest, is referred to herein, collectively, as the
"Collateral").
3.2 Perfection and Protection of Security Interest.
Borrower shall, at its expense, take all actions requested by
FINOVA at any time to perfect, maintain, protect and enforce
FINOVA's first priority security interest and other rights in the
Collateral and the priority thereof from time to time, including,
without limitation, (i) executing and filing financing or
continuation statements and amendments thereof and executing and
delivering such documents and titles in connection with motor
vehicles as FINOVA shall require, all in form and substance
satisfactory to FINOVA, (ii) maintaining a perpetual inventory
and complete and accurate stock records, (iii) delivering to
FINOVA warehouse receipts covering any portion of the Collateral
located in warehouses and for which warehouse receipts are
issued, and transferring Inventory to warehouses designated by
FINOVA, (iv) placing notations on Borrower's books of account to
disclose FINOVA's security interest therein and (v) delivering to
FINOVA all letters of credit on which Borrower is named
beneficiary. FINOVA may file, without Borrower's signature, one
or more financing statements disclosing FINOVA's security
interest under this Agreement. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement
or of a financing statement is sufficient as a financing
statement. If any Collateral is at any time in the possession or
control of any warehouseman, bailee or any of Borrower's agents
or processors, Borrower shall notify such Person of FINOVA's
security interest in such Collateral and, upon FINOVA's request,
instruct them to hold all such Collateral for FINOVA's account
subject to FINOVA's instructions. From time to time, Borrower
shall, upon FINOVA's request, execute and deliver confirmatory
written instruments pledging the Collateral to FINOVA, but
Borrower's failure to do so shall not affect or limit FINOVA's
security interest or other rights in and to the Collateral.
Until the Obligations have been fully satisfied and FINOVA's
obligation to make further advances hereunder has terminated,
FINOVA's security interest in the Collateral shall continue in
full force and effect.
3.3 Preservation of Collateral. FINOVA may, in its
Permitted Discretion, at any time discharge any lien or
encumbrance on the Collateral or bond the same, pay any
insurance, maintain guards, pay any service bureau, obtain any
record or take any other action to preserve the Collateral and
charge the cost thereof to Borrower's loan account as an
Obligation.
3.4 Insurance. Borrower will maintain and deliver evidence
to FINOVA of such insurance as is required by FINOVA, written by
insurers, in amounts, and with lender's loss payee, additional
insured, and other endorsements, satisfactory to FINOVA. All
premiums with respect to such insurance shall be paid by Borrower
as and when due. Accurate and certified copies of the policies
shall be delivered by Borrower to FINOVA. If Borrower fails to
comply with this Section, FINOVA may (but shall not be required
to) procure such insurance and endorsements at Borrower's expense
and charge the cost thereof to Borrower's loan account as an
Obligation.
3.5 Collateral Reporting; Inventory.
(a) Invoices. Borrower shall not re-date any invoice or
sale from the original date thereof or make sales on extended
terms beyond those customary in Borrower's industry, or otherwise
extend or modify the term of any Receivable. If Borrower becomes
aware of any matter affecting any Receivable, including
information affecting the credit of the account debtor thereon,
Borrower shall promptly notify FINOVA in writing. Borrower shall
sequentially number each invoice.
(b) Instruments. In the event any Receivable is or becomes
evidenced by a promissory note, trade acceptance or any other
instrument for the payment of money, Borrower shall immediately
deliver such instrument to FINOVA appropriately endorsed to
FINOVA and, regardless of the form of any presentment, demand,
notice of dishonor, protest and notice of protest with respect
thereto, Borrower shall remain liable thereon until such
instrument is paid in full.
(c) Physical Inventory. Borrower shall conduct a physical
count of the Inventory at such intervals as FINOVA requests and
promptly supply FINOVA with a copy of such accounts accompanied
by a report of the value (calculated at the lower of cost or
market value on a first in, first out basis) of the Inventory and
such additional information with respect to the Inventory as
FINOVA may request from time to time.
(d) Returns. For so long as no Event of Default has
occurred and is continuing and subject to the provisions of
Section 3.6(b), if any account debtor returns any Inventory to
Borrower in the ordinary course of its business, Borrower shall
promptly determine the reason for such return and promptly issue
a credit memorandum to the account debtor (sending a copy to
FINOVA) in the appropriate amount. In the event any attempted
return occurs after the occurrence of any Event of Default,
Borrower shall (i) hold the returned Inventory in trust for
FINOVA, (ii) segregate all returned Inventory from all of
Borrower's other property, (iii) conspicuously label the returned
Inventory as FINOVA's property, and (iv) immediately notify
FINOVA of the return of any Inventory, specifying the reason for
such return, the location and condition of the returned
Inventory, and on FINOVA's request deliver such returned
Inventory to FINOVA.
(e) Borrower shall not consign any Inventory.
3.6 Receivables.
(a) Eligibility. (i) Borrower represents and warrants that
each Receivable covers and shall cover a bona fide sale or lease
and delivery by it of goods or the rendition by it of services in
the ordinary course of its business, and shall be for a
liquidated amount and FINOVA's security interest shall not be
subject to any offset, deduction, counterclaim, rights of return
or cancellation, lien or other condition. If any representation
or warranty herein is breached as to any Receivable or any
Receivable ceases to be an Eligible Receivable for any reason
other than payment thereof, then FINOVA may, in addition to its
other rights hereunder, designate any and all Receivables owing
by that account debtor as not Eligible Receivables; provided,
that FINOVA shall in any such event retain its security interest
in all Receivables, whether or not Eligible Receivables, until
the Obligations have been fully satisfied and FINOVA's obligation
to provide loans hereunder has terminated.
(ii) FINOVA at any time shall be entitled to (i) establish
and increase or decrease Loan Reserves against Eligible
Receivables and Eligible Inventory, (ii) reduce the advance rates
in the Schedule or restore such advance rates to any level equal
to or below the advance rates set forth in the Schedule or (iii)
impose additional restrictions (or eliminate the same) to the
standards of eligibility set forth in the definitions of
"Eligible Receivables" and "Eligible Inventory," in the exercise
of its Permitted Discretion. FINOVA may but shall not be
required to rely on the schedules an/or reports delivered to
FINOVA in connection herewith in determining the then eligibility
of Receivables and Inventory. Reliance thereon by FINOVA from
time to time shall not be deemed to limit the right of FINOVA to
revise advance rates or standards of eligibility as provided
above.
(b) Disputes. Borrower shall notify FINOVA promptly of all
disputes or claims and settle or adjust such disputes or claims
at no expense to FINOVA, but no discount, credit or allowance
shall be granted to any account debtor and no returns of
merchandise shall be accepted by Borrower without FINOVA's
consent, except for discounts, credits and allowances made or
given in the ordinary course of Borrower's business. FINOVA may,
at any time after the occurrence of an Event of Default and
during the existence of such Event of Default, settle or adjust
disputes or claims directly with account debtors for amounts and
upon terms which FINOVA considers advisable in its reasonable
credit judgment and, in all cases, FINOVA shall credit Borrower's
loan account with only the net amounts received by FINOVA in
payment of any Receivables.
3.7 Equipment. Borrower shall keep and maintain the
Equipment in good operating condition and repair and make all
necessary replacements thereto to maintain and preserve the value
and operating efficiency thereof at all times consistent with
Borrower's past practice, ordinary wear and tear excepted.
Borrower shall not permit any item of Equipment to become a
fixture (other than a trade fixture) to real estate or an
accession to other property.
3.8 Other Liens; No Disposition of Collateral. Borrower
represents, warrants and covenants that except for FINOVA's
security interest, Permitted Encumbrances, and such other liens,
claims and encumbrances as may be permitted by FINOVA in its
Permitted Discretion from time to time in writing, (a) all
Collateral is and shall continue to be owned by it free and clear
of all liens, claims and encumbrances whatsoever and (b) Borrower
shall not, without FINOVA's prior written approval, sell,
encumber or dispose of or permit the sale, encumbrance or
disposal of any Collateral or all or any substantial part of any
of its other assets (or any interest of Borrower therein), except
for the sale of Inventory in the ordinary course of Borrower's
business. In the event FINOVA gives any such prior written
approval with respect to any such sale of Collateral, the same
may be conditioned on the sale price being equal to, or greater
than, an amount acceptable to FINOVA. The proceeds of any such
sales of Collateral shall be remitted to FINOVA pursuant to this
Agreement for application to the Obligations.
3.9 Collateral Security. The Obligations shall constitute
one loan secured by the Collateral. FINOVA may, in its Permitted
Discretion, (i) exchange, enforce, waive or release any of the
Collateral, (ii) apply Collateral and direct the order or manner
of sale thereof as it may determine, and (iii) settle,
compromise, collect or otherwise liquidate any Collateral in any
manner without affecting its right to take any other action with
respect to any other Collateral.
4. CONDITIONS OF CLOSING.
4.1 Initial Advance. The obligation of FINOVA to make the
initial advance hereunder or to issue or arrange for the issuance
of the initial Letter of Credit hereunder is subject to the
fulfillment, to the satisfaction of FINOVA and its counsel, of
each of the following conditions on or prior to the date set
forth on the Schedule:
(a) Loan Documents. FINOVA shall have received each of the
following Loan Documents: (i) the Agreement fully and properly
executed by Borrower; (ii) promissory notes in such amounts and
on such terms and conditions as FINOVA shall specify, executed by
Borrower; (iii) Guaranties executed by each of the Guarantors
and/or Validity and Support Agreements executed by the applicable
parties; (iv) such security agreements, intellectual property
assignments, pledge agreements, mortgages and deeds of trust as
FINOVA may require with respect to this Agreement and any
Guaranties, executed by each of the parties thereto and, if
applicable, duly acknowledged for recording or filing in the
appropriate governmental offices; (v) Subordination Agreements
in form and substance acceptable to FINOVA, executed by each of
the Subordinating Creditors, together with copies of all
instruments subject thereto showing a legend indicating such
subordination; (vi) such Blocked Account or Dominion Account
agreements as it shall determine; and (vii) such other
documents, instruments and agreements in connection herewith as
FINOVA shall require, executed, certified and/or acknowledged by
such parties as FINOVA shall designate;
(b) Intentionally Omitted.
(c) Terminations by Existing Lender. Borrower's existing
lender(s) shall have executed and delivered UCC termination
statements and other documentation evidencing the termination of
its liens and security interests in the assets of Borrower or a
subordination agreement in form and substance satisfactory to
FINOVA;
d) Charter Documents. FINOVA shall have received copies
of Borrower's By-laws and Articles or Certificate of
Incorporation, as amended, modified, or supplemented to the
Closing Date, certified by the Secretary of Borrower;
(e) Good Standing. FINOVA shall have received a
certificate of corporate status with respect to Borrower, dated
within ten (10) days of the Closing Date, by the Secretary of
State of the state of incorporation of Borrower, which
certificate shall indicate that Borrower is in good standing in
such state;
(f) Foreign Qualification. FINOVA shall have received
certificates of corporate status with respect to Borrower and
each other Loan Party, each dated within ten (10) days of the
Closing Date, issued by the Secretary of State of each state in
which such party's failure to be duly qualified or licensed would
have a material adverse effect on its financial condition or
assets, indicating that such party is in good standing;
(g) Authorizing Resolutions and Incumbency. FINOVA shall
have received a certificate from the Secretary of Borrower
attesting to (i) the adoption of resolutions of Borrower's Board
of Directors, and shareholders or members if necessary,
authorizing the borrowing of money from FINOVA and execution and
delivery of this Agreement and the other Loan Documents to which
Borrower is a party, and authorizing specific officers of
Borrower to execute same, and (ii) the authenticity of original
specimen signatures of such officers;
(h) Insurance. FINOVA shall have received the insurance
certificates and certified copies of policies required by Section
3.4 hereof, in form and substance satisfactory to FINOVA and its
counsel, together with an additional insured endorsement in favor
of FINOVA with respect to all liability policies and a lender's
loss payable endorsement in favor of FINOVA with respect to all
casualty and business interruption policies, each in form and
substance acceptable to FINOVA and its counsel;
(i) Title Insurance. FINOVA shall have received binding
commitments to issue such title insurance with respect to
Collateral or security for Guaranties which is comprised of real
property as it shall determine;
(j) Searches; Certificates of Title. FINOVA shall have
received searches reflecting the filing of its financing
statements and fixture filings in such jurisdictions as it shall
determine, and shall have received certificates of title with
respect to the Collateral which shall have been duly executed in
a manner sufficient to perfect all of the security interests
granted to FINOVA;
(k) Landlord, Bailee and Mortgagee Waivers. FINOVA shall
have received landlord, bailee and/or mortgagee waivers from the
lessors, bailees and/or mortgagees of all locations where any
Collateral is located;
(l) Fees. Borrower shall have paid all fees payable by it
on the Closing Date pursuant to this Agreement;
(m) Opinion of Counsel. FINOVA shall have received an
opinion of Borrower's counsel covering such matters as FINOVA
shall determine in its Permitted Discretion;
(n) Officer Certificate. FINOVA shall have received a
certificate of the President and the Chief Financial Officer or
similar official of Borrower, attesting to the accuracy of each
of the representations and warranties of Borrower set forth in
this Agreement and the fulfillment of all conditions precedent to
the initial advance hereunder;
(o) Solvency Certificate. If requested, FINOVA shall have
received a signed certificate of the Borrower's duly elected
Chief Financial Officer concerning the solvency and financial
condition of Borrower, on FINOVA's standard form;
(p) Blocked Account. The Blocked Account referred to in
Section 2.10(c) hereof shall have been established to the
satisfaction of FINOVA in its Permitted Discretion;
(q) Intentionally Omitted.
(r) Intentionally Omitted.
(s) Search and References. FINOVA shall have received and
approved the results of UCC, tax lien, litigation, judgment, and
bankruptcy searches regarding Borrower, and shall have received
satisfactory customer, vendor and credit reference checks on
Borrower.
(t) Intentionally omitted.
(u) Life Insurance. FINOVA shall require that Borrower
maintain a life insurance policy on the life of the persons
specified in the Schedule in an amount specified in the Schedule
(the "Life Insurance Policy"). The Life Insurance Policy shall
be collaterally assigned to FINOVA (pursuant to an assignment in
form satisfactory to FINOVA, hereinafter referred to as the
"Assignment of Life Insurance") and be accepted and acknowledged
in writing by the applicable insurer or its authorized
representative. Borrower hereby grants to FINOVA a security
interest in the Life Insurance Policy, all replacements thereof,
any supplementary contract issued in connection therewith, and
all proceeds of the foregoing (including without limitation, the
beneficiary's interest therein, collectively referred to as the
"Insurance Collateral") to secure Borrower's payment and
performance of all the Obligations. The insurer under the Life
Insurance Policy and the terms and conditions of the Life
Insurance Policy are subject to the approval of FINOVA. The
original of the policy evidencing the Life Insurance Policy,
signed by an authorized insurance company representative, shall
be delivered to FINOVA at the closing together with a duly
executed Collateral Assignment of Life Insurance which has been
accepted and acknowledged in writing by the applicable insurer or
its authorized representative. The Life Insurance Policy shall
require the insurer to provide FINOVA with thirty (30) days
advance written notice of any cancellation and/or any material
change in coverage. Borrower warrants and represents that it is
and will be (throughout the entire term of the Loan) the owner
and beneficiary of the Life Insurance Policy. Notwithstanding
anything herein to the contrary, upon the maturity of the Life
Insurance Policy or upon the death of the individual insured, the
proceeds of the Life Insurance Policy shall be paid directly to
FINOVA, shall (at the option of FINOVA) be treated as a
prepayment and, if treated as a prepayment, shall be applied in
order against (a) all of Borrower's Obligations, other than as
set forth in the remaining subsections of this paragraph, (b) all
costs and expenses of FINOVA in connection with such prepayment,
(c) accrued interest, and (d) the unpaid principal balance of the
Loans in such manner as FINOVA shall elect. No prepayment
premium or Termination Fee shall be due and owing in connection
with such prepayment. To the extent that the proceeds of said
Life Insurance Policy exceed the amount of Borrower's
Obligations, any such excess shall be paid by FINOVA directly to
Borrower. Notwithstanding anything to the contrary herein, the
obligations, undertakings and representations of Borrower under
this Section [4.1(u)] shall survive the Closing Date and shall be
a continuing obligation and agreement of Borrower hereunder.
(v) No Material Adverse Changes. Prior to the Closing
Date, there shall have occurred no material adverse change in the
financial condition of Borrower, or in the condition of the
assets of Borrower, from that shown on the draft financial
statements for Borrower dated on the date set forth in the
Schedule. At the closing, Borrower shall deliver to FINOVA an
officer's certification confirming that Borrower is unaware of
the existence of any such material adverse change in Borrower's
financial condition.
(w) Material Agreements. FINOVA shall have received,
reviewed and approved all material agreements to which Borrower
shall be a party.
(x) Projections. Borrower shall submit cash flow
projections and pro forma balance sheet with adjusting entries
(i) showing that the proposed financing will provide sufficient
funds for the Borrower's projected working capital needs, and
(ii) showing: (1) that the Borrower will have reasonably
sufficient capital for the conduct of its business following the
initial funding, and (2) that the Borrower will not incur debts
beyond its ability to pay such debts as they mature.
(y) Opinions. To the extent any Person other than Borrower
shall be parties to the Loan Documents, FINOVA reserves the right
to require satisfactory opinions of counsel for each such Person
concerning the proper organization of such Person and the due
authorization, execution, delivery, enforceability, validity and
binding effect of the Loan Documents to which such Person is a
party. Each such opinion of counsel shall confirm, to the
satisfaction of FINOVA, that the opinion is being delivered to
FINOVA at the instruction of the party represented by such
counsel, that FINOVA is entitled to rely on such opinion and that
for purposes of such reliance, FINOVA is deemed to be in privity
with the opining counsel.
(z) ADA Compliance. If necessary, as of the Closing
Date, Borrower shall be in compliance with the Americans with
Disabilities Act of 1990 ("ADA"), or, if any renovations of
Borrower's facilities or modifications of Borrower's employment
practices shall be required to bring them into compliance with
the ADA, review and approval by FINOVA of Borrower's proposed
plan to come into such compliance. Borrower shall deliver
representations and warranties to FINOVA concerning Borrower's
compliance with the ADA, and no evidence shall have come to the
attention of FINOVA indicating that Borrower is not in compliance
with the ADA (except to the extent that FINOVA has reviewed and
approved Borrower's plan to come into compliance).
(aa) Subordination and Intercreditor Agreements. FINOVA and
each Subordinating Creditor shall have entered into a
Subordination Agreement, in form and substance satisfactory to
FINOVA.
(bb) Intentionally omitted.
(cc) Intentionally omitted.
(dd) Employment and Non-compete Agreements. FINOVA
shall have reviewed and approved all employment agreements to be
in effect as of the Closing Date between Borrower and any
officer, director, member or shareholder of Borrower.
(ee) Intentionally Omitted.
(ff) Intentionally Omitted.
(gg) Schedule Conditions. Borrower shall have complied with
all additional conditions precedent as set forth in the Schedule
attached hereto.
(hh) Other Matters. All other documents and legal matters
in connection with the transactions contemplated by this
Agreement shall have been delivered, executed and recorded and
shall be in form and substance satisfactory to FINOVA and its
counsel including, without limitation, each of the items listed
on the Closing Checklist attached as Exhibit 4.1 hereto.
4.2 Subsequent Advances. The obligation of FINOVA to make
any advance hereunder (including the initial advance) shall be
subject to the further conditions precedent that, on and as of
the date of such advance: (a) the representations and
warranties of Borrower set forth in this Agreement shall be
accurate, before and after giving effect to such advance or
issuance and to the application of any proceeds thereof; (b) no
Event of Default and no event which, with notice or passage of
time or both, would constitute an Event of Default has occurred
and is continuing, or would result from such advance or issuance
or from the application of any proceeds thereof; (c) no material
adverse change has occurred in the Borrower's business,
operations, financial condition, in the condition of the
Collateral or other assets of Borrower or in the prospect of
repayment of the Obligations; and (d) FINOVA shall have received
such other approvals, opinions or documents as FINOVA shall
reasonably request.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
5.1 Due Organization. It is a corporation duly organized,
validly existing and in good standing under the laws of the State
set forth on the Schedule, is qualified and authorized to do
business and is in good standing in all states in which such
qualification and good standing are necessary in order for it to
conduct its business and own its property, and has all requisite
power and authority to conduct its business as presently
conducted, to own its property and to execute and deliver each of
the Loan Documents to which it is a party and perform all of its
Obligations thereunder, and has not taken any steps to wind-up,
dissolve or otherwise liquidate its assets;
5.2 Other Names. Borrower has not, during the preceding
five (5) years, been known by or used any other corporate or
fictitious name except as set forth on the Schedule, nor has
Borrower been the surviving corporation of a merger or
consolidation or acquired all or substantially all of the assets
of any Person during such time;
5.3 Due Authorization. The execution, delivery and
performance by Borrower of the Loan Documents to which it is a
party have been authorized by all necessary corporate action and
does not and shall not constitute a violation of any applicable
law or of Borrower's Articles or Certificate of Incorporation or
By-Laws or any other document, agreement or instrument to which
Borrower is a party or by which Borrower or its assets are bound;
5.4 Binding Obligation. Each of the Loan Documents to
which Borrower is a party is the legal, valid and binding
obligation of Borrower enforceable against Borrower in accordance
with its terms;
5.5 Intangible Property. Borrower possesses adequate
assets, licenses, patents, patent applications, copyrights,
trademarks, trademark applications and trade names for the
present and planned future conduct of its business without any
known conflict with the rights of others, and each is valid and
has been duly registered or filed with the appropriate
governmental authorities; each of Borrower's patents, patent
applications, copyrights, trademarks and trademark applications
which have been registered or filed with any governmental
authority (including the U.S. Patent and Trademark Office and the
Library of Congress) are listed by name, date and filing number
on the Schedule;
5.6 Capital. Borrower has capital sufficient to conduct
its business, is able to pay its debts as they mature, and owns
property having a fair salable value greater than the amount
required to pay all of its debts (including contingent debts);
5.7 Material Litigation. Borrower has no pending or
overtly threatened litigation, actions or proceedings which would
materially and adversely affect its business, assets, operations,
prospects or condition, financial or otherwise, or the Collateral
or any of FINOVA's interests therein;
5.8 Title; Security Interests of FINOVA. Borrower has
good, indefeasible and merchantable title to the Collateral and,
upon the execution and delivery of the Loan Documents, the filing
of UCC-1 Financing Statements, delivery of the certificate(s)
evidencing any pledged securities, the filing of any collateral
assignments or security agreements regarding Borrower,
Trademarks, Copyrights, Licenses and/or Patents, if any, with the
appropriate governmental offices and the recording of any
mortgages or deeds of trust with respect to real property, in
each case in the appropriate offices, this Agreement and such
documents shall create valid and perfected first priority liens
in the Collateral, subject only to Permitted Encumbrances;
5.9 Restrictive Agreements; Labor Contracts. Borrower is
not a party or subject to any contract or subject to any charge,
corporate restriction, judgment, decree or order materially and
adversely affecting its business, assets, operations, prospects
or condition, financial or otherwise, or which restricts its
right or ability to incur Indebtedness, and it is not party to
any labor dispute. In addition, no labor contract is scheduled
to expire during the Initial Term of this Agreement, except as
disclosed to FINOVA in writing prior to the date hereof;
5.10 Laws. Borrower is not in violation of any applicable
statute, regulation, ordinance or any order of any court,
tribunal or governmental agency, in any respect materially and
adversely affecting the Collateral or its business, assets,
operations, prospects or condition, financial or otherwise;
5.11 Consents. Borrower has obtained or caused to be
obtained or issued any required consent of a governmental agency
or other Person in connection with the financing contemplated
hereby;
5.12 Defaults. Borrower is not in default with respect to
any note, indenture, loan agreement, mortgage, lease, deed or
other agreement to which it is a party or by which it or its
assets are bound, nor has any event occurred which, with the
giving of notice or the lapse of time, or both, would cause such
a default;
5.13 Financial Condition. The Prepared Financials fairly
present Borrower's financial condition and results of operations
and those of such other Persons described therein as of the date
thereof in accordance with GAAP; there are no material omissions
from the Prepared Financials or other facts or circumstances not
reflected in the Prepared Financials; and there has been no
material and adverse change in such financial condition or
operations since the date of the initial Prepared Financials
delivered to FINOVA hereunder;
5.14 ERISA. Neither Borrower, nor any ERISA Affiliate, nor
any Plan is or has been in violation of any of the provisions of
ERISA, any of the qualification requirements of IRC Section
401(a) or any of the published interpretations thereunder, nor
has Borrower or any ERISA Affiliate received any notice to such
effect. No notice of intent to terminate a Plan has been filed
under Section 4041 of ERISA, nor has any Plan been terminated
under ERISA. The PBGC has not instituted proceedings to
terminate, or appointed a trustee to administer, a Plan. No lien
upon the assets of Borrower has arisen with respect to a Plan. No
prohibited transaction or Reportable Event has occurred with
respect to a Plan. Neither Borrower nor any ERISA Affiliate has
incurred any withdrawal liability with respect to any
Multiemployer Plan. Borrower and each ERISA Affiliate have made
all contributions required to be made by them to any Plan or
Multiemployer Plan when due. There is no accumulated funding
deficiency in any Plan, whether or not waived;
5.15 Taxes. Borrower has filed all tax returns and such
other reports as it is required by law to file and has paid or
made adequate provision for the payment on or prior to the date
when due of all taxes, assessments and similar charges that are
due and payable;
5.16 Locations; Federal Tax ID No. Borrower's chief
executive office and the offices and locations where it keeps the
Collateral (except for Inventory in transit) are at the locations
set forth on the Schedule, except to the extent that such
locations may have been changed after notice to FINOVA in
accordance with Section 6.1.4 hereof; Borrower's federal tax
identification number is as shown on the Schedule;
5.17 Business Relationships. There exists no actual or
threatened termination, cancellation or limitation of, or any
modification or change in, the business relationship between
Borrower and any customer or any group of customers whose
purchases individually or in the aggregate are material to the
business of Borrower, or with any material supplier, and there
exists no present condition or state of facts or circumstances of
which Borrower knows or should know, which would materially and
adversely affect Borrower or prevent Borrower from conducting
such business after the consummation of the transactions
contemplated by this Agreement in substantially the same manner
in which it has heretofore been conducted; and
5.18 Reaffirmations. Each request for a loan made by
Borrower pursuant to this Agreement shall constitute (i) an
automatic representation and warranty by Borrower to FINOVA that
there does not then exist any Event of Default and (ii) a
reaffirmation as of the date of said request of all of the
representations and warranties of Borrower contained in this
Agreement and the other Loan Documents.
5.19 Year 2000. Borrower has taken all action necessary to
assure that there will be no material adverse change to
Borrower's business by reason of the advent of the year 2000,
including without limitation that all computer-based systems,
embedded microchips and other processing capabilities effectively
recognize and process dates after April 1, 1999.
6. COVENANTS.
6.1 Affirmative Covenants. Borrower covenants that, so
long as any Obligation remains outstanding and this Agreement is
in effect, it shall:
6.1.1 Taxes. File all tax returns and pay or make
adequate provision for the payment of all taxes, assessments and
other charges on or prior to the date when due;
6.1.2 Notice of Litigation. Promptly notify FINOVA
in writing of any litigation, suit or administrative proceeding
which may materially and adversely affect the Collateral or
Borrower's business, assets, operations, prospects or condition,
financial or otherwise, whether or not the claim is covered by
insurance;
6.1.3 ERISA. Notify FINOVA in writing (i) promptly
upon the occurrence of any event described in Paragraph 4043 of
ERISA, other than a termination, partial termination or merger of
a Plan or a transfer of a Plan's assets and (ii) prior to any
termination, partial termination or merger of a Plan or a
transfer of a Plan's assets;
6.1.4 Change in Location. Notify FINOVA in writing
forty-five (45) days prior to any change in the location of
Borrower's chief executive office or the location of any
Collateral, or Borrower's opening or closing of any other place
of business;
6.1.5 Corporate Existence. Maintain its corporate
existence and its qualification to do business and good standing
in all states necessary for the conduct of its business and the
ownership of its property and maintain adequate assets, licenses,
patents, copyrights, trademarks and trade names for the conduct
of its business;
6.1.6 Labor Disputes. Promptly notify FINOVA in
writing of any labor dispute to which Borrower is or may become
subject and the expiration of any labor contract to which
Borrower is a party or bound;
6.1.7 Violations of Law. Promptly notify FINOVA in
writing of any violation of any law, statute, regulation or
ordinance of any governmental entity, or of any agency thereof,
applicable to Borrower which may materially and adversely affect
the Collateral or Borrower's business, assets, prospects,
operations or condition, financial or otherwise;
6.1.8 Defaults. Notify FINOVA in writing within
five (5) Business Days of Borrower's default under any note,
indenture, loan agreement, mortgage, lease or other agreement to
which Borrower is a party or by which Borrower is bound, or of
any other default under any Indebtedness of Borrower;
6.1.9 Capital Expenditures. Promptly notify FINOVA
in writing of the making of any Capital Expenditure materially
affecting Borrower's business, assets, prospects, operations or
condition, financial or otherwise, except to the extent permitted
in the Schedule;
6.1.10 Books and Records. Keep adequate records and
books of account with respect to its business activities in which
proper entries are made in accordance with GAAP, reflecting all
of its financial transactions;
6.1.11 Leases; Warehouse Agreements. Provide FINOVA
with (i) copies of all agreements between Borrower and any
landlord, warehouseman or bailee which owns any premises at which
any Collateral may, from time to time, be located (whether for
processing, storage or otherwise), and (ii) without limiting the
landlord, bailee and/or mortgagee waivers to be provided pursuant
to Section 4.1(k) hereof, additional landlord, bailee and/or
mortgagee waivers in form acceptable to FINOVA with respect to
all locations where any Collateral is hereafter located;
6.1.12 Additional Documents. At FINOVA's request,
promptly execute or cause to be executed and delivered to FINOVA
any and all documents, instruments or agreements deemed necessary
by FINOVA to facilitate the collection of the Obligations or the
Collateral or otherwise to give effect to or carry out the terms
or intent of this Agreement or any of the other Loan Documents.
Without limiting the generality of the foregoing, if any of the
Receivables with a face value in excess of $1,000 arises out of a
contract with the United States of America or any department,
agency, subdivision or instrumentality thereof, Borrower shall
promptly notify FINOVA of such fact in writing and shall execute
any instruments and take any other action required or requested
by FINOVA to comply with the provisions of the Federal Assignment
of Claims Act; and
6.1.13 Financial Covenants. Comply with the
financial covenants set forth on the Schedule.
6.2 Negative Covenants. Without FINOVA's prior written
consent, which consent FINOVA may withhold in its Permitted
Discretion, so long as any Obligation remains outstanding and
this Agreement is in effect, Borrower shall not:
6.2.1 Mergers. Merge or consolidate with or acquire
any other Person, or make any other material change in its
capital structure or in its business or operations which might
adversely affect the repayment of the Obligations;
6.2.2 Loans. Make advances, loans or extensions of
credit to, or invest in, any Person, except for loans or cash
advances to employees which are permitted in the Schedule;
6.2.3 Dividends. Declare or pay cash dividends
upon any of its stock, other than its Preferred Stock, or
distribute any of its property or redeem, retire, purchase or
acquire directly or indirectly any of its stock;
6.2.4 Adverse Transactions. Enter into any
transaction which materially and adversely affects the Collateral
or its ability to repay the Obligations in full as and when due;
6.2.5 Indebtedness of Others. Guarantee or become
directly or contingently liable for the Indebtedness of any
Person, except by endorsement of instruments for deposit and
except for the existing guarantees made by Borrower prior to the
date hereof, if any, which are set forth in the Schedule;
6.2.6 Repurchase. Make a sale to any customer on a
bill-and-hold, guaranteed sale, sale and return, sale on
approval, consignment, or any other repurchase or return basis;
6.2.7 Name. Use any corporate or fictitious name
other than its corporate name as set forth in its Articles or
Certificate of Incorporation on the date hereof or as set forth
on the Schedule;
6.2.8 Prepayment. Prepay any Indebtedness other
than trade payables and other than the Obligations;
6.2.9 Capital Expenditure. Make or incur any
Capital Expenditure if, after giving effect thereto, the
aggregate amount of all Capital Expenditures by Borrower in any
fiscal year would exceed the amount set forth on the Schedule;
6.2.10 Intentionally Omitted.
6.2.11 Indebtedness. Create, incur, assume or
permit to exist any Indebtedness (including Indebtedness in
connection with Capital Leases) in excess of the amount set forth
on the Schedule, other than (i) the Obligations, (ii) trade
payables and other contractual obligations to suppliers and
customers incurred in the ordinary course of business, and (iii)
other Indebtedness existing on the date of this Agreement and
reflected in the Prepared Financials (except Indebtedness paid on
the date of this Agreement from proceeds of the initial advances
hereunder), and (iv) Subordinated Debt;
6.2.12 Affiliate Transactions. Except as set forth
below, sell, transfer, distribute or pay any money or property to
any Affiliate, or invest in (by capital contribution or
otherwise) or purchase or repurchase any stock or Indebtedness,
or any property, of any Affiliate, or become liable on any
guaranty of the indebtedness, dividends or other obligations of
any Affiliate. Notwithstanding the foregoing, Borrower may pay
compensation permitted by Section 6.23 to employees who are
Affiliates and, if no Event of Default has occurred, Borrower may
(i) engage in transactions with Affiliates in the normal course
of business, in amounts and upon terms which are fully disclosed
to FINOVA and which are no less favorable to Borrower than would
be obtainable in a comparable arm's length transaction with a
Person who is not an Affiliate, and (ii) make payments to a
Subordinating Creditor that is an Affiliate, subject to and only
to the extent expressly permitted in the Subordination Agreement
between such Subordinating Creditor and FINOVA;
6.2.13 Nature of Business. Enter into any new
business or make any material change in any of Borrower's
business objectives, purposes or operations;
6.2.14 FINOVA's Name. Use the name of FINOVA in
connection with any of Borrower's business or activities, except
in connection with internal business matters or as required in
dealings with governmental agencies and financial institutions or
with trade creditors of Borrower, solely for credit reference
purposes; or
6.2.15 Margin Security. Borrower will not (and has
not in the past) engaged principally, or as one of its important
activities, in the business of extending credit for the purpose
of purchasing or carrying margin stock (within the meaning of
Regulation G or Regulation U issued by the Board of Governors of
the Federal Reserve System), and no proceeds of any Loan or other
advance will be used to purchase or carry any margin stock or to
extend credit to others for the purpose of purchasing or carrying
any margin stock, or in any manner which might cause such Loan or
other advance or the application of such proceeds to violate (or
require any regulatory filing under) Regulation G, Regulation T,
Regulation U, Regulation X or any other regulation of the Board
of Governors of the Federal Reserve System, in each case as in
effect on the date or dates of such Loan or other advance and
such use of proceeds. Further, no proceeds of any Loan or other
advance will be used to acquire any security of a class which is
registered pursuant to Section 12 of the Securities Exchange Act
of 1934.
6.2.16 Real Property. Purchase or acquire any real
property without FINOVA's prior written consent, a condition of
which consent shall include delivery of appropriate environmental
reports and analysis, in form and substance satisfactory to
FINOVA and its counsel.
6.2.17. Year 2000. Borrower shall take all action
necessary to assure that there will be no material adverse change
to Borrower's business by reason of the advent of the year 2000,
including without limitation that all computer-based systems,
embedded microchips and other processing capabilities effectively
recognize and process dates after April 1, 1999. At FINOVA's
request, Borrower shall provide to FINOVA assurance reasonably
acceptable to FINOVA that Borrower's computer-based systems,
embedded microchips and other processing capabilities are year
2000 compatible.
7. DEFAULT AND REMEDIES.
7.1 Events of Default. Any one or more of the
following events shall constitute an Event of Default under this
Agreement:
(a) Borrower fails to pay when due and payable any portion
of the Obligations at stated maturity, upon acceleration or
otherwise;
(b) Borrower or any other Loan Party fails or neglects to
perform, keep, or observe any Obligation including, but not
limited to, any term, provision, condition, covenant or agreement
contained in any Loan Document to which Borrower or such other
Loan Party is a party;
(c) Any material adverse change occurs in Borrower's
business, assets, operations, prospects or condition, financial
or otherwise;
(d) The prospect of repayment of any portion of the
Obligations or the value or priority of FINOVA's security
interest in the Collateral is materially impaired;
(e) Any portion of Borrower's assets is seized, attached,
subjected to a writ or distress warrant, is levied upon or comes
into the possession of any judicial officer and is not vacated or
bonded within five (5) days;
(f) Borrower shall generally not pay its debts as they
become due or shall enter into any agreement (whether written or
oral), or offer to enter into any agreement, with all or a
significant number of its creditors regarding any moratorium or
other indulgence with respect to its debts or the participation
of such creditors or their representatives in the supervision,
management or control of the business of Borrower;
(g) Any bankruptcy or other insolvency proceeding is
commenced by Borrower, or any such proceeding is commenced
against Borrower and remains undischarged or unstayed for
forty-five (45) days;
(h) Any notice of lien, levy or assessment is filed of
record with respect to any of Borrower's assets and is not
vacated or bonded within five (5) days;
(i) Any judgments are entered against Borrower in an
aggregate amount exceeding $25,000 in any fiscal year and is not
bonded and appealed within five (5) days;
(j) Any default shall occur under (i) any material
agreement between Borrower and any third party including, without
limitation, any default which would result in a right by such
third party to accelerate the maturity of any Indebtedness of
Borrower to such third party, or (ii) any Subordinated Debt;
(k) Any representation or warranty made or deemed to be
made by Borrower, any Affiliate or any other Loan Party in any
Loan Document or any other statement, document or report made or
delivered to FINOVA in connection therewith shall prove to have
been misleading in any material respect;
(l) Any Prohibited Transaction or Reportable Event shall
occur with respect to a Plan which could have a material adverse
effect on the financial condition of Borrower; any lien upon the
assets of Borrower in connection with any Plan shall arise;
Borrower or any of its ERISA Affiliates shall fail to make full
payment when due of all amounts which Borrower or any of its
ERISA Affiliates may be required to pay to any Plan or any
Multiemployer Plan as one or more contributions thereto; Borrower
or any of its ERISA Affiliates creates or permits the creation of
any accumulated funding deficiency, whether or not waived; or
(m) Any transfer, without FINOVA's prior written consent of
more than ten percent (10%) of the issued and outstanding shares
of common stock or other evidence of ownership of Borrower that
results in a fundamental change in control.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, FINOVA
RESERVES THE RIGHT TO CEASE MAKING ANY LOANS DURING ANY CURE
PERIOD STATED ABOVE, AND THEREAFTER IF AN EVENT OF DEFAULT HAS
OCCURRED.
7.2 Remedies. Upon the occurrence of an Event of Default,
FINOVA may, at its option and in its Permitted Discretion and in
addition to all of its other rights under the Loan Documents,
cease making Loans, terminate this Agreement and/or declare all
of the Obligations to be immediately payable in full. Borrower
agrees that FINOVA shall also have all of its rights and remedies
under applicable law, including, without limitation, the default
rights and remedies of a secured party under the Code, and upon
the occurrence of an Event of Default Borrower hereby consents to
the appointment of a receiver by FINOVA in any action initiated
by FINOVA pursuant to this Agreement and to the jurisdiction and
venue set forth in Section 9.26 hereof, and Borrower waives
notice and posting of a bond in connection therewith. Further,
FINOVA may, at any time, take possession of the Collateral and
keep it on Borrower's premises, at no cost to FINOVA, or remove
any part of it to such other place(s) as FINOVA may desire, or
Borrower shall, upon FINOVA's demand, at Borrower's sole cost,
assemble the Collateral and make it available to FINOVA at a
place reasonably convenient to FINOVA. FINOVA may sell and
deliver any Collateral at public or private sales, for cash, upon
credit or otherwise, at such prices and upon such terms as FINOVA
deems advisable, at FINOVA's Permitted Discretion, and may, if
FINOVA deems it reasonable, postpone or adjourn any sale of the
Collateral by an announcement at the time and place of sale or of
such postponed or adjourned sale without giving a new notice of
sale. Borrower agrees that FINOVA has no obligation to preserve
rights to the Collateral or marshall any Collateral for the
benefit of any Person. FINOVA is hereby granted a license or
other right to use, without charge, Borrower's labels, patents,
copyrights, name, trade secrets, trade names, trademarks and
advertising matter, or any similar property, in completing
production, advertising or selling any Collateral and Borrower's
rights under all licenses and all franchise agreements shall
inure to FINOVA's benefit. Any requirement of reasonable notice
shall be met if such notice is mailed postage prepaid to Borrower
at its address set forth in the heading to this Agreement at
least five (5) days before sale or other disposition. The
proceeds of sale shall be applied, first, to all attorneys fees
and other expenses of sale, and second, to the Obligations in
such order as FINOVA shall elect, in its Permitted Discretion.
FINOVA shall return any excess to Borrower and Borrower shall
remain liable for any deficiency to the fullest extent permitted
by law.
7.3 Standards for Determining Commercial Reasonableness.
Borrower and FINOVA agree that the following conduct by FINOVA
with respect to any disposition of Collateral shall conclusively
be deemed commercially reasonable (but other conduct by FINOVA,
including, but not limited to, FINOVA's use in its Permitted
Discretion of other or different times, places and manners of
noticing and conducting any disposition of Collateral shall not
be deemed unreasonable): Any public or private disposition: (i)
as to which on no later than the fifth calendar day prior thereto
written notice thereof is mailed or personally delivered to
Borrower and, with respect to any public disposition, on no later
than the fifth calendar day prior thereto notice thereof
describing in general non-specific terms, the Collateral to be
disposed of is published once in a newspaper of general
circulation in the county where the sale is to be conducted
(provided that no notice of any public or private disposition
need be given to the Borrower or published if the Collateral is
perishable or threatens to decline speedily in value or is of a
type customarily sold on a recognized market); (ii) which is
conducted at any place designated by FINOVA, with or without the
Collateral being present; and (iii) which commences at any time
between 8:00 a.m. and 5:00 p.m. Without limiting the generality
of the foregoing, Borrower expressly agrees that, with respect to
any disposition of accounts, instruments and general intangibles,
it shall be commercially reasonable for FINOVA to direct any
prospective purchaser thereof to ascertain directly from Borrower
any and all information concerning the same, including, but not
limited to, the terms of payment, aging and delinquency, if any,
the financial condition of any obligor or account debtor thereon
or guarantor thereof, and any collateral therefor.
8. EXPENSES AND INDEMNITIES
8.1 Expenses. Borrower covenants that, so long as any
Obligation remains outstanding and this Agreement remains in
effect, it shall promptly reimburse FINOVA for all costs, fees
and expenses incurred by FINOVA in connection with the
negotiation, preparation, execution, delivery, administration and
enforcement of each of the Loan Documents, including, but not
limited to, the attorneys' and paralegals' fees of in-house and
outside counsel, expert witness fees, lien, title search and
insurance fees, appraisal fees, all charges and expenses incurred
in connection with any and all environmental reports and
environmental remediation activities, and all other costs,
expenses, taxes and filing or recording fees payable in
connection with the transactions contemplated by this Agreement,
including without limitation all such costs, fees and expenses as
FINOVA shall incur or for which FINOVA shall become obligated in
connection with (i) any inspection or verification of the
Collateral, (ii) any proceeding relating to the Loan Documents or
the Collateral, (iii) actions taken with respect to the
Collateral and FINOVA's security interest therein, including,
without limitation, the defense or prosecution of any action
involving FINOVA and Borrower or any third party, (iv)
enforcement of any of FINOVA's rights and remedies with respect
to the Obligations or Collateral and (v) consultation with
FINOVA's attorneys and participation in any workout, bankruptcy
or other insolvency or other proceeding involving any Loan Party
or any Affiliate, whether or not suit is filed or the issues are
peculiar to federal bankruptcy or state insolvency laws.
Borrower shall also pay all FINOVA charges in connection with
bank wire transfers, forwarding of loan proceeds, deposits of
checks and other items of payment, returned checks, establishment
and maintenance of lockboxes and other Blocked Accounts, and all
other bank and administrative matters, in accordance with
FINOVA's schedule of bank and administrative fees and charges in
effect from time to time.
8.2 Environmental Matters.
(a) Definitions. The following definitions apply to
the provisions of this Section 8.2: (a) the term "Applicable
Law" shall include, but shall not be limited to, all local, state
and/or federal laws, rules, regulations or ordinances, whether
currently in existence or hereafter enacted, which govern, to the
extent applicable to the Property or to Borrower, (i) the
existence, cleanup and/or remedy of contamination on real
property; (ii) the protection of the environment from soil, air
or water pollution, or from spilled, deposited or otherwise
emplaced contamination; (iii) the emission or discharge of
hazardous substances into the environment; (iv) the control of
hazardous wastes; or (v) the use, generation, transport,
treatment, removal or recovery of Hazardous Substances; (b) the
term "Hazardous Substance" shall mean (i) any oil, flammable
substance, explosives, radioactive materials, hazardous wastes or
substances, toxic wastes or substances or any other wastes,
materials or pollutants which either pose a hazard to the
Property or to persons on or about the Property or cause the
Property to be in violation of any Applicable Law; (ii) asbestos
in any form which is or could become friable, urea formaldehyde
foam insulation, transformers or other equipment which contain
dielectric fluid containing levels of polychlorinated biphenyls,
or radon gas; (iii) any chemical, material or substance defined
as or included in the definition of "hazardous substances,"
"waste," "hazardous wastes," "hazardous materials," "extremely
hazardous waste," "restricted hazardous waste," or "toxic
substances" or words of similar import under any Applicable Law;
; (iv) any other chemical, material or substance, exposure to
which is prohibited, limited or regulated by any governmental
authority which may or could pose a hazard to the health or
safety of the occupants of the Property or the owners and/or
occupants of property adjacent to or surrounding the Property, or
any other person coming upon the Property or adjacent property;
and (v) any other chemical, materials or substance which may or
could pose a hazard to the environment; and (c) the term
"Property" shall mean all real property, wherever located, in
which Borrower or any Affiliate of Borrower has any right, title
or interest, whether now existing or hereafter arising, and
including, without limitation, as owner, lessor or lessee.
(b) Covenants and Representations. (1) Borrower represents
and warrants that there have not been during the period of
Borrower's possession of any interest in the Property and, to the
best of its knowledge after reasonable inquiry, there have not
been at any other times, any activities on the Property
involving, directly or indirectly, the use, generation,
treatment, storage or disposal of any Hazardous Substances except
in compliance with Applicable Law (i) under, on or in the land
included in the Property, whether contained in soil, tanks,
sumps, ponds, lagoons, barrels, cans or other containments,
structures or equipment, (ii) incorporated in the buildings,
structures or improvements included in the Property, including
any building material containing asbestos, or (iii) used in
connection with any operations on or in the Property. (2)
Without limiting the generality of the foregoing and to the
extent not included within the scope of this Section 8.2(b),
Borrower represents and warrants that it is in full compliance
with Applicable Law and has received no notice from any Person or
any governmental agency or other entity of any violation by
Borrower or its Affiliates of any Applicable Law. (3) Borrower
shall be solely responsible for and agrees to indemnify FINOVA,
protect and defend FINOVA with counsel reasonably acceptable to
FINOVA, and hold FINOVA harmless from and against any claims,
actions, administrative proceedings, judgments, damages, punitive
damages, penalties, fines, costs, liabilities (including sums
paid in settlements of claims), interest or losses, attorneys'
fees (including any fees and expenses incurred in enforcing this
indemnity), consultant fees, expert fees, and other out-of-pocket
costs or expenses actually incurred by FINOVA (collectively, the
"Environmental Costs"), that may, at any time or from time to
time, arise directly or indirectly from or in connection with:
(i) the presence, suspected presence, release or suspected
release of any Hazardous Substance whether into the air, soil,
surface water or groundwater of or at the Property, or any other
violation of Applicable Law, or (ii) any breach of the foregoing
representations and covenants; except to the extent any of the
foregoing result from the actions of FINOVA, its employees,
agents and representatives. All Environmental Costs incurred or
advanced by FINOVA shall be deemed to be made by FINOVA in good
faith and shall constitute Obligations hereunder.
9. MISCELLANEOUS.
9.1 Examination of Records; Financial Reporting.
(a) Examinations. FINOVA shall at all reasonable times
have full access to and the right to examine, audit, make
abstracts and copies from and inspect Borrower's records, files,
books of account and all other documents, instruments and
agreements relating to the Collateral and the right to check,
test and appraise the Collateral. Borrower shall deliver to
FINOVA any instrument necessary for FINOVA to obtain records from
any service bureau maintaining records for Borrower. All
instruments and certificates prepared by Borrower showing the
value of any of the Collateral shall be accompanied, upon
FINOVA's request, by copies of related purchase orders and
invoices. FINOVA may, at any time after the occurrence of an
Event of Default, remove from Borrower's premises Borrower's
books and records (or copies thereof) or require Borrower to
deliver such books and records or copies to FINOVA. FINOVA may,
without expense to FINOVA, use such of Borrower's personnel,
supplies and premises as may be reasonably necessary for
maintaining or enforcing FINOVA's security interest.
Notwithstanding the foregoing, FINOVA may not remove from
Borrower's premises any original documents filed by Borrower with
the United States Securities and Exchange Commission pursuant to
the requirements of the Securities Act of 1933 or the Securities
Exchange Act of 1934.
(b) Reporting Requirements. Borrower shall furnish FINOVA, upon
request, such information and statements as FINOVA shall request
from time to time regarding Borrower's business affairs,
financial condition and the results of its operations. Without
limiting the generality of the foregoing, Borrower shall provide
FINOVA with: (i) FINOVA's standard form collateral and loan
report, daily, and upon FINOVA's request, copies of sales
journals, cash receipt journals, and deposit slips; (ii) upon
FINOVA's request, copies of sales invoices, customer statements
and credit memoranda issued, remittance advices and reports;
(iii) copies of shipping and delivery documents, upon request;
(iv) on or prior to the date set forth on the Schedule, monthly
agings (aged from invoice date) and reconciliations of
Receivables (with listings of concentrated accounts), payables
reports, inventory reports, compliance certificates and unaudited
financial statements with respect to the prior month prepared on
a basis consistent with such statements prepared in prior months
and otherwise in accordance with GAAP; (v) audited annual
consolidated and consolidating financial statements, prepared in
accordance with GAAP applied on a basis consistent with the most
recent Prepared Financials provided to FINOVA by Borrower,
including balance sheets, income and cash flow statements,
accompanied by the unqualified report thereon of independent
certified public accountants acceptable to FINOVA, as soon as
available, and in any event, within ninety (90) days after the
end of each of Borrower's fiscal years; and (vi) such
certificates relating to the foregoing as FINOVA may request,
including, without limitation, a monthly certificate from the
president and the chief financial officer of Borrower showing
Borrower's compliance with each of the financial covenants set
forth in this Agreement, and stating whether any Event of Default
has occurred or event which, with giving of notice or the passage
of time, or both, would constitute an Event of Default, and if
so, the steps being taken to prevent or cure such Event of
Default. All reports or financial statements submitted by
Borrower shall be in reasonable detail and shall be certified by
the principal financial officer of Borrower as being complete and
correct.
9.2 Term; Termination.
(a) Term. The Initial Term of the Revolving Credit Loans
facility and the obligation of FINOVA to make advances with
respect thereto in accordance with this Agreement shall be as set
forth on the Schedule, and the Revolving Credit Loans facility
and this Agreement shall be automatically renewed for one or more
Renewal Term(s) as set forth in the Schedule, unless earlier
terminated as provided herein.
(b) Prior Notice. Each party shall have the right to terminate
this Agreement effective at the end of the Initial Term or at the
end of any Renewal Term by giving the other party written notice
not less than sixty (60) days prior to the effective date of such
termination, by registered or certified mail.
(c) Payment in Full. Upon the effective date of termination,
the Obligations shall become immediately due and payable in full
in cash.
(d) Early Termination; Termination Fee. In addition to the
procedure set forth in Section 9.2(b), Borrower may terminate
this Agreement at any time but only upon sixty (60) days' prior
written notice and prepayment of the Obligations. Upon any such
early termination by Borrower or any termination of this
Agreement by FINOVA upon the occurrence of an Event of Default,
then, and in any such event, Borrower shall pay to FINOVA upon
the effective date of such termination a fee (the "Termination
Fee") in an amount equal to the amount shown on the Schedule.
9.3 Recourse to Security; Certain Waivers. All Obligations
shall be payable by Borrower as provided for herein and, in full,
at the termination of this Agreement; recourse to security shall
not be required at any time. Borrower waives presentment and
protest of any instrument and notice thereof, notice of default
and, to the extent permitted by applicable law, all other notices
to which Borrower might otherwise be entitled.
9.4 No Waiver by FINOVA. Neither FINOVA's failure to exercise
any right, remedy or option under this Agreement, any supplement,
the Loan Documents or other agreement between FINOVA and Borrower
nor any delay by FINOVA in exercising the same shall operate as a
waiver. No waiver by FINOVA shall be effective unless in writing
and then only to the extent stated. No waiver by FINOVA shall
affect its right to require strict performance of this Agreement.
FINOVA's rights and remedies shall be cumulative and not
exclusive.
9.5 Binding on Successor and Assigns. All terms,
conditions, promises, covenants, provisions and warranties shall
inure to the benefit of and bind FINOVA's and Borrower's
respective representatives, successors and assigns.
9.6 Severability. If any provision of this Agreement shall
be prohibited or invalid under applicable law, it shall be
ineffective only to such extent, without invalidating the
remainder of this Agreement.
9.7 Amendments; Assignments. This Agreement may not be
modified, altered or amended, except by an agreement in writing
signed by Borrower and FINOVA. Borrower may not sell, assign or
transfer any interest in this Agreement or any other Loan
Document, or any portion thereof, including, without limitation,
any of Borrower's rights, title, interests, remedies, powers and
duties hereunder or thereunder. Borrower hereby consents to
FINOVA's participation, sale, assignment, transfer or other
disposition, at any time or times hereafter, of this Agreement
and any of the other Loan Documents, or of any portion hereof or
thereof, including, without limitation, FINOVA's rights, title,
interests, remedies, powers and duties hereunder or thereunder.
In connection therewith, FINOVA may disclose all documents and
information which FINOVA now or hereafter may have relating to
Borrower or Borrower's business. To the extent that FINOVA
assigns its rights and obligations hereunder to a third party,
FINOVA shall thereafter be released from such assigned
obligations to Borrower and such assignment shall effect a
novation between Borrower and such third party.
9.8 Integration. This Agreement, together with the
Schedule (which is a part hereof) and the other Loan Documents,
reflect the entire understanding of the parties with respect to
the transactions contemplated hereby.
9.9 Survival. All of the representations and warranties of
Borrower contained in this Agreement shall survive the execution,
delivery and acceptance of this Agreement by the parties. No
termination of this Agreement or of any guaranty of the
Obligations shall affect or impair the powers, obligations,
duties, rights, representations, warranties or liabilities of the
parties hereto and all shall survive such termination.
9.10 Evidence of Obligations. Each Obligation may, in
FINOVA's Permitted Discretion, be evidenced by notes or other
instruments issued or made by Borrower to FINOVA. If not so
evidenced, such Obligation shall be evidenced solely by entries
upon FINOVA's books and records.
9.11 Loan Requests. Each oral or written request for a loan
by any Person who purports to be any employee, officer or
authorized agent of Borrower shall be made to FINOVA on or prior
to 11:00 a.m., Eastern time, on the Business Day on which the
proceeds thereof are requested to be paid to Borrower and shall
be conclusively presumed to be made by a Person authorized by
Borrower to do so and the crediting of a loan to Borrower's
operating account shall conclusively establish Borrower's
obligation to repay such loan. Unless and until Borrower
otherwise directs FINOVA in writing, all loans shall be wired to
Borrower's operating account set forth on the Schedule.
9.12 Notices. Any notice required hereunder shall be in
writing and addressed to the Borrower and FINOVA at their
addresses set forth at the beginning of this Agreement with a
copy to Vard Griffith, VP, at 355 S. Grand Ave., Suite 2400, Los
Angeles, CA 90071, and a copy to Joseph R. D'Amore, VP-Associate
General Counsel, at 1850 N. Central Ave., Suite 1141, Phoenix, AZ
85002. Notices hereunder shall be deemed received on the earlier
of receipt, whether by mail, personal delivery, facsimile, or
otherwise, or upon deposit in the United States mail, postage
prepaid.
9.13 Brokerage Fees. Borrower represents and warrants to
FINOVA that, with respect to the financing transaction herein
contemplated, no Person is entitled to any brokerage fee or other
commission and Borrower agrees to indemnify and hold FINOVA
harmless against any and all such claims.
9.14 Disclosure. No representation or warranty made by
Borrower in this Agreement, or in any financial statement,
report, certificate or any other document furnished in connection
herewith contains any untrue statement of a material fact or
omits to state any material fact necessary to make the statements
herein or therein not misleading. There is no fact known to
Borrower or which reasonably should be known to Borrower which
Borrower has not disclosed to FINOVA in writing with respect to
the transactions contemplated by this Agreement which materially
and adversely affects the business, assets, operations, prospects
or condition (financial or otherwise), of Borrower.
9.15 Publicity. FINOVA is hereby authorized to issue
appropriate press releases and to cause a tombstone to be
published announcing the consummation of this transaction and the
aggregate amount thereof.
9.16 Captions. The Section titles contained in this
Agreement are without substantive meaning and are not part of
this Agreement.
9.17 Injunctive Relief. Borrower recognizes that, in the
event Borrower fails to perform, observe or discharge any of its
Obligations under this Agreement, any remedy at law may prove to
be inadequate relief to FINOVA. Therefore, FINOVA, if it so
requests, shall be entitled to temporary and permanent injunctive
relief in any such case without the necessity of proving actual
damages.
9.18 Counterparts; Facsimile Execution. This Agreement may
be executed in one or more counterparts, each of which taken
together shall constitute one and the same instrument, admissible
into evidence. Delivery of an executed counterpart of this
Agreement by telefacsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement.
Any party delivering an executed counterpart of this Agreement by
telefacsimile shall also deliver a manually executed counterpart
of this Agreement, but the failure to deliver a manually executed
counterpart shall not affect the validity, enforceability, and
binding effect of this Agreement.
9.19 Construction. The parties acknowledge that each party
and its counsel have reviewed this Agreement and that the normal
rule of construction to the effect that any ambiguities are to be
resolved against the drafting party shall not be employed in the
interpretation of this Agreement or any amendments or exhibits
hereto.
9.20 Time of Essence. Time is of the essence for the
performance by Borrower of the Obligations set forth in this
Agreement.
9.21 Limitation of Actions. Borrower agrees that any claim
or cause of action by Borrower against FINOVA, or any of FINOVA's
directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Agreement, or any
other present or future agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or
any other matter, cause or thing whatsoever, whether or not
relating hereto or thereto, occurred, done, omitted or suffered
to be done by FINOVA, or by FINOVA's directors, officers,
employees, agents, accountants or attorneys, whether sounding in
contract or in tort or otherwise, shall be barred unless asserted
by Borrower by the commencement of an action or proceeding in a
court of competent jurisdiction by the filing of a complaint
within one year after the first act, occurrence or omission upon
which such claim or cause of action, or any part thereof, is
based and service of a summons and complaint on an officer of
FINOVA or any other Person authorized to accept service of
process on behalf of FINOVA, within 30 days thereafter. Borrower
agrees that such one-year period of time is a reasonable and
sufficient time for Borrower to investigate and act upon any such
claim or cause of action. The one-year period provided herein
shall not be waived, tolled, or extended except by a specific
written agreement of FINOVA. This provision shall survive any
termination of this Loan Agreement or any other agreement.
9.22 Liability. Neither FINOVA nor any FINOVA Affiliate
shall be liable for any indirect, special, incidental or
consequential damages in connection with any breach of contract,
tort or other wrong relating to this Agreement or the Obligations
or the establishment, administration or collection thereof
(including without limitation damages for loss of profits,
business interruption, or the like), whether such damages are
foreseeable or unforeseeable, even if FINOVA has been advised of
the possibility of such damages. Neither FINOVA, nor any FINOVA
Affiliate shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or
suffered by the Borrower through the ordinary negligence of
FINOVA, or any FINOVA Affiliate. "FINOVA Affiliate" shall mean
FINOVA's directors, officers, employees, agents, attorneys or any
other Person or entity affiliated with or representing FINOVA.
9.23 Notice of Breach by FINOVA. Borrower agrees to give
FINOVA written notice of (i) any action or inaction by FINOVA or
any attorney of FINOVA in connection with any Loan Documents that
may be actionable against FINOVA or any attorney of FINOVA or
(ii) any defense to the payment of the Obligations for any
reason, including, but not limited to, commission of a tort or
violation of any contractual duty or duty implied by law.
Borrower agrees that unless such notice is fully given as
promptly as possible (and in any event within thirty (30) days)
after Borrower has knowledge, or with the exercise of reasonable
diligence should have had knowledge, of any such action, inaction
or defense, Borrower shall not assert, and Borrower shall be
deemed to have waived, any claim or defense arising therefrom.
9.24 Application of Insurance Proceeds. The net proceeds of
any casualty insurance insuring the Collateral, after deducting
all costs and expenses (including attorneys' fees) of collection,
shall be applied, at FINOVA's option, either toward replacing or
restoring the Collateral, in a manner and on terms satisfactory
to FINOVA, or toward payment of the Obligations. Any proceeds
applied to the payment of Obligations shall be applied in such
manner as FINOVA may elect. In no event shall such application
relieve Borrower from payment in full of all installments of
principal and interest which thereafter become due in the order
of maturity thereof.
9.25 Power of Attorney. Borrower appoints FINOVA and its
designees as Borrower's attorney, with the power to endorse
Borrower's name on any checks, notes, acceptances, money orders
or other forms of payment or security that come into FINOVA's
possession; to sign Borrower's name on any invoice or bill of
lading relating to any Receivable, on drafts against customers,
on assignments of Receivables, on notices of assignment,
financing statements and other public records, on verifications
of accounts and on notices to customers or account debtors; to
send requests for verification of Receivables to customers or
account debtors; after the occurrence of any Event of Default, to
notify the post office authorities to change the address for
delivery of Borrower's mail to an address designated by FINOVA
and to open and dispose of all mail addressed to Borrower; and to
do all other things FINOVA deems necessary or desirable to carry
out the terms of this Agreement. Borrower hereby ratifies and
approves all acts of such attorney. Neither FINOVA nor any of
its designees shall be liable for any acts or omissions nor for
any error of judgment or mistake of fact or law while acting as
Borrower's attorney. This power, being coupled with an interest,
is irrevocable until the Obligations have been fully satisfied
and FINOVA's obligation to provide loans hereunder shall have
terminated
9.26 Governing Law; Waivers. THIS AGREEMENT, INCLUDING
WITHOUT LIMITATION ENFORCEMENT OF THE OBLIGATIONS, SHALL BE
INTERPRETED IN ACCORDANCE WITH THE INTERNAL LAWS (AND NOT THE
CONFLICT OF LAWS RULES) OF THE STATE OF ARIZONA GOVERNING
CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. BORROWER
HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR
FEDERAL COURT LOCATED WITHIN THE COUNTY OF MARICOPA IN THE STATE
OF ARIZONA OR, AT THE SOLE OPTION OF FINOVA, IN ANY OTHER COURT
IN WHICH FINOVA SHALL INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND
WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER IN
CONTROVERSY. BORROWER WAIVES ANY OBJECTION OF FORUM NON
CONVENIENS AND VENUE. BORROWER FURTHER WAIVES PERSONAL SERVICE
OF ANY AND ALL PROCESS UPON IT, AND CONSENTS THAT ALL SUCH
SERVICE OF PROCESS BE MADE IN THE MANNER SET FORTH IN SECTION
9.12 HEREOF FOR THE GIVING OF NOTICE. BORROWER FURTHER WAIVES
ANY RIGHT IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK ANY
JUDGMENT ENTERED AGAINST IT.
9.27 Mutual Waiver of Right to Jury Trial. FINOVA and
Borrower each hereby waives the right to trial by jury in any
action or proceeding based upon, arising out of, or in any way
relating to: (i) this Agreement; (ii) any other present or
future instrument or agreement between FINOVA and Borrower; or
(iii) any conduct, acts or omissions of FINOVA or Borrower or any
of their directors, officers, employees, agents, attorneys or
any other persons affiliated with FINOVA or Borrower; in each of
the foregoing cases, whether sounding in contract or tort or
otherwise.
BORROWER: nSTOR TECHNOLOGIES, INC.
Fed. Tax ID #95-2094565
By:__________________________________________
Lawrence F. Steffann, President
BORROWER: nSTOR CORPORATION, INC.
Fed. Tax ID #59-3379673
By________________________________________
Lawrence F. Steffann, President
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 3rd day of August in the year 1998, before me, the
undersigned, a Notary Public in and for said state, personally
appeared Lawrence F. Steffann personally known to me or proved to
me on the basis of satisfactory evidence to be the person(s)
whose name(s) is (are) subscribed to the within instrument and
acknowledged to me that he/she/they executed the same in
his/her/their capacity(ies) and that by his/her/their
signature(s) on the instrument, the person(s) or the entity upon
behalf of which the person(s) acted, executed the instrument.
_______________________________________
NOTARY PUBLIC
FINOVA CAPITAL CORPORATION
By_______________________________
Mark Picillo, Vice President
Schedule to
Loan and Security Agreement
Borrower: nStor Technologies, Inc.
Address: Administration Building
100 Century Boulevard
West Palm Beach, Florida 33417
nStor Corporation, Inc.
450 Technology Park
Lake Mary, Florida 32746
Date: August 3, 1998
This Schedule forms an integral part of the Loan and Security
Agreement between the above Borrower and FINOVA Capital
Corporation dated the above date, and all references herein and
therein to "this Agreement" shall be deemed to refer to said
Agreement and to this Schedule.
DEFINITIONS (SECTION 1):
"Preferred Stock Dividends" means Dividends to be paid to
the holders of Series B Preferred Stock of nSTOR TECHNOLOGIES,
INC. in accordance with Article Fourth of the Certificate of
Incorporation of nSTOR TECHNOLOGIES, INC. filed on June 22, 1998
with the Delaware Secretary of State, and in that certain
Certificate of Designation of Series B convertible Preferred
Stock of nSTOR TECHNOLOGIES, INC. filed on June 1, 1998 with the
Delaware Secretary of State, and in that certain Certificate of
Designation of Series A convertible Preferred Stock of nSTOR
TECHNOLOGIES, INC. filed on July 30, 1998 with the Delaware
Secretary of State.
"Subordinating Creditor" means nStor Technologies, Inc.; H.
Irwin Levy, Herbert Gimmelstob, Fairway Partnership, and
Bernard Marden; and Maurice Halperin.
TOTAL FACILITY (Section 2.1):
$5,000,000
LOANS (Section 2.2):
Revolving Credit Loans: A revolving line of credit consisting of
loans against Borrower's Eligible Receivables ("Receivable
Loans") (the Receivable Loans shall be referred to as the
"Revolving Credit Loans") in an aggregate outstanding principal
amount not to exceed the lesser of (a) or (b) below:
(a.) up to Five Million Dollars ($5,000,000) (the "Revolving
Credit Limit"), less any Loan Reserves, or
(b) (i) an amount up to 80% of the net amount of Eligible
Receivables, less
(ii) any Loan Reserves.
INTEREST AND FEES (SECTION 2.6):
Revolving Interest Rate. Borrower shall pay FINOVA interest on
the daily outstanding balance of Borrower's Revolving Credit
Loans at a per annum rate of (2%) in excess of the rate of
interest announced publicly by Citibank, N.A., (or any successor
thereto), from time to time as its "prime rate" (the " Prime
Rate") which may not be such institution's lowest rate. The
interest rate chargeable hereunder in respect of the Revolving
Credit Loans (herein, the "Revolving Interest Rate") shall be
increased or decreased, as the case may be, without notice or
demand of any kind, upon the announcement of any change in the
Prime Rate. Each change in the Prime Rate shall be effective
hereunder on the first day following the announcement of such
change. Interest charges and all other fees and charges herein
shall be computed on the basis of a year of 360 days and actual
days elapsed and shall be payable to FINOVA in arrears on the
first day of each month.
Collateral Monitoring Fee. On the first day of each calendar
month following the closing of this transaction, Borrower shall
pay FINOVA a collateral monitoring fee of $500 ("Collateral
Monitoring Fee"); provided however, that Borrower agrees and
acknowledges that each Loan Year a full year's fee shall be
deemed earned at the beginning of the respective Loan Year.
Facility Fee. Borrower shall pay to FINOVA a facility fee equal
to 1% per annum of the amount of the Total Facility ("Facility
Fee"). The Facility Fee shall be deemed fully earned and payable
on the Closing Date and thereafter shall be payable annually,
commencing upon the first anniversary of the date of this
Agreement and continuing on each subsequent anniversary thereof.
Examination Fee. Borrower agrees to pay to FINOVA an examination
fee in the amount of $750 per person per day in connection with
each audit or examination of Borrower performed by FINOVA prior
to or after the date hereof, plus all costs and expenses incurred
in connection therewith (the "Examination Fee"). Without
limiting the generality of the foregoing, Borrower shall pay to
FINOVA an initial Examination Fee in an amount equal to $750 per
person per day, plus all costs and expenses incurred in
connection therewith. Such initial Examination Fee shall be
deemed fully earned at the time of payment and due and payable
upon the closing of this transaction, and shall be deducted from
any good faith deposit paid by Borrower to FINOVA prior to the
date of this Agreement.
CONDITIONS OF CLOSING (Section 4.1):
The obligation of FINOVA to make the initial advance hereunder or
to issue or arrange for the issuance of the initial Letter of
Credit hereunder is subject to the fulfillment, to the
satisfaction of FINOVA and its counsel, of each of the following
conditions, in addition to the conditions set forth in Sections
4.1 and 4.2 above:
(a) No Material Adverse Change (Section 4.1(v)). Draft financial
statements for Borrower dated as of March 31, 1998. Further, no
material adverse change has occurred in the Borrower's business,
operations, financial condition, or assets or in the prospect of
repayment of the Obligations since March 31, 1998.
(b) Validity and Support Agreements. Mark Levy, Lorenzo Calise
a/k/a Larry Calise, and Lawrence F. Steffann shall each have
delivered a Validity and Support Agreement in favor of FINOVA,
and in form and substance satisfactory to FINOVA.
Borrower shall cause the conditions precedent set forth in
Section 4.1 of this Agreement and set forth above in this
Schedule to be satisfied, and shall provide evidence to FINOVA
that all such conditions precedent have been satisfied, on or
before August 3, 1998.
BORROWER INFORMATION:
Borrower's State of Incorporation (Section 5.1): Delaware.
Borrower's copyrights, patents trademarks, and licenses (Section
5.5): [Borrower to Supply on Separate Exhibit].
Fictitious Names/Prior Corporate Names (Section 5.2):
Prior Corporate Names of nStor Technologies, Inc.: IMGE,
Inc.
Fictitious Names: None
Borrower Locations (Section 5.16)
100 Century Boulevard, West Palm Beach, Florida 33417
450 Technology Park, Lake Mary, Florida 32746
155 Technology Park, Lark Mary, Florida 32746
170 Knowles Drive, #200, Los Gatos, California 95030
2900 Bristol Street, Suite G-105, Costa Mesa,
California 92626
44 Catlin Avenue, Staten Island, New York 10304
1600 Boston - Providence Highway, Walpole,
Massachusetts 02081
3613 Lowrey Way, Plano, Texas 75025
3133 Indian Road, Boulder, Colorado 80301
Borrower's Federal Tax Identification Number (Section 5.16):
nStor Technologies, Inc. 95-2094565
nStor Corporation, Inc. 59-3379673
FINANCIAL COVENANTS (SECTION 6.1.13):
Borrower shall comply with all of the following covenants.
Compliance shall be determined as of the end of each month or
quarter (as determined by FINOVA in its Permitted Discretion),
except as otherwise specifically provided below:
Current Ratio. Borrower shall maintain a ratio of Current Assets
to Current Liabilities of not less than 1.0 to 1.0;
Net Worth. Borrower shall maintain Net Worth of not less than
One Thousand Dollars ($1,000) (including Subordinated Line of
Credit) as of December 31, 1998 and through and including the
expiration of the term of this Agreement.
Operating Net Loss. Borrower shall not have an Operating Net Loss
of more than $1,500,000 for the period from July 1, 1998 through
and including December 31, 1998.
Without limiting the foregoing, in the event Borrower fails
to comply with any of the foregoing financial covenants, Borrower
shall have five (5) days to comply with the foregoing Financial
Covenants and cure such Event of Default.
NEGATIVE COVENANTS (SECTION 6.2):
Employee Advances: Borrower shall not make any loans or advances
to Employees except in the ordinary course of business and
consistent with past practices of Borrower in an aggregate amount
not exceeding at any time $5,000;
Existing Guaranties: [Borrower to describe on separate
Exhibit.]
Capital Expenditures: Borrower shall not make or incur any
Capital Expenditure if, after giving effect thereto, the
aggregate amount of all Capital Expenditures by Borrower in any
fiscal year (beginning with the current fiscal year) would exceed
$500,000, conditioned upon Borrower's compliance with the
Reporting Requirements set forth in Section 9.1(4) of this
Schedule to this Agreement.
Indebtedness: Borrower shall not create, incur, assume or
permit to exist any Indebtedness (including Indebtedness in
connection with Capital Leases) in excess of $100,000 other than
(i) the Obligations, (ii) trade payables and other contractual
obligations to suppliers and customers incurred in the ordinary
course of business and (iii) other Indebtedness existing on the
date of this Agreement and reflected in Exhibit 6.2.11 attached
hereto (other than Indebtedness paid on the date of this
Agreement from proceeds of the initial advances hereunder).
REPORTING REQUIREMENTS (SECTION 9.1):
1. Borrower shall provide FINOVA with monthly agings aged by
invoice date and reconciliations of Receivables within ten (10)
days after the end of each month.
2. Borrower shall provide FINOVA with monthly accounts payable
agings aged by invoice date, outstanding or held check registers
and inventory certificates within ten (10) days after the end of
each month.
3. Borrower shall provide FINOVA with inventory reports as are
reasonably requested by FINOVA, all within ten (10) days after
such request.
4. Borrower shall provide FINOVA with monthly reports of Capital
Expenditures made or incurred by Borrower within ten (10) days
after the end of each month.
5. Borrower shall provide FINOVA with monthly unaudited
financial statements within thirty (30) days after the end of
each month.
6. Borrower shall provide FINOVA with audited consolidated and
consolidating fiscal financial statements within ninety (90) days
after the end of each fiscal year, as more specifically described
in Section 9.1(b) hereof, and with an opinion issued by a
Certified Public Accountant which is acceptable to FINOVA.
7. Borrower shall provide FINOVA with annual operating budgets
(including income statements, balance sheets and cash flow
statements, by month) for the upcoming fiscal year of Borrower
within thirty (30) days prior to the end of each fiscal year of
Borrower.
8. Borrower's balance sheets for purposes of the definition of
Prepared Financials shall be as of end of fiscal year.
9. Borrower shall provide FINOVA with monthly proof of payment of
the rents paid to Borrower's landlord for the premises located at
155 Technology Park, Lake Mary, Florida 32746 no later than the
10th day of each month that such payment is made, thereby
evidencing that Borrower is current in payment of such rents due
under the lease agreement for such premises.
TERM (SECTION 9.2):
The initial term of this Agreement shall be two year(s) from the
date hereof (the "Initial Term") and shall be automatically
renewed for successive periods of one (1) year each (each, a
"Renewal Term"), unless earlier terminated as provided in Section
7 or 9.2 above or elsewhere in this Agreement.
TERMINATION FEE (Section 9.2):
(A) Revolving Credit Loans Facility. The Termination Fee
applicable to the Revolving Credit Loans facility provided for in
Section 9.2(d) shall be an amount equal to the following
percentage of the Total Facility:
(i) five percent (5%), if such early termination occurs on or
prior to the first anniversary of the date of this Agreement;
(ii) two percent (2%), if such early termination occurs after the
first anniversary of the date of this Agreement.
Without limiting the foregoing, in the event that FINOVA
does not consent to a proposal by Borrower that it acquire the
assets and/or stock of another entity, and Borrower elects to
enter into such acquisition, than such act shall be deemed an
Event of Default under this Agreement, and upon payment in full
to FINOVA of all the Obligations of Borrower to FINOVA, FINOVA
shall waive its right to collect the Termination Fee provided
herein.
DISBURSEMENT (Section 9.11):
Unless and until Borrower otherwise directs FINOVA in writing,
all loans shall be wired to Borrower's following operating
account:
First Union National Bank
77 East Camino Real
Boca Raton, Florida 33432
ABA # 063000021
Acct # 2090002758148
nStor Technologies, Inc. nStor Corporation, Inc.
By_______________________________ By_______________________________
Lawrence F. Steffann, President Lawrence F. Steffann, President
STATE OF NEW YORK )
) ss.:
COUNTY OF NEW YORK )
On this 3rd day of August, in the year 1998, before me, the
undersigned, a Notary Public in and for said state, personally
appeared Lawrence F. Steffann, personally known to me or proved
to me on the basis of satisfactory evidence to be the person
whose name is subscribed to the within instrument and
acknowledged to me that he executed the same in his capacity and
that by his signature on the instrument, the person or the entity
upon behalf of which the person acted, executed the instrument.
_______________________________________
NOTARY PUBLIC
FINOVA CAPITAL CORPORATION
By_______________________________
Mark Picillo, Vice President
TABLE OF CONTENTS
1. DEFINITIONS. 1
1.1 Defined Terms 1
1.2 Other Terms 7
2. LOANS; INTEREST RATE AND OTHER CHARGES. 7
2.1 Total Facility. 7
2.2 Loans. 7
2.3 Overlines; Overadvances. 7
2.4 Intentionally omitted. 7
2.5 Loan Account. 7
2.6 Interest; Fees. 7
2.7 Default Interest Rate. 8
2.8 Examination Fee. 8
2.9 Excess Interest. 8
2.10 Principal Payments; Proceeds of Collateral. 9
2.11 Application of Collateral. 10
2.12 Application of Payments. 10
2.13 Intentionally omitted. 10
3. SECURITY. 10
3.1 Security Interest in the Collateral. 10
3.2 Perfection and Protection of Security Interest. 10
3.3 Preservation of Collateral. 11
3.4 Insurance. 11
3.5 Collateral Reporting; Inventory. 11
3.6 Receivables. 12
3.7 Equipment. 12
3.8 Other Liens; No Disposition of Collateral. 12
3.9 Collateral Security. 12
4. CONDITIONS OF CLOSING. 13
4.1 Initial Advance. 13
4.2 Subsequent Advances. 15
5. REPRESENTATIONS AND WARRANTIES. 15
5.1 Due Organization. 16
5.2 Other Names. 16
5.3 Due Authorization. 16
5.4 Binding Obligation. 16
5.5 Intangible Property. 16
5.6 Capital. 16
5.7 Material Litigation. 16
5.8 Title; Security Interests of FINOVA. 16
5.9 Restrictive Agreements; Labor Contracts. 16
5.10 Laws. 16
5.11 Consents. 16
5.12 Defaults. 16
5.13 Financial Condition. 17
5.14 ERISA. 17
5.15 Taxes. 17
5.16 Locations; Federal Tax ID No. 17
5.17 Business Relationships. 17
5.18 Reaffirmations. 17
5.19 Year 2000 17
6. COVENANTS. 17
6.1 Affirmative Covenants. 17
6.1.1 Taxes. 17
6.1.2 Notice of Litigation. 17
6.1.3 ERISA. 17
6.1.4 Change in Location. 18
6.1.5 Corporate Existence. 18
6.1.6 Labor Disputes. 18
6.1.7 Violations of Law. 18
6.1.8 Defaults. 18
6.1.9 Capital Expenditures. 18
6.1.10 Books and Records. 18
6.1.11 Leases; Warehouse Agreements. 18
6.1.12 Additional Documents. 18
6.1.13 Financial Covenants. 18
6.2 Negative Covenants. 18
6.2.1 Mergers. 18
6.2.2 Loans. 18
6.2.3 Dividends. 18
6.2.4 Adverse Transactions. 19
6.2.5 Indebtedness of Others. 19
6.2.6 Repurchase. 19
6.2.7 Name. 19
6.2.8 Prepayment. 19
6.2.9 Capital Expenditure. 19
6.2.10 Compensation. 19
6.2.11 Indebtedness. 19
6.2.12 Affiliate Transactions. 19
6.2.13 Nature of Business. 19
6.2.14 FINOVA's Name. 19
6.2.15 Margin Security. 19
6.2.16 Real Property. 19
6.2.17 Year 2000 20
7. DEFAULT AND REMEDIES. 20
7.1 Events of Default. 20
7.2 Remedies. 21
7.3 Standards for Determining Commercial Reasonableness. 21
8. EXPENSES AND INDEMNITIES 21
8.1 Expenses. 21
8.2 Environmental Matters. 22
9. MISCELLANEOUS. 23
9.1 Examination of Records; Financial Reporting. 23
9.2 Term; Termination. 23
9.3 Recourse to Security; Certain Waivers. 24
9.4 No Waiver by FINOVA. 24
9.5 Binding on Successor and Assigns. 24
9.6 Severability. 24
9.7 Amendments; Assignments. 24
9.8 Integration. 24
9.9 Survival. 24
9.10 Evidence of Obligations. 24
9.11 Loan Requests. 24
9.12 Notices. 25
9.13 Brokerage Fees. 25
9.14 Disclosure. 25
9.15 Publicity. 25
9.16 Captions. 25
9.17 Injunctive Relief. 25
9.18 Counterparts; Facsimile Execution. 25
9.19 Construction. 25
9.20 Time of Essence. 25
9.21 Limitation of Actions. 25
9.22 Liability. 26
9.23 Notice of Breach by FINOVA. 26
9.24 Application of Insurance Proceeds. 26
9.25 Power of Attorney. 26
9.26 Governing Law; Waivers. 26
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. 27
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000075448
<NAME> NSTOR TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 1,044<F1>
<SECURITIES> 0
<RECEIVABLES> 3,705
<ALLOWANCES> 260
<INVENTORY> 3,182
<CURRENT-ASSETS> 8,324
<PP&E> 9,846<F2>
<DEPRECIATION> 1,557<F3>
<TOTAL-ASSETS> 16,613
<CURRENT-LIABILITIES> 7,524
<BONDS> 0
0
0
<COMMON> 934
<OTHER-SE> 2,582
<TOTAL-LIABILITY-AND-EQUITY> 16,613
<SALES> 9,344
<TOTAL-REVENUES> 9,384
<CGS> 7,685
<TOTAL-COSTS> 6,472
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 481
<INCOME-PRETAX> (6,036)
<INCOME-TAX> 0
<INCOME-CONTINUING> (6,036)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (6,036)
<EPS-PRIMARY> (.32)
<EPS-DILUTED> 0
<FN>
<F1>Cash balance includes $1,024 of restricted cash (see note 3 to consolidated
financial statements).
<F2>PP&E balance includes $6,892 of intangible assets.
<F3>Accumulated depreciation balance includes $695 of accumulated amortization.
</FN>
</TABLE>
