<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For quarter ended Commission file number: 0-15895
June 30, 1996
DIGITAL MICROWAVE CORPORATION
(Exact name of registrant specified in its charter)
DELAWARE 77-0016028
(State or other jurisdiction (IRS employer
of incorporation or organization) identification number)
170 Rose Orchard Way
San Jose, CA 95134
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (408) 943-0777
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
-------- -------
Indicate the number of shares outstanding of each of the Issuer's classes of
common stock, as of the latest practicable date.
CLASS OUTSTANDING AT JULY 31, 1996
Common Stock - $0.01 par value 15,264,670
Page 1 of 14
<PAGE> 2
INDEX
PAGE
COVER PAGE 1
INDEX 2
PART I - FINANCIAL INFORMATION
Item 1 - Financial Statements
Condensed Consolidated Balance Sheets 3
Condensed Consolidated Statements of Operations 4
Condensed Consolidated Statements of Cash Flows 5
Notes to Condensed Consolidated Financial Statements 6-7
Item 2 - Management's Discussion and Analysis of
Financial Condition and Results of Operations 8-11
PART II - OTHER INFORMATION
Item 6 - Exhibits and Reports on Form 8K 12-13
SIGNATURE 14
Page 2 of 14
<PAGE> 3
PART I - FINANCIAL INFORMATION
ITEM I - FINANCIAL STATEMENTS
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
ASSETS 6/30/96 03/31/96
(Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 2,459 $ 8,299
Restricted cash 1,427 719
Accounts receivable, net 33,051 33,398
Inventories, net 43,636 35,347
Other current assets 2,933 2,973
------- -------
Total current assets 83,506 80,736
PROPERTY AND EQUIPMENT, NET 14,854 15,061
------- -------
Total assets $98,360 $95,797
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Lines of credit $ 3,018 $ 3,106
Current maturities of note payable 3,334 3,334
Current maturities of capital lease obligations 969 1,025
Accounts payable 20,154 16,252
Income taxes payable 1,103 973
Other accrued liabilities 16,547 18,590
------- -------
Total current liabilities 45,125 43,280
LONG-TERM LIABILITIES:
Note payable, net of current maturities 1,111 1,944
Capital lease obligations, net of current
maturities 598 838
------- -------
Total liabilities 46,834 46,062
STOCKHOLDERS' EQUITY 51,526 49,735
------- -------
Total liabilities and stockholders' equity $98,360 $95,797
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 3 of 14
<PAGE> 4
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
1996 1995
---- ----
<S> <C> <C>
Net sales $ 36,807 $ 39,693
Cost of sales 24,902 29,708
-------- --------
Gross profit 11,905 9,985
-------- --------
Operating Expenses:
Research and development 2,461 2,952
Selling, general and administrative 7,927 6,473
-------- --------
Total operating expenses 10,388 9,425
-------- --------
Operating income 1,517 560
Other income:
Interest and other income (expense), net 13 380
Interest expense (282) (671)
-------- --------
Income before provision for income taxes 1,248 269
Provision for income taxes 125 27
-------- --------
Net income $ 1,123 $ 242
======== ========
Net income per share $ 0.07 $ 0.02
======== ========
Weighted average number of common & common
equivalent shares outstanding 16,242 13,823
======== ========
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 4 of 14
<PAGE> 5
DIGITAL MICROWAVE CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
<TABLE>
<CAPTION>
Three Months Ended
June 30,
--------
1996 1995
---- ----
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,123 $ 242
Adjustments to reconcile net income
to net cash used for operating activities:
Depreciation and amortization 1,117 1,684
Provision for valuation reserves 783 1,070
Provision for warranty reserve 386 282
Changes in assets and liabilities:
Decrease (increase) in restricted cash (708) 443
Decrease (increase) in accounts receivable 343 (2,648)
Decrease (increase) in inventories (9,074) (162)
Decrease (increase) in other current assets 43 (520)
(Decrease) increase in accounts payable 3,903 (507)
(Decrease) increase in other accrued liabilities (2,296) (103)
------- -------
Net cash used for operating activities (4,380) (219)
------- -------
Cash flows from investing activities:
Purchases of property and equipment (746) (1,541)
------- -------
Cash flows from financing activities:
Borrowings from (repayments to) bank (922) 3,145
Payment of capital lease obligations (296) (187)
Sale of common stock 668 447
------- -------
Net cash provided by financing activities (550) 3,405
------- -------
Effect of exchange rate changes on cash (164) 61
------- -------
Net increase (decrease) in cash and cash equivalents (5,840) 1,706
Cash and cash equivalents at beginning of year 8,299 1,919
------- -------
Cash and cash equivalents at end of period $ 2,459 $ 3,625
======= =======
</TABLE>
See accompanying Notes to Condensed Consolidated Financial Statements.
Page 5 of 14
<PAGE> 6
DIGITAL MICROWAVE CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
BASIS OF PRESENTATION
The condensed consolidated financial statements include the accounts of
Digital Microwave Corporation and its wholly owned subsidiaries.
Intercompany accounts and transactions have been eliminated.
While the financial information furnished is unaudited, the financial
statements included in this report reflect all adjustments (consisting
only of normal recurring adjustments) which the Company considers
necessary for a fair presentation of the results of operations for the
interim periods covered and of the financial condition of the Company at
the date of the interim balance sheet. The results for interim periods
are not necessarily indicative of the results for the entire year. The
condensed consolidated financial statements should be read in connection
with the Digital Microwave Corporation financial statements included in
the Company's annual report and Form 10-K for the year ended March 31,
1996.
CASH AND CASH EQUIVALENTS
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid debt instruments with an original maturity of
three months or less to be cash equivalents.
RESTRICTED CASH
The Company is required to segregate and maintain certain cash balances
as security for letters of credit provided to secure performance or bid
bonds under some of the Company's revenue contracts. As of June 30, 1996,
the Company was required to segregate and maintain $1.4 million which is
included as restricted cash in the accompanying balance sheets.
Page 6 of 14
<PAGE> 7
INVENTORIES
Inventories are stated at the lower of cost (first-in, first-out) or
market where cost includes material, labor and manufacturing overhead.
Inventories consist of:
<TABLE>
<CAPTION>
(In thousands)
June 30, 1996 March 31, 1996
------------- --------------
(Unaudited)
<S> <C> <C>
Raw materials 15,202 $11,840
Work in process 17,358 16,342
Finished goods 11,076 7,165
------- -------
$43,636 $35,347
======= =======
</TABLE>
NET INCOME PER SHARE
Net income per share is computed using the weighted average number of
common and common equivalent shares outstanding during the period.
LITIGATION AND CONTINGENCIES
The Company is subject to legal proceedings and claims that arise in
the normal course of its business. In the opinion of management, these
proceedings will not have a material adverse effect on the financial
position and results of operations of the Company.
CONCENTRATION OF CREDIT RISK
Trade receivables concentrated with certain customers primarily in the
telecommunications industry and in certain geographic locations
potentially subject the Company to concentration of credit risk. In
addition to sales in Western Europe and North America, the Company
actively markets and sells products in the Far East, Eastern Europe and
South America. The Company performs on-going credit evaluations of its
customers' financial conditions and generally requires no collateral.
Page 7 of 14
<PAGE> 8
ITEM 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following table sets forth items from the Condensed Consolidated Statements
of Operations as percentages of net sales:
<TABLE>
<CAPTION>
Three Months Ended
June 30,__
------------------
1996 1995
---- ----
<S> <C> <C>
Net sales 100.0% 100.0%
Cost of sales 67.7 74.8
---- ----
Gross profit 32.3 25.2
Research & development 6.7 7.5
Selling, general & administrative 21.5 16.3
---- ----
Operating income 4.1 1.4
Other expense, net (0.7) (0.7)
---- ----
Income before tax 3.4 0.7
Income before provision for
income taxes 0.3 0.1
--- ---
Net income 3.1% 0.6%
=== ===
</TABLE>
Net sales for the first quarter of fiscal year 1997 were $36.8 million, compared
to $39.7 million reported in the same quarter of fiscal year 1996. The decrease
in net sales in the first quarter of fiscal 1997 was primarily due to lower
sales in the Asia Pacific region. Sales in the Asia Pacific region declined
from $12.8 million in the first quarter of fiscal 1996 to $10.1 in the similar
quarter of fiscal 1997.
During the first quarter of fiscal 1997, the Company received $34 million in
orders shippable over the next twelve months, compared to $36 million in the
first quarter of fiscal 1996. The decline was due primarily to the timing
of orders from customers, some of which were not booked until July. The twelve
month backlog at June 30, 1996 was $81 million, compared to $84 million at March
31, 1996.
The Company includes in its backlog purchase orders with respect to which a
delivery schedule has been specified for product shipment within one year.
Orders in the Company's current backlog are subject to changes in delivery
schedules or to cancellation at the option of the purchaser without significant
penalty. Accordingly, although useful for scheduling production, backlog as of
any particular date may not be a reliable measure of sales for any future
period.
Page 8 of 14
<PAGE> 9
Gross margin as a percentage of net sales for the first quarter of fiscal 1997
was 32.3% compared to 25.2% in the same quarter of fiscal 1996. The improved
margins were the result of lower manufacturing expenses as a result of lower
component material costs and improved manufacturing efficiency. In
addition, the first quarter of fiscal 1996 had lower gross margins because of
the shipment of interim product to E-Plus at no margin due to delays in
acceptance of SPECTRUM(TM) II equipment. The Company received SPECTRUM(TM) II
product acceptance from E-Plus during the second quarter of fiscal 1996.
Research and development expenses decreased by $0.5 million, from $3.0 million
in the first quarter of fiscal 1996 to $2.5 million in the same period in fiscal
1997. As a percentage of net sales, research and development expenses were 6.7%
in the first quarter of fiscal 1997 compared to 7.5% in the first quarter of
fiscal 1996. This decrease was primarily attributable to the lower spending as
the SPECTRUM(TM) II product transitioned from development stage to expansion to
other bandwidths.
Selling, general and administrative expenses were $7.9 million in the first
quarter of fiscal 1997 compared to $6.5 million in the first quarter of fiscal
1996. As a percentage of net sales, selling, general and administrative expenses
were 21.5% in the first quarter of fiscal 1997 compared to 16.3% in the
comparable quarter of fiscal 1996. The increase was mostly attributable to
higher head count and related travel expense as the Company continues to
increase its sales and worldwide support capability. In addition, there was an
increase in bonus expense in the first quarter of fiscal 1997 compared to the
prior year due to the improvement of the profitability of the Company.
Interest and other income, net was minimal in the first quarter of fiscal 1997
compared to $0.4 million in the similar quarter of fiscal 1996. This decrease
was primarily due to an exchange loss in this fiscal year as compared to an
exchange gain in the prior fiscal year first quarter on receivables denominated
in foreign currencies. Interest expense in the first quarter of fiscal 1997 was
$0.3 million compared to $0.7 million in the first quarter of fiscal 1996. The
decrease in interest expense was primarily attributable to the lower principal
balances outstanding on the line of credit and note payable in fiscal 1997.
The Company recorded an income tax provision in the first quarter of both fiscal
years 1997 and 1996 at an effective rate of 10%. This was less than the
statutory rate primarily due to the utilization of the net operating loss carry
forwards.
Page 9 of 14
<PAGE> 10
FACTORS THAT MAY AFFECT FUTURE OPERATING RESULTS
The statements in this Form 10-Q concerning the Company's expenses, revenue,
liquidity and cash needs contain forward-looking statements concerning the
Company's future operations and financial results. These forward-looking
statements are based on current expectations and the Company assumes no
obligations to update this information. Numerous factors, such as economic and
competitive conditions, incoming order levels, shipment volumes, product
margins, and foreign exchange rates, could cause actual results to differ from
those described in these statements, and prospective investors and stockholders
should carefully consider the factors set forth below in evaluating these
forward-looking statements.
Sales of the Company's products are concentrated in a small number of customers.
For the first quarter of fiscal 1997, the top four customers accounted for 38%
of the net sales. As of June 30, 1996, four of the Company's customers accounted
for 43% of the backlog, of which 12% was attributable to orders under the E-Plus
contract. The worldwide telecommunications industry is dominated by a small
number of large corporations, and the Company expects that a significant portion
of its future product sales will continue to be concentrated in a limited number
of customers. The loss of any existing customer, a significant reduction in the
level of sales to any existing customer, or the failure of the Company to gain
additional customers could have a material adverse effect on the Company's
business, financial condition and results of operations. In addition, a
substantial portion of shipments may occur near the end of each quarter.
Accordingly, the Company's results are difficult to predict and delays in
product delivery or closing of a sale can cause revenues and net income to
fluctuate significantly from anticipated levels and from quarter to quarter.
The markets for the Company's products are extremely competitive and the Company
expects that competition will increase. The Company's existing and potential
competitors include large and emerging domestic and international companies,
such as California Microwave Corporation, Alcatel, Ericsson, Siemens AG, Harris
Corporation, Nokia, NEC, and P-Com, many of which have significantly greater
financial , technical, manufacturing, marketing, sales and distribution
resources and management expertise than the Company. The Company believes that
its ability to compete successfully will depend on a number of factors both
within and outside its control, including price, quality, availability, product
performance and features; timing of new product introductions by the Company,
its customers and its competitors; the ability of its customers to obtain
financing; and customer service and technical support. The Company is also
experiencing customer demands for shorter delivery cycles. As a result of this,
the Company may increase its inventory levels in order to respond to this
demand which in turn may increase the risk of obsolescence of the inventories.
The Company expects that international sales will continue to account for the
majority of its net product sales for the foreseeable future. As a result, the
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in foreign currency
rates; imposition of tariffs and other barriers and restrictions; the burdens of
complying with a variety of foreign laws and general economic and geopolitical
conditions, including inflation and trade relationships.
Page 10 of 14
<PAGE> 11
Manufacturers of digital microwave telecommunications equipment are
experiencing, and are likely to continue to experience, intense price pressure,
which has resulted, and is expected to continue to result in downward pricing
competition on the Company's products. As a result, the Company has experienced,
and expects to continue to experience, declining average sales prices for its
products. The Company's future profitability is dependent upon its ability to
reduce costs in line with, or faster than, declines in prices.
The Company's manufacturing operations are highly dependent upon the delivery of
materials by outside suppliers in a timely manner. From time to time the Company
has experienced delivery delays from key suppliers which impacted sales. There
can be no assurance that the Company will not experience material supply
problems or component or subsystem delays in the future.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used for operating activities in the first quarter of fiscal 1997 was
$4.4 million, compared to net cash used for operating activities of $0.2 million
in the first quarter of fiscal 1996. Total assets at June 30, 1996 of $98.4
million increased by $2.6 million from $95.8 million at March 31, 1996,
principally due to increases in inventory. Inventories increased primarily as a
result of increases in inventory purchases in anticipation of a higher volume of
shipments. As a result of the increased inventory, cash and cash equivalents,
decreased from $8.3 million at March 31, 1996 to $2.5 million at June 30, 1996.
Total liabilities at June 30, 1996 of $46.8 million were $0.7 million higher
than the $46.1 million at March 31, 1996. The increase was primarily due to
higher accounts payable from inventory purchases as explained above. The
increase in accounts payable was offset by a reduction in accrued liabilities.
At June 30, 1996, the Company's principal sources of liquidity consisted of $2.5
million in cash and cash equivalents and a revolving bank credit facility that
provides up to $25.0 million in credit, of which approximately $22.0 million was
available and $3.0 million was outstanding at June 30, 1996.
The Company's lines of credit and term note payable require the Company to meet
certain financial covenants, including minimum tangible net worth, minimum debt
coverage ratios and profitability requirements. As of June 30, 1996, the Company
was in compliance with the covenants.
The Company believes that the liquidity provided by existing cash balances,
anticipated future cash flows from operations, and the Company's existing
borrowing arrangements will be sufficient to meet both working capital and
capital expenditure requirements at least through fiscal 1997.
Page 11 of 14
<PAGE> 12
PART II - OTHER INFORMATION
ITEM 6 - EXHIBITS AND REPORTS ON FORM 8K
(a) Exhibits
For a list of exhibits to this Form 10-Q, see exhibit index located on
page 13.
(b) None.
Page 12 of 14
<PAGE> 13
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.
DIGITAL MICROWAVE CORPORATION
Date: August 14, 1996 By /s/ Carl A. Thomsen
--------------------------- ---------------------------------------
Carl A. Thomsen
Vice President and Chief Financial
Officer
Page 13 of 14
<PAGE> 14
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
3.1 Restated Certificate of Incorporation (incorporated by reference
to Exhibit 3.1 to the Company's Registration Statement on Form S-1
(File No. 33-13431)).
3.2 Amended and Restated Bylaws (incorporated by reference to Exhibit
3.2 to the Company's Annual Report on Form 10-K for the year ended
March 31, 1993).
4.1 Form of Common Stock Certificate (incorporated by reference to
Exhibit 4.1 to the Company's Annual Report on Form 10-K for the
year ended March 31, 1988).
4.2 Rights Agreement dated as of October 24, 1991, between the Company
and Manufacturers Hanover Trust Company of California, including
the Certificate of Designations for the Series A Junior
Participating Preferred Stock (incorporated by reference to
Exhibit 1 of the Company's Current Report on 8-K filed on November
5, 1991).
10.38 Amendment to Loan Agreement dated June 24, 1996, between the
Company and CoastFed Business Credit Corporation.
27.1 Financial data schedule
Page 14 of 14
<PAGE> 1
LOAN AND SECURITY AGREEMENT
BETWEEN COAST BUSINESS CREDIT AND DIGITAL MICROWAVE CORPORATION
DATED JUNE 24, 1996
<PAGE> 2
COAST
AMENDED AND RESTATED
LOAN AND SECURITY AGREEMENT
BORROWER: DIGITAL MICROWAVE CORPORATION
ADDRESS: 170 ROSE ORCHARD WAY
SAN JOSE, CALIFORNIA
DATE: JUNE 24, 1996
THIS AMENDED AND RESTATED LOAN AND SECURITY AGREEMENT ("Loan Agreement"),
dated the above date, is entered into at Los Angeles, California, between COAST
BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association
("Coast"), a California corporation (successor to Coastfed Business Credit
Corporation), with offices at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California 90025, and the borrower named above ("Borrower"), whose chief
executive office is located at the above address ("Borrower's Address"). This
Loan Agreement amends and restates in its entirety the Loan and Security
Agreement between Coast and Borrower dated June 25, 1992 (as amended), effective
on the date hereof. The Letter of Credit Collateral Agreement, dated June 25,
1992, between the parties is hereby terminated effective on the date hereof, and
the parties acknowledge that there are no letters of credit thereunder presently
outstanding.
1. LOANS.
1.1 LOANS, COLLATERAL AGREEMENTS. Borrower has requested and may hereafter
request that Coast advance funds or otherwise extend credit to or for the
benefit of Borrower ("Loan(s)") in accordance with the terms and provisions of
this Loan Agreement and other written agreements ("Collateral Agreement(s)"),
including, but not limited to, any one or more of the following described
security agreements now or hereafter entered into between Borrower and Coast:
(a) Accounts Collateral Security Agreement; (b) Inventory Collateral Security
Agreement; (c) Equipment Collateral Security Agreement; and (d) any promissory
notes or guaranties. The amount and terms of payment of any Loans by Coast to
Borrower shall be determined in accordance with the terms and provisions of this
Loan Agreement and of any executed Collateral Agreements. Notwithstanding
anything herein or in any Collateral Agreement to the contrary, in no event
shall the Borrower permit the total balance of all Loans and all other
Obligations outstanding at any one time to exceed $25,000,000; and, if for any
reason they do, Borrower shall immediately pay the amount of such excess to
Coast in immediately available funds.
1.2 INTEREST. Unless specifically provided to the contrary in any Collateral
Agreement, all Loans shall bear interest at a rate equal to the "Prime Rate" (as
hereinafter defined), plus 1.00% per annum, calculated on the basis of a 360-day
year for the actual number of days elapsed. The interest rate applicable to all
Loans shall be adjusted monthly as of the first day of each month, and the
interest to be charged for that month shall be based on the highest "Prime Rate"
in effect during said month, but in no event shall the rate of interest charged
on any Loans in any month be less than 7.00% per annum. "Prime Rate" is defined
as the actual "Reference Rate" or the substitute therefor of the Bank of America
NT & SA ("B of A") whether or not that rate is the lowest interest rate charged
by B of A. If the Prime Rate, as defined, is unavailable, "Prime Rate" shall
mean the highest of the prime rates published in the Wall Street Journal on the
first business day of the month, as the base rate on corporate loans at large
U.S. money center commercial banks.
2. DEFINITIONS OF OBLIGATIONS AND COLLATERAL; GRANT OF SECURITY INTEREST.
2.1 OBLIGATIONS. The term "Obligations" as used in this Loan Agreement, and
any and all Collateral Agreements, shall mean and include each and all of the
following: the obligation to pay all Loans and all interest thereon when due and
to pay and perform when due all other indebtedness, liabilities, obligations,
guarantees, covenants, agreements, warranties and representations of Borrower to
Coast, whether heretofore, now or hereafter existing, owing or arising; whether
primary, secondary, direct, acquired from a third party, absolute, contingent,
fixed, secured or unsecured; joint or several, written or oral, monetary or
non-monetary; and whether created pursuant to, or caused by Borrower's breach
of, this Loan Agreement, a Collateral Agreement or any other present or future
agreement or instrument, or created by operation of law or otherwise.
2.2 COLLATERAL. As security and collateral for all Obligations, Borrower
hereby grants to Coast a continuing security interest in, and assigns to Coast,
all of Borrower's interest in the types of property described below, whether now
owned or hereafter acquired and wherever located, together with all proceeds
-2-
<PAGE> 3
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
(including insurance proceeds), substitutions, accessions and products thereof
(collectively referred to as "Collateral "):
2.2(a) ACCOUNTS. All accounts, contract rights*, chattel paper, and
instruments, and all other obligations now or hereafter owing to Borrower
(hereinafter sometimes collectively referred to as "Accounts"), including, but
not limited to, those described in any Accounts Collateral Security Agreement
executed by Borrower, and all right, title and interest of Borrower in, and all
of Borrower's rights and remedies with respect to, all goods, the sale or other
disposition of which gives rise to any Account, including, without limitation,
all returned, reclaimed and repossessed goods and all rights of stoppage in
transit, replevin, reclamation, and all rights as an unpaid vendor; and
*(TO THE EXTENT SUCH CONTRACT RIGHTS ARE ASSIGNABLE WITHOUT BREACH OF THE
CONTRACT CREATING THEM)
2.2(b) INVENTORY. All inventory, goods, merchandise, materials, raw materials,
work in process, finished goods, advertising, packaging and shipping materials,
supplies, and all other tangible personal property which is held for sale or
lease or furnished under contracts of service or consumed in Borrower's
business, including, without limitation, any and all of the foregoing which are
returned, repossessed, reclaimed or stopped in transit, and including, but not
limited to, those described in any Inventory Collateral Security Agreement
executed by Borrower, and all warehouse receipts and other documents or
instruments now or hereafter issued with respect to any of the foregoing; and
2.2(c) EQUIPMENT. All equipment, goods (other than inventory), machinery,
fixtures, trade fixtures, vehicles, furnishings, furniture, supplies, materials,
tools, machine tools, office equipment, appliances, apparatus, parts, dies,
jigs, and chattels, including, but not limited to, those described in any
Equipment Collateral Security Agreement executed by Borrower; and
2.2(d) INTANGIBLES. All deposit accounts and general intangibles (including,
but not limited to, tax refunds, goodwill, name, drawings, trademarks,
blueprints, trade names, trade secrets, customer lists, patents, patent
applications, copyrights, security deposits, loan commitment fees, royalties,
licenses, processes, and all other rights, privileges and franchises); and
All personal property of Borrower which comes into Coast's possession, custody
or control; and all tangible and intangible personal property in which Coast now
has or hereafter acquires a security interest to secure any or all of the
Obligations; and all substitutions, additions and accessions to any or all of
the foregoing items of Collateral; and all guaranties of and security for any
and all of the foregoing; and all books and records relating to any and all of
the foregoing and the equipment containing said books and records. Payment and
performance of the Obligations are collateralized by the Collateral and by any
security interest created in any other agreement now or hereafter existing
between Coast and Borrower unless such other agreement is a deed of trust or
other security instrument having real property or rents from real property as
its subject matter and expressly provides to the contrary.
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF DEBTOR.
To induce Coast to enter into this Loan Agreement and now and hereafter to
enter into any Collateral Agreement, Borrower represents and warrants that each
of the following representations and warranties now is and hereafter will
continue to be true and correct in all respects and Borrower has and will timely
perform each of the following covenants:
3.1 CORPORATE EXISTENCE AND POWER. Borrower, if a corporation, is and will
continue to be, duly authorized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. Borrower is and will continue to
be qualified and licensed to do business in all jurisdictions in which the
nature of the business transacted by it, or the ownership or leasing of its
property, makes such qualification or licensing necessary, and Borrower has and
will continue to have all requisite power and authority to carry on its business
as it is now, or may hereafter be, conducted.
3.2 AUTHORITY. Borrower is, and will continue to be, authorized to enter into,
to grant security interests in its property pursuant to, and to perform its
obligations under, this Loan Agreement, any Collateral Agreement and all other
instruments and transactions contemplated herein. The execution, delivery and
performance by Borrower of this Loan Agreement, any Collateral Agreement and all
other instruments and transactions contemplated herein have been validly
authorized, are enforceable against the Borrower in accordance with their terms,
and do not violate any law or any provision of, and are not grounds for
acceleration under, any agreement, indenture, note or instrument which is
binding upon Borrower, or any of its property, including, without limitation,
Borrower's Articles of Incorporation, By-Laws and any Shareholder Agreements.
3.3 NAME; TRADE NAMES AND STYLES. Borrower has set forth above its correct
name. Listed on the Schedule hereto are all prior names of Borrower and each
fictitious name, trade name and trade style by which Borrower has been, or is
now, known. Borrower shall provide Coast with fifteen (15) days' advance written
notice prior to doing business under any other name, fictitious name, trade name
or trade style. Borrower has complied, and will hereafter comply, with all laws
relating to the conduct of business under, the ownership of property in, and the
renewal or continuation of the right to use, a corporate, fictitious or trade
name or trade style.
3.4 PLACE OF BUSINESS; LOCATION OF COLLATERAL. Borrower's sole place of
business; or, if Borrower has more than one place of business, Borrower's chief
executive office; or, if Borrower is an individual and does not have a separate
place of business, Borrower's residence is, and will continue to be, located at
Borrower's Address and all of Borrower's books and records, including, but not
limited to, the books and records relating to Borrower's Accounts, are and will
be maintained at Borrower's Address unless and until Coast shall otherwise
consent in writing. In addition to Borrower's Address, Borrower has places of
business and Collateral is located only at the locations shown on the Schedule
hereto. Borrower will provide Coast with advance written notice if Borrower
moves any of the Collateral*, or obtains any additional sites for the conduct of
Borrower's business or the location of any Collateral.
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
*(OTHER THAN (I) IN CONNECTION WITH SALES OR OTHER DISPOSITIONS OF INVENTORY
IN THE ORDINARY COURSE OF BUSINESS, (II) DISPOSAL IN THE ORDINARY COURSE OF
BUSINESS OF ITEMS OF COLLATERAL WHICH HAVE BECOME WORN OUT OR OBSOLETE OR WHICH
ARE PROMPTLY BEING REPLACED, (III) DISPOSAL OF COLLATERAL OUTSIDE THE ORDINARY
COURSE OF BUSINESS NOT EXCEEDING IN THE AGGREGATE OF $100,000 IN ANY FISCAL
YEAR, AND (IV) MOVEMENT OF COLLATERAL OF THE TYPE DESCRIBED IN SECTION 2.2(C)
ABOVE ("EQUIPMENT") WITHIN ANY OF THE STATES SPECIFIED IN THE SCHEDULE OR WITHIN
ANY OTHER JURISDICTION NOTIFIED TO COAST HEREUNDER IN WHICH COAST HAS TAKEN ALL
NECESSARY ACTION IN ORDER TO PROTECT AND PERFECT ITS SECURITY INTEREST THEREIN,
AND (IV) ANY AND ALL MOBILE GOODS WHICH ARE OF A TYPE NORMALLY USED IN MORE THAN
ONE JURISDICTION)
3.5 TITLE TO COLLATERAL; LIENS. Borrower is now, and will at all times
hereafter be, the lawful and sole owner of all the Collateral. With the
exception of the security interest granted Coast, the Collateral now is and will
remain free and clear of any and all liens, charges, security interests,
encumbrances and adverse claims*. Without limiting any of Coast's other rights
and remedies, if Borrower grants any third party a lien or encumbrance on or
security interest in any of the Collateral**, Coast, in its sole discretion,
shall have the right to treat such action as a notice of termination by Borrower
to Coast under Paragraph 8(d) hereof, as of any date subsequent to such grant
selected by Coast, in its sole discretion, and to charge Borrower the
termination fee therein provided. Coast now has, and will have, a perfected and
enforceable first priority security interest in all of the Collateral***, and
Borrower will at all times defend Coast and the Collateral against all claims of
others. None of the Collateral now is or will be affixed to any real property in
such a manner, or with such intent, as to constitute a fixture thereto****.
Borrower is not and will not become a lessee under any real property lease
pursuant to which the lessor may obtain any rights in any of the Collateral and
no such lease now prohibits, restrains, impairs or will prohibit, restrain or
impair Borrower's right to remove any Collateral from the leased premises++.
Whenever any Collateral is located upon premises in which any third party has an
interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien
or otherwise), Borrower shall, whenever requested by Coast, use its best efforts
to cause such third party to execute and deliver to Coast, in form acceptable to
Coast, whatever waivers and subordinations that Coast specifies, so as to ensure
that Coast's rights in the Collateral are, and will continue to be, superior to
the rights of any such third party. Borrower will keep in full force and effect,
and will comply with all the terms of, any lease of real property where any of
the Collateral now or in the future may be located.
*("LIENS"), OTHER THAN PERMITTED LIENS. AS USED HEREIN, "PERMITTED LIENS"
MEANS (I) ANY LIENS EXISTING AS OF THE DATE HEREOF AND DISCLOSED IN THE
SCHEDULE; (II) LIENS FOR TAXES, FEES, ASSESSMENTS OR OTHER GOVERNMENTAL CHARGES
OR LEVIES, EITHER NOT DELINQUENT OR BEING CONTESTED IN GOOD FAITH BY APPROPRIATE
PROCEEDINGS, PROVIDED THE SAME HAS NOT PRIORITY OVER ANY OF COAST'S SECURITY
INTERESTS; (III) LIENS OF MATERIALMEN, MECHANICS, WAREHOUSEMEN, CARRIERS, OR
EMPLOYEES OR OTHER LIKE LIENS ARISING IN THE ORDINARY COURSE OF BUSINESS AND
SECURING OBLIGATIONS EITHER NOT DELINQUENT OR BEING CONTESTED IN GOOD FAITH BY
APPROPRIATE PROCEEDINGS; (IV) ANY JUDGMENT, ATTACHMENT OR SIMILAR LIEN, UNLESS
THE JUDGMENT IT SECURES IS NOT FULLY COVERED BY INSURANCE AND HAS NOT BEEN
DISCHARGED OR EXECUTION THEREOF EFFECTIVELY STAYED AND BONDED AGAINST PENDING
APPEAL WITHIN 30 DAYS OF THE ENTRY THEREOF; (V) EASEMENTS, RIGHTS OF WAY,
SERVITUDES OR ZONING OR BUILDING RESTRICTIONS AND OTHER MINOR ENCUMBRANCES ON
REAL PROPERTY AND IRREGULARITIES IN THE TITLE TO SUCH PROPERTY WHICH DO NOT IN
THE AGGREGATE MATERIALLY IMPAIR THE USE OR VALUE OF SUCH PROPERTY OR RISK THE
LOSS OR FORFEITURE OF TITLE THERETO; (VI) STATUTORY LANDLORD'S LIENS ON
EQUIPMENT AND LEASEHOLD IMPROVEMENTS UNDER LEASES TO WHICH THE BORROWER IS A
PARTY; (VII) LIENS (A) UPON OR IN ANY PROPERTY ACQUIRED OR HELD BY THE BORROWER
OR ANY OF ITS SUBSIDIARIES TO SECURE THE PURCHASE PRICE OF SUCH PROPERTY OR
INDEBTEDNESS INCURRED SOLELY FOR THE PURPOSE OF FINANCING THE ACQUISITION OF
SUCH PROPERTY, OR (B) EXISTING ON SUCH PROPERTY AT THE TIME OF ITS ACQUISITION,
PROVIDED THAT THE LIEN IS CONFINED SOLELY TO THE PROPERTY SO ACQUIRED AND
IMPROVEMENTS THEREON; (VIII) LIENS ON ASSETS OF CORPORATIONS WHICH BECOME
SUBSIDIARIES OF THE BORROWER AFTER THE DATE HEREOF, PROVIDED THAT SUCH LIENS
EXISTED AT THE TIME THE RESPECTIVE CORPORATIONS BECAME SUBSIDIARIES OF THE
BORROWER AND WERE NOT CREATED IN ANTICIPATION THEREOF; AND (IX) LIENS INCURRED
IN CONNECTION WITH THE EXTENSION, RENEWAL OR REFINANCING OF THE INDEBTEDNESS
SECURED BY LIENS OF THE TYPE DESCRIBED IN CLAUSES (I) , (VII) AND (VIII) ABOVE,
PROVIDED THAT ANY EXTENSION, RENEWAL OR REPLACEMENT LIEN SHALL BE LIMITED TO THE
PROPERTY ENCUMBERED BY THE EXISTING LIEN AND THE PRINCIPAL AMOUNT OF THE
INDEBTEDNESS BEING EXTENDED, RENEWED OR REFINANCED DOES NOT INCREASE.
** (OTHER THAN A PERMITTED LIEN)
*** SUBJECT TO PERMITTED LIENS
****, UNLESS SUCH COLLATERAL IS COVERED BY A FIXTURE FILING DULY EXECUTED AND
DELIVERED BY THE BORROWER IN FAVOR OF COAST
++ EXCEPT TO THE EXTENT PROVIDED UNDER LEASES EXISTING AS OF THE DATE HEREOF
AND DISCLOSED IN THE SCHEDULE.
3.6 MAINTENANCE OF COLLATERAL. Borrower has maintained and will maintain the
Collateral and all of its assets in good working condition, at Borrower's
expense*. Borrower will not use the Collateral or any of its other properties
for any unlawful purpose and will not secrete or abandon the Collateral.
Borrower will immediately advise Coast in writing of any material loss or
significant decline in value of the Collateral.
*EXCEPT FOR ASSETS WHICH HAVE BECOME WORN OUT OR OBSOLETE IN THE ORDINARY COURSE
OF BUSINESS
3.7 BOOKS AND RECORDS. Borrower has maintained and will maintain at Borrower's
Address complete and accurate books and records comprising an accounting system
in accordance with generally accepted accounting principles. Borrower has not
and will not in the future enter into any agreement with any accounting firm,
service bureau or third party to prepare or store Borrower's books and records
at any location other than Borrower's Address, without first obtaining Coast's
written consent, which may be conditioned upon such accounting firm, service
bureau or other third party agreeing to give Coast the
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<PAGE> 5
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
same rights with respect to access to books and records and related rights as
Coast has under Paragraph 4.3 of this Loan Agreement.
3.8 FINANCIAL CONDITION AND STATEMENTS. All financial statements now or
hereafter delivered to Coast have been, and will be, prepared in conformity with
generally accepted accounting principles and now and hereafter will completely
and accurately reflect the financial condition of Borrower, at the times and for
the periods therein stated. Since the last date covered by any such statement,
there has been no material adverse change in the financial condition, operations
or any other status of the Borrower. Borrower is now and will continue to be
solvent in both the "equity" and "bankruptcy" sense. Borrower will deliver to
Coast a copy of all financial statements prepared with respect to Borrower no
later than five (5) days after the filing or submission thereof by Borrower.
Borrower will cause to be prepared, and will provide Coast within ninety (90)
days following the end of Borrower's fiscal year, complete annual financial
statements, certified by independent certified public accountants acceptable to
Coast.
3.9 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state or local law. Borrower has timely paid, and will timely pay, all
foreign, federal, state and local taxes, assessments, deposits and contributions
now or hereafter owed by Borrower. Borrower may defer payment of any contested
taxes provided that Borrower (i) in good faith contests Borrower's obligation to
pay such taxes by appropriate proceedings promptly and diligently instituted and
conducted, (ii) notifies Coast in writing of the commencement of and any
material development in such proceedings, and (iii) posts bonds or takes any
other steps required to keep such contested taxes from becoming a lien against
or charge upon any of the Collateral or other properties of Borrower. Borrower
shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
Borrower is unaware of any claims or adjustments proposed for any of Borrower's
prior tax years which could result in additional taxes becoming due and payable
by Borrower. Borrower has paid, and shall continue to pay all amounts necessary
to fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any * liability of Borrower, including, without limitation, any liability to
the Pension Benefit Guaranty Corporation or its successors or any other
governmental agency. When requested, Borrower will furnish Coast with proof
satisfactory to Coast of Borrower's making the payment or deposit of all such
taxes and contributions, such proof to be delivered within five (5) days after
the due date established by law for each such payment or deposit. If Borrower
fails or is unable to pay or deposit such taxes or contributions, Coast may, but
is not obligated to, pay the same and treat all such advances as additional
Obligations of Borrower. Such advances shall bear interest at the highest
interest rate applicable to any of the Obligations.
*MATERIAL
3.10 COMPLIANCE WITH LAW. Borrower has complied, and will comply, * with all
provisions of all foreign, federal, state and local laws and regulations
relating to Borrower, including, but not limited to, those relating to
Borrower's ownership of real or personal property, conduct and licensing of
Borrower's business and employment of Borrower's personnel.
*IN ALL MATERIAL RESPECTS
3.11 LITIGATION. *There is no claim, suit, litigation, proceeding or
investigation pending or threatened by or against or affecting Borrower in any
court or before any regulatory commission, board or other governmental agency
(or any basis therefor known to Borrower) which** result, either separately or
in the aggregate, in any *** adverse change in the business or condition of
Borrower, or in any impairment in the ability of Borrower to carry on its
business in substantially the same manner as it is now being conducted. Borrower
will immediately inform Coast in writing of any claim, proceeding, litigation or
investigation hereafter threatened or instituted by or against Borrower****.
*EXCEPT AS SET FORTH IN THE SCHEDULE HERETO
** IS REASONABLY LIKELY TO
*** MATERIAL
**** INVOLVING IN EXCESS OF $500,000
3.12 USE OF PROCEEDS. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan 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." All proceeds of all Loans shall be
used solely for lawful business purposes.
3.13 CONTINUING EFFECT. All representations, warranties and covenants of
Borrower contained in this Loan Agreement and any Collateral Agreement and any
other agreement with Coast shall be true and correct at the time of the
effective date of each such agreement and shall be deemed continuing and shall
remain true, correct and in full force and effect until payment and satisfaction
in full of all of the Obligations, and Borrower acknowledges that Coast is and
will be expressly relying on such representations, warranties and covenants in
making Loans to Borrower.
4. ADDITIONAL DUTIES OF DEBTOR.
4.1 INSURANCE. Borrower shall, at all times, at Borrower's expense, insure all
of the Collateral * and carry such other business insurance with insurers
acceptable to Coast, ** in such form and amounts as Coast may *** require. All
such insurance policies shall name Coast as an additional loss payee, shall
provide that proceeds payable thereunder be payable directly to Coast unless
written authority to the contrary is obtained, and shall also provide that no
act or default of Borrower or any other person shall affect the right of Coast
to recover thereunder and shall contain a lenders loss payee endorsement in form
acceptable to Coast. Upon receipt of the proceeds of any such insurance, Coast
shall apply such proceeds in reduction of the Obligations as Coast shall
determine in its sole and absolute discretion. If Borrower fails to provide or
pay for any such
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<PAGE> 6
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
insurance, Coast may, but is not obligated to, procure the same
at Borrower's expense. Borrower agrees to deliver to Coast, promptly as
rendered, copies of all reports made to all insurance companies****.
* OTHER THAN ACCOUNTS
** COVERING SUCH PROPERTY AND RISKS AS IS CUSTOMARILY CARRIED BY COMPANIES
ENGAGED IN SIMILAR BUSINESSES AND OWNING SIMILAR PROPERTIES IN THE LOCALITIES
WHERE THE BORROWER OPERATES, AND
** REASONABLY
**** INVOLVING A CLAIM IN EXCESS OF $250,000
4.2 REPORTS. At its expense, Borrower shall report, in form satisfactory to
Coast, such information as Coast may from time to time * specify regarding
Borrower or the Collateral; such reports shall be rendered with such frequency
as Coast may * specify. All reports furnished Coast shall be complete and
accurate in all ** respects.
*REASONABLY **MATERIAL
4.3 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At any time Coast, or its
agents, shall have immediate access to the Collateral and any other property of
Borrower, wherever located. Coast shall have the right to audit and copy
Borrower's books and records and accounts including accountants' reports
wherever located (hereinafter collectively the "Records"). Borrower hereby
irrevocably authorizes and directs any of the officers, agents, accountants and
attorneys having possession or control of any of the Records (including computer
records) to physically deliver or make same available to Coast upon Coast's
request. Borrower waives the benefit of any accountant-client privilege or other
evidentiary privilege ** precluding or limiting the disclosure, divulgence or
delivery of any of the Records. * Coast shall have the right to possession of,
or to move to the premises of Coast or any agent of Coast, for so long as Coast
may *** desire, all or any part of the Records.
* UPON THE OCCURRENCE AND CONTINUATION OF AN EVENT OF DEFAULT
** (OTHER THAN ATTORNEY-CLIENT PRIVILEGE)
*** REASONABLY
4.4 PROHIBITED TRANSACTIONS. Borrower shall not without Coast's prior written
consent*: merge, consolidate, dissolve, acquire any other corporation; enter
into any transaction not in its usual course of business; guarantee or otherwise
become in any way liable with respect to the obligations of another party or
entity (except by endorsements of instruments or items of payment for deposit to
the general account of Borrower or which are transmitted or turned over to Coast
on account of the Obligations**); pay or declare any dividends upon Borrower's
stock; redeem, retire, purchase or otherwise acquire, directly or indirectly,
any of Borrower's stock; make any change in Borrower's name, identity, corporate
or capital structure***; sell or transfer any Collateral, except for the sale of
finished inventory in the ordinary course of Borrower's business****; lend or
distribute any of Borrower's property or assets, or incur any ++ outside of the
ordinary course of Borrower's business.
*WHICH SHALL BE A MATTER OF COAST'S GOOD FAITH BUSINESS JUDGMENT
**, OBLIGATIONS PURSUANT TO THE BORROWER'S BYLAWS OR IN INDEMNIFICATION
AGREEMENTS, TO INDEMNIFY OFFICERS, DIRECTORS AND EMPLOYEES OF THE BORROWER, AND
GUARANTEES OF THE OBLIGATIONS OF THE BORROWER'S SUBSIDIARIES
***WITHOUT NOTIFYING COAST HEREUNDER
****, SALES OR OTHER DISPOSITIONS OF ASSETS IN THE ORDINARY COURSE OF
BUSINESS WHICH HAVE BECOME WORN OUT OR OBSOLETE OR WHICH ARE PROMPTLY BEING
REPLACED, AND SALES OR DISPOSITIONS OF ASSETS OUTSIDE THE ORDINARY COURSE OF
BUSINESS NOT EXCEEDING IN THE AGGREGATE $100,000 IN ANY FISCAL YEAR
++ INDEBTEDNESS FOR BORROWED MONEY IN EXCESS OF $500,000 IN ANY FISCAL YEAR
4.5 NOTIFICATION OF CHANGES. Borrower will promptly notify Coast in writing
of any change of its executive officers, or directors, any purchase * out of the
regular course of Borrower's business and any adverse or material change in the
business or financial affairs of Borrower.
*OF ASSETS OR PROPERTY WITH AN AGGREGATE VALUE EXCEEDING $1,000,000 IN ANY
FISCAL YEAR
4.6 CHARGES. Borrower shall pay all charges assessed by Coast, in accordance
with Coast's schedule of charges in effect from time to time, and such charges
shall be part of the Obligations and shall be payable on demand.
4.7 LITIGATION COOPERATION. Should any suit or proceeding be instituted by or
against Coast with respect to any Collateral or for the collection or
enforcement of any Account, or in any manner relating to Borrower, Borrower
shall, without expense to Coast, and wherever and whenever designated by Coast,
make available Borrower and its officers, employees and agents and Borrower's
Records to the extent that Coast may deem * necessary in order to prosecute or
defend any such suit or proceeding.
*REASONABLY
4.8 REMITTANCE OF PROCEEDS. *All proceeds arising from the disposition of the
Collateral shall be delivered, in kind, by Borrower to Coast in the original
form in which received by Borrower not later than the following business day
after receipt by Borrower. *Borrower agrees that it will not commingle proceeds
of Collateral with any of Borrower's other funds or property, but will hold such
proceeds separate and apart from such other funds and property and in an express
trust for Coast. Coast may from time to time verify directly with the respective
account debtors the validity, amount and any other matters relating to the
Accounts by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose.
*FOLLOWING THE OCCURRENCE AND DURING THE CONTINUANCE OF AN EVENT OF DEFAULT,
OR ANY EVENT WHICH, WITH NOTICE OR PASSAGE OF TIME OR BOTH, WOULD CONSTITUTE AN
EVENT OF DEFAULT, WITHOUT LIMITING COAST'S OTHER RIGHTS AND REMEDIES,
4.9 EXECUTE ADDITIONAL DOCUMENTATION. Borrower agrees, at its expense, on
demand by Coast, to execute all documents in
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<PAGE> 7
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
form satisfactory to Coast, as Coast, in its sole discretion, may * deem
necessary or useful in order to perfect and maintain Coast's perfected
first-priority or any other security interest in the Collateral, and in order to
fully consummate all of the transactions contemplated under this Loan Agreement
and under any Collateral Agreement.
*REASONABLY
5. APPLICATION OF PAYMENTS.
All forms of payments delivered to Coast on account of the Obligations
constitute conditional payment only until such items are actually paid in cash
to Coast; solely for the purpose of computing interest earned by Coast, credit
therefor and for bank wire transfers shall be given as of the first business day
after receipt by Coast in the case of payments received in immediately available
funds, and three business days after receipt by Coast in other cases. All
payments made by Borrower may be applied, and in Coast's sole discretion
reversed and re-applied, in whole or in part to any of the Obligations, in such
order and manner as Coast shall determine in its sole discretion.
6. EVENTS OF DEFAULT AND REMEDIES.
6.1 EVENTS OF DEFAULT. If any of the following events shall occur, such an
occurrence shall constitute an "Event of Default" and Borrower shall provide
Coast with immediate written notice thereof: (a) Any warranty, representation,
statement, report or certificate made or delivered to Coast by Borrower or any
of Borrower's officers, employees or agents now or hereafter shall be incorrect,
false, untrue or misleading in any material respect*****; or (b) Borrower shall
fail to repay when due part or all of any Loan or to pay any interest thereon
when due; or (c) Borrower shall fail to perform when due any term or condition
contained in this Loan Agreement or in any Collateral Agreement, or any other
agreement between Coast and Borrower; or (d) Borrower shall fail to pay or
perform any other Obligation when due; or (e) Any loss, theft, or substantial
damage to, or destruction of, any * or all of the Collateral (unless within five
(5) days after the occurrence of any such event, Borrower furnishes Coast with
evidence satisfactory to Coast that the amount of any such loss, theft, damage
to or destruction of the Collateral is fully insured under policies designating
Coast as the additional named insured); or (f) A material impairment of the
prospect of payment or performance of the Obligations or a material impairment
of the value of the Collateral or any impairment in the priority of Coast's
security interest; or (g) Any event shall arise which ** or actually results in
the acceleration of the maturity of the indebtedness of Borrower to others under
any loan or other agreement or undertaking***; or (h) Any levy, assessment,
attachment, seizure, lien or encumbrance for any cause or reason whatsoever,
upon all or any part of the Collateral or any other asset of Borrower ****
(unless discharged by payment, release or fully bonded against not more than
thirty (30) days after such event has occurred); or (i) Dissolution, termination
of existence, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by or against, Borrower under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or hereafter in effect ++++; or entry of a
court or governmental order which enjoins, restrains or in any way prevents
Borrower from conducting all or any part of its business; or failure to pay any
foreign, federal, state or local tax or other debt of Borrower unless, with
respect to any such tax, Borrower complies with the provisions of Paragraphs 3.9
(i), (ii), and (iii); or (j) A notice of lien, levy or assessment is filed of
record with respect to any of Borrower's assets by the United States or any
department, agency or instrumentality thereof, or by any state, county,
municipal or other governmental agency, or if any taxes or debts now or
hereafter owing to any one or more of them becomes a lien upon all or any of the
Collateral or any other assets of Borrower (other than a lien for real property
taxes which are not yet due and payable ++++++); or (k) Death, insolvency or
incompetency of any guarantor of the Obligations; appointment of a conservator
or guardian of the person of any such guarantor; appointment of a conservator,
guardian, trustee, custodian or receiver of all or any part of the assets,
property or estate of, any such guarantor; revocation or termination of, or
limitation of liability upon, any guaranty of the Obligations; or commencement
of proceedings by or against any guarantor or surety for Borrower under any
bankruptcy or insolvency law; or (l) Borrower makes any payment on account of
any indebtedness or obligation which has been subordinated to the Obligations
++++++++ or if any person who has subordinated such indebtedness or obligations
terminates or in any way limits his subordination agreement; or (m) 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 such 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; or Borrower shall conceal, remove or transfer any part
of its property, with intent to hinder, delay or defraud its creditors, or make
or suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law, or shall make any transfer of
its property to or for the benefit of any creditor at a time when other
creditors similarly situated have not been paid.
*MATERIAL PORTION OF
**PERMITS THE ACCELERATION OF
***FOR BORROWED MONEY
****OTHER THAN A PERMITTED LIEN
*****WHEN MADE
++++ , PROVIDED THAT THE FILING OF AN INVOLUNTARY BANKRUPTCY PETITION AGAINST
THE BORROWER SHALL NOT BE DEEMED TO BE AN EVENT OF DEFAULT HEREUNDER IF IT IS
CURED BY BEING DISMISSED WITHIN 30 DAYS AFTER THE DATE INSTITUTED (ALTHOUGH
COAST SHALL HAVE NO OBLIGATION TO MAKE LOANS DURING SUCH 30-DAY CURE PERIOD)
++++++ OR ANY OTHER PERMITTED LIEN
++++++++ OTHER THAN IN COMPLIANCE WITH THE SUBORDINATION AGREEMENT WITH
RESPECT HERETO
6.2 REMEDIES. Upon the occurrence of any Event of Default, and at any time
thereafter, Coast, at its option, and without
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<PAGE> 8
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
notice or demand of any kind (all of which are hereby expressly waived by
Borrower), may do any one or more of the following: (a) Cease advancing money or
extending credit to or for the benefit of Borrower under this Loan Agreement,
any Collateral Agreement, and any other document or agreement; (b) Accelerate
and declare all or any part of the Obligations to be immediately due, payable,
and performable notwithstanding any deferred or installment payments allowed by
any instrument evidencing or relating to any Obligation; (c) Take possession of
any or all of the Collateral wherever it may be found, and for that purpose
Borrower hereby authorizes Coast without judicial process to enter onto any of
the Borrower's premises without hindrance to search for, take possession of,
keep, store, or remove any of the Collateral and remain on such premises or
cause a custodian to remain thereon in exclusive control thereof without charge
for so long as Coast deems necessary in order to complete the enforcement of its
rights under this Loan Agreement or any Collateral Agreement, or any other
agreement; provided, however, that should Coast seek to take possession of any
or all of the Collateral by Court process, Borrower hereby irrevocably waives:
(i) any bond and any surety or security relating thereto required by any
statute, court rule or otherwise as an incident to such possession; (ii) any
demand for possession prior to the commencement of any suit or action to recover
possession thereof; and (iii) any requirement that Coast retain possession of
and not dispose of any such Collateral until after trial or final judgment; (d)
Require Borrower to assemble any or all of the Collateral and make it available
to Coast at a place or places to be designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to such locations
as Coast may deem advisable; (e) Complete processing, manufacturing or repair of
all or any portion of the Collateral prior to a disposition thereof and, for
such purpose and for the purpose of removal, Coast shall have the right to use
Borrower's premises, vehicles, hoists, lifts, cranes, equipment and all other
property without charge. Without limiting any security interest granted Coast in
other provisions of this Loan Agreement or in any Collateral Agreement or other
agreement, for the purpose of completing manufacturing, processing or repair of
Collateral and the disposition thereof, Coast is hereby granted a security
interest in, and Coast and any purchaser from Coast may use without charge, all
of the Borrower's plant, machinery, equipment, labels, licenses, processes,
patents, patent applications, copyrights, names, trade names, trademarks, trade
secrets, logos, advertising material and all other assets, and may also utilize
all of Borrower's rights under any license or franchise agreement; (f) Sell,
ship, reclaim, lease or otherwise dispose of all or any portion of the
Collateral in its condition at the time Coast obtains possession or after
further manufacturing, processing or repair, at any one or more public and/or
private sales (including execution sales), in lots or in bulk, for cash,
exchange or other property or on credit and to adjourn any such sale from time
to time without notice other than oral announcement at the time scheduled for
sale. Coast shall have the right to conduct such disposition on Borrower's
premises without charge for such time or times as Coast deems fit, or on Coast's
premises, or elsewhere and the Collateral need not be located at the place of
disposition. Coast may directly or through any affiliated company purchase or
lease any Collateral at any such public disposition and if permissible under
applicable law, at any private disposition. Any sale or other disposition of
Collateral shall not relieve Borrower of any liability Borrower may have if any
Collateral is defective as to title or physical condition or otherwise at the
time of sale; (g) Demand payment of, and collect any Accounts and general
intangibles comprising part or all of the Collateral and, in connection
therewith, Borrower irrevocably authorizes Coast to endorse or sign Borrower's
name on all collections, receipts, instruments and other documents, to take
possession of and open mail addressed to Borrower and remove therefrom payments
made with respect to any item of the Collateral or proceeds thereof, and, in
Coast's sole discretion, to grant extensions of time to pay, compromise claims
and settle Accounts and the like for less than face value; (h) Demand and
receive possession of any of Borrower's federal and state income tax returns and
the Records utilized in the preparation thereof or referring thereto. All
attorneys' fees, expenses, costs, liabilities and obligations incurred by Coast
with respect to the foregoing shall be added to and become part of the
Obligations, shall be due on demand, and shall bear interest at a rate equal to
the highest interest rate applicable to any of the Obligations. Without limiting
any of Coast's rights and remedies, from and after the occurrence of any Event
of Default, the interest rate applicable to the Obligations shall be increased
by an additional three percent per annum.
6.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and Coast
agree that the following conduct by Coast with respect to any disposition of
Collateral shall conclusively be deemed commercially reasonable (but other
conduct by Coast, including, but not limited to, Coast's use in its sole
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 as to which on no later than the tenth 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 tenth
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, at any
place designated by Coast, with or without the Collateral being present, and
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 (collectively
"Receivables"), it shall be commercially reasonable for Coast to direct any
prospective acquirer thereof to ascertain directly from Borrower any and all
information (and Coast shall not be required to maintain records of, or answer
any inquiries) concerning the Receivables offered for disposition, including,
but not limited to, the terms of payment, aging and delinquency, if any, of the
Receivables, the financial condition of any obligor or account debtor thereon or
guarantor thereof, any collateral therefor and the condition and location of the
goods, if any, that are the subject of any of the Receivables.
6.4 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
disposition of the Collateral shall be applied by Coast first to the costs,
expenses, liabilities, obligations and attorneys' fees incurred by Coast in the
exercise of its rights under this Loan Agreement and any Collateral Agreement,
second to the interest due upon any of the Obligations and third
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<PAGE> 9
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
to the principal of the Obligations in any order determined by Coast in its sole
discretion. The surplus, if any, shall be paid to Borrower; if any deficiency
shall arise, Borrower shall remain liable to Coast therefor. If, as a result of
the disposition of any of the Collateral, Coast directly or indirectly enters
into a credit transaction with any third party, Coast shall have the option,
exercisable at any time, in its sole discretion, of either reducing the
Obligations by the principal amount of such credit transaction or deferring the
reduction thereof until the actual receipt by Coast of cash therefor from such
third party.
6.5 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth in
this Loan Agreement and any Collateral Agreement, Coast shall have all the other
rights and remedies accorded a secured party under the California Uniform
Commercial Code and under any and all other applicable laws and in any other
instrument or agreement now or hereafter entered into between Coast and Borrower
and all of such rights and remedies are cumulative and none is exclusive.
Exercise or partial exercise by Coast of one or more of its rights or remedies
shall not be deemed an election, nor bar Coast from subsequent exercise or
partial exercise of any other rights or remedies. The failure or delay of Coast
to exercise any rights or remedies shall not operate as a waiver thereof, but
all rights and remedies shall continue in full force and effect until all of the
Obligations have been fully paid and performed.
7. POWER OF ATTORNEY.
Borrower grants to Coast an irrevocable power of attorney coupled with an
interest, authorizing and permitting Coast (acting through any of its employees,
attorneys or agents) at any time, at its option, but without obligation, with or
without notice to Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise*: (a) Execute on behalf of Borrower
any documents that Coast may, in its sole and absolute discretion, deem
advisable in order to perfect, maintain or improve Coast's security interest in
the Collateral or other real or personal property intended to constitute
Collateral, or in order to exercise a right of Borrower or Coast, or in order to
fully consummate all the transactions contemplated under this Loan Agreement,
any Collateral Agreement and all other present and future agreements; (b) At any
time after the occurrence of an Event of Default, to execute on behalf of
Borrower any document exercising, transferring or assigning any option to
purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any
real or personal property which is part of Coast's Collateral or in which Coast
has an interest; (c) Execute on behalf of Borrower, any invoices relating to any
Account, any draft against any Account debtor and any notice to any Account
debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien; (d) Take control in any manner of any
cash or non-cash items of payment or proceeds of Collateral; endorse the name of
Borrower upon any instruments, or documents, evidence of payment or Collateral
that may come into Coast's possession; (e) Upon the occurrence of any Event of
Default, to receive and open all mail addressed to Borrower; and to notify the
Post Office authorities to change the address for the delivery of mail addressed
to Borrower to such other address as Coast may designate, including, but not
limited to, Coast's own address; Coast shall turn over to Borrower all of such
mail not relating to the Collateral; (f) Endorse all checks and other forms of
remittances received by Coast "Pay to the Order of Coast Business Credit
Corporation," or in such other manner as Coast may designate; (g) Pay, contest
or settle any lien, charge, encumbrance, security interest and adverse claim In
or to any of the Collateral, or any judgment based thereon, or otherwise take
any action to terminate or discharge the same; (h) Grant extensions of time to
pay, compromise claims and settle Accounts and the like for less than face value
and execute all releases and other documents in connection therewith; (i) Pay
any sums required on account of Borrower's taxes or to secure the release of any
liens therefor, or both; (j) Settle and adjust, and give releases of, any
insurance claim that relates to any of the Collateral and obtain payment
therefor; (k) Instruct any third party having custody or control of any books or
records belonging to, or relating to, Borrower to give Coast the same rights of
access and other rights with respect thereto as Coast has under Paragraph 4.3 of
this Loan Agreement; and (l) Take any action or pay any sum required of Borrower
pursuant to this Loan Agreement, any Collateral Agreement and any other present
or future agreements. Any and all sums paid and any and all costs, expenses,
liabilities, obligations and attorneys' fees incurred by Coast with respect to
the foregoing shall be added to and become part of the Obligations, shall be
payable on demand, and shall bear interest at a rate equal to the highest
interest rate applicable to any of the Obligations. In no event shall Coast's
rights under the foregoing power of attorney or any of Coast's other rights
under this Loan Agreement or any Collateral Agreement be deemed to indicate that
Coast is in control of the business, management or properties of Borrower.
*PROVIDED COAST ACTS IN A COMMERCIALLY REASONABLE MANNER
8. TERMINATION.
This Loan Agreement and all Collateral Agreement(s) shall continue in effect
until JUNE 30, 1997 (the "initial renewal date") and shall thereafter
automatically and continuously renew for successive additional terms of ONE
year(s) each unless terminated as to future transactions as hereinafter
provided. (The initial renewal date and each subsequent date on which the terms
of this Loan Agreement and the Collateral Agreement(s) automatically renew are
hereinafter referred to as "renewal dates.") This Loan Agreement and any
Collateral Agreement may be terminated, as to future transactions only, as
follows: (a) By written notice from either Coast or Borrower to the other, not
less than sixty (60) days prior to the next renewal date, in which event
termination shall be effective on the next renewal date; or (b) By Coast at any
time after the occurrence of an Event of Default, without notice, in which event
termination shall be effective immediately; or (c) By sixty (60) days' prior
written notice from Borrower to Coast, in which event, termination shall be
effective on the sixtieth day after such notice is given; or (d) By the grant by
Borrower to any third party of a lien or encumbrance on, or security interest
in, any of the Collateral *, as provided in Paragraph 3.5, in which event
termination shall be effective on the date selected by Coast pursuant to
Paragraph 3.5. On the effective date of termination, Borrower shall pay and
perform in full all Obligations, whether evidenced by installment notes or
otherwise, and whether or not all or any part of such Obligations are otherwise
then due and payable. If
-9-
<PAGE> 10
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
Borrower attempts to terminate this Loan Agreement under subparagraph (a) or (c)
above, but does not pay and perform all *** the effective date of termination,
then this Loan Agreement and all Collateral Agreement(s) shall not be terminated
and shall continue in full force and effect until the next renewal date and
shall automatically renew thereafter as provided above. If termination occurs
under subparagraph (b), (c) or (d) above, Borrower shall pay to Coast a
termination fee in an amount equal to $20,000 for each month (or portion
thereof) from the effective date of termination to the date which would have
been the next renewal date had this Loan Agreement not been terminated. Said
termination fee shall be included in the Obligations, shall be payable on the
effective date of termination, and shall bear interest at a rate equal to the
highest interest rate applicable to any of the Obligations. Notwithstanding any
termination of this Loan Agreement or any Collateral Agreement, all of Coast's
security interest in all of the Collateral and all of the terms and provisions
of this Loan Agreement and all Collateral Agreement(s) shall continue in full
force and effect until all Obligations have been paid and performed in full, and
no termination shall in any way affect or impair any right or remedy of Coast,
nor shall any such termination relieve Borrower of any Obligation to Coast until
all of the Obligations have been paid and performed in full. Without limiting
the fact that all Loans are discretionary on the part of Coast**, Coast may, in
its sole discretion, refuse to make any further Loans after termination. Upon
payment and performance in full of all the Obligations, Coast shall promptly
deliver to Borrower termination statements, request for reconveyances and such
other documents as may be required to fully terminate any of Coast's security
interests.
*OTHER THAN A PERMITTED LIEN
**TO THE EXTENT AND IN THE MANNER PROVIDED HEREIN
***MONETARY OBLIGATIONS IN FULL WITHIN FIVE DAYS AFTER
9. NOTICES.
Except as otherwise set forth herein, notices to be given hereunder shall be
in writing and shall be served either personally or by depositing the same in
the United States mail, postage prepaid, by regular first-class mail, or by
certified mail, return receipt requested, addressed to Coast or Borrower at the
addresses shown above, or at any other address as shall be designated by one
party in a written notice to the other party. Any such notice shall be deemed to
have been given upon delivery in the case of notices personally delivered to
Borrower or to an officer of Coast, or at the expiration of two (2) business
days following the deposit thereof in the United States mail, with postage
prepaid (except that any notice of disposition referred to in Paragraph 6.3
hereof that is mailed shall be deemed given at the time of deposit thereof in
the United States mail, with postage prepaid). If there is more than one
Borrower, notice to any Borrower shall constitute notice to all; if Borrower is
a corporation, notices shall be addressed to the attention of the President.
10. GENERAL WAIVERS.
The failure of Coast at any time or times hereafter to require Borrower to
strictly comply with any of the provisions of this Loan Agreement or any
Collateral Agreement or any other present or future agreement between Borrower
and Coast shall not waive or diminish any right of Coast thereafter to demand
and receive strict compliance therewith. Any waiver of any default shall not
waive or affect any other default, whether prior or subsequent thereto. None of
the provisions of this Loan Agreement or any Collateral Agreement or other
agreement now or hereafter executed by Borrower and delivered to Coast shall be
deemed to have been waived by any act or knowledge of Coast or its agents or
employees, but only by a specific written waiver signed by an officer of Coast
and delivered to Borrower. Borrower waives the benefit of all statute(s) of
limitations in any action or proceeding based upon or arising out of this Loan
Agreement or any Collateral Agreement or any other present or future instrument
or agreement between Coast and Borrower. Borrower waives any and all notices or
demands which Borrower might be entitled to receive with respect to this Loan
Agreement, any Collateral Agreement, or any other agreement by virtue of any
applicable law**. Borrower hereby waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, Account, general intangible, document or guaranty at any time held
by Coast on which Borrower is or may in any way be liable, and notice of any
action taken by Coast unless expressly required by this Loan Agreement or any
Collateral Agreement. Borrower hereby ratifies and confirms whatever Coast may
do pursuant to this Loan Agreement and any Collateral Agreement and agrees that
Coast shall not be liable for (a) the safekeeping of the Collateral or any loss
or damage thereto, or diminution in value thereof, from any cause whatsoever *,
or (b) any act or omission of any carrier, warehouseman, bailee, forwarding
agent or other person, or (c) any act of commission or any omission by Coast or
its officers, employees, agents, or attorneys, or any of its or their errors of
judgment or mistakes of fact or law***.
*(EXCEPT THAT COAST SHALL EXERCISE REASONABLE CARE TO ASSURE THE SAFE CUSTODY
OF COLLATERAL IN ITS POSSESSION)
**EXCEPT AS EXPRESSLY SET FORTH HEREIN OR IN SUCH OTHER AGREEMENT
***OTHER THAN COAST'S GROSS NEGLIGENCE OR WILLFUL MISCONDUCT
11. ATTACHMENT WAIVERS.
To the extent that Coast, in its sole and absolute discretion, determines,
prior to the disposition of all of the Collateral, that the amount to be
realized by Coast from the disposition of all of the Collateral may be less than
the amount of the Obligations, and to the full extent of any such anticipated
deficiency, Borrower waives the benefit of Section 483.010 (b) of the California
Code of Civil Procedure and of any and all other statutes requiring Coast to
first resort to and exhaust all of the Collateral before seeking or obtaining
any attachment remedy against Borrower, and Borrower expressly agrees that, to
the extent of such anticipated deficiency, Coast shall have all of the rights of
an unsecured creditor, including, but not limited to, the right of Coast, prior
to the disposition of all of the Collateral, to obtain a temporary protective
order and writ of attachment or other available remedy. Coast shall have no
liability to Borrower if the actual deficiency realized by Coast is less than
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<PAGE> 11
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
the anticipated deficiency on the basis of which Coast obtained a temporary
protective order or writ of attachment. In the event Coast should seek a
temporary protective order, or writ of attachment, or both, Borrower hereby
irrevocably waives any bond and any surety or security relating thereto required
by any statute, court rule or otherwise as an incident or condition precedent to
the issuance of any temporary protective order or writ of attachment.
12. ATTORNEYS' FEES AND COSTS.
Borrower shall forthwith pay to Coast the amount of all * attorneys' fees and
all filing, recording, publication, search and other costs incurred by Coast
pursuant to this Loan Agreement, any Collateral Agreement or any other present
or future agreement or in connection with any transaction contemplated hereby,
or with respect to the Collateral or the defense or enforcement of its interests
(whether or not Coast files a lawsuit against Borrower). Without limiting the
generality of the foregoing, Borrower shall, with respect to each and all of the
foregoing, pay all attorneys' fees and costs Coast incurs in order to: obtain
legal advice; enforce, or seek to enforce, any of its rights; prosecute actions
against, or defend actions by, Account debtors; commence, intervene in, respond
to, or defend any action or proceeding; initiate any complaint to be relieved of
the effect of the automatic stay in bankruptcy in order to commence or continue
any foreclosure or other disposition of the Collateral or to commence, defend or
continue any action or other proceeding in or out of bankruptcy against Borrower
or relating to the Collateral; file or prosecute a claim or right in any action
or proceeding, including, but not limited to, any probate claim, bankruptcy
claim, third-party claim, secured creditor claim or reclamation complaint;
examine, audit, count, test, copy, or otherwise inspect any of the Collateral or
any of Borrower's books and records; or protect, obtain possession of, lease,
dispose of, or otherwise enforce any security interest in or lien on, the
Collateral or represent Coast in any litigation with respect to Borrower's
affairs. Without limiting the generality of the foregoing, Borrower shall
reimburse Coast for its out of pocket costs in connection with Coast's regular
quarterly audits of Borrower and shall Borrower shall pay Coast an audit fee of
$1,250 for each such quarterly audit. If either Coast or Borrower files any
lawsuit against the other predicated on a breach of this Loan Agreement or any
Collateral Agreement, the prevailing party in such action shall be entitled to
recover its costs and attorneys' fees, including, but not limited to, attorneys'
fees and costs incurred in the enforcement of, execution upon or defense of any
order, decree, award or judgment. All attorneys' fees and costs to which Coast
may be entitled pursuant to this Paragraph shall immediately become part of
Borrower's Obligations, shall be due on demand, and shall bear interest at a
rate equal to the highest interest rate applicable to any of the Obligations.
*REASONABLE
13. DESTRUCTION OF DEBTOR'S DOCUMENTS; LIMITATION OF ACTIONS.
Any documents, schedules, invoices or other papers delivered to Coast may be
destroyed or otherwise disposed of by Coast six (6) months after they are
delivered to Coast unless Borrower makes written request therefor and pays all
expenses attendant to their return, in which event, Coast shall return same when
Coast's actual or anticipated need therefor has terminated. Borrower agrees that
any claim or cause of action by Borrower against Coast, its directors, officers,
employees, agents, accountants or attorneys, based upon, arising from, or
relating to this Loan Agreement, or any Collateral 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, occurred, done, omitted or suffered to be done by Coast, its
directors, officers, employees, agents, accountants or attorneys, relating in
any way to Borrower, 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 six (6) months after * the first act,
occurrence or omission upon which such claim or cause of action, or any part
thereof, is based, and the service of a summons and complaint on an officer of
Coast, or on any other person authorized to accept service on behalf of Coast,
within thirty (30) days thereafter. Borrower agrees that such six-month period
of time is a reasonable and sufficient time for Borrower to investigate and act
upon any such claim or cause of action. The six-month period provided herein
shall not be waived, tolled, or extended except by the written consent of Coast
in its sole and absolute discretion. This provision shall survive any
termination, however arising, of this Loan Agreement, any Collateral Agreement,
and any other present or future agreement.
*BORROWER LEARNS OF, OR IN THE EXERCISE OF REASONABLE DILIGENCE SHOULD HAVE
LEARNED OF,
14. GENERAL PROVISIONS.
14.1 SEVERABILITY. Should any provision, clause or condition of this Loan
Agreement or any Collateral Agreement be held by any court of competent
jurisdiction to be void or unenforceable, such defect shall not affect the
remainder of this Loan Agreement or any Collateral Agreement.
14.2 INTEGRATION. This Loan Agreement and any Collateral Agreements and such
other agreements, documents and instruments as may be executed in connection
herewith shall be construed as the entire and complete agreement between
Borrower and Coast and shall supersede all prior negotiations, all of which are
merged and integrated herein.
14.3 AMENDMENT. The terms and provisions of this Loan Agreement and any
Collateral Agreement may not be waived or amended except in a writing executed
by Borrower and a duly authorized officer of Coast.
14.4 TIME OF ESSENCE. Time is of the essence in the performance by Borrower of
each and every obligation under this Loan Agreement and any Collateral
Agreement.
14.5 BENEFIT OF AGREEMENT. The provisions of this Loan Agreement and any
Collateral Agreement shall be binding upon and inure to the benefit of the
respective successors, assigns, heirs, beneficiaries and representatives of the
parties hereto; provided, however, that Borrower may not assign or transfer any
of its rights under this Loan Agreement or any Collateral Agreement without the
prior written consent of Coast, and any prohibited assignment shall be void. No
consent by Coast to any
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<PAGE> 12
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
assignment shall relieve Borrower or any guarantor from its liability for the
Obligations.
14.6 JOINT AND SEVERAL LIABILITY. The liability of each Borrower shall be
joint and several and the compromise of any claim with, or the release of, any
Borrower shall not constitute a compromise with, or a release of, any other
Borrower.
14.7 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are used herein for
convenience only. Borrower acknowledges that the same may not describe
completely the subject matter of the applicable paragraph, and the same shall
not be used in any manner to construe, limit, define or interpret any term or
provision hereof. This Loan Agreement and the Collateral Agreements have been
fully reviewed and negotiated between the parties and no uncertainty or
ambiguity in any term or provision of this Loan Agreement or any Collateral
Agreement shall be construed strictly against Coast or Borrower under any rule
of construction or otherwise. *
*REFERENCES IN THIS AGREEMENT TO "FOLLOWING THE OCCURRENCE OF AN EVENT OF
DEFAULT" SHALL BE DEEMED TO MEAN "FOLLOWING THE OCCURRENCE AND DURING THE
CONTINUANCE OF AN EVENT OF DEFAULT"
14.8 GOVERNING LAW; JURISDICTION; VENUE. This Loan Agreement and any
Collateral Agreement and all acts and transactions hereunder and all rights and
obligations of Coast and Borrower shall be governed by and in accordance with
the laws of the State of California. Any undefined term used in this Loan
Agreement or in any Collateral Agreement that is defined in the California
Uniform Commercial Code shall have the meaning therein assigned to that term. As
a material part of the consideration to Coast to enter into this Agreement,
Borrower (i) agrees that all actions and proceedings relating directly or
indirectly hereto shall, at Coast's option, be litigated in courts located
within California, and that the exclusive venue therefor shall be Los Angeles
County; (ii) consents to the jurisdiction and venue of any such court and
consents to service of process in any such action or proceeding by personal
delivery or any other method permitted by law; and (iii) waives any and all
rights Borrower may have to object to the jurisdiction of any such court, or to
transfer or change the venue of any such action or proceeding.
14.9 EXECUTION BY COAST. This Loan Agreement and any Collateral Agreement
which has been executed and delivered by Borrower to Coast shall not become
effective unless and until executed by a duly authorized officer of Coast.
14.10 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS LOAN AGREEMENT OR ANY COLLATERAL AGREEMENT OR
ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER,
OR ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
COAST OR BORROWER.
14.11 CONFIDENTIALITY. COAST COVENANTS AND AGREES, ON A CONTINUING BASIS, TO
USE REASONABLE EFFORTS TO MAINTAIN THE CONFIDENTIALITY OF AND NOT TO DISCLOSE TO
ANY PERSON OTHER THAN ITS OFFICERS, DIRECTORS, ATTORNEYS AND ACCOUNTANTS AND
AFFILIATES, AND SUCH OTHER PERSONS TO WHOM COAST SHALL AT ANY TIME BE REQUIRED
TO MAKE SUCH DISCLOSURE IN ACCORDANCE WITH APPLICABLE LAW, ANY AND ALL
PROPRIETARY, TRADE SECRET OR CONFIDENTIAL INFORMATION PROVIDED TO OR RECEIVED BY
COAST FROM OR ON ACCOUNT OF BORROWER OR ANY AFFILIATE OF BORROWER, INCLUDING
BUSINESS PLANS AND FORECASTS, NON-PUBLIC FINANCIAL INFORMATION, CONFIDENTIAL OR
SECRET PROCESSES, FORMULAE, DEVICES OR CONTRACTUAL INFORMATION, CUSTOMER LISTS,
EMPLOYEE RELATION MATTERS, AND ANY OTHER INFORMATION THE DISCLOSURE OF WHICH
COULD REASONABLY BE EXPECTED TO HAVE A MATERIAL ADVERSE IMPACT ON THE BUSINESS,
FINANCES OR OPERATIONS OF BORROWER OR ITS AFFILIATES, PROVIDED, HOWEVER, THE
FOREGOING PROVISIONS SHALL NOT BE EFFECTIVE REGARDING THE DISPOSITION OF
COLLATERAL AFTER AN EVENT OF DEFAULT.
14.12 FINANCIAL COVENANTS: Borrower shall comply with all of the following
covenants. Compliance shall be determined as of the end of each fiscal quarter,
except as otherwise specifically provided below:
TANGIBLE NET WORTH: Borrower shall maintain a tangible net worth of not
less than $40,000,000.
PROFITABILITY: Borrower shall not incur a loss (after taxes) for any two
consecutive calendar quarters or for any fiscal year.
DEFINITIONS:
"Tangible net worth" means the excess of total assets over total
liabilities, determined in accordance with generally accepted accounting
principles, excluding however all assets which would be classified as intangible
assets under generally accepted accounting principles, including without
limitation goodwill, licenses, patents, trademarks, trade names, copyrights, and
franchises.
SUBORDINATED DEBT: "Liabilities" for purposes of the foregoing covenants
do not include indebtedness which is subordinated to the indebtedness to Coast
under a subordination agreement in form specified by Coast or by language in the
instrument evidencing the indebtedness which is acceptable to Coast.
BORROWER:
DIGITAL MICROWAVE CORPORATION
BY
-------------------------------------------------
/S/ VICE PRESIDENT AND CHIEF FINANCIAL OFFICER
BY
-------------------------------------------------
/S/ TREASURER AND ASSISTANT SECRETARY
COAST:
COAST BUSINESS CREDIT, A DIVISION OF SOUTHERN PACIFIC THRIFT & LOAN
ASSOCIATION
-12-
<PAGE> 13
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
BY
--------------------------------
TITLE
------------------------------
44,536-1
-13-
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<FISCAL-YEAR-END> MAR-31-1997
<PERIOD-START> APR-1-1996
<PERIOD-END> JUN-30-1996
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</TABLE>
