U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
(Mark One)
X Annual report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [Fee Required]
For the fiscal year ended December 31, 1997.
Transition report under Section 13 or 15(d) of the Securities
Exchange Act of 1934 [No Fee Required]
For the transition period to .
Commission File No. 0-18303
LEC TECHNOLOGIES, INC. (formerly known as Leasing Edge Corporation)
(Name of small business issuer in its charter)
Delaware No. 11-2990598
(State or other jurisdiction of (I.R.S. Employer Identifi-
incorporation or organization) cation No.)
6540 South Pecos Road, Suite 103, Las Vegas NV 89120
(Address of principal executive offices) (Zip Code)
Issuer's telephone number (702) 454-7900
(Including area code)
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, Par Value $0.01 Per Share
Series A Convertible Preferred Stock
Common Stock Purchase Warrants
Class C Common Stock Purchase Warrants
Class D Common Stock Purchase Warrants
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or
for such shorter period that the registrant was required to file such
reports), and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No .
Check if there is no disclosure in this form of delinquent filers in
response to Item 405 of Regulation S-B, and if no disclosure will be
contained, to the best of the registrant's knowledge, in definitive
proxy or information statements incorporated by reference in Part III of
this Form 10-KSB or any amendment to this Form 10-KSB. [X]
State issuer's revenues for its most recent fiscal year: $30,714,624
State the aggregate market value of the voting stock held by non-
affilates computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, as of a
specified date within the past 60 days: As of February 27, 1998, the
the approximate market value of the common stock (based upon the NASDAQ
closing price of $0.75 of stated shares on that date) held by non-
affiliates was $3,225,614.
State the number of shares outstanding of each of the issuer's classes
of common stock, as of the latest practicable date: As of February 27,
1998, the issuer had 4,704,069 shares of common stock, par value $0.01
per share, outstanding.
Documents incorporated by reference: None.
Transitional Small Business Disclosure Format: Yes[ ] No[X]
AMENDMENT NO. 1
THE REGISTRANT HEREBY AMENDS ITS ANNUAL REPORT ON FORM 10-KSB FOR THE
YEAR ENDED DECEMBER 31, 1997 TO AMEND AND RESTATE ITEM 13 IN ITS
ENTIRETY IN ORDER TO ADD ELECTRONIC COPIES OF CERTAIN EXHIBITS
PREVIOUSLY FILED IN PAPER PURSUANT TO A TEMPORARY HARDSHIP EXEMPTION
LEC TECHNOLOGIES INC. AND SUBSIDIARIES
1997 ANNUAL REPORT ON FORM 10-KSB
TABLE OF CONTENTS
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PAGE
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PART I
Item 1. DESCRIPTION OF BUSINESS 2
Item 2. DESCRIPTION OF PROPERTY 8
Item 3. LEGAL PROCEEDINGS 8
Item 4. SUBMISSION OF MATTERS TO A VOTE OF
SECURITY HOLDERS 9
PART II
Item 5. MARKET FOR COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS 9
Item 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR
PLAN OF OPERATION 10
Item 7. CONSOLIDATED FINANCIAL STATEMENTS 15
Item 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ON ACCOUNTING AND FINANCIAL DISCLOSURE 42
PART III
Item 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
CONTROL PERSONS; COMPLIANCE WITH SECTION
16(a) OF THE EXCHANGE ACT 43
Item 10. EXECUTIVE COMPENSATION 44
Item 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT 45
Item 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. EXHIBITS AND REPORTS ON FORM 8-K 46
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PART I
ITEM 1: DESCRIPTION OF BUSINESS
General
LEC Technologies, Inc. and subsidiaries (collectively, the "Company" or
"LEC") is a technology services company, providing solutions that help
organizations reduce technology cost and risk, primarily through the
leasing, distribution and remarketing of high technology equipment.
Such equipment generally consists of midrange computer systems,
telecommunications systems, system peripherals (terminals, printers,
communications controllers, etc.) and point-of-sale systems.
As an independent organization, the Company provides customers with
technical, financial and product alternatives, irrespective of hardware
platform or manufacturer. In addition to working with its customers to
develop strategies governing when to acquire equipment, upgrade existing
equipment and order new equipment to take advantage of current
technology, LEC also acts as an outlet for the equipment being
displaced.
LEC's business is diversified by customer, customer type, equipment
type, equipment manufacturer, and geographic location of its customers
and subsidiaries. The Company's customers include "Fortune 1000"
corporations or companies of similar size as well as smaller
corporations. A significant portion of the Company's business is with
long-term, repeat customers. Three customers of the Company, Tiffany &
Co., Bed, Bath & Beyond and The Hertz Corporation, respectively,
accounted for approximately 15.0%, 9.2%, 3.7%, and 25.0%, 12.8% and 7.4%
of consolidated revenues for the years ended December 31, 1997 and 1996.
However, the Company does not believe its businesses are dependent on
any single customer or on any single source for the purchasing, selling
or leasing of equipment.
The Company's services are organized into three groups of related
businesses, and are provided generally through separate business units,
although there is a significant amount of interrelated activities. The
three business groups are as follows:
Leasing Services: Leasing, remarketing, financial engineering,
consulting and third-party maintenance and systems integration
services for midrange systems, telecommunications equipment, point-
of-sale systems and system peripherals. The Company conducts its
leasing services business under the trade name Leasing Edge
Corporation.
Distribution Services: Sale of terminals, printers, communications
controllers, supplies, technical consulting and third-party
maintenance services. Business units comprising distribution
services are Superior Computer Systems, Inc. ("SCS") and Pacific
Mountain Computer Products, Inc. ("PMCPI"), wholly-owned
subsidiaries of LEC Technologies, Inc.
Remarketing Services: Remarketing of previously leased equipment,
displaced equipment, and used equipment purchased from other
lessors or brokers. This unit also has consignment relationships
with certain customers to assist such organizations in the sale of
their used equipment. Business units comprising remarketing
services include Leasing Edge Corporation, SCS, PMCPI and Atlantic
Digital International ("ADI"), a wholly-owned subsidiary of LEC
Technologies, Inc., which specializes in the acquisition and
remarketing of used computer equipment on both a domestic and
international basis.
The Company's leasing operations are conducted primarily through its
principal office in Las Vegas, Nevada and its distribution and
remarketing operations are conducted primarily through its subsidiaries'
offices located in Minneapolis, Minnesota, Woodland Hills, California
and Atlanta, Georgia.
Each business unit is directed by its own management team and has its
own sales and operations support personnel. Each management team
reports directly to the Office of the President, which is responsible
for overall corporate control and coordination, as well as strategic
planning. Coordination of the business units is also accomplished
through shared services, such as legal, risk management and accounting.
The business units maintain their own direct marketing force to manage
their customer base and to market their own as well as other units'
services. In its business operations, the Company attempts to cross-
sell services where and when appropriate.
The Company was founded in 1980 under the name TJ Computer Services,
Inc. ("TJCS"). In 1989, all of the outstanding common stock of TJCS was
acquired by Harrison Development, Inc., an inactive public corporation
organized in Colorado, which then changed its name to TJ Systems
Corporation. In October 1991, the Company reincorporated in the State
of Delaware and in June 1995 changed its name to Leasing Edge
Corporation. In March 1997, the Company's shareholders approved a
change in the Company's name to LEC Technologies, Inc. to more
accurately reflect the evolving nature of the Company's business. The
executive offices of the Company are located at 6540 S. Pecos Road,
Suite 103, Las Vegas, Nevada, 89120, and its telephone number is (702)
454-7900.
Forward-Looking Statements
Statements about the Company's expectations, including future revenues,
earnings, its ability to compete effectively and to maintain market
share, to adapt to changes in its customers' technology requirements,
and all other statements in this Report on Form 10-KSB, including
Management's Discussion and Analysis or Plan of Operation and Note 11 of
Notes to Consolidated Financial Statements "Management's Plans", and
other Company communications other than historical facts, are "forward-
looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Act of 1934, and the
Company intends that such forward-looking statements be subject to the
safe harbors created thereby. Since these statements involve risks and
uncertainties and are subject to change at any time, the Company's
actual results could differ materially from expected results. Reference
is made to "Safe Harbor Statement under the Private Securities
Litigation Reform Act of 1995" in Item 6 of this Report on Form 10-KSB.
Leasing Services
Management estimates that the world-wide market for high technology
equipment approximates $400 billion annually and that approximately ten
percent represents leasing activities. The computer equipment leasing
industry consists of many products and services loosely divided into
several major submarkets. These submarkets include mainframe and
midrange computer equipment, microcomputer sales and network design,
local area networks, point-of-sale equipment, disaster recovery services
and other engineering and technical support services. The Company
believes that the size of the computer equipment leasing market reflects
the rapid technological improvements in and the development of new
equipment as well as the advantages that leasing offers over equipment
purchasing, including off-balance sheet financing, lower monthly
payments and cash requirements, protection against technological
obsolescence and ease of disposal of equipment at the end of the lease
term.
Historically, the industry was dominated by the manufacturers of
mainframe computer equipment and their captive or related leasing
companies. However, the introduction of new and more powerful
microcomputers offering increased capability at reduced prices has led
to an increase in the demand for midrange and microcomputer hardware,
software, accessories and related services. Business users are
employing, at an increasing rate, midrange and microcomputer networks to
perform applications previously requiring a mainframe computer. This
increase in technological capability and the relatively high cost of
mainframe systems has resulted in a fundamental shift in the demand for
information systems and services, creating new opportunities for more
efficient, flexible and competitive lessors and distributors of midrange
and microcomputers and related equipment.
The Company's structured lease transactions provide customers with a
full range of new and used data processing equipment, including midrange
central processing units, peripherals, point-of-sale systems and
telecommunications equipment produced by major manufacturers. By
emphasizing a full range of products and manufacturers and by
maintaining a balanced client base, the Company maximizes its leasing
opportunities while providing stability to its lease portfolio. Through
its leasing transactions, the Company serves as an intermediary between
end users of high technology equipment and sources of financing for
equipment purchases.
The Company purchases new equipment directly from the manufacturer and
obtains used equipment from its customer base and from the nationwide
secondary market for used data processing and telecommunications
equipment. Management's experience in the secondary market, coupled
with the Company's portfolio of equipment under lease, enables the
Company to tailor systems to customer's specific needs by combining new
and used equipment configurations at competitive prices. Similarly, the
Company is often able to facilitate new lease transactions by either
buying, remarketing or trading in a prospective customer's existing
equipment.
A significant amount of the equipment leased by the Company consists of
equipment manufactured by IBM, including computer systems, such as
midrange central processing units, and computer peripherals, such as
disk and tape drives, control units, printers, and work stations. The
Company considers the leasing of IBM equipment to be generally
advantageous because of the large national IBM customer base and
equipment aftermarket, IBM's policy of supporting its users with
software and maintenance services, and IBM's reputation in the computer
equipment marketplace.
In a typical leasing transaction, the Company cultivates a customer
relationship, develops an understanding of the customer's requirements
and then delivers what the customer needs in the form of an advantageous
lease financing structure. The terms and conditions of the lease are
negotiated and, if accepted by the customer, a master lease agreement is
executed and the equipment to be leased is secured either from a
manufacturer, reseller or from the Company's inventory. The Company
arranges nonrecourse financing secured by the equipment by selling the
future lease rentals on a discounted basis. The discount rate reflects
the credit standing of the lessee, the length of the lease and the total
amount financed. The Company typically receives between 85% and 95% of
its equipment cost through nonrecourse financing. The difference
between the cost of the equipment and the amount received through the
nonrecourse financing is referred to as the Company's "equity position"
in the equipment. The Company usually finances its equity position in
a lease through internally generated funds and recourse bank borrowings.
The Company retains ownership of the equipment during the term of the
lease. Upon expiration of the lease term, the Company seeks to maximize
the realization of the residual value of the leased equipment through
its remarketing activities on either a wholesale or retail basis.
Equipment lease terms generally range from monthly to five years, with
data processing and telecommunications equipment leases typically
spanning two to four years. Additions to the lease portfolio frequently
result from a competitive bidding process. Substantially all leases are
noncancelable, require the lessee to protect the equipment, at their
cost, with the manufacturer's maintenance contract and place the risk
of loss or damage to the equipment on the lessee.
The Company believes it provides its clients with superior customer
service and creative solutions for their data processing,
telecommunications and technical support needs. The Company develops
close partnership relationships with its customers; by listening
carefully, the Company's management and employees are better able to
understand the Company's customers' complex data processing requirements
and deliver quick response, high impact and competitively priced
solutions appropriate for each environment and circumstance. Close
client relationships and the expertise and experience of management
allow the Company to assist customers in their leasing decisions
regarding data processing or other technological equipment. The Company
frequently participates, early on, in a customer's decision-making
process regarding the type of equipment to acquire to meet its needs and
also helps in developing a customized leasing structure. The Company
believes that this strategy leads to customer satisfaction, encourages
a loyal customer base and contributes to repeat business.
The Company offers to customers a full range of new and used computer
and telecommunications equipment manufactured by a variety of major
manufacturers, including IBM, Unisys, AT&T, Sun Microsystems, DEC and
Tandem. Over the last few years, the Company has strategically
diversified its lease portfolio to include equipment such as computer
storage hardware, point-of-sale and telecommunications equipment; the
Company believes these to be less susceptible to rapid technological
obsolescence than large computer central processing units. The Company
further believes that an expanded equipment base mitigates the risks of
obsolescence associated with a specific type of equipment, as well as
reducing the Company's reliance on any one particular manufacturer.
The Company's leasing customers are generally creditworthy corporations
and other organizations that have significant data processing and tele-
communication needs. These financial profiles allow the Company to
structure lower rate, long-term nonrecourse financing transactions with
various financial institutions on competitive terms. Moreover, non-
recourse financing limits the Company's financial exposure on lease
transactions, thereby further enabling the Company to expand its lease
portfolio and customer base.
Distribution Services
Management estimates that the distribution market for the products
offered by its distribution subsidiaries, SCS and PMCPI, is
approximately $225 million annually. The principal products offered by
SCS and PMCPI are midrange peripheral equipment, including TWINAX and
COAX terminals, ASCII terminals, desktop and network printers, emulation
boards, remote controllers and network adapters. In addition to
equipment sales, the Company's distribution subsidiaries provide
customers with technical consulting and third-party maintenance
services.
Approximately 70 percent of the distribution subsidiaries' revenues
related to new equipment are derived from sales to resellers and
approximately 30 percent represents direct sales to end users. Both SCS
and PMCPI secure their end-user customers through cold calls, referrals,
trade journal advertising and the cross-selling of the Company's leasing
customers. Reseller customers are primarily generated through a nation-
wide on-line system and direct advertising via facsimile machine.
Both SCS and PMCPI are IBM Business Partners and Authorized
Distributors; PMCPI also has contractual relationships with Lexmark
Printer Company, IDEAssociates, Perle Systems, DataSouth Corporation,
Hewlett Packard Corporation and BOS. SCS and PMCPI are highly dependent
on their suppliers, the manufacturers. Most manufacturers extend terms
of net 30 days or provide an inventory line of credit for purposes of
ordering equipment. Any event of default on any credit facility offered
by a manufacturer could materially and adversely affect the Company's
ability to acquire equipment for resale.
In May of 1997, SCS and IBM Printing Systems Company ("PSC") entered
into a letter agreement whereby SCS agreed to manage PSC's Try-Buy
Program (the "Try-Buy Program"). The Try-Buy Program allows qualified
prospective purchasers of certain PSC printers to test such printers for
a sixty-day trial period. At the end of such period, the user may
return the printer(s) to SCS or purchase the trial unit(s). In the
event of a return, SCS may sell the unit "as is" to a different customer
or refurbish the unit for future use under the Try-Buy Program. The
Company believes that PSC's selection of SCS as the Try-Buy Program
manager demonstrates PSC's confidence in SCS' ability to deliver PSC's
products on a timely basis as well as SCS' technical expertise in
addressing customer inquiries during the trial period.
Remarketing Services
The Company's remarketing services consist of the remarketing of
previously leased equipment, displaced equipment, and used equipment
purchased from other lessors and brokers. Each of the Company's
business units (Leasing Edge Corporation, SCS, PMCPI and ADI) engage in
remarketing activities primarily related to their respective businesses,
although specific sales often result from coordinated efforts. In
addition to the remarketing of IBM peripheral equipment, SCS also has
consignment relationships with certain customers to assist such
organizations in the disposal of their displaced equipment. ADI cur-
rently specializes in the acquisition and remarketing of Digital
Equipment Corporation equipment on both a domestic and an international
basis. The Company intends to expand ADI's product offering in 1998 to
include equipment manufactured by Sun Microsystems, IBM and Hewlett
Packard.
Competition
The Company competes as a lessor and as a dealer of new and used
computer and selected other high technology equipment with different
firms, many of which are larger and better known than the Company and
which possess substantially greater financial resources than that of the
Company. While its competitive methodologies will vary by business
unit, in general, the Company competes mainly on the basis of terms
offered in its transactions, its quick response and reliability in
meeting its commitments, its manufacturers' independence, its long-term
relationships with its customers and its ability to develop and offer
alternative solutions and options to high technology equipment users.
The Company's competition with respect to leasing services includes
equipment manufacturers such as IBM, AT&T, DEC and Amdahl, other
equipment dealers, brokers and leasing companies (including captive or
related leasing companies of IBM and AT&T) as well as financial
institutions, including branches or divisions of national, regional and
local commercial banks and other commercial lending firms. The Company
also competes with other small, independent leasing companies as well as
individuals and firms that act as leasing brokers and other
institutions. Primarily as a result of rapid technological changes,
competition has increased in the leasing industry and the number of
companies offering competitive services, such as technical consulting
and other high technology equipment leasing, has increased. Competitive
alliances have also impacted the leasing industry. Management believes
that the level of competition will continue to increase in the future.
SCS and PMCPI compete with other authorized distributors of midrange
peripherals as well as equipment manufacturers. In the IBM terminal
distribution market, SCS and PMCPI are two of the six authorized IBM
distributors. All authorized distributors receive identical discounts
for their products, so the Company and its competitors have equal
opportunity to sell such products. Many times, availability of product
in inventory is a determining factor in a sale. SCS and PMCPI compete
primarily on the basis of product knowledge, price, availability and
their long standing customer relationships.
ADI competes with numerous other used equipment brokers and dealers as
well as with the remarketing activities of lessors. ADI competes
primarily on the basis of price and relationship selling.
Other
The Company does not own any patents, trademarks, licenses or franchises
which would be considered significant to the Company's business.
The Company's business is not seasonal, however, quarter-to-quarter
results from operations can vary significantly.
The amount of backlog orders is not significant to an understanding of
the Company's business.
The Company is not required to carry significant amounts of inventory
either for delivery requirements or to assure continuous availability of
equipment related to its leasing operations. With respect to the
Company's distribution operations, product availability is often a
significant factor in generating sales.
At December 31, 1997, the Company had 48 full-time employees. None of
the Company's employees is represented by a union. The Company believes
that relations with its employees are good.
ITEM 2: DESCRIPTION OF PROPERTY
The Company leases approximately 5,250, 10,000, 7,500 and 1,100 square
feet of office and warehouse space in Las Vegas, NV, Minneapolis, MN,
Woodland Hills, CA and Atlanta, GA, respectively, under lease agreements
expiring individually through 2002. Each respective lease agreement
requires the Company to pay all costs of operations, including real
property taxes, in addition to the basic rent. All of the Company's
leased properties are in good condition.
ITEM 3: LEGAL PROCEEDINGS
There are no pending legal proceedings which require disclosure pursuant
to Item 103 of Regulation S-B.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
PART II
ITEM 5: MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock trades on the Nasdaq SmallCap tier of The
Nasdaq Stock Market under the symbol LECE. The following table sets
forth the high and low sales price quotations of the Company's common
stock for the periods indicated.
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1997 1996
Fiscal Quarter HIGH LOW HIGH LOW
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First Quarter $1.25 $0.88 $2.94 $1.56
Second Quarter $1.50 $0.63 $2.75 $1.38
Third Quarter $1.44 $0.75 $2.38 $1.69
Fourth Quarter $1.19 $0.59 $2.00 $1.00
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As of February 27, 1998 the Company had approximately 425 shareholders
of record.
The Company has not previously paid cash dividends on its common stock
and does not intend to pay such dividends for the foreseeable future.
The Company's Second Loan Modification Agreement, effective February 5,
1998, (the "Second Loan Modification Agreement") with Bank of America
National Trust and Savings Association ("Bank of America") also
restricts the payment of such dividends.
In September of 1997, the Company sold 156,250 shares of common stock at
a price of $0.80 per share to an accredited investor. The sale of such
securities was exempt from registration under the Securities Act of
1933, as amended, pursuant to Section 4(2) thereof and Regulation D
promulgated thereunder.
American Stock Transfer & Trust Company, 40 Wall Street, New York, NY
10022 is the Company's registrar and transfer agent with respect to its
common stock and preferred stock and registrar, transfer agent and
warrant agent with respect to the Company's warrants.
ITEM 6: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Overview
The Company's services are organized into three groups of related
businesses, and are provided generally through separate business units,
although there is a significant amount of interrelated activities. The
three business groups are as follows:
Leasing Services: Leasing, remarketing, financial engineering,
consulting and third-party maintenance and systems integration
services for midrange systems, telecommunications equipment, point-
of-sale systems and system peripherals. The Company conducts its
leasing services business under the trade name Leasing Edge
Corporation.
Distribution Services: Sale of terminals, printers, communications
controllers, supplies, technical consulting and third-party
maintenance services. Business units comprising distribution
services are SCS and PMCPI, wholly-owned subsidiaries of LEC
Technologies, Inc.
Remarketing Services: Remarketing of previously leased equipment,
displaced equipment, and used equipment purchased from other
lessors or brokers. This unit also has consignment relationships
with certain customers to assist such organizations in the sale of
their used equipment. Business units comprising remarketing
services include Leasing Edge Corporation, SCS, PMCPI and ADI, a
wholly-owned subsidiary of LEC Technologies, Inc., which
specializes in the acquisition and remarketing of used computer
equipment on both a domestic and international basis.
Accounting Practices
Accounting Classification of Leases: Reported earnings are
significantly impacted by the accounting classification of leases. The
Company's lease portfolio is comprised of sales-type, direct financing
and operating leases. The Company classifies each lease at inception in
accordance with Statement of Financial Accounting Standards No. 13, as
amended and interpreted. Sales-type and direct financing leases are
those leases which transfer substantially all of the costs and risks of
ownership of the equipment to the lessee. Operating leases are those
leases in which substantially all of the benefits and risks of ownership
of the equipment are retained by the lessor.
The accounting treatment and resulting impact on the financial
statements differs significantly during the term of the lease, depending
on the type of lease classification. Under sales-type leases, the
present value of the minimum lease payments calculated at the rate
implicit in the lease is recorded as revenue and the cost of the
equipment less the present value of the estimated unguaranteed residual
value is recorded as leasing costs at lease inception. Consequently, a
significant portion of the gross profit on the lease transaction is
recognized at lease inception. Under direct financing leases, the
excess of the aggregate minimum lease payments plus the estimated
unguaranteed residual over the cost of the equipment is recorded as
unearned interest income at lease inception. Such amount is then
recognized monthly over the lease term as a constant percentage of the
related asset. There are no costs and expenses related to direct
financing leases since revenue is recorded on a net basis. Under
operating leases, the monthly lease rental is recorded as revenue
ratably over the lease term. The cost of the related equipment is
recorded as leased assets and is depreciated over the lease term to the
estimated unguaranteed residual value. Regardless of the classification
of a lease transaction and the resultant accounting treatment during the
lease term, the aggregate gross profit recognized during the lease term
is identical.
Residual Values: The Company's cash flow depends to a great extent
on its ability to realize the residual value of leased equipment after
the initial term of the lease by re-leasing or selling such equipment.
The Company's financial results would be materially and adversely
affected if the residual value of the equipment could not be realized
when returned to the Company because of technological obsolescence or
for any other reason. Estimated residual values for leased equipment
vary, both in amount and as a percentage of the original equipment cost,
depending upon many factors, including the type and manufacturer of the
equipment, the Company's experience with the type of equipment and the
term of the lease. In estimating future residual values, the Company
relies on both its own experience and upon third-party estimates of
future market value where available. The Company reviews its estimated
residual values at least annually and reduces them as necessary. At the
time of expiration of a lease, the Company remarkets the equipment and
records the proceeds from the sale (in the event of a sale) or the
present value of the lease rentals (in the event of a sales-type lease)
as revenue and records the net book value of the related equipment as a
cost of sale or lease.
For a description of the Company's other accounting practices, see Note
1 of Notes to Consolidated Financial Statements. The following analysis
of the Company's financial condition and operating results should be
read in conjunction with the accompanying consolidated financial
statements including the notes thereto.
Results of Operations
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996
Revenues
Total revenues from leasing operations decreased 7.7% from $14,178,580
for the year ended December 31, 1996 to $13,085,616 for the year ended
December 31, 1997, a decrease of $1,092,964. The decrease in revenues
is primarily due to the 1996 renewal, upgrade and consolidation of
several existing operating leases into a smaller number of new leases,
three of which were accounted for as sales-type leases pursuant to SFAS
No. 13 (see Note 2 of Notes to Consolidated Financial Statements for a
description of the Company's lease accounting policies). As compared to
other lease transactions, sales-type leases result in a greater
percentage of the related revenue and expense from the transaction being
recognized at lease inception. Consequently, revenue recognized
subsequent to lease inception consists only of the finance income
element of the transaction. During 1997, two similar renewal/upgrade
transactions were consumated, which resulted in the Company recording
revenue from sales-type leases of approximately $2.1 million.
Management anticipates that total revenues from leasing operations in
1998 when compared to 1997 will reflect a similar decrease. The Company
does not expect to regularly enter into transactions of this size in the
future.
Revenue from the portfolio base of operating leases decreased 11.1% from
$9,694,905 for the year ended December 31, 1996 to $8,618,861 for the
year ended December 31, 1997, a decrease of $1,076,044. The decrease in
operating lease revenue is due primarily to a change in the mix of
leases written, principally as a result of the lease renewals referred
to previously. The Company anticipates that the majority of its 1998
lease additions will be classified as either direct financing leases or
as operating leases.
Distribution sales, representing the activity of ADI, SCS and PMCPI,
increased 150.2% from $7,038,154 for the year ended December 31, 1996 to
$17,612,586 for the year ended December 31, 1997, an increase of
$10,574,432. The increase in distribution sales was due primarily to
the acquisition of SCS on November 1, 1996 and the formation of ADI in
January of 1997. SCS' revenues for the two-month period ended December
31, 1996 were $1,478,792 as compared to revenues of $9,416,880 for the
twelve months ended December 31, 1997. SCS and PMCPI are distributors
of computer peripherals and data communications equipment.
Costs and Expenses
Total costs from leasing operations decreased 16.6% from $12,631,385 for
the year ended December 31, 1996 to $10,535,365 for the year ended
December 31, 1997, a decrease of $2,096,020. The decrease in total
costs from leasing operations was due primarily to a 1996 fourth quarter
charge of $889,000 to reduce the carrying amount of certain off-lease
equipment and the estimated unguaranteed residual values of equipment on
lease (see Note 16 of Notes to Consolidated Financial Statements) due to
changed market conditions together with a decrease in depreciation
expense on operating leases of $1,239,953. The decrease in operating
lease depreciation was consistent with the decrease in operating lease
revenue. Gross profit from leasing operations (total revenues from
leasing operations less total costs from leasing operations) increased
64.8% from $1,547,195 for the year ended December 31, 1996 to $2,550,251
for the year ended December 31, 1997, an increase of $1,003,056. Gross
margin (gross profit from leasing operations as a percentage of total
revenues from leasing operations) increased to 19.5% from 10.9% due to
the foregoing.
Leasing costs associated with the portfolio base of operating leases
decreased 18.0% from $6,881,020 for the year ended December 31, 1996 to
$5,641,067 for the year ended December 31, 1997, a decrease of
$1,239,953. The decrease in costs from this segment of the Company's
lease portfolio is due primarily to the lease renewals/upgrades
mentioned above which were accounted for as sales-type leases. Gross
profit on operating leases increased 5.8% from $2,813,885 for the year
ended December 31, 1996 to $2,977,794 for the year ended December 31,
1997, an increase of $163,909. Gross margin from operating leases
increased from 29.0% for the 1996 period to 34.5% for the 1997 period as
a result of the foregoing.
Direct sales costs (leasing costs with respect to the sale of off-lease
equipment and leases with dollar buyout options treated as sales)
increased 47.6% from $1,224,406 for the year ended December 31, 1996 to
$1,806,939 for the year ended December 31, 1997, an increase of
$582,533. This increase in direct sales costs was directly related to
a year-to-year increase in the volume of leases coming to term. Direct
sales costs decreased as a percentage of the related revenue to 96.0%
from 107.6%. The decrease in costs as a percentage of revenue is due to
residual value realization more closely matching stated values in 1997
as compared to 1996.
Distribution cost of sales increased 137.2% from $6,190,582 for the year
ended December 31, 1996 to $14,686,695 for the year ended December 31,
1997, an increase of $8,496,113. Distribution cost of sales relates to
the distribution sales of ADI, SCS and PMCPI. The increase in
distribution cost of sales is directly related to the acquisition of SCS
in November of 1996 and the formation of ADI in January of 1997. Gross
margin on distribution sales increased to 16.6% for the year ended
December 31, 1997 from 12.0% for the year ended December 31, 1996 due
primarily to an increase in the contribution margin generated from sales
of used equipment and sales of new equipment directly to end users. In
both instances, the Company is able to realize higher margins than those
realized through sales to other resellers.
Selling, general and administrative expenses increased 33.2% from
$3,416,093 for the year ended December 31, 1996 to $4,549,586 for the
year ended December 31, 1997, an increase of $1,133,493. The increase
in selling, general and administrative expenses was due primarily to the
acquisition of SCS and the formation of ADI.
Interest expense on non-lease related indebtedness increased 54.3% from
$397,656 for the year ended December 31, 1996 to $613,447 for the year
ended December 31, 1997, an increase of $215,791. The increase in
interest expense on non-lease related indebtedness was due primarily to
interest costs associated with inventory flooring arrangements at SCS
and an increase in the interest rate on the Company's outstanding
indebtedness to Bank of America from approximately 10.5% in 1996 to
approximately 12.5% in 1997 (see Liquidity and Capital Resources below
and Note 7 of Notes to Consolidated Financial Statements).
Net Income
As a result of the foregoing, the Company recorded net income of
$329,531 for the year ended December 31, 1997 as compared to a net loss
of $(1,398,316) for the year ended December 31, 1996.
Liquidity and Capital Resources
In October of 1997, PMCPI and Merrill Lynch Business Financial Services,
Inc. ("Merrill Lynch") replaced PMCPI's prior line of credit (the
"Merrill Line of Credit") with a term note in the amount of $443,848
(the "Merrill Note"). The Merrill Line of Credit was replaced by the
Merrill Note in anticipation of the Company entering into a new $1.75
million revolving line of credit facility with Finova Capital
Corporation (the "Finova Line") that would have been secured by the
inventory and accounts receivable of both PMCPI and SCS. Subsequent to
executing the Merrill Note, the Company reevaluated the terms and
conditions of the Finova Line and determined it was too costly and that
it did not sufficiently address the Company's liquidity needs.
Consequently, the Company is currently negotiating a reinstatement of
the prior line of credit with Merrill Lynch or, in the event the line of
credit is not reinstated, a term out of the remaining obligation. The
Merrill Note is guaranteed by the Company and is secured by inventory
and accounts receivable of PMCPI (collectively, the "Merrill
Collateral").
On December 1, 1997, the remaining principal balance of approximately
$394,000 outstanding under the Merrill Note plus accrued interest became
due and payable. As of March 27, 1998, PMCPI has not made the December
1, 1997 payment. Although no demand for payment has been made by
Merrill Lynch to date, PMCPI is currently in payment default under the
terms of the Merrill Note and Merrill Lynch may exercise any of the
rights and remedies available to it under the Merrill Note, the original
agreements with respect to the Merrill Line of Credit, or otherwise
available to it at law or in equity. Such rights and remedies include
demanding immediate payment from PMCPI or the Company (pursuant to the
Company Guarantee) of the amounts due under the Merrill Note and
foreclosure on the Merrill Collateral. Although the Company believes
that its current negotiations with Merrill Lynch will be successful,
there can be no assurance that the Company will be successful in its
efforts to reinstate the Merrill Line of Credit or negotiate a term out
upon terms satisfactory to the Company. In the event that Merrill Lynch
were to demand immediate payment by PMCPI or the Company of the amounts
due and payable under the Merrill Note, the financial condition and,
consequently, the operations of the Company could be materially and
adversely affected.
The Second Loan Modification Agreement governs the Company's debt
obligation due January 1, 1998 to Bank of America (the "Term Loan"). At
February 5, 1998, the amount of unpaid principal on the Term Loan was
$1,366,365 and the interest rate was 12.5%. The terms of the Second
Loan Modification Agreement require the Company to make monthly pricipal
payments of $45,546 plus interest at the prime rate plus 400 basis
points from January 15, 1998 through June 15, 1998; monthly principal
payments of $72,873 plus interest at the prime rate plus 500 basis
points from July 15, 1998 through December 15, 1998; monthly principal
payments of $109,309 plus interest at the prime rate plus 600 basis
points from January 15, 1999 through May 15, 1999; and to pay all
remaining unpaid principal, accrued and unpaid interest, and any unpaid
fees and expenses on June 15, 1999. The Term Loan is secured by all of
the personal property, tangible and intangible, of the Company and its
wholly-owned subsidiary, TJ Computer Services, Inc. (dba Leasing Edge
Corporation). Restrictive covenants under the Second Loan Modification
Agreement include the maintenance of consolidated tangible net worth (as
defined) of at least $4.5 million; restrictions on the payment of cash
dividends on shares of the Company's common stock; restrictions on
incurring additional indebtedness and creating additional liens on the
Company's property; and limitations on unfinanced capital expenditures
(as defined).
In November of 1995, the Company entered into a letter agreement with
Excel Bank N.A. ("Excel") (formerly Union Chelsea National Bank) whereby
Excel agreed to make available to the Company a $250,000 line of credit
(the "Equity Line") to be used to fund the Company's equity investment
in certain leases discounted by Excel (i.e., the difference between the
cost of the leased equipment and the discounted present value of the
minimum lease payments assigned to Excel). Borrowings under the Equity
Line are evidenced by term notes and require monthly payments of
principal and interest over a period equal to the term of the related
discounted lease with a final balloon payment of between 30 and 50
percent depending on the lease term. Interest rates on the term notes
are at the applicable discounted lease rate plus 1.75%. In July of 1996
and December of 1997, Excel increased its maximum commitment under the
Equity Line to $1,000,000 and $2,500,000, respectively. Such maximum
commitment is reduced by the amount of outstanding recourse discounted
lease rentals funded by Excel, a term note and an outstanding capital
lease obligation of approximately $258,030, $160,838 and $122,982,
respectively, at December 31, 1997. At December 31, 1997, the Company
had outstanding term notes and available credit under the Equity Line of
$1,049,133 and $709,017, respectively.
On March 9, 1998, ADI entered into a $500,000 Revolving Credit Agreement
(the "ADI Credit Agreement") with Excel for general corporate purposes.
Pursuant to the ADI Credit Agreement, Excel has agreed, subject to
certain conditions, to make advances to ADI from time to time prior to
October 15, 1998 of up to $500,000. Amounts repaid under the ADI Credit
Agreement may be reborrowed until October 15, 1998, the date that the
loans under the ADI Credit Agreement mature. The loans under the ADI
Credit Agreement bear interest at the prime rate plus 2.5%. Accrued
interest, if any, will be payable monthly, beginning on April 1, 1998.
The ADI Credit Agreement is guaranteed by the Company and is secured by
a lien on the receivables, inventory and equipment of ADI. Under the
ADI Credit Agreement, ADI has agreed not to incur any additional
indebtedness or to create any additional liens on its property other
than under the ADI Credit Agreement. Upon consumation of the ADI Credit
Agreement, Excel reduced its maximum commitment under the Equity Line to
$2,000,000 and transferred the $160,838 term note to the ADI Credit
Agreement. As of March 27, 1998, loans in the amount of $330,263 were
outstanding under the ADI Credit Agreement.
Due to the fact that the equipment the Company leases must be paid for
by the Company prior to leasing, the Company requires a substantial
amount of cash for its leasing activities. The Company's growth has
been significantly dependent upon its ability to borrow funds or raise
equity or debt financing to acquire additional equipment for lease.
Historically, the Company has derived most of the funds necessary for
the purchase of equipment from nonrecourse financing and the remainder
from internally generated funds, recourse indebtedness and existing
cash. Consequently, the Company is continuously seeking debt and/or
equity financing to fund the growth of its lease portfolio. However,
should the Company fail to receive additional equity financing or
refinance its existing debt in 1998, the Company's portfolio growth and
resultant cash flows could be materially and adversely affected. In
addition, there is no assurance that financial institutions will
continue to finance the Company's future leasing transactions on a
nonrecourse basis or that the Company will continue to attract customers
that meet the credit standards of its nonrecourse financing sources or
that, if it receives such additional financing for future lease
transactions, it will be on terms favorable to the Company. At December
31, 1997, the Company had approximately $917,656 in cash and
availability under the Equity Line.
At the inception of each lease, the Company establishes the residual
value of the leased equipment, which is the estimated market value of
the equipment at the end of the initial lease term. The Company's cash
flow depends to a great extent on its ability to realize the residual
value of leased equipment after the initial term of its leases with its
customers. Historically, the Company has realized its recorded
investment in residual values through (i) renegotiation of the lease
during its term to add or modify equipment; (ii) renewal or extension of
the original lease; (iii) leasing equipment to a new user after the
initial lease term; or (iv) sale of the equipment. Each of these
alternatives impacts the timing of the Company's cash realization of
such recorded residual values. Equipment may be returned to the Company
at the end of an initial or extended lease term when it may not be
possible for the Company to resell or re-lease the equipment on
favorable terms. Developments in the high technology equipment market
tend to occur at rapid rates, adding to the risk of obsolescence and
shortened product life cycles which could affect the Company's ability
to realize the residual value of such equipment. In addition, if the
lessee defaults on a lease, the financial institution that provided
nonrecourse financing may foreclose on its security interest in the
leased equipment and the Company may not realize any portion of such
residual value. If the residual value in any equipment cannot be
realized after the initial lease term, the recorded investment in the
equipment must be written down, resulting in lower cash flow and reduced
earnings. During 1997 and 1996, the Company reduced residual values and
off-lease equipment inventory by approximately $75,331 and $1,099,089,
respectively, to their net realizable values. There can be no assurance
that the Company will not experience further material residual value or
inventory write-downs in the future.
The Company intends to continue to retain residual ownership of all the
equipment it leases. As of December 31, 1997, the Company had a total
net investment in lease transactions of $23.0 million compared to $22.5
million as of December 31, 1996. The estimated residual value of the
Company's portfolio of leases expiring between January 1, 1998 and
December 31, 2003 totals $9,106,063, although there can be no assurance
that the Company will be able to realize such residual value in the
future. As of December 31, 1997, the estimated residual value of the
Company's portfolio of leases by year of lease termination was as
follows:
<TABLE>
<CAPTION>
Year ending December 31,
<S> <C>
1998 $ 3,726,363
1999 1,572,600
2000 3,067,000
2001 701,100
2002 and thereafter 39,000
Total $ 9,106,063
</TABLE>
Leased equipment expenditures of $9,872,360 for the year ended December
31, 1997 were financed through the discounting of $10,530,281 of
noncancelable lease rentals to various financial institutions. The
difference of $657,921 reflects the refinancing of existing leases
either at the end of their original lease term or in connection with a
renewal/upgrade.
Management recognizes that certain risks are inherent in the leasing
services portion of the Company's business. Such risks and assumptions
include, but are not limited to, technological obsolescence associated
with equipment the Company currently has on lease or in inventory, the
estimated residual values of such equipment and the timing of the
Company's cash realization of such residual values. In an effort to
mitigate such risks, management has implemented a plan to expand and
diversify the non-leasing portion of the Company's business. The first
step of this plan was the acquisition of SCS in November of 1996. As a
result of such acquisition, management was able to eliminate certain
redundant administrative tasks at PMCPI, thereby returning PMCPI to
profitability during 1997. A second phase of the Company's strategy was
implemented in January of 1997 by the formation of ADI, which
contributed positive earnings to the Company's consolidated financial
results.
The Company intends to continue to pursue its strategy of diversifying
the technology services it offers through the acquisition of parallel
businesses as well as the expansion of its current product offerings.
Accordingly, management believes that revenues from the leasing services
unit of the Company's operations will continue to decline as a
percentage of consolidated revenues, although management believes that
the dollar amount of such revenues will remain relatively constant over
the near term. Management further recognizes that the Company must
generate additional resources or consider modifications of its expansion
plan. To the extent the Company is unable to achieve its funding plan,
either through the cash realization of estimated lease residuals or the
negotiation of expanded credit facilities, management has contingency
plans which include curtailing the rate of its planned expansion
activities and reducing existing infrastructure costs.
Based on the Company's anticipated residual value realization, existing
credit availability under the Equity Line and the ADI Credit Agreement,
and the anticipated contribution margin from the Company's distribution
services units, management believes that the Company will have adequate
capital resources to continue its operations at the present level for at
least the next twelve months. Management further believes that the
Company's existing credit lines will be renewed as they come due.
The Company believes that inflation has not been a significant factor in
its business.
The Company is aware of the issues associated with the programming code
in existing computer systems as the millennium approaches. Independent
of such issues, management of the Company has initiated an information
systems project to standardize all of the Company's hardware and
software systems. The systems selected by management are Year 2000
compliant. The implementation of such systems is anticipated to be
completed during 1998. Management does not believe that such
implementation will have a significant effect on the Company's earnings.
Recently Issued Accounting Standards
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 130, "Reporting Comprehensive Income" ("SFAS No. 130").
SFAS No. 130 requires companies to classify items of other comprehensive
income by their nature in a financial statement and display the
accumulated balance of other comprehensive income separately from
retained earnings and additional paid-in capital in the equity section
of a statement of financial position, and is effective for financial
statements issued for fiscal years beginning after December 15, 1997.
The Company is currently assessing the impact of SFAS No. 130 on the
Company's financial statements for the years ended December 31, 1997 and
1996 and believes that SFAS No. 130 will not result in comprehensive
income different from net income as reported in the accompanying
financial statements.
In June of 1997, the FASB issued Statement of Financial Accounting
Standards No. 131, "Disclosure About Segments of an Enterprise and
Related Information" ("SFAS No. 131"). SFAS No. 131 establishes
additional standards for segment reporting in financial statements and
is effective for fiscal years beginning after December 15, 1997. The
Company is currently assessing the impact of SFAS No. 131 on the
Company's financial statements for the years ended December 31, 1997 and
1996.
Safe Harbor Statement under the
Private Securities Litigation Reform Act of 1995
Certain statements herein and in the future filings by the Company with
the Securities and Exchange Commission and in the Company's written and
oral statements made by or with the approval of an authorized executive
officer constitute "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the
Securities Exchange Act of 1934, and the Company intends that such
forward-looking statements be subject to the safe harbors created
thereby. The words and phrases "looking ahead", "we are confident",
"should be", "will be", "predicted", "believe", "expect", and
"anticipate" and similar expressions identify forward-looking
statements. These and other similar forward-looking statements reflect
the Company's current views with respect to future events and financial
performance, but are subject to many uncertainties and factors relating
to the Company's operations and business environment which may cause the
actual results of the Company to be materially different from any future
results expressed or implied by such forward-looking statements.
Examples of such uncertainties include, but are not limited to, changes
in customer demand and requirements, the mix of leases written, the
availability and timing of external capital, the timing of the Company's
realization of its recorded residual values, new product announcements,
continued growth of the semiconductor industry, trend of movement to
client/server environment, interest rate fluctuations, changes in
federal income tax laws and regulations, competition, unanticipated
expenses and delays in the integration of newly-acquired businesses,
industry specific factors and worldwide economic and business
conditions. With respect to economic conditions, a recession can cause
customers to put off new investments and increase the Company's bad debt
experience. The mix of leases written in a quarter is a direct result
of a combination of factors, including, but not limited to, changes in
customer demands and/or requirements, new product announcements, price
changes, changes in delivery dates, changes in maintenance policies and
the pricing policies of equipment manufacturers, and price competition
from other lessors. The Company undertakes no obligation to publicly
update or revise any forward-looking statements whether as a result of
new information, future events or otherwise.
ITEM 7: CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
PAGE
Independent Auditors' Report - KPMG Peat Marwick LLP 16
Consolidated Balance Sheets As Of December 31, 1997 and 1996 17
Consolidated Statements of Operations For The Years Ended
December 31, 1997 and 1996 19
Consolidated Statements of Cash Flows For The Years Ended
December 31, 1997 and 1996 20
Consolidated Statements of Stockholders' Equity For The
Years Ended December 31, 1997 and 1996 22
Notes To Consolidated Financial Statements 23
The consolidated financial statements of the Company are filed under
this Item 7 pursuant to Regulation S-B. Financial statement schedules
are omitted because either they are not required under the instructions,
are inapplicable, or the information is included elsewhere in the
financial statements.
Independent Auditors' Report
The Stockholders and Board of Directors
LEC Technologies, Inc.
We have audited the accompanying consolidated balance sheets of LEC
Technologies, Inc. (formerly Leasing Edge Corporation) and subsidiaries
as of December 31, 1997 and 1996, and the related consolidated
statements of operations, stockholders' equity, and cash flows for the
years then ended. These consolidated financial statements are the
responsibility of the Company's management. Our resonsibility is to
express an opinion on these consolidated financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of LEC
Technologies, Inc. and subsidiaries as of December 31, 1997 and 1996,
and the results of their operations and their cash flows for the years
then ended in conformity with generally accepted accounting principles.
/s/ KPMG Peat Marwick LLP
Las Vegas, Nevada
March 27, 1998
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- ------------
<S> <C> <C>
ASSETS:
Cash $ 208,639 $ 412,340
Receivables - net of allowance for
doubtful accounts of $157,405 and
$170,699 at December 31, 1997 and
1996, respectively 2,372,159 1,096,868
Notes receivable - employees 176,311 199,185
Inventory, net of reserve for
obsolescence of $102,102 and
$816,290 at December 31, 1997 and
1996, respectively 2,039,685 2,210,674
Investment in leased assets:
Operating leases, net 15,284,177 17,617,934
Sales-type and direct financing leases 7,738,825 4,927,894
Furniture and equipment - net of
accumulated depreciation of
$310,378 and $304,495 at December 31,
1997 and 1996, respectively 363,970 157,112
Other assets 272,338 397,712
Goodwill, net of accumulated
amortization of $134,543 and $84,408
at December 31, 1997 and 1996,
respectively 617,496 667,631
---------- ----------
TOTAL ASSETS $29,073,600 $27,687,350
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
----------- ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
<S> <C> <C>
LIABILITIES:
Accounts payable $ 3,823,522 $ 2,946,365
Accrued liabilities 492,325 401,569
Notes payable and lines of credit 3,128,764 3,881,882
Nonrecourse and recourse discounted
lease rentals 15,905,823 14,808,581
Other liabilities 244,796 410,763
---------- ----------
TOTAL LIABILITIES 23,595,230 22,449,160
---------- ----------
STOCKHOLDERS' EQUITY:
Series A convertible preferred
stock, $.01 par value; 1,000,000 shares
authorized, 380,000 shares issued;
229,016 shares outstanding 2,290 2,290
Common stock, $.01 par value; 25,000,000
and 12,500,000 shares authorized,
4,882,269 and 4,407,019 shares issued
and 4,789,069 and 4,340,919 shares
outstanding at December 31, 1997 and
1996, respectively 48,823 44,071
Additional paid-in capital 10,382,421 10,437,915
Accumulated deficit (4,716,732) (5,046,263)
---------- ----------
5,716,802 5,438,013
Common stock held in treasury, at
cost; 93,200 and 66,100 shares at
December 31, 1997 and 1996, respectively (144,682) (106,073)
Notes receivable from stockholders (93,750) (93,750)
---------- ----------
TOTAL STOCKHOLDERS' EQUITY 5,478,370 5,238,190
---------- ----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $29,073,600 $27,687,350
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1997 1996
---------- -----------
<S> <C> <C>
Revenues:
Operating leases $ 8,618,861 $ 9,694,905
Sales-type leases 2,108,977 2,721,483
Finance income 475,140 285,121
Direct sales 1,882,638 1,137,686
Other - 339,385
---------- ----------
Total revenues from
leasing operations 13,085,616 14,178,580
Distribution sales 17,612,586 7,038,154
Other 16,422 20,666
---------- ----------
Total revenues 30,714,624 21,237,400
---------- ----------
Costs and expenses:
Operating leases 5,641,067 6,881,020
Sales-type leases 1,685,134 2,101,426
Interest expense 1,326,894 1,325,444
Direct sales 1,806,939 1,224,406
Write down of inventory and
residual values 75,331 1,099,089
---------- ----------
Total costs from
leasing operations 10,535,365 12,631,385
Distribution cost of sales 14,686,695 6,190,582
Selling, general and
administrative expenses 4,549,586 3,416,093
Interest expense 613,447 397,656
---------- ----------
Total costs and expenses 30,385,093 22,635,716
---------- ----------
Income (loss) before
income taxes 329,531 (1,398,316)
Provision for income taxes - -
---------- ----------
Net income (loss) $ 329,531 $(1,398,316)
========== ==========
Earnings (loss) per common share $ 0.02 $ (0.45)
========== ==========
Earnings (loss) per common share
assuming dilution $ 0.02 $ (0.45)
========== ==========
</TABLE>
The accompanying notes are integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997
AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
Notes Receiv- Total
----------------- ------------------- Paid-in
Accumulated Treasury able From Stockholders'
Shares Amount Shares Amount Capital
Deficit Stock Stockholders Equity
-------- ------- --------- -------- ----------
- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Balance at
December 31, 1995 229,016 $ 2,290 3,132,319 $ 31,324 $9,526,259
$(3,647,947) $ (12,000) $ (25,000) $ 5,874,926
Sale of common stock 880,125 8,801 849,477
858,278
Exercise of stock
options 127,375 1,274 173,867
(68,750) 106,391
Exercise of "A"
warrants 27,492 275 (275)
-
Acquisition of SCS 239,708 2,397 117,603
120,000
Purchase of treasury
stock
(94,073) (94,073)
Preferred stock
dividends (229,016)
(229,016)
Net loss
(1,398,316) (1,398,316)
- --------------------------------------------------------------------------------
- -------------------------
Balance at
December 31, 1996 229,016 2,290 4,407,019 44,071 10,437,915
(5,046,263) (106,073) (93,750) 5,238,190
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
(Continued)
LEC TECHNOLOGIES, INC. AND
SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS'
EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1997
AND 1996
<TABLE>
<CAPTION>
Preferred Stock Common Stock Additional
Notes Receiv- Total
----------------- ------------------- Paid-in
Accumulated Treasury able From Stockholders'
Shares Amount Shares Amount Capital
Deficit Stock Stockholders Equity
-------- ------- --------- -------- ----------
- ------------ ---------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
<C> <C> <C>
Balance at
December 31, 1996 229,016 $ 2,290 4,407,019 $ 44,071 $10,437,915
$(5,046,263) $(106,073) $ (93,750) $5,238,190
Sale of common stock 156,250 1,562 123,438
125,000
Issuance of common
stock for services 50,000 500 46,375
46,875
Exercise of "B"
warrants 269,000 2,690 (2,690)
-
Stock option compen-
sation expense 6,399
6,399
Purchase of treasury
stock
(38,609) (38,609)
Preferred stock
dividends (229,016)
(229,016)
Net income
329,531 329,531
- --------------------------------------------------------------------------------
- -------------------------
Balance at
December 31, 1997 229,016 $ 2,290 4,882,269 $ 48,823 $10,382,421
$(4,716,732) $(144,682) $ (93,750) $5,478,370
================================================================================
=========================
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM OPERATING
ACTIVITIES:
Net income (loss) $ 329,531 $(1,398,316)
Adjustments to reconcile net income
(loss) to net cash provided by
operating activities:
Depreciation and amortization 5,757,672 6,986,608
Write down of inventory, residual
values and other 75,331 1,189,981
Stock option compensation expense 53,274 -
Change in assets and liabilities,
net of effects of acquisition:
Increase in receivables (1,275,291) (60,503)
Increase inventory (135,879) (354,532)
Increase (decrease) in
accounts payable 877,157 (446,485)
Increase (decrease) in
accrued liabilities 33,502 (52,583)
All other operating activities (309,593) 302,564
--------- ---------
Net cash provided by operating
activities 5,405,704 6,166 734
----------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sales and disposals of off-lease
inventory and equipment 1,734,074 2,786,579
Purchases of inventory for lease (6,253,853) (5,579,587)
Purchases of furniture and equipment (132,908) (52,277)
(Increase) decrease in notes receivable 22,874 (50,435)
Purchase of SCS, net of cash acquired - 80,957
Additions to net investment in
sales-type and direct financing leases (3,618,507) (4,504,865)
Sales-type and direct financing
lease rentals received 2,251,582 1,763,154
----------- ----------
Net cash used in investing activities (5,996,738) (5,556,474)
----------- ----------
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
(Continued)
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from nonrecourse and
recourse discounted lease rentals 10,530,281 9,186,720
Payments on nonrecourse and recourse
discounted lease rentals (9,433,039) (10,638,141)
Proceeds from notes payable 1,051,373 817,647
Payments on notes payable (1,944,911) (363,905)
Proceeds from exercise of stock
options - 106,391
Proceeds from sale of stock, net 125,000 858,278
Proceeds from exercise of warrants 269,000 55,592
Deferred equity transaction costs - (106,497)
Purchase of treasury stock (38,609) (94,073)
Preferred stock dividends paid (171,762) (229,016)
----------- ----------
Net cash provided by (used in)
financing activities 387,333 (407,004)
---------- ----------
Net increase (decrease) in cash (203,701) 203,256
Cash at beginning of period 412,340 209,084
---------- ----------
Cash at end of period $ 208,639 $ 412,340
=========== ==========
Supplemental Disclosure of Cash Flow
Information:
Cash paid during the period for:
Interest $ 1,875,196 $ 1,729,001
========== ==========
Income taxes $ 3,750 $ 29,826
========== ==========
</TABLE>
The accompanying notes are an integral part of these consolidated
financial statements.
LEC TECHNOLOGIES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Nature of Operations: LEC Technologies, Inc. and subsidiaries (formerly
known as Leasing Edge Corporation)(collectively, the "Company" or "LEC") is
a technology services company, providing solutions that help organizations
reduce technology cost and risk. The Company is primarily engaged in the
buying, selling, and leasing of data processing and other high technology
equipment and related services.
Organization: The Company was originally founded in 1980 under the name TJ
Computer Services, Inc. ("TJCS"). In 1989, all of the outstanding common
stock of TJCS was acquired by Harrison Development, Inc., an inactive public
corporation organized in Colorado, which then changed its name to TJ Systems
Corporation. In October 1991, the Company reincorporated in the State of
Delaware and in June 1995, changed its name to Leasing Edge Corporation. On
March 12, 1997, the Company's shareholders' approved a change in the
Company's name to LEC Technologies, Inc.
NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiaries. Intercompany accounts
and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of these consolidated financial statements in
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenue and expenses during
the reporting period. For lease accounting, this includes the
estimated fair market value at lease termination of the related
equipment, commonly referred to as "residual value". Residual
values are established at lease inception at amounts equal to the
estimated value to be received from the equipment following
termination of the initial lease, as determined by management. In
estimating such values, management considers all relevant
information and circumstances regarding the equipment and the
lessee, including historical experience by equipment type and
manufacturer, adjusted for known trends. On at least an annual
basis, management assesses the realizability of recorded residual
values and, if necessary, establishes a reserve to reduce the
recorded values to their estimated net realizable value. Actual
results could differ from those estimates.
Lease Accounting
See Note 2 "Lease Accounting Policies" for a description of lease
accounting policies, lease revenue recognition and related costs.
Inventory
Inventory of equipment that has come off lease is valued at the
lower of cost or market based on specific identification. Inventory
of equipment held for distribution is stated at the lower of cost
(first in, first out) or market.
Goodwill
Goodwill, which represents the excess of purchase price over the
fair value of net assets acquired, is amortized on a straight-line
basis over 15 years.
Nonrecourse Financing
The Company assigns the rentals under its leases to financial
institutions and other lenders primarily on a nonrecourse basis.
The Company receives a cash amount equal to the discounted value of
the minimum lease payments. In the event of a default by a lessee,
the lender has a security interest in the underlying leased
equipment but has no recourse against the Company. Proceeds from
discounted lease rentals are recorded as nonrecourse discounted
lease rentals. Under sales-type and direct financing leases,
leased assets and nonrecourse discounted lease rentals are reduced
as lessees make payments under the lease to financial institutions.
Under operating leases, leasing revenue is recorded and nonrecourse
discounted lease rentals are reduced as lessees make rental
payments to financial institutions. The Company has no restrictive
arrangements with these financial institutions as a result of the
nonrecourse borrowings.
Revenue Recognition
Leasing activities: See Note 2 "Lease Accounting Policies" for a
description of lease revenue recognition.
Direct sales: Revenue from direct sales is generated from the
remarketing of equipment off lease and leases with dollar buyout
options treated as sales. Revenue and related cost of sales
is recognized at the time title to the equipment transfers to the
customer.
Distribution sales: Revenue from distribution sales is generated
from the resale of equipment purchased for inventory. Revenue and
related cost of sales is recognized at the time title to the
equipment transfers to the customer, generally upon shipment.
Furniture and Equipment
Furniture and equipment are recorded at cost. Expenditures that
materially increase the life of the assets are capitalized.
Ordinary repairs and maintenance are charged to expense as
incurred.
Depreciation and amortization are provided on the straight-line
method over the following useful lives:
Computer equipment 3 to 5 years
Furniture and office equipment 5 to 7 years
Leasehold improvements Term of lease
Impairment of Long-Lived Assets and Long-Lived Assets to Be
Disposed Of
Management periodically evaluates the carrying value of its long-
lived assets, including operating leases, furniture and equipment
and intangible assets. Whenever events or changes in circumstances
indicate that the carrying value of such assets may not be
recoverable, the Company recognizes an impairment loss for the
difference between the carrying value and the estimated net future
cash flows attributable to such asset. Management believes that no
material impairment in the carrying value of long-lived assets
existed at December 31, 1997 or 1996.
Income Taxes
The Company uses the asset and liability method to account for
income taxes. Deferred tax assets and liabilities are recognized
for the future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and
liabilities and their respective tax bases. The measurement of
deferred tax assets is reduced, if necessary, by a valuation
allowance for any tax benefits which may not ultimately be
realized.
Stock Option Plans
Prior to January 1, 1996, the Company accounted for its stock
option plans in accordance with the provisions of Accounting
Principles Board Opinion No. 25, "Accounting for Stock Issued to
Employees" ("APB No. 25"), and related interpretations. As such,
compensation would be recorded on the date of grant only if the
current market price of the underlying stock exceeded the exercise
price. On January 1, 1996, the Company adopted Statement of
Financial Accounting Standards ("SFAS") No. 123, "Accounting for
Stock-Based Compensation" ("SFAS No. 123"), which permits entities
to recognize as expense over the vesting period the fair value of
all stock-based awards on the date of grant. Alternatively, SFAS
No. 123 also allows entities to continue to apply the provisions of
APB No. 25 and provide pro forma net income and pro forma earnings
per share disclosures for employee stock option grants made in 1995
and future years as if the fair-value-based method defined in SFAS
No. 123 had been applied. The Company has elected to continue to
apply the provisions of APB No. 25 and provide the pro forma
disclosure provisions of SFAS No. 123.
Earnings Per Share
Basic and diluted earnings (loss) per share are computed in
accordance with SFAS No. 128, "Earnings Per Share".
Impact of Recently Issued Accounting Standards
In June of 1997, the FASB issued SFAS No. 130, "Reporting
Comprehensive Income" ("SFAS No. 130"). SFAS No. 130 requires
companies to classify items of other comprehensive income by their
nature in a financial statement and display the accumulated balance
of other comprehensive income separately from retained earnings and
additional paid-in capital in the equity section of a statement of
financial position, and is effective for financial statements
issued for fiscal years beginning after December 15, 1997. The
Company is currently assessing the impact of SFAS No. 130 on the
Company's financial statements for the years ended December 31,
1997 and 1996 and believes that SFAS No. 130 will not result in
comprehensive income different from net income as reported in the
accompanying financial statements.
In June of 1997, the FASB issued SFAS No. 131, "Disclosure About
Segments of an Enterprise and Related Information" ("SFAS No.
131"). SFAS No. 131 establishes additional standards for segment
reporting in financial statements and is effective for fiscal years
beginning after December 15, 1997. The Company is currently
assessing the impact of SFAS No. 131 on the financial statements
for the years ended December 31, 1997 and 1996.
Reclassification
Certain reclassifications have been made in the 1996 financial
statements to conform to the 1997 presentation.
NOTE 2: LEASE ACCOUNTING POLICIES
SFAS No. 13 requires that a lessor account for each lease by either
the direct financing, sales-type or operating method.
Leased Assets
Direct financing and sales-type leases - Direct financing and
sales-type leased assets consist of the future minimum lease
payments plus the present value of the estimated unguaranteed
residual less unearned finance income (collectively referred to as
the net investment).
Operating Leases - Operating leased assets consist of the equipment
cost less accumulated depreciation.
Revenue, Costs and Expenses
Direct Financing Leases - Revenue consists of interest earned on
the present value of the lease payments and residual and is
included in finance income in the accompanying Consolidated
Statements of Operations. Revenue is recognized periodically over
the lease term as a constant percentage return on the net
investment. There are no costs and expenses related to direct
financing leases since revenue is recorded on a net basis.
Sales-type Leases - Revenue consists of the present value of the
total contractual lease payments and is recognized at lease
inception. Costs and expenses consist of the equipment's net book
value at lease inception, less the present value of the residual.
Interest earned on the present value of the lease payments and the
residual, which is recognized periodically over the lease term as
a constant percentage return on the net investment, is included in
finance income in the accompanying Consolidated Statements of
Operations.
Operating Leases - Revenue consists of the contractual lease
payments and is recognized on a straight-line basis over the lease
term. Costs and expenses are principally depreciation on the
equipment which is recognized on a straight-line basis over the
term of the lease to the Company's estimate of the equipment's
residual value.
NOTE 3: LEASED ASSETS
The components of the net investment in sales-type and direct
financing leases as of December 31 are as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Total future minimum lease payments $7,448,044 $4,670,997
Estimated unguaranteed residual
values of leased equipment 1,225,500 797,300
Less unearned finance income ( 934,719) ( 540,403)
Total $ 7,738,825 $ 4,927,894
</TABLE>
Future minimum lease payments on sales-type and direct financing
leases as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $3,173,468
1999 2,492,875
2000 1,224,521
2001 372,979
2002 and thereafter 184,201
$7,448,044
</TABLE>
Assets under operating leases are as follows at December 31:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Equipment at cost or net
realizable value $26,777,702 $29,056,736
Accumulated depreciation (11,493,525) (11,438,802)
Total $15,284,177 $17,617,934
</TABLE>
Depreciation expense related to operating leases was $5,641,067 and
$6,881,020 for the years ended December 31, 1997 and 1996,
respectively.
Future minimum lease rentals on operating leases are due as
follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $ 5,153,505
1999 3,691,355
2000 1,406,379
2001 66,705
2002 13,689
$10,331,633
</TABLE>
The estimated residual value of the Company's portfolio of leases
(including sales-type, direct financing and operating) by year of
lease termination are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $3,726,363
1999 1,572,600
2000 3,067,000
2001 701,100
2002 and thereafter 39,000
$9,106,063
</TABLE>
NOTE 4: Acquisition of Superior Computer Systems, Inc. ("SCS")
On November 1, 1996, the Company acquired all of the common stock
of SCS, a distributor of computer peripherals, for 239,708 shares
of the Company's common stock and two $100,000 non-interest bearing
notes, payable at various dates through November 1997. The
acquisition was accounted for by the purchase method of accounting.
The excess of the total acquisition cost over the fair value of net
assets acquired of $299,923 was recorded as goodwill and is being
amortized over 15 years. The Consolidated Statement of Operations
for the year ended December 31, 1996 includes SCS's results of
operations for the period November 1, 1996 through December 31,
1996.
The following unaudited pro forma consolidated results of
operations assume that the acquisition occurred on January 1, 1996
and reflect the historical operations of the purchased business
adjusted for amortization of goodwill resulting from the
acquisition.
(In thousands, except per share data)
<TABLE>
<CAPTION>
Year ended
December 31, 1996
(Unaudited)
<S> <C>
Total revenues 32,203
Net loss (1,522)
Loss per share (0.46)
</TABLE>
The pro forma results of operations are not necessarily indicative
of the actual results of operations that would have occurred had
the acquisition been made at the beginning of the period, or of
results which may occur in the future.
NOTE 5: INCOME TAXES
Total income tax expense (benefit) differed from the "expected"
income tax expense (benefit) determined by applying the statutory
federal income tax rate of 35% for the years ended
December 31 as follows:
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Computed "expected" income tax
expense (benefit) $ 115,336 $ (489,411)
Change in valuation allowance
for deferred tax assets (119,701) 93,181
Nondeductible expenses 4,365 396,230
Total tax expense - -
</TABLE>
The tax effects of temporary differences that give rise to
significant portions of the deferred tax assets and tax liabilities
at December 31, 1997 and 1996 are presented below:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
<S> <C> <C>
Deferred Tax Assets
Allowances for doubtful accounts,
inventory obsolescence and
residual value realization not
currently deductible $ 117,428 $ 450,447
Expenses accrued for financial
statement purposes, not
currently deductible 576,450 576,450
Net operating loss carryforwards 1,374,967 1,498,762
--------- ---------
Total gross deferred tax assets 2,068,845 2,525,659
Valuation allowance (248,757) (368,458)
--------- ---------
Net deferred tax assets 1,820,088 2,157,201
--------- ---------
Deferred Tax Liabilities
------------------------
Basis difference for sales-type and
direct financing leases for
financial statement purposes and
sales for tax purposes 218,719 342,507
Basis difference for operating
leases, principally due to
depreciation 1,601,369 1,814,694
--------- ---------
Total deferred tax liabilities 1,820,088 2,157,201
--------- ---------
Net deferred taxes - -
========= =========
</TABLE>
The Company has recorded a valuation allowance in accordance with
the provisions of SFAS No. 109 "Accounting for Income Taxes" to
reflect the estimated amount of deferred tax assets which may not
be realized. In assessing the realizability of deferred tax
assets, management considers whether it is more likely than not
that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is
dependent upon the generation of future taxable income during the
periods in which those temporary differences become deductible. At
December 31, 1997 and 1996, the Company determined that $248,757
and $368,458, respectively, of tax benefits did not meet the
realization criteria.
At December 31, 1997, the Company has net operating loss
carryforwards for Federal income tax purposes of approximately
$3,900,000 which are available to offset future taxable income, if
any, through 2009.
NOTE 6: NONRECOURSE AND RECOURSE DISCOUNTED LEASE RENTALS
The Company assigns the rentals of its leases to financial
institutions at fixed rates on a nonrecourse or, to a lesser
extent, on a recourse basis but retains the residual rights. In
return for future lease payments, the Company receives a discounted
cash payment. Discounted lease rentals as of December 31, 1997 and
1996 were $15,905,823 and $14,808,581 respectively of which
$258,030 and $196,518 are recourse, respectively. Interest expense
on discounted lease rentals for the years ended December 31, 1997
and 1996 was $1,326,894 and $1,325,444, respectively.
Principal and interest payments required on discounted lease
rentals as of December 31, 1997 are as follows:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $ 8,195,787
1999 6,154,015
2000 2,626,387
2001 439,684
2002 and thereafter 185,600
Total 17,601,473
Less interest (1,695,650)
Principal amount $15,905,823
</TABLE>
NOTE 7: NOTES PAYABLE AND LINES OF CREDIT
The Company and Bank of America National Trust and Savings
Association ("Bank of America") have entered into a Second Loan
Modification Agreement, effective February 5, 1998, (the "Second
Loan Modification Agreement") governing the Company's debt
obligation due January 1, 1998 to Bank of America (the "Term
Loan"). At February 5, 1998, the amount of unpaid principal on the
Term Loan was $1,366,365 and the interest rate was 12.5%. The
terms of the Second Loan Modification Agreement require the Company
to make monthly pricipal payments of $45,546 plus interest at the
prime rate plus 400 basis points from January 15, 1998 through June
15, 1998; monthly principal payments of $72,873 plus interest at
the prime rate plus 500 basis points from July 15, 1998 through
December 15, 1998; monthly principal payments of $109,309 plus
interest at the prime rate plus 600 basis points from January 15,
1999 through May 15, 1999; and to pay all remaining unpaid
principal, accrued and unpaid interest, and any unpaid fees and
expenses on June 15, 1999. The Term Loan is secured by all of the
personal property, tangible and intangible, of the Company and its
wholly-owned subsidiary, TJ Computer Services, Inc. (dba Leasing
Edge Corporation). Restrictive covenants under the Second Loan
Modification Agreement include the maintenance of consolidated
tangible net worth (as defined) of at least $4.5 million;
restrictions on the payment of cash dividends on shares of the
Company's common stock; restrictions on incurring additional
indebtedness and creating additional liens on the Company's
property; and limitations on unfinanced capital expenditures (as
defined).
In November of 1995, the Company entered into a letter agreement
with Excel Bank N.A. ("Excel") (formerly Union Chelsea National
Bank) whereby Excel agreed to make available to the Company a
$250,000 line of credit (the "Equity Line") to be used to fund the
Company's equity investment in certain leases discounted by Excel
(i.e., the difference between the cost of the leased equipment and
the discounted present value of the minimum lease payments assigned
to Excel). Borrowings under the Equity Line are evidenced by term
notes and require monthly payments of principal and interest over
a period equal to the term of the related discounted lease with a
final balloon payment of between 30 and 50 percent depending on the
lease term. Interest rates on the term notes are at the applicable
discounted lease rate plus 1.75%. In addition, a fee equal to 15%
of the original loan amount is due at maturity which amount is
accrued ratably over the life of the loan. The unaccrued portion
thereof at December 31, 1997 was $117,080. In July of 1996 and
December of 1997, Excel increased its maximum commitment under the
Equity Line to $1,000,000 and $2,500,000, respectively. Such
maximum commitment is reduced by the amount of outstanding recourse
discounted lease rentals funded by Excel, a term note and an
outstanding capital lease obligation of approximately $258,030,
$160,838 and $122,982, respectively, at December 31, 1997. At
December 31, 1997, the Company had outstanding term notes and
available credit under the Equity Line of $1,049,133 and $909,017,
respectively.
In October of 1997, PMCPI and Merrill Lynch Business Financial
Services, Inc. ("Merrill Lynch") replaced PMCPI's prior line of
credit (the "Merrill Line of Credit") with a term note in the
amount of $443,848 (the "Merrill Note"). The Merrill Line of
Credit was replaced by the Merrill Note in anticipation of the
Company entering into a new $1.75 million revolving line of credit
facility with Finova Capital Corporation (the "Finova Line") that
would have been secured by the inventory and accounts receivable of
both PMCPI and SCS. Subsequent to executing the Merrill Note, the
Company reevaluated the terms and conditions of the Finova Line and
determined it was too costly and that it did not sufficiently
address the Company's liquidity needs. Consequently, the Company
is currently negotiating a reinstatement of the prior line of
credit with Merrill Lynch or, in the event the line of credit is
not reinstated, a term out of the remaining obligation. The Merrill
Note is guaranteed by the Company and is secured by inventory and
accounts receivable of PMCPI (collectively, the "Merrill
Collateral").
On December 1, 1997, the remaining principal balance of
approximately $394,000 outstanding under the Merrill Note plus
accrued interest became due and payable. As of March 27, 1998,
PMCPI has not made the December 1, 1997 payment. Although no
demand for payment has been made by Merrill Lynch to date, PMCPI is
currently in payment default under the terms of the Merrill Note
and Merrill Lynch may exercise any of the rights and remedies
available to it under the Merrill Note, the original agreements
with respect to the Merrill Line of Credit, or otherwise available
to it at law or in equity. Such rights and remedies include
demanding immediate payment from PMCPI or the Company (pursuant to
the Company Guarantee) of the amounts due under the Merrill Note
and foreclosure on the Merrill Collateral. Although the Company
believes that its current negotiations with Merrill Lynch will be
successful, there can be no assurance that the Company will be
successful in its efforts to reinstate the Merrill Line of Credit
or negotiate a term out upon terms satisfactory to the Company. In
the event that Merrill Lynch were to demand immediate payment by
PMCPI or the Company of the amounts due and payable under the
Merrill Note, the financial condition and, consequently, the
operations of the Company could be materially and adversely
affected.
On March 9, 1998, ADI entered into a $500,000 Revolving Credit
Agreement (the "ADI Credit Agreement") with Excel for general
corporate purposes. Pursuant to the ADI Credit Agreement, Excel
has agreed, subject to certain conditions, to make advances to ADI
from time to time prior to October 15, 1998 of up to $500,000.
Amounts repaid under the ADI Credit Agreement may be reborrowed
until October 15, 1998, the date that the loans under the ADI
Credit Agreement mature. The loans under the ADI Credit Agreement
bear interest at the prime rate plus 2.5%. Accrued interest, if
any, will be payable monthly, beginning on April 1, 1998. The ADI
Credit Agreement is guaranteed by the Company and is secured by a
lien on the receivables, inventory and equipment of ADI. Under the
ADI Credit Agreement, ADI has agreed not to incur any additional
indebtedness or to create any additional liens on its property
other than under the ADI Credit Agreement. Upon consumation of the
ADI Credit Agreement, Excel reduced its maximum commitment under
the Equity Line to $2,000,000 and transferred the $160,838 term
note to the ADI Credit Agreement. As of March 27, 1998, loans in
the amount of $330,263 were outstanding under the ADI Credit
Agreement.
In connection with the Company's 1994 acquisition of PMCPI, the
Company issued a $250,000 non-interest bearing note payable to
PMCPI's sole shareholder. At December 31, 1996, the remaining
obligation on such note, discounted at an imputed rate of 8.5%, was
$50,000. The note was paid in full at its maturity date of
January 1, 1997.
In connection with the Company's acquisition of SCS, the Company
issued to each of SCS' two shareholders a $100,000 non-interest
bearing note payable due in varying installments through November
1997. At December 31, 1996, the remaining obligation due on such
notes, discounted at an imputed rate of 10.0%, was $194,385. The
notes were paid in full in 1997.
Notes payable and lines of credit consist of the following at
December 31,
<TABLE>
<CAPTION>
1997 1996
------ ------
<S> <C> <C>
Term loan with Bank of America, with
interest at prime plus 4.0 percent,
due in varying installments through
June 15, 1999 $1,366,365 $ 2,476,365
Term note with Merrill Lynch, due
December 1, 1997, with floating
interest rate, currently at 9.25
percent 401,614 -
Revolving line of credit agreement
with Merrill Lynch, with floating
interest rate of prime plus 1.0
percent - 499,937
Secured notes payable to Excel,
payable in installments through
November, 1999 with fixed interest
rates between 9.75 and 10.0 percent,
secured by leased equipment 1,049,133 626,801
Term note payable to Excel, due
January 29, 1998, with floating
interest rate of prime plus 2.5
percent 160,838 -
Acquisition notes payable, with
imputed interest ranging from 8.5 to
10 percent, due in varying
installments through November 1997 - 244,385
Other 150,814 34,394
--------- ---------
$3,128,764 $3,881,882
========= =========
</TABLE>
Required annual principal payments as of December 31, 1997 are as
follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $1,612,663
1999 1,076,261
2000 418,837
2001 19,115
2002 1,888
---------
Total $3,128,764
=========
</TABLE>
NOTE 8: COMMITMENTS AND CONTINGENCIES
a) Lease Agreements
The Company leases office and warehouse space under operating
leases expiring individually through 2002. The following is
a schedule by year of future minimum rental payments required
as of December 31, 1997 under these operating leases that have
initial or remaining noncancelable lease terms in excess of
one year:
<TABLE>
<CAPTION>
Years ending December 31,
<S> <C>
1998 $228,083
1999 210,808
2000 210,808
2001 137,540
2002 51,386
Thereafter -
Total $838,625
</TABLE>
Rental expense on operating leases was $267,552 and $206,342
for the years ended December 31, 1997 and 1996, respectively.
b) Employment Contracts
The Company has employment agreements with certain of its
executive officers and management personnel with remaining
terms of approximately four years. Under these agreements,
the employee is entitled to receive other employee benefits of
the Company, including medical and life insurance coverage.
The agreements may be terminated by either the Company or the
employee at any time or for any reason. If an agreement
is terminated due to the death of an employee, a death benefit
equal to six months salary shall be paid to the employee's
estate. The employment agreement of the Company's President
and Chief Executive Officer includes additional compensation
in the form of a bonus based on Company performance. The
Company's annual expense under these agreements is
approximately $930,000.
NOTE 9: RELATED PARTY TRANSACTIONS
a) Company's Board of Directors
A member of the Company's Board of Directors was formerly an
officer of Tiffany & Co., a major customer of the Company.
Such individual did not have approval authority over lease
transactions on behalf of Tiffany & Co.
b) Other Transactions
Included in notes receivable from shareholders in the
accompanying consolidated balance sheets at December 31, 1997
and 1996 is a $25,000 note receivable from a current officer
for the purchase of Company common stock.
c) Aggregate Effect of Transactions with Related Parties
The Board of Directors of the Company has reviewed the
aggregate effect on operations of the above-described
transactions and concluded that such transactions were in the
best interest of the Company and on terms as fair to the
Company as could have been obtained from unaffiliated parties.
NOTE 10: STOCKHOLDERS' EQUITY
During the year ended December 31, 1997, the Company sold 156,250
shares of common stock to an individual in a private placement
transaction for proceeds of $125,000.
Also in 1997, the Company issued an aggregate of 50,000 shares of
restricted common stock to two individuals in connection with their
employment at ADI. The fair market value of the shares at date of
issue was $46,875 and was expensed in 1997.
During the year ended December 31, 1996, the Company sold an
aggregate of 880,125 shares of common stock to two investment
groups in private placement transactions. The proceeds of these
transactions, net of related costs of $131,692, was $858,278.
In 1996, the Company issued 239,708 shares of restricted common
stock in connection with the Company's acquisition of SCS.
A. SERIES A CONVERTIBLE PREFERRED STOCK
In August of 1993, the Company completed the sale of 380,000 shares
of Series A Convertible Preferred Stock. The Preferred Stock is
convertible at the holders option at any time into 1.75 shares of
common stock at a conversion price of $5.68 per share. If the
Series A Preferred Stock is converted on or prior to August 4,
1998, the holder will receive ten (10) warrants to purchase 1/8th
share of common stock for each share of Series A Preferred Stock
converted. Outstanding Series A Preferred Stock is redeemable by
the Company at $10.00 per share plus accrued and unpaid dividends.
The Series A Preferred Stock pays dividends in arrears at an annual
rate of $1.00 per share. A conversion bonus equal to $0.25 per
share of Series A Preferred Stock converted shall be payable to any
holder who converts such shares after the date in any calendar
quarter on which dividends accrue and prior to such date for the
succeeding calendar quarter.
At December 31, 1997 and 1996 there were 229,016 shares of
preferred stock and 1,509,840 warrants outstanding.
Preferred stock dividends of $171,762 and $229,016 were paid from
additional paid in capital in 1997 and 1996, respectively. Accrued
and unpaid preferred stock dividends were $114,508 and $57,254 at
December 31, 1997 and 1996, respectively.
B. WARRANTS AND STOCK OPTIONS
Warrants
In August of 1995, the Company registered 3,092,687 Class A Common
Stock Purchase Warrants and 1,000,000 Class B Common Stock Purchase
Warrants, together with the underlying common shares. Each of the
warrants entitles the holder thereof to purchase one share of the
Company's common stock at an exercise price of $3.00 per share.
On July 9, 1996, the Company reduced the exercise price of the
Class A Common Stock Purchase Warrants and called for redemption,
effective at the close of business on August 9, 1996, all of the
Class A warrants. The Company received gross proceeds of $55,592
from the exercise of 27,492 Class A warrants. All costs related to
redeeming the Class A warrants in excess of the exercise proceeds
were expensed in 1996.
On December 15, 1996, the Company reduced the exercise price of the
Class B Common Stock Purchase Warrants and called for redemption,
effective at the close of business on January 15, 1997, all of the
Class B warrants. Subsequent to December 31, 1996, 269,000 Class
B Common Stock Purchase Warrants were exercised resulting in gross
proceeds to the Company of $269,000. All costs related to
redeeming the Class B warrants in excess of the exercise proceeds
were expensed in 1996.
During the year ended December 31, 1996, the Company issued an
aggregate of 2,319,993 Class C Common Stock Purchase Warrants
and an aggregate of 2,319,993 Class D Common Stock Purchase
Warrants at exercise prices of $1.625 and $1.75, respectively, in
connection with two private placements of common stock. In
September of 1997, the Company's Board of Directors voted to reduce
the exercise price of the warrants to $1.25. Each of the warrants
entitle the holders thereof to purchase one share of the Company's
common stock at the exercise prices referred to above and expire on
April 30, 1999. At December 31, 1997, none of the Class C or Class
D warrants had been exercised.
Stock Options
1) Key Employee and Director
The Company has five stock option plans covering an aggregate
of 2,687,500 shares of common stock which provide for the
granting of incentive stock options and/or nonqualified stock
options to employees and directors of the Company to purchase
shares of the Company's common stock. Options granted to
employees generally vest over a three to five year period and
expire five years from the date of grant. Options granted to
directors are immediately vested and expire ten years from the
date of grant. Under the Company's stock option plans, the
exercise price of each option at issuance equals the market
price of the Company's common stock on the date of grant.
Additionally, an officer of the Company has 58,125 options to
acquire common stock at an exercise price of $0.08 per share.
Such options were granted in 1993 in lieu of prospective
commissions and were subject to a three year vesting.
The Company applies APB Opinion No. 25 and related
Interpretations in accounting for its plans. Accordingly, no
compensation cost has been recognized for its fixed stock
option plans in the consolidated financial statements. Had
compensation cost for the Company's stock option plans been
determined consistent with SFAS No. 123, the Company's net
earnings (loss) available to common stockholders and earnings
(loss) per common weighted average share would have been
reduced to the pro forma amounts indicated below (in
thousands, except per share data):
<TABLE>
<CAPTION>
1997 1996
<S> <C> <C>
Net earnings (loss) available to
common stockholders:
As reported $ 101 $(1,627)
Pro forma (123) (1,836)
Earnings (loss) per common
weighted average share:
As reported $ 0.02 $ (0.45)
Pro forma (0.03) (0.51)
</TABLE>
For purposes of calculating the compensation cost consistent
with SFAS No. 123, the fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-
pricing model with the following weighted average assumptions
used for grants in 1997 and 1996, respectively: dividend yield
of 0.0% for each year; expected volatility of 35 percent and
19 percent; risk free interest rates of 5.96% and 5.94%; and
expected lives of three years and five years.
Additional information on shares subject to options is as
follows:
<TABLE>
<CAPTION>
1997 1996
---------------------- --------------------
Weighted Weighted
Number Average Number Average
of Exercise of Exercise
Shares Price Shares Price
---------- -------- ---------- --------
<S> <C> <C> <C> <C>
Outstanding at
beginning of
year 1,214,625 $ 1.62 419,625 $ 1.36
Granted 2,100,000 0.75 800,000 0.75
Exercised - - - -
Forfeited (2,759,000) 0.76 (5,000) (1.06)
--------- ------- --------- -------
Outstanding at
end of year 555,625 0.68 1,214,625 1.62
========= ======= ========= =======
Options exer-
cisable at
year end 168,292 0.52 719,625 1.52
========= ======= ========= =======
Weigted average
fair value of
options granted
during the year $ 0.25 $ 0.45
===== =====
</TABLE>
The following table summarizes information about stock options
outstanding at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding
--------------------------------
Weighted
Average Weighted
Number Remaining Average
Range of exercise of Contractual Exercise
prices Shares Life Price
---------------------------------------------------------
<S> <C> <C> <C>
$0.08 58,125 5.7 yrs $ 0.08
0.75 497,500 4.1 yrs 0.75
------- ---------- -------
555,625 4.3 yrs $ 0.68
======= ========== =======
</TABLE>
<TABLE>
<CAPTION>
Options Exercisable
--------------------------
Weighted
Number Average
Range of exercise of Exercise
prices Shares Price
------------------------------------------------------
<S> <C> <C>
$0.08 58,125 $ 0.08
0.75 110,167 0.75
------- --------
168,292 $ 0.52
======= ========
</TABLE>
2) Other Options
Options granted by the Company to other than the Company's
employees/directors are accounted for based on the fair value
method pursuant to SFAS No. 123 utilizing the Black-Scholes
option-pricing method. The amount charged to expense during
1997 for such options was $6,399.
In August of 1997, the Company granted an aggregate of 150,000
options (50,000 at an exercise price of $0.75 and 100,000 at
an exercise price of $1.00) to an unaffiliated company for
services. Such options were immediately vested and expire in
August of 1999. Subsequent to December 31, 1997, such grant
was modified to eliminate the 100,000 options having the $1.00
per share exercise price.
In October of 1996, the Company granted 50,000 stock options
to an individual at an exercise price of $1.56. Such options
were immediately vested and expire on April 7, 1998.
During 1995, the Board of Directors of the Company approved
the issuance of options covering 275,000 shares of the
Company's common stock to two unaffiliated companies for
services. The exercise price of the options was $1.38 per
share which was equal to the quoted market value of the
Company's common stock on the date of grant. Such options
were immediately vested and expire on March 6, 2000. During
the year ended December 31, 1996, 77,000 of such options were
exercised.
In addition, the Board of Directors approved the issuance of
options covering an aggregate of 150,000 shares of the
Company's common stock to an existing shareholder of the
Company and to one of the Company's directors as an inducement
to such individuals to provide the Company with a short term
loan during its transition and relocation from Hauppauge, New
York to Las Vegas, Nevada. The exercise price of such options
ranged from $1.31 to $1.69 per share; such prices were equal
to the quoted market value of the Company's common stock on
the date of grant. Such options were immediately vested and
expire on various dates through June 7, 2000.
Also in 1995, the Company issued options covering 25,000
shares of the Company's common stock to an individual at an
exercise price of $1.38. Such options were immediately vested
and were exercised during 1996.
In 1993, the Company issued options covering 25,375 shares of
the Company's common stock at an exercise price of $1.38.
Such options were immediately vested and were exercised during
1996.
C. OTHER
Included in other assets in the accompanying consolidated balance
sheet at December 31, 1996 is $269,000 of deferred costs associated
with the Class B Common Stock Purchase Warrants. Such capitalized
costs were netted against the proceeds received in the first
quarter of fiscal 1997.
NOTE 11: MANAGEMENT'S PLANS
Management recognizes that certain risks are inherent in the
leasing services portion of the Company's business. Such risks and
assumptions include, but are not limited to, technological
obsolescence associated with equipment the Company currently has on
lease or in inventory, the estimated residual values of such
equipment and the timing of the Company's cash realization of such
residual values. In an effort to mitigate such risks, management
has implemented a plan to expand and diversify the non-leasing
portion of the Company's business. The first step of this plan was
the acquisition of SCS in November of 1996. As a result of such
acquisition, management was able to eliminate certain redundant
administrative tasks at PMCPI, thereby returning PMCPI to
profitability during 1997. A second phase of the Company's
strategy was implemented in January of 1997 by the formation of
ADI, which contributed positive earnings to the Company's
consolidated financial results.
The Company intends to continue to pursue its strategy of
diversifying the technology services it offers through the
acquisition of parallel businesses as well as the expansion of its
current product offerings. Accordingly, management believes that
revenues from the leasing services unit of the Company's operations
will continue to decline as a percentage of consolidated revenues,
although management believes that the dollar amount of such
revenues will remain relatively constant over the near term.
Management further recognizes that the Company must generate
additional resources or consider modifications of its expansion
plan. To the extent the Company is unable to achieve its funding
plan, either through the cash realization of estimated lease
residuals or the negotiation of expanded credit facilities,
management has contingency plans which include curtailing the rate
of its planned expansion activities and reducing existing
infrastructure costs.
Based on the Company's anticipated residual value realization,
existing credit availability under the Equity Line and the
ADI Credit Agreement, and the anticipated contribution margin
from the Company's distribution services units, management believes
that the Company will have adequate capital resources to continue
its operations at the present level for at least the next twelve
months. Management further believes that the Company's existing
credit lines will be renewed as they come due.
NOTE 12: MAJOR CUSTOMERS AND SUPPLIERS
Revenue from leases with three customers of the Company accounted
for 15.0%, 9.2%, and 3.7% and 25.0%, 12.8% and 7.4% of
consolidated revenues for the years ended December 31, 1997 and
1996, respectively.
The Company currently purchases a significant amount of inventory
for resale from a limited number of suppliers in connection with
its distribution operations. Consequently, the Company is
dependent upon the availability of product from and the timeliness
of delivery by such suppliers in fulfilling its customers' orders.
NOTE 13: EMPLOYEE BENEFIT PLANS
The Company has a qualified 401(k) Profit Sharing Plan (the "Plan")
covering all employees of the Company, including officers.
Employees are eligible to participate in the Plan upon hire. The
Plan requires the Company to match 50% of each dollar contributed
by a Plan participant up to the Participants qualified deferral
amount. During 1997 and 1996, the Company contributed its required
amounts of $56,902 and $34,498 to the Plan on behalf of the Plan's
participants.
NOTE 14: SUPPLEMENTAL DISCLOSURES OF NONCASH INVESTING AND FINANCING
ACTIVITIES
During the year ended December 31, 1997, the Company purchased
computer hardware and software for $140,420 which was funded
through a capital lease obligation.
During the year ended December 31, 1997, operating lease assets of
$1,128,453 were reclassified as sales-type or direct financing
leases due to leases renewals/upgrades.
During the year ended December 31, 1996, the Company issued 67,500
shares of common stock in exchange for a note receivable of $68,750
and acquired all of the outstanding common stock of Superior
Computer Services, Inc. in exchange for 239,708 shares of
restricted common stock and a $200,000 non-interest bearing note
payable.
NOTE 15: DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of the estimated fair value of financial
instruments was made in accordance with Statement of Financial
Accounting Standards, "Disclosures about Fair Value of Financial
Instruments" ("SFAS No. 107"). SFAS No. 107 specifically excludes
certain items from its disclosure requirements such as the
Company's investment in leased assets. Accordingly, the aggregate
fair value amounts presented are not intended to represent the
underlying value of the net assets of the Company.
The carrying amounts at December 31, 1997 for receivables,
accounts payable, accrued liabilities, notes payable and lines of
credit approximate their fair values due to the short maturity of
these instruments. As of December 31, 1997, the carrying amount of
recourse discounted lease rentals of $258,030 approximate their
fair values because the discount rates are comparable to current
market rates of comparable debt having similar maturities and
credit quality.
NOTE 16: 1996 FOURTH QUARTER CHARGES
During the fourth quarter of 1996, the Company recorded a charge of
$889,000 to reduce the carrying amount of certain previously leased
equipment and the estimated unguaranteed residual values of
equipment on lease. These charges resulted from a decrease in the
wholesale market value of the previously leased equipment due to an
increase in availability in excess of current demand. Although
management believes that its recorded residual values are properly
stated, there can be no assurance that the Company will not
experience further material residual value or inventory write-downs
in the future.
NOTE 17: EARNINGS PER COMMON SHARE
In February of 1997, the Financial Accounting Standards Board
issued SFAS No. 128, "Earnings Per Share" ("SFAS No. 128"). SFAS
No. 128 supercedes APB Opinion No. 15 and specifies the
computation, presentation and disclosure requirements for earnings
per share ("EPS"). It replaces the presentation of "primary EPS"
with a presentation of "basic EPS" and "fully diluted EPS" with
"diluted EPS". Basic EPS excludes dilution and is computed by
dividing income available to common stockholders by the weighted
average number of shares outstanding for the period. Diluted EPS
reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted
into common stock and is computed similarly to fully diluted EPS
under APB Opinion No. 15. The following EPS amounts reflect EPS as
computed under SFAS No. 128:
<TABLE>
<CAPTION>
December 31, December 31,
1997 1996
------------ ------------
<S> <C> <C>
Shares outstanding at
beginning of period 4,340,919 3,129,319
Effect of issuance of common
stock for services 43,698 -
Issuance of common stock
pursuant to private place-
ment transactions 48,801 422,089
Issuance of common stock
related to 1996 acquisition
of SCS - 17,682
Exercise of stock options - 52,049
Exercise of "A" warrants - 10,891
Exercise of "B" warrants 258,682 -
Purchase of treasury stock (18,078) (6,375)
------------ ------------
Weighted average common
shares outstanding 4,674,022 3,625,655
============ ============
Net income (loss) $ 329,531 $ (1,398,316)
Preferred stock dividends (229,016) (229,016)
------------ ------------
Net earnings available to
common shareholders $ 100,515 $ (1,627,332)
============ ============
Earnings (loss) per common
share $ 0.02 (0.45)
============ ============
Weighted average common
shares outstanding 4,674,022 3,625,655
Effect of common shares
issuable upon exercise of
dilutive stock options 155,048 -
----------- ------------
Weighted average common
shares outstanding assuming
dilution 4,829,070 3,625,655
=========== ============
Earnings (loss) per common
share assuming dilution $ 0.02 $ (0.45)
=========== ============
</TABLE>
The following potentially dilutive securities were not included in
the computation of dilutive EPS because the effect of doing so
would be antidilutive:
<TABLE>
<CAPTION>
1997 1996
------------ ------------
<S> <C> <C>
Options 448,000 1,562,625
Warrants 4,828,716 5,828,716
Convertible preferred stock 400,778 400,778
Warrants issuable upon conversion
of preferred stock if conversion
occured prior to August 4, 1998 286,270 286,270
</TABLE>
ITEM 8: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 9: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
The names, ages and respective positions of the Executive
Officers and Directors of the Company are as follows:
<TABLE>
<CAPTION>
Name Age Position
<S> <C> <C>
Michael F. Daniels 49 Chairman of the Board, President and
Chief Executive Officer
William J. Vargas 38 Vice President - Finance, Chief
Financial Officer, Treasurer and
Secretary
Larry M. Segall 43 Director
L. Derrick Ashcroft 69 Director
</TABLE>
MICHAEL F. DANIELS has served as Chairman of the Board of Directors,
President and Chief Executive Officer since April of 1994 and as a Director
of the Company since 1983. He served as Chief Operating Officer of the
Company from March of 1993 to April of 1994 and as Senior Vice President -
Marketing of the Company for more than five years prior thereto.
WILLIAM J. VARGAS has served as Vice President - Finance, Chief Financial
Officer and Treasurer of the Company since May of 1995 and as Secretary of
the Company since February of 1996. From July of 1993 to January of 1995
he was the Senior Director of Finance for Fitzgeralds Casino/Hotel and from
February of 1995 through April of 1995 he was an independent financial
consultant. From January of 1992 to July of 1993 he was the Chief
Financial Officer of Sport of Kings, Inc., a publicly traded gaming
company.
LARRY M. SEGALL has served as a Director of the Company since November of
1989. Mr. Segall is currently the Chief Financial Officer of Vitamin
Industries, Inc. From 1985 through October 1997, Mr. Segall was employed
by Tiffany & Co. as its Vice President - Treasurer and Controller.
L. DERRICK ASHCROFT has served as a Director of the Company since August of
1994. From 1988 to 1995 he was Chairman of the Board of Cardiopet, Inc.,
an animal diagnostic firm. Mr. Ashcroft is a graduate of Oxford
University, England.
Mr. William G. McMurtrey and Dr. David C. Ward resigned from the Company's
Board of Directors on March 25, 1997 and March 31, 1997, respectively.
Their were no disagreements related to such resignations.
Officers serve at the discretion of the Board of Directors. All Directors
hold office for one year terms and until the election and qualification of
their successors. The Company has a Key Employee Stock Option Committee
and an Audit Committee, each consisting of Messrs. Segall and Ashcroft.
The Board of Directors did not have a standing nomination committee or
committee performing similar functions during the year ended December 31,
1997.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers, directors and persons who own more than ten percent of a
registered class of the Company's equity securities, to file reports of
ownership and changes in ownership with the Securities and Exchange
Commission. Officers, Directors and ten percent shareholders are required
by regulation to furnish the Company with all Section 16(a) forms they
file. Based solely on the Company's copies of such forms received or
written representations from certain reporting persons that no Form 5's
were required for those persons, the Company believes that, during the time
period from January 1, 1996 through December 31, 1997, all filing
requirements applicable to its officers, Directors and greater than ten
percent beneficial owners were complied with.
ITEM 10. EXECUTIVE COMPENSATION
The compensation paid and/or accrued to the Chief Executive Officer of the
Company for services rendered to the Company during the three fiscal years
ended December 31, 1997 and the compensation paid and/or accrued to the
Chief Financial Officer of the Company for services rendered to the Company
during the two fiscal years ended December 31, 1997 is presented in the
following table. No other executive officer received annual compensation
in excess of $100,000 in any of the three fiscal years ended December 31,
1997.
(a) Summary Compensation Table
<TABLE>
<CAPTION>
Annual Compensation
-------------------------------------
Other Annual
Name of Individual and Fiscal Salary Bonus Compensation
Principal Position Year ($) ($) ($)
- ---------------------- ------ -------- -------- ------------
<S> <C> <C> <C> <C>
Michael F. Daniels 1997 $336,519 - $181,653 (2)
President & CEO 1996 273,077 - 258,619 (2)
1995 254,808 $ 25,000(1) 198,987 (2)
William J. Vargas 1997 128,871 - -
CFO & Secretary 1996 115,341 - -
</TABLE>
(a) Summary Compensation Table (cont'd)
<TABLE>
<CAPTION>
Long Term Compensation
-------------------------------------
Awards Payouts
------------------------ ----------
Securities Long Term
Restricted Underlying Incentive
Name of Individual and Fiscal Stock Options/SARs Plan
Principal Position Year Awards($) (#) Payouts($)
- ---------------------- ------ ---------- ------------ ----------
<S> <C> <C> <C> <C>
Michael F. Daniels 1997 - - (4) -
President & CEO 1996 - 250,000(4) -
1995 - 79,000(4) -
William J. Vargas 1997 - - (4) -
CFO & Secretary 1996 - 70,000(4) -
</TABLE>
(a) Summary Compensation Table (cont'd)
<TABLE>
<CAPTION>
All
Name of Individual and Fiscal Other
Principal Position Year Compensation($)
- ---------------------- ------ ---------------
<S> <C> <C>
Michael F. Daniels 1997 $4,750 (3)
President & CEO 1996 4,750 (3)
1995 4,500 (3)
William J. Vargas 1997 4,750 (3)
CFO & Secretary 1996 1,900 (3)
</TABLE>
(1) Consists of accrued bonus pursuant to employment contract.
(2) Consists of commission income based upon realization of excess
residual values related to leases entered into prior to May 15, 1993.
(3) Represents Company matching contribution to 401(k) Profit Sharing
Plan.
(4) In January of 1997 and August of 1997, Messrs. Daniels and Vargas were
granted stock options aggregating 816,000 and 345,000, respectively.
On December 8, 1997, Messrs. Daniels and Vargas voluntarily rescinded
their respective 1997 option grants, together with all grants received
prior thereto, with the exception of 58,125 stock options received by
Mr. Daniels during 1993. Messrs. Daniels and Vargas received no
compensation for such recissions.
(b) Option/SAR Grants in Last Fiscal Year
<TABLE>
<CAPTION>
Number of Percent of
Securities Total
Underlying Options/SAR's Exercise
Options/SAR's Granted to or Base Expiration
Name Granted (#) In Fiscal Year Price($/Sh) Date
- ----------- ------------- -------------- ----------- ----------
<S> <C> <C> <C> <C>
Michael F.
Daniels - - - -
William J.
Vargas - - - -
</TABLE>
(c) Aggregated Option/SAR Exercises in Last Fiscal Year and Fiscal Year
End Option/SAR Values
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-The-Money
Options/SAR's Options/SAR's
At Fiscal At Fiscal
Shares Year End (#) Year End ($)
Acquired Value Exercisable/ Exercisable/
Name On Exercise Realized Unexercisable Unexercisable
- ----------- ----------- -------- ------------- -------------
<S> <C> <C> <C> <C>
Michael F. 0 0 58,125/ $37,200/
Daniels 58,125 $0.00
William J. 0 0 0/0 $0.00/
Vargas $0.00
</TABLE>
(d) Directors Compensation
Each non-employee director of the Company is paid $1,000 per month. In
addition, each director is entitled to participate in the Company's 1991
and 1993 Director Stock Option Plan and in the 1994 Stock Option Plan.
During 1996, the Company granted an aggregate of 300,000 options to non-
employee directors at an exercise price of $1.75 per share, which was the
market value of the Company's common stock on the date of grant. The
Company does not pay its directors any additional fees for committee
participation.
(e) Employment Contracts
Michael F. Daniels serves as the Company's President and Chief Executive
Officer under an employment agreement dated July 1, 1995 and expiring June
30, 2000. Mr. Daniels' compensation under such agreement is $300,000 per
annum and he is eligible for a bonus based on company performance. In
addition, Mr. Daniels is entitled to receive commissions equal to 25% of
the net proceeds realized by the Company in excess of the residual value of
equipment subject to leases which commenced prior to May 15, 1993 and for
which Mr. Daniels was the lead salesperson. Pursuant to Mr. Daniels'
employment contract, if Mr. Daniels should die during the term thereof, a
death benefit equal to six-months salary ($150,000) shall be paid to his
estate.
William J. Vargas serves as the Company's Chief Financial Officer,
Treasurer and Secretary under an employment agreement dated July 1, 1995
and expiring June 30, 2000. Mr. Vargas' compensation under such agreement
is $110,000 per annum.
ITEM 11: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth, as of March 27, 1998, certain information
concerning those persons known to the Company, based on information
obtained from such persons, with respect to the beneficial ownership (as
such term is defined in Rule 13d-3 under the Securities Exchange Act of
1934) of shares of common stock, $0.01 par value, of the Company (the
"Common Stock") by (i) each person known by the Company to be the owner of
more than 5% of the outstanding Common Stock, (ii) each Director of the
Company, (iii) each executive officer of the Company named in the Summary
Compensation Table and (iv) all executive officers and Directors as a
group:
<TABLE>
<CAPTION>
Amount and Nature
Name and Address of of Beneficial Own- Percentage of
Beneficial Owner (1) ership (2) Class (3)
- ---------------------- ------------------ -------------
<S> <C> <C>
Michael F. Daniels 412,500 (4) 8.7%
William J. Vargas 31,000 0.7%
Larry M. Segall 312,875 (5) 6.3%
L. Derrick Ashcroft 255,000 (6) 5.1%
All Directors and
Executive Officers
as a Group (4 persons) 1,011,375 19.0%
<F1> The address for all individuals identified herein is 6540 S. Pecos
Road, Suite 103, Las Vegas, Nevada 89120.
<F2> Unless otherwise noted, the Company believes that all persons named in
the table have sole investment power with respect to all shares of
common stock beneficially owned by them. A person is deemed to be the
beneficial owner of securities that can be acquired by such person
within 60 days from the date hereof upon the exercise of warrants or
options or upon the conversion of convertible securities. Each
beneficial owner's percentage ownership is determined by assuming that
options or warrants or shares of Series A Convertible Preferred Stock
that are held by such person (but not those held by any other person)
and which are exercisable or convertible within 60 days from the date
hereof have been exercised or converted.
<F3> Based on 4,704,069 shares of common stock outstanding as of February
27, 1998.
<F4> Includes options to purchase 58,125 shares of common stock granted to
Mr. Daniels which are currently exercisable.
<F5> Includes options to purchase 300,000 shares of common stock granted to
Mr. Segall which are currently exercisable.
<F6> Includes options to purchase 250,000 shares of common stock granted to
Mr. Ashcroft which are currently exercisable.
</TABLE>
ITEM 12: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Mr. Segall, a director of the Company, was formerly an officer of Tiffany &
Co., one of the Company's customers. Mr. Segall receives no cash or other
remuneration from the Company other than a fee for his services as a
director and participation in the Company's Director Stock Option Plans.
The Company believes that the terms of its lease arrangements with Tiffany
& Co. are fair and have been reached on an arms-length basis.
ITEM 13: EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
(b) Reports on Form 8-K: None.
(a) Exhibits
<TABLE>
<CAPTION>
Exhibit
Number Description
<C> <S>
3.1 Certificate of Incorporation.*
3.2 Certificate of Amendment of Certificate of Incorporation,
dated June 23, 1995.**
3.3 Certificate of Amendment of Certificate of Incorporation,
dated March 20, 1997.******
3.4 By laws.*
4.1 Specimen Common Stock Certificate.*
4.2 Specimen Series A Convertible Preferred Stock Certificate.*
4.3 Specimen Warrant Certificate.*
4.4 Certificate of Designation of Series A Convertible Preferred
Stock.*
4.5 Form of Representative's Warrants.*
4.6 Form of Class C Common Stock Purchase Warrant.*****
4.7 Form of Class D Common Stock Purchase Warrant.*****
4.8 Amended and Restated Warrant Agency Agreement Dated as of
March 3, 1998, between the Company and American Stock
Transfer and Trust Company, as Warrant Agent.*****
10.1 Standard Office Lease - Gross dated April 7, 1995 between
the Company and Jack Cason (relating to office space in
Clark County, Nevada).**
10.2 1991 Directors' Stock Option Plan.*
10.3 1991 Key Employees' Stock Option Plan.*
10.4 1993 Directors' Stock Option Plan.*
10.5 1993 Key Employees' Stock Option Plan.*
10.6 1994 Stock Option Plan.****
10.7 1996 Stock Option Plan.*****
10.8 1997 Stock Option Plan.******
10.9 Form of 1996 Non-Plan Director Stock Option Agreement.******
10.10 Indemnification Agreement dated as of September 5, 1990
between the Company and Michael F. Daniels.*
10.11 Loan Agreement with Bank of America dated July 11, 1995.***
10.12 Amendment No. 1 to Loan Agreement with Bank of America.***
10.13 Amendment No. 2 to Loan Agreement with Bank of America.***
10.14 Amendment No. 3 to Loan Agreement with Bank of America.***
10.15 Amended and Restated Business Loan Agreement with Bank of
America dated February 28, 1997.
10.16 Bank of America Loan Modification Agreement dated July 24,
1997.
10.17 Second Bank of America Loan Modification Agreement dated
February 5, 1998.
10.18 Merrill Lynch Line of Credit Agreement.***
10.19 Amendment No. 1 to Merrill Lynch Line of Credit Agree-
ment.***
10.20 Amendment No. 2 to Merrill Lynch Line of Credit Agree-
ment.***
10.21 Letter Agreement and Collateral Installment Note dated as of
October 8, 1997 with Merrill Lynch Business Financial
Services, Inc.
10.22 Letter Agreement between the Registrant and Excel Bank, N.A.
(formerly Union Chelsea National Bank) dated November 27,
1995.***
10.23 Revolving Credit Agreement with Excel Bank, N.A. dated as
March 8, 1998.
21 List of Subsidiaries.
27 Financial Data Schedule.
<F*> Incorporated by reference to the Company's Registration Statement
on Form S-2, as filed with the Securities and Exchange Commission
on June 10, 1993, Registration No. 33-64246.
<F**> Incorporated by reference to the Company's Post Effective
Amendment No. 1 on Form S-2 to its Registration Statement on Form
S-2, as filed with the Securities and Exchange Commission on
August 1, 1995, Registration No. 33-93274.
<F***> Incorporated by reference to the Company's 1995 Annual Report on
Form 10-KSB/A, as filed with the Securities and Exchange
Commission on April 23, 1996, Commission File No. 0-18303.
<F****> Incorporated by reference to the Company's 1994 Proxy Statement,
Commission File No. 0-18303.
<F*****> Incorporated by reference to the Company's 1996 Proxy Statement,
Commission File No. 0-18303.
<F******> Incorporated by reference to the Company's Registration Statement
on Form S-8/S-3, as filed with the Securities and Exchange
Commission on June 11, 1997, Commission File No. 333-28921.
</TABLE>
SIGNATURES
In accordance with the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.
LEC TECHNOLOGIES, INC.
Date: March 27, 1998 By: /s/ Michael F. Daniels
Michael F. Daniels, President
and Chief Executive Officer
In accordance with the Securities Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the Registrant and
in the capacities and on the dates indicated:
Date: March 27, 1998 By: /s/ Michael F. Daniels
Michael F. Daniels, President and
Chief Executive Officer
(Principal Executive Officer)
Date: March 27, 1998 By: /s/ William J. Vargas
William J. Vargas, V.P.
Finance (Principal Financial and
Accounting Officer)
Date: March 27, 1998 By: /s/ Larry M. Segall
Larry M. Segall, Director
Date: March 27, 1998 By: /s/ L. Derrick Ashcroft, Director
L. Derrick Ashcroft, Director
EXHIBIT 10.15
Amended and Restated
Bank of America Business Loan Agreement
===========================================================================
This Amended and Restated Business Loan Agreement dated to be effective
February 28, 1997, is between BANK OF AMERICA NATIONAL TRUST AND SAVINGS
ASSOCIATION, successor by merger to Bank of America Nevada, (referred to
hereinafter as the "Bank") and TJ SYSTEMS CORPORATION, a Delaware
corporation C'TJS") and TJ COMPUTER SERVICES, INC., a Delaware corporation
C'TJCS"). TJS and TJCS are sometimes refer-red to hereinafter individually
as the "Borrower" and collectively as the "Borrowers".
RECITALS
A. Borrowers' business consists of acquiring new computer and
telecommunications equipment ("Leased Equipment") for lease to unaffiliated
third parties ("Lessees"), creating equipment leases ("Equipment Leases")
between Borrowers, as lessor, and such Lessees for the Leased Equipment.
From time to time, Borrowers will assign such Equipment Leases ("Lease
Assignments") to other unaffiliated third party investors ("Assignees") for
negotiated fees ("Assignment Fees"). Pursuant to said Lease Assignments,
Borrowers retain title to the Leased Equipment and grants to said Assignee
a security interest in said Leased Equipment.
B. Bank and Borrowers are parties to that certain Business Loan Agreement
dated as of July I 1, 1995 (the "Original Loan Agreement"), which
established a revolving line of credit in the original maximum principal
amount of Two Million Five Hundred Thousand and No/100 Dollars
($2,500,000.00) (the "Loan"). The Original Loan Agreement was subsequently
modified on December 6, 1995, December 11, 1995, March 10, 1996, July 1,
1996, and August 15, 1996. Capitalized terms used herein without
definition shall have the same meanings given in the Original Loan
Agreement.
C. In connection with the Loan, TJS and TJCS each executed a Security
Agreement dated July 11, 1995, in favor of Bank, granting to Bank
collateral defined therein (the "Security Agreement").
D. In connection with the Loan, TJS executed Uniform Commercial Code
Financing Statements on Form UCC- 1 dated July 11, 1995, (a) filed in the
office of the Secretary of State- of the State of Nevada on July 28, 1995,
as Filing No. 9510581, (b) filed in the office of the Secretary of State of
the State of New York on July 31, 1995, as Filing No. 154451, and (c)
recorded in the Official Records of Clark County, Nevada on August 9, 1995,
in Book No. 950809, Instrument No. 01433; and (ii) TJCS executed Uniform
Commercial Code Financing Statements on Form UCC- 1 dated July 11, 1995,
(a) filed in the office of the Secretary of State of the State of Nevada on
July 28, 1995, as Filing No. 9510582, (b) filed in the office of the
Secretary of State of the State of New York on July 31, 1995, as Filing No.
154452, and (c) recorded in the Official Records' of Clark County, Nevada
on August 9, 1995, in Book No.950809, Instrument No. 0 1432 (collectively,
the "UCCs").
E. In connection with the Loan, Bank and IBM CREDIT CORPORATION ("IBM
Credit") entered into that certain Intercreditor and Subordination
Agreement made as of July 20, 1995, whereby IBM Credit agreed to
subordinate certain of its security interests to the security interests of
Bank under the Loan.
F. All of the documents certificates or agreements executed in connection
with the Loan, including, without limitation, those listed above and those
which evidence, guaranty, secure or modify the Loan, as any or all of them
may have been amended or modified to date, shall hereinafter be
collectively referred to as the "Existing Loan Documents". This Amended
and Restated Business Loan Agreement (the "Agreement"), all other documents
executed in connection with this Agreement, and the Existing Loan
Documents, as modified hereby, are herein collectively referred to as the
"Loan Documents".
G. The Loan matured on October 31, 1996, and since then Bank has been
forbearing on a day to day basis.
H. As of February 28, 1997, Borrowers were indebted to Bank under the
Existing Loan Documents in the principal amount of Two Million Four Hundred
Seventy-Six Thousand Three Hundred Sixty-Five and
No/l00 Dollars ($2,476,3 65.00), plus accrued and unpaid interest of
Nineteen Thousand Seven Hundred Forty-Two and 13/100 Dollars ($19,742.13)
(collectively, the "Present Debt'), which Present Debt is which Present
Debt is due and payable to Bank without offset, counterclaim or any defense
of any kind or nature. This principal balance is calculated without regard
to any principal payments which are required under this Agreement.
I. Borrowers have requested that Bank modify the Loan as set forth below.
Bank, although under no obligation to do so, is willing to so modify the
Loan, subject to the terms and conditions set forth below.
Agreement
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
1. Accuracy of Recitals. Borrowers acknowledge that the Recitals set forth
above are true, accurate and correct, and such recitals are incorporated
herein by this reference.
2. Reaffirmation of Loan. Borrowers reaffirm all of their obligations
under the Loan Documents, and Borrowers acknowledge that they have no
claims, offsets, or defenses with respect to the payment of sums due under
the Loan or any Loan Document.
3. Modification of Loan Documents. The Loan Documents are hereby amended as
follows:
3.1 Maturity Date. The maturity date of the Loan is hereby extended to
August 30, 1997 (the "1997 Maturity Date'). All sums owing under the Loan
shall be due and payable no later than this extended maturity date.
3.2 Extension of Maturity Date. Borrowers may exercise the option to
extend the maturity of the Loan from the 1997 Maturity Date until January
1, 1998 (the "1998 Maturity Date"), if (a) Borrowers request this extension
in a written notice which shall be delivered to Bank between sixty (60) and
thirty (30) days before the 1997 Maturity Date; and (b) prior to the 1997
Maturity Date, Borrowers satisfy all of the terms and conditions set forth
in Section 3.3 of this Agreement, and if no Event of Default exists under
the Loan Documents, in a manner satisfactory to Bank in its sole and
absolute discretion and judgment. If the Loan is extended beyond the 1997
Maturity Date to the 1998 Maturity Date, Borrowers shall pay to Bank any
remaining unpaid principal balance and accrued and unpaid interest and any
other fees and expenses due under the Loan no later than the 1998 Maturity
Date.
3.3 Conditions to Extension of Maturity Date. Borrowers' right to
exercise the option to extend the Loan to the 1998 Maturity Date as
described in Section 3.2 of this Agreement, is subject to the following
conditions:
(a) Good Condition and Repair. Bank shall have been satisfied that all of
the collateral has been well maintained and is in good repair;
(b) No Default. There shall exist no default or event that, with notice of
the passage of time or both, would be an Event of Default under any of the
Loan Documents, including without limitation this Agreement. There shall
have been no material adverse change in any Borrower's financial condition,
or event or condition that materially impairs any Borrower's ability to
repay the Loan;
(c) Required Principal Reductions. Bank shall have received, in immediately
available funds, principal reductions in the amounts stated below no later
than the dates listed below:
<TABLE>
<CAPTION>
Date Due Principal Reduction
------------------ -------------------
<S> <C>
May 15, 1997 $ 30,000.00
June 15, 1997 $ 40,000.00
July 15, 1997 $ 55,000.00
August 15 1997 $125,000.00
</TABLE>
These principal reductions shall be in addition to scheduled principal
payments listed. In Section 3.7 or Section 8.24 of this Agreement, and
shall be applied to the most remote payment of principal due under this
Agreement.
(d) Extension Fee for the 1998 Maturity Date. Bank shall have received, in
immediately available funds, an extension fee in the amount of Ten Thousand
and No/100 Dollars, no later than May 15, 1997.
3.4 Failure to Satisfy Condition. If any of the conditions listed in
Section 3.3 of this Agreement have not been satisfied in a manner
acceptable to Bank in the exercise of Bank's sole judgment and discretion,
Bank, in its sole discretion, may require
payment in full of all principal, interest, fees and expenses under the
Loan and the Loan Documents on the 1997 Maturity Date, and not grant the
extension of the Loan to the 1998 Maturity Date.
3.5 Interest Rate.
(a) Effective February 28, 1997, interest shall accrue on the unpaid
principal balance of the Loan at an annual interest rate equal to the
Reference Rate in effect from time to time plus two hundred (200) basis
points; and
(b) effective April 1, 1997, the interest rate shall accrue on the unpaid
principal balance of the Loan at an increased annual interest rate equal to
the Reference Rate in effect from time to time plus four hundred (400)
basis points (the "Interest Rate").
The Reference Rate is the rate of interest publicly announced from time to
time by Bank in San Francisco, California, as its Reference Rate. The
Reference Rate is set by Bank based on various factors, including its costs
and desired return, general economic conditions and other factors, and is
used as a reference point for pricing some loans. Bank may price loans to
its customers at, above, or below the Reference Rate. Any change in the
Reference Rate shall take effect at the opening of business on the date
specified in the public announcement of a change in the Reference Rate.
3.6 Interest Calculation. Except as otherwise stated in this Agreement,
all interest and fees, if any, will be computed on the basis of a 360-day
year and the actual number of days elapsed. This results in more interest
or a higher fee than if a 365-day year is used.
3.7 Payment. Concurrently with the execution of this Agreement, an initial
principal reduction in the amount of One Hundred Eighty Thousand and No/100
Dollars ($180,000.00) shall be due and payable. Beginning March 15, 1997,
installments of principal, each in the amount specified below for the due
date specified below, shall be due and payable on the fifteenth (15th) day
of each month, plus interest accrued through the last day of the
immediately preceding month on the then outstanding principal balance at
the applicable Interest Rate in effect pursuant to Section 3.3 (c) of this
Agreement. The principal payment schedules listed below do not include the
principal reductions required under Section 3.3-W or Section 8.24 of this
Agreement.
<TABLE>
<CAPTION>
Date Due Principal Payment
- -------------------------------- -----------------
<S> <C>
Upon execution of this Agreement $ 180,000.00
March 15, 1997 $ 40,000.00
April 15, 1997 $ 40,000.00
May 15, 1997 $ 60,000.00
June 15, 1997 $ 60,000.00
July 15, 1997 $ 60,000.00
August 15, 1997 $ 60,000.00
September 15, 1997 $ 80,000.00
October 15, 1997 $ 80,000.00
November 15, 1997 $ 80,000.00
December 15, 1997 $ 120,000.00
January 1, 1998 all remaining unpaid
principal, accrued and
unpaid interest, and
any unpaid fees and
expenses
</TABLE>
The principal payment schedule listed above shall be in effect if Bank
agrees to extend the Loan is extended to the 1998 Maturity Date. If Bank
does not agree to extend the Loan to the 1998 Maturity Date, the principal
payments due concurrently with the execution of this Agreement and on March
15, 1997, April 15, 1997, May 15, 1997, June 15, 1997, July 15, 1997, and
August 15, 1997, shall be due as stated in this Section 3.7, and all
remaining unpaid principal, accrued and unpaid interest, and any unpaid
fees and expenses shall be due no later than the 1997 Maturity Date.
3.8 Term Loan. Borrowers acknowledge that: (a) the Loan is modified to be
a non-revolving term loan; (b) Bank has no obligation to make any
additional advances on the Loan; and (c) any principal payments shall be
applied to the Loan as a permanent principal reduction and shall not be
available for readvance by Borrowers.
3.9 Bank of America Address. All addresses of Bank in the Loan
Documents are amended to read:
Bank of America National Trust & Savings Association
Dept. No. 4934, Attn.: Gary L. Richerson
101 North First Avenue
Phoenix, Arizona, 85003
Any notices to the Bank under any of the Loan Documents shall be sent to
this address (or any other address later specified by Bank) certified mail,
return receipt requested.
4. Conditions Precedent. Before this Agreement becomes effective and any
party becomes obligated under it, all of the following conditions shall
have been satisfied at Borrowers' sole cost and expense in a manner
acceptable to Bank in the exercise of Bank's sole judgment and discretion:
(a) Bank shall have received fully executed, and where appropriate,
acknowledged originals this Agreement and any other documents which Bank
may require or request in accordance with this Agreement or the other Loan
Documents.
(b) Bank shall have received, in immediately available funds, a fully
earned and nonrefundable extension fee in the amount of Five Thousand and
No/100 Dollars ($5,000.00).
(c) Bank shall have received, in immediately available funds, the initial
principal reduction required under Section 3.7 of this Agreement in the
amount of One Hundred Eighty Thousand and No/I 00 Dollars ($180,000.00).
(d) Bank shall have received reimbursement, in immediately available
funds, of all costs and expenses incurred by Bank in connection with this
Agreement, including charges for title insurance (including endorsements),
recording, filing, and escrow charges, fees for appraisal, architectural
and engineering review, construction services and environmental services,
mortgage taxes, and legal fees, costs and expenses of Bank's counsel.
Borrowers acknowledge that any extension fees payable in connection with
this transaction does not include the amounts payable by Borrowers under
this Section 4 (d) or under Section 6.8 of this Agreement.
(e) Bank shall have received a copy of each Borrower's articles of
incorporation, bylaws and any amendments thereto.
(f) Evidence of insurance coverage, as required in Section 8.18 of this
Agreement.
(g) Any other items that Bank may reasonably require.
5. Collateral; Audits of Collateral.
5.1 Personal Property. Borrowers' obligations to Bank under this
Agreement will be secured by personal property Borrowers now own or will
own in the future as listed below. The collateral is further defined in
the Security Agreements. In addition, personal property collateral
securing the Loan shall also secure all other present and future
obligations.of Borrowers or any one of them to Bank (excluding consumer
credit covered by the federal Trust in Lending law, unless Borrowers have
otherwise agreed in writing). All personal property collateral securing
any other present or future obligations of Borrowers or any one of them to
Bank shall also secure the Loan.
(a) Machinery, equipment, and furniture, including Leased Equipment,
provided such Leased Equipment may be subject to the terms of Equipment
Leases and security interests in favor of Assignees.
(b) Inventory.
(c) Receivables (including accounts receivable due on Leased Equipment
subject to third party assignments), patents, trademarks and other general
intangibles.
5.2 Ownership. Borrowers lawfully possess and hold a 100% ownership
interest in all of the collateral for the Loan, free and clear of any
defects, reservations of title and conditional sales contracts, and also of
any security interests other than those in favor of Bank, other than those
previously approved by Bank in writing. There is no financing statement
affecting any collateral for the Loan on file in any public office except
for financing statements in favor of Bank, other than those previously
approved by Bank in writing.
5.3 Access to Properly, Books and Records. Borrowers shall allow Bank to
examine, copy and audit its books and records. Any site visit, observation
or examination by Bank shall be solely for the purpose of protecting Bank's
security and preserving Bank's rights under the Loan Documents. Bank owes
no duty of care to protect Borrowers or any other party against, or to
inform Borrowers or any other party of, any adverse condition affecting the
Loan, the collateral for the Loan, or Borrowers' ability to repay the Loan.
If any of the Borrowers' properties, books or records are in the possession
of a third party, Borrowers authorize the Bank or its agents to have access
to perform inspections or audits and to respond to the Bank's requests for
information concerning such properties, books and records.
5.4 Bank Use Only. Borrowers acknowledge that any inspections, audits or
evaluations performed by Bank of the collateral securing the Loan pursuant
to this Agreement (a) are solely for Bank's use in evaluating and
underwriting an existing or proposed transaction in Bank's capacity as an
existing or proposed lender, and (b) shall not be relied upon by any person
or entity, including, without limitation, any Borrower, other than Bank.
Bank makes no express or implied representation or warranty of any kind
with respect to such inspection, audit or evaluation of the collateral.
Bank expressly disclaims any liability to any person or entity, including,
without limitation, any Borrower, with respect to such inspections, audits
or evaluations.
6. Payments and Costs.
6.1 Telephone Authorization. Bank may honor telephone instructions for
repayments given by any one of the individuals authorized to sign loan
agreements on behalf of Borrowers, or any other individual designated in
writing by any one of such authorized signers. Borrowers indemnify and
excuse Bank (including its officers employees, and agents) from all
liability, loss, and costs in connection with any act resulting from
telephone instructions it reasonably believes are made by any individual
authorized by Borrowers to give such instructions. This indemnity and
excuse will survive this Agreement's termination.
6.2 Direct Debit.
(a) Borrowers agree that interest and principal payments and any fees will
be deducted automatically on the due date from Borrowers' account number
[ ], or such other of Borrowers' accounts with Bank as designated
in writing by Borrowers (the "Designated Account").
(b) Bank will debit the Designated Account on the dates the payments become
due. If a Due date does not fall on a Banking Day, as defined below, Bank
will debit the Designated Account on the first Banking Day following the
due date.
(c) Borrowers will maintain sufficient funds in the Designated Account on
the dates Bank enters debits authorized by this Agreement. If there are
insufficient funds in the account on the date Bank enters any debit
authorized by this Agreement, the debit will be reversed.
6.3 Banking Days. Unless otherwise provided in this Agreement, a banking
day is a day other than a Saturday or a Sunday on which Bank is open for
business in Nevada. All payments and disbursements which would be due on a
day which is not a banking day will be due on the next banking day. All
payments received on a day which is not a banking day will be applied to
the credit on the next banking day.
6.4 Taxes. Borrowers will not deduct any taxes from any payments it makes
to Bank. If any government authority imposes any taxes on any payments
made by Borrowers, Borrowers will pay the taxes and will also pay to Bank,
at the time interest is paid, any additional amount which Bank specifies as
necessary to preserve the after-tax yield Bank would have received if such
taxes had not been imposed. Upon request by Bank, Borrowers will confirm
that it has paid the taxes by giving Bank official tax receipts (or
notarized copies) within thirty (30) days after the due date. However,
Borrowers will not pay Bank's net income taxes.
(6.5) Prepayment. Borrowers may prepay the Loan in full or in part at any
time. The prepayment will be applied to the most remote payment of
principal due under this Agreement.
6.6 Late Charge on Late Payments. In the event any payment required
hereunder is received by Bank fifteen (15) days after its due date,
Borrowers agree to pay to Bank a late charge of five percent (5.00%) of
each overdue payment (whether the overdue payment is a payment of interest
only or a payment consisting of principal and interest). Borrowers will
pay this late charge only once on any late payment.
6.7 Default Rate. Upon the occurrence and during the continuation of any
default under this Agreement or any of the Loan Documents, advances under
this Agreement will, at the option of Bank, bear interest at a rate per
annum which is two hundred (200) basis points higher than the rate of
interest otherwise provided under this Agreement. This will not constitute
a waiver of any default.
6.8 Expenses and Costs. Borrowers agree to reimburse Bank, immediately
upon written request of Bank, in immediately available funds.
(a) Audit Expense. Bank's cost of periodic audits and appraisals of the
personal property collateral securing the Loan, at such intervals as Bank
may reasonably require, immediately upon written request of Bank. The
audits and appraisals may be performed by employees of Bank or by
independent appraisers.
(b) Administration Costs. All reasonable costs incurred by Bank in
connection with administering this Agreement.
7. Borrowers' Representations and Warranties. Borrowers represent and
warrant to Bank as follows:
7.1 Loan Documents. All representations and warranties made and given by
Borrowers in the Loan Documents are true, complete, accurate and correct.
7.2 Borrowing Entity. Each Borrower is a Delaware corporation, which is
duly organized, validly existing and in good standing under the laws of the
State of Delaware. There have been no changes in the organization,
composition, ownership, structure or formation documents of Borrowers since
the inception of the Loan. In each state in which each Borrower does
business, it is properly licensed, in good standing, and, where required,
in compliance with fictitious name statutes.
7.3 Enforceable Loan Documents. The Loan Documents, including this
Agreement, to which Borrowers are a party are legal, valid and binding,
agreements of Borrowers enforceable in accordance with their respective
terms, and any instrument or agreement required hereunder or thereunder,
when executed and delivered, will be similarly legal, valid, binding and
enforceable.
7.4 No Conflicts. This Agreement does not conflict with any law,
agreement, or obligation by which any Borrower is bound.
7.5 Financial Information. All financial and other information that has
been or will be supplied to Bank is: (a) sufficiently complete to give Bank
accurate knowledge of each Borrower's financial condition; (b) in form and
content required by Bank and in accordance with Generally Accepted
Accounting Practices ("GAAP"); and (c) in compliance with all applicable
government regulations. No material adverse change has occurred in the
business assets, or financial condition of Borrowers since Borrowers last
supplied financial statements or information to Bank.
7.6 Lawsuits. There is no lawsuit, tax claim or other dispute pending or
threatened against any Borrower, which, if lost, would impair Borrowers'
financial condition or ability to repay the Loan, except as have been
disclosed in writing to Bank prior to this Agreement.
7.7 Permits, Franchises. Borrowers possess all permits, memberships,
franchises, contracts, and licenses required and all trademark rights,
trade name rights, patent rights, and fictitious name rights necessary to
enable it to conduct the business in which it is now engaged without
conflict with the rights of others.
7.8 Other Obligations. Borrowers are not in default on any obligation for
borrowed money, any purchase money obligation or any other material lease,
commitment, contract, instrument or obligation.
7.9 Income Tax Returns. Borrowers have no knowledge or any pending
assessments or adjustments of its income tax for any year.
7.10 No Default. No Event of Default has occurred and is continuing, and
no event has occurred and is continuing which, with notice or the passage
of time or both, would be an Event of Default.
7.11 No Claims or Defenses. The Present Debt is due and payable to Bank,
and Borrowers have no claims, offsets, counterclaims or defenses with
respect to: (a) the payment of the Present Debt; (b) the payment or any
other sums due under the Loan Documents; (c) the performance of Borrowers'
obligations under the Loan Documents; or (d) any liability under any of the
Loan Documents.
7.12 Claims, Disputes, Impairments. Borrowers have no pending
litigation, tax claims, proceedings or disputes that may adversely affect
Borrowers' financial condition or impair Borrowers' ability to perform
under the Loan Documents.
7.13 ERISA Plans.
(a) Borrowers have fulfilled their obligations, if any, under the minimum
funding standards of ERISA and the Code with respect to each Plan and is in
compliance in all material respects with the presently applicable
provisions of ERISA and the Code, and has not incurred any liability with
respect to any Plan under Title IV of ERISA.
(b) No reportable event has occurred under Section 4043(b) of ERISA for
which the PBGC requires thirty (30) days' notice.
(c) No action by Borrowers to terminate or withdraw from any Plan has been
taken and no notice of intent to terminate a Plan has been filed under
Section 4041 of ERISA.
(d) No proceeding has been commenced with respect to a Plan under Section
4042 of ERISA, and no event has occurred or condition exists which might
constitute grounds for the commencement of such a proceeding.
(e) The following terms have the meanings indicated for purposes of this
Agreement:
(i) "Code" means the Internal Revenue Code of 1986, as amended
from time to time.
(ii) "ERISA" means the Employee Retirement Income Act of 1974, as
amended from time to time.
(iii) "PBGC" means the Pension Benefit Guaranty Corporation
established pursuant to Subtitle A of Title IV of ERISA.
(iv) "Plan" means any employee pension benefit plan maintained or
contributed to by the Borrower and insured by the Pension Benefit Guaranty
Corporation under Title IV of ERISA.
7.14 Location of Borrower. Borrowers' place of business (or, if Borrowers
have more than one place of business, its chief executive office) is
located at the address listed under Borrowers' signature on this Agreement.
8. Covenants. Borrowers agree, so long as credit is available under this
Agreement and until Bank is repaid in full:
8.1 Use of Proceeds. To use the proceeds of the credit only for working
capital.
8.2 Financial Information. To provide the following financial information
and statements and such additional information as requested by Bank from
time to time:
(a) Within 120 days of each calendar year end, Borrowers' annual financial
statements for the immediately preceding calendar year, including
Borrowers' Form 10-KSB. These financial statements must be prepared by a
Certified Public Accountant ("CPA") acceptable to Bank. The statements
shall be prepared on a consolidated basis.
(b) Within 60 days of each calendar quarter end, Borrowers' Quarterly
financial statements for the immediately preceding calendar quarter,
including Borrowers' Form 10-QSB. These statements may be internally
prepared. The statements shall be prepared on a consolidated basis.
(c) Promptly upon Bank's request, such other statements, lists of property
and accounts, budgets, forecasts or reports of Borrowers as Bank may
reasonably request from time to time.
8.3 Tangible Net Worth. To maintain on a consolidated basis Tangible Net
Worth equal to at least Four Million Five Hundred Thousand and No/100
Dollars ($4,500,000.00), to be measured on a quarterly basis. Patents,
trademarks, trade names, organization expense, treasury stock, unamortized
debt discount and expense, deferred research and development costs,
deferred marketing expenses, and other like intangibles) less total
liabilities, including but not limited to accrued and deferred income
taxes, and any reserves against assets.
8.4 Equipment Leases in Default. Not to have more than Five Hundred
Thousand and No/100 Dollars ($500,000.00) in the aggregate of Equipment
Leases in default at any time.
8.5 Other Debts. Not to have outstanding or incur any direct or contingent
debts (other than those to Bank), or become liable for the debts of others
without Bank's written consent. This does not prohibit:
(a) Acquiring goods, supplies or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Additional debts for the acquisition of fixed or capital assets, to
the extent permitted elsewhere in this Agreement.
(e) Additional debts and lease obligations for business purposes which do
not exceed a total principal amount of One Million and No/100 Dollars
($1,000,000.00) outstanding at any one time.
8.6 Other Liens. Not to create, assume, or allow any security interest or
lien (including judicial liens) on property Borrowers now or later own,
except:
(a) Deeds of trust and security agreements in favor of Bank.
(b) Liens for taxes not yet due.
(c) Liens outstanding on the date of this Agreement disclosed in writing to
Bank.
(d) Additional purchase money security interests if the total principal
amount of debts secured by such liens does not exceed Two Hundred Thousand
and No/100 Dollars ($200,000.00) at any one time.
(e) Liens created through assignment of Equipment Lease stream revenues to
third-party lenders.
8.7 Dividends. Not to declare or pay any dividends on any of its shares,
except:
(a) dividends payable on its preferred stock;
(b) from earnings available for dividends and earned during the
immediately preceding fiscal year, and in any event, not in
excess of Two Hundred Thirty Thousand and No/100 Dollars($230,000.00) in
any one fiscal year;
(c) in an amount in each fiscal year sufficient to cover the federal and
state income tax liabilities of Borrowers' shareholder's for the
preceding fiscal year arising as a direct result of Borrowers'
reported income tax for such fiscal year.
8.8 Loans to Officers. Not to make any loans, advances or other extensions
of credit to any of Borrowers' executives, officers, directors or
shareholders (or any relatives of any of the foregoing) in excess of Thirty
Thousand and No/100 Dollars ($30,000.00) in the aggregate.
8.9 Change of Ownership. Not to cause, permit, or suffer any change,
direct or indirect, in Borrowers' capital ownership, except between
existing shareholders.
8.10 Notices to Bank. To promptly notify Bank in writing of:
(a) any lawsuit over Two Hundred Thousand and No/100 Dollars ($200,000.00)
against any Borrower.
(b) any substantial dispute between any Borrower and any government
authority.
(c) any failure to comply with this Agreement.
(d) any material adverse change in any Borrower's financial condition or
operations.
(e) any change in any Borrower's name, legal structure, place of business,
or chief executive office if said Borrower has more than one place of
business.
8.11 Books and Records. To maintain adequate books and records.
8.12 Audits. To allow Bank and its agents to inspect Borrowers' properties
and examine, audit, and make copies of books and records at any reasonable
time. If any of Borrowers' properties, books or records are in the
possession of a third party, Borrowers authorize that third party to permit
Bank or its agents to have access to perform inspections or audits and to
respond to Bank's requests for information concerning such properties,
books and records.
8.13 Compliance with Laws. To comply with the laws (including any
fictitious name statute), regulations, and orders of any government body
with authority over Borrower's business.
8.14 Preservation of Rights. To maintain and preserve all rights,
privileges and franchises Borrowers now have.
8.15 Maintenance of Properties. To make any repairs, renewals, or
replacements to keep Borrowers' properties in good working condition.
8.16 Perfection of Liens. To help Bank perfect and protect its security
interests and liens, and reimburse it for related costs it incurs to
protect its security interests and liens.
8.17 Cooperation. To take any action requested by Bank to carry out the
intent of this Agreement.
8.18 Insurance.
(a) Insurance Covering Collateral. To maintain all risk property damage
insurance policies covering the tangible property comprising the
collateral. Each insurance policy must be in an amount acceptable to Bank.
The insurance must be issued by an insurance company acceptable to the Bank
and must include a lender's loss payable endorsement in favor of Bank in a
form acceptable to Bank.
(b) General Business Insurance. To maintain insurance satisfactory to Bank
as to amount, nature and carrier covering property damage (including loss
of use and occupancy) to any of Borrowers' properties, public liability
insurance, including coverage for contractual liability, product liability
and workers' compensation, and any other insurance which is usual for
Borrowers' business.
(c) Evidence of Insurance. To deliver to Bank, upon the request of Bank,
a copy of each insurance policy, or, if permitted by Bank, a certificate of
insurance listing all insurance in force.
8.19 Additional Negative Covenants. Not to, without Bank's written
consent:
(a) engage in any business activities substantially different from
Borrowers' present business.
(b) liquidate or dissolve any Borrower's business.
(c) enter into any consolidation, merger, pool, joint venture, syndicate or
other combination.
(d) lease, or dispose of all or a substantial part of any Borrower's
business or assets except in the ordinary course of Borrowers' business.
(e) Acquire or purchase a business or its assets.
(f) sell or otherwise dispose of any assets for less than fair market value
or enter into any sale and leaseback agreement covering any of its fixed or
capital assets.
8.20 Transfer of Assets to a Trust. Not to transfer any of Borrowers'
assets to a trust unless (a) the trust agreement governing the trust to
which the assets are to be transferred has been reviewed by Bank and Bank
has determined in its sole discretion that such transfer will not be
adverse to Bank's interest; and (b) the trustee of such trust issues a
guaranty of payment in favor of Bank for the Loan and all of Borrowers'
obligations under the Loan Documents in such form as is acceptable to Bank
in its sole discretion.
8.21 ERISA Plans. To give prompt written notice to Bank of-
(a) the occurrence of any reportable event under Section 4043(b) of ERISA
for which the PBGC requires thirty (30) days' notice.
(b) any action by Borrowers to terminate or withdraw from a Plan or the
filing of any notice of intent to terminate under Section 4041(b) of ERISA.
(c) any notice of noncompliance made with respect to a Plan under Section
4041(b) of ERISA.
(d) The commencement of any proceeding with respect to a Plan under
Section 4041 of ERISA.
8.22 Ratio of Residual Value to Unfinanced Capital Expenditures. The ratio
of cash received from residual value of Leased Equipment liquidations at
scheduled Equipment Lease maturities to Unfinanced Capital Expenditures may
not be less than 2.00:1.00 on a quarterly basis. This ratio shall be
tested at the end of each calendar quarter for the immediately preceding
quarter, by dividing the sum of actual cash received from the liquidation
or sale of Leased Equipment sold at Equipment Lease maturities during the
immediately preceding calendar quarter, per Borrowers' current Form 10-QSB,
or Form 10-KSB, as applicable, by the sum of the calculated Unfinanced
Capital Expenditures.
"Unfinanced Capital Expenditures" means the total cost of Leased Equipment
purchases, less the proceeds from discounted Equipment Lease rentals.
8.23 Adjusted EBITDA Debt Coverage Ratio. To maintain on a consolidated
basis an Adjusted EBITDA Debt Coverage Ratio of at least 1.0:1.0. This
ratio will be calculated at the end of each fiscal quarter, using the
prorated current portion of lease payments due on assigned non-recourse
discounted operating leases.
"Adjusted EBITDA Debt Coverage Ratio" means the ratio of Adjusted EBITDA to
the sum of the current portion of long term debt plus (a) the current
portion of lease payments due on assigned non-recourse discounted operating
lease, plus (b) non-lease related interest expense, plus (e) dividends.
"Adjusted EBITDA" means the sum of operating income plus (a) operating
lease depreciation, plus (b) operating lease interest.
8.24 New Equity Investments. To pay to Bank twenty-five percent (25%) of
net proceeds from new equity investments within ninety (90) days of
Borrowers' receipt of said investments, to be applied as principal
reductions to the Loan. Such principal reductions shall be in addition to
any other payments required under this Agreement. and shall be applied to
the most remote payment of principal due under this Agreement.
9. Hazardous Waste Indemnification. Each Borrower will indemnify and hold
Bank harmless from any loss or liability directly or indirectly arising out
of the use, generation, manufacture, production, storage, release,
threatened release, discharge, disposal or presence of a hazardous
substance. This indemnity will apply whether the hazardous substance is
on, under or about each Borrower's property or operations or property
leased to each Borrower. The indemnity includes but is not limited to
attorneys' fees (including the reasonable estimate of the allocated cost of
in-house counsel and staff). The indemnity extends to Bank, its parent,
subsidiaries and all of their directors, officers, employees, agents,
successors, attorneys, and assigns. For these purposes, the term
"hazardous" or "toxic" means any substance which is or becomes designated
as "hazardous" or "toxic" under any federal, state, or local law. This
indemnity will survive repayment of Borrowers' obligations to Bank.
10. Events of Default. Notwithstanding any provision of the Loan
Documents, from and after the date of this Agreement, the following shall
constitute "Events of Default":
10.1 Failure to Pay. Borrowers fail to make a payment when due under: (a)
this Agreement; (b) any of the other Loan Documents; or (c) any other
agreement any Borrower has with Bank or any affiliate of Bank.
10.2 Non-Compliance. Borrowers fail to meet the conditions of, or fail to
perform, any obligation under: (a) this Agreement; (b) any of the other
Loan Documents; or (c) any other agreement any Borrower has with Bank or
any affiliate of Bank.
10.3 Cross-Default. Any default occurs under any agreement in connection
with any credit any Borrower has obtained from anyone else or which any
Borrower has guaranteed.
10.4 Lien Priority. Bank fails to have an enforceable first lien on all
property given as collateral for the Loan.
10.5 False Information. Borrowers or any officer, authorized agent or
accountant of Borrowers have given Bank false, incomplete or misleading
information or representations.
10.6 Death. If any principal officer or majority shareholder of any
Borrower dies.
10.7 Bankruptcy. Any Borrower files a bankruptcy petition, a bankruptcy
petition is filed against any Borrower, or any Borrower makes a general
assignment for the benefit of creditors.
10.8 Receivers. A receiver or similar official is appointed for any
Borrower's business, or the business of any Borrower is terminated.
10.9 Lawsuits. Any lawsuit or lawsuits are filed against Borrowers in an
aggregate amount of Two Hundred Thousand and No/100 Dollars ($200,000.00).
10.10 Judgments. Any judgments or arbitration awards are entered against
any Borrower, or any Borrower enters into any settlement agreements with
respect to any litigation or arbitration, in, an aggregate amount of Two
Hundred Thousand and No/100 Dollars ($200,000.00).
10.11 Government Action. Any governmental authority takes action that Bank
reasonably believes materially adversely affects Borrowers' financial
condition or ability to repay the Loan or perform pursuant to any of the
Loan Documents.
10.12 Default under Related Agreements. Any subordination agreement,
security agreement, deed of trust, or other document required by the Loan
Documents is violated or no longer in effect.
10.13 Other Breach under Agreement. Any Borrower fails to meet the
conditions of, or fails to perform any obligation under, any terms of this
Agreement not specifically referred to in this Article.
10.14 Dissolution or Liquidation. Any Borrower dissolves or liquidates, or
if Borrower is a trust, the trust is revoked or materially modified or
there is a change or substitution of the trustee.
10.15 Material Adverse Change. A material adverse change occurs in: (a)
the financial condition of Borrowers; (b) the value of the collateral; (c)
the ability of Borrowers to repay the Loan; (d) the control or ownership of
Borrowers; or (e) the operations or business of Borrowers.
10.16 ERISA Plans. The occurrence of any one or more of the following
events with respect to Borrowers, provided such event or events could
reasonably be expected, in the judgment of Bank, to subject Borrowers to
any tax, penalty or liability (or any combination of the foregoing) which,
in the aggregate, could have a material adverse effect on the financial
condition of Borrowers with respect to a Plan:
(a) A reportable event with respect to a Plan which is, in the reasonable
judgment of Bank, likely to result in the termination of such Plan for
purposes of Title IV of ERISA.
(b) Any plan termination (or commencement of any proceeding to terminate a
Plan) or Borrowers' full or partial withdrawal from a Plan.
If any of the foregoing Events of Default occur, Bank may do any one or
more of the following, in Bank's sole and absolute discretion: declare
Borrowers in default, require Borrowers to repay Borrowers' entire debt
immediately and without prior notice, collect interest at the default
interest rate contained in the Note from the date of default without
accelerating the payments or exercising any other remedies, and exercise
any and all of Bank's rights, powers and remedies under any of the Loan
Documents, including this Agreement, or otherwise available at law or in
equity. If a bankruptcy petition is filed with respect to any Borrower,
the entire debt outstanding under this Agreement will automatically be due
and payable immediately. Borrowers shall have fifteen (I 5) days, from
receipt of written notice of an Event of Default, to cure the default.
11. Borrowers Acknowledgments. Borrowers hereby acknowledge and agree
that:
11.1 No Breach By Bank. Bank (including all its predecessors) has not
breached any duty to any Borrower in connection with the Loan, and Bank
(including all its predecessors) has fully performed all obligations it may
have had or now has to Borrowers.
11.2 Interest and Other Charges. All interest or other fees or charges
heretofore imposed, accrued or collected by Bank (including all its
predecessors) under the Loan Documents or in connection with the Loan
through the date hereof, and the methodof computing the same, were and are
proper and agreed to by Borrowers and were properly computed and collected.
11.3 Note Balances. The outstanding balances owing on the Note, as
described in this Agreement, are true and correct.
11.4 No Waiver. Except as specifically provided herein, by entering into
this Agreement, Bank does not waive any existing default or any default
hereafter occurring, or become obligated to waive any condition or
obligation in any agreement between or among any of the parties hereto.
11.5 No Future Obligations. Bank has no obligation to make any additional
loan or extension of credit to or for the benefit of any Borrower, and no
obligation to further extend the maturity date of any credit extended to
any Borrower.
11.6 No Third -Party Beneficiaries. This agreement is not intended for,
and shall not be construed to be for, the benefit of any person not a
signatory thereto.
12. Reference and Arbitration.
12.1 Mandatory Arbitration. Unless expressly prohibited by law, any
controversy or claim between or among the parties, including those arising
out of or relating to this Agreement or the Loan Documents and any claim
based on or arising from an alleged tort, shall at the request of any party
be determined by arbitration. The arbitration shall be conducted in
accordance with the United States Arbitration Act (Title 9, U.S. Code),
notwithstanding any choice of law provision in this Agreement, and under
the Commercial Rules of the AAA. The arbitrator(s) shall give effect to
statutes of limitation in determining any claim. Any controversy
concerning whether an issue is arbitrable shall be determined by the
arbitrator(s). Judgment upon the arbitration award may be entered in any
court having jurisdiction. The institution and maintenance of an action
for judicial relief or pursuit of a provisional or ancillary remedy shall
not constitute a waiver of the right of any party, including the plaintiff,
to submit the controversy or claim to arbitration if any other party
contests such action for judicial relief.
12.2 Provisional Remedies, Self-Help and Foreclosure. No provision of this
Section 12 shall limit the right of any party to this Agreement to exercise
self-help remedies such as setoff, foreclosure against or sale of any real
or personal property or collateral or security, or obtaining provisional or
ancillary remedies from a court of competent jurisdiction before, after, or
during the pendency of any arbitration or other proceeding. The exercise
of a remedy does not waive the right of either party to resort to
arbitration or reference. At Bank's option, foreclosure under a deed of
trust or mortgage may be accomplished either by exercise of power of sale
under the deed of trust or by judicial foreclosure of the deed of trust or
mortgage.
13. Release of Bank. In consideration of the agreements and of Bank set
forth in this Agreement, Borrowers and all of their respective heirs,
personal representatives, predecessors, successors and assigns
(individually and collectively, the "Releasors"), hereby fully release,
remise, and forever discharge Bank, the parent of Bank and all other
affiliates and predecessors of Bank, and all past and present officers,
directors, agents, employees, servants, partners, shareholders, attorneys
and managers of Bank, the parent of Bank, and all other affiliates, and
predecessors of Bank and all of their respective heirs, personal
representatives, predecessors, successors and assigns, for, from, and
against any and all claims, liens, demands, causes of action,
controversies, offsets, obligations, losses, damages and liabilities of
every kind and character whatsoever, including, without limitation, any
action, omission, misrepresentation or other basis of liability founded
either in tort or contract and the duties arising thereunder, that the
Releasors, or any one of more of them, has had in the past, or now has,
whether known or unknown, whether asserted or unasserted, by reason of any
matter, cause or thing set forth in, relating to or arising out of, or in
any way connected with or resulting from, the Loan or the Loan Documents.
14. Joint and Several Liability.
(a) Each Borrower agrees that Borrowers are jointly and severally liable
to Bank for the payment of all obligations arising under this Agreement,
and that such liability is independent of the obligations of the other
Borrower. Bank may bring an action against any Borrower, whether an action
is brought against the other Borrower.
(b) Each Borrower agrees that any release which be given by Bank to the
other Borrower will not release such Borrower from its obligations under
this Agreement.
(c) Each Borrower waives any right to assert against Bank any defense,
setoff, counterclaim, or claims which such Borrower may have against the
other Borrower or any other party liable to Bank for the obligations of
Borrowers under this Agreement.
(d) Each Borrower agrees that it is solely responsible for keeping itself
informed as to the financial condition of the other Borrower and of all
circumstances which bear upon the risk of nonpayment. Each Borrower waives
any right it may have to require Bank to disclose to such Borrower any
information which Bank may now or hereafter acquire concerning the
financial condition of the other Borrower.
(e) Each Borrower waives all rights to notices of default or nonperformance
by any other Borrower under this Agreement. Each Borrower waives all
rights to notices of the existence or the creation of new indebtedness by
any other Borrower.
(f) Each Borrower represents and warrants to Bank that it will derive
benefit, directly or indirectly, from the collective administration and
availability of credit under this Agreement. Each Borrower agrees that
Bank will not be required to inquire as to the disposition by any Borrower
of funds disbursed in accordance with the terms of this Agreement.
(g) Each Borrower waives any right of subrogation, reimbursement
indemnification and contribution (contractual, statutory or otherwise),
including without limitation, any claim or right of subrogation under the
Bankruptcy Code (Title 11 of the U.S. Code) or any successor statute, which
such Borrower may now or hereafter have against any other Borrower with
respect to the indebtedness incurred under this Agreement. Each Borrower
waives any right to enforce any remedy which Bank now has or may hereafter
have against any other Borrower, and waives any benefit of, and right to
participate in, any security now or hereafter held by Bank.
15. Rights in the Event of Bankruptcy. If there shall be filed by or
against any Borrower a petition (whether voluntary or involuntary) under
any chapter of the United States Bankruptcy Code (the "Code") on or after
the date of this Agreement, it is the intention of Borrowers and Bank that
the terms and conditions of this Agreement with respect to Borrowers shall
be incorporated into a plan of reorganization under Section 1129 of Code (a
"PI&'). Borrowers agree that under any potential Plan which may be filed
in the future (a) this Agreement shall represent a necessary element
of such Plan, (b) Borrowers will not seek to alter or amend any of terms
and conditions of this Agreement, (c) such terms and conditions are
necessary for Bank's adequate protection, and (d) such terms and conditions
will remain binding upon Borrowers in any such Plan. If Borrowers fail to
obtain confirmation of a plan of reorganization incorporating the terms of
this Agreement within one hundred twenty (120) days after a petition is
filed, Bank is entitled to the automatic and absolute lifting of any
automatic stay as to the enforcement of any of the Loan Documents against
the collateral, including specifically, but not limited to, the stay
imposed by Section 362 of the Code. Borrowers hereby consent to the
immediate lifting of any such automatic stay, and will not contest any
motion by Bank to lift such stay. Borrowers acknowledge that Bank's
interest in the collateral can be adequately protected only if a plan of
reorganization incorporating the terms of this Agreement is confirmed
within one hundred twenty (120) days after the petition is filed. Bank
reserves its right to seek all remedies available to credits under the
Code, including, but not limited to, the right to move for relief from the
automatic stay at any time.
16. Miscellaneous.
16.1 Incorporation. This agreement shall form a part of each of the Loan
Documents, and all references to one of the Loan Documents shall mean that
document as hereby modified.
16.2 No Prejudice; Reservation of Rights. This Agreement shall not
prejudice any rights or remedies of Bank under the Loan Documents. Bank
reserves, without limitation, all rights which it has against any
indemnitor, guarantor, or endorser of the Note.
16.3 No Impairment. Except as specifically hereby amended, the Loan
Documents shall each remain unaffected by this Agreement and all such
documents shall remain in force and effect.
16.4 Purpose and Effect of Bank's Approval. Bank's approval of any matter
in connection with the Loan shall be for the sole purpose of protecting
Bank's security and rights. No such approval shall result in a waiver of
any default of Borrowers. In no event shall Bank's approval be a
representation of any kind with regard to the matter being approved.
16.5 Integration. The Loan Documents, including this Agreement, (a)
integrate all the terms and conditions mentioned in or incidental to the
Loan Documents; (b) supersede all oral negotiations and prior and other
writings with respect to their subject matter; and (c) are intended by the
parties as the final expression of the agreement with respect to the terms
and conditions set forth in those documents, including this Agreement, and
as the complete and exclusive statement of the terms agreed to by the
parties. If there is any conflict between the terms, conditions and
provisions of this Agreement and those of any other agreement or
instrument, including the other Loan Documents, the terms, conditions and
provisions of this Agreement shall prevail. No supplement modification or
amendment of this Agreement or the other Loan Documents shall be effective
unless in writing and signed by Bank and Borrowers.
16.6 Cross Default. Any default under this Agreement or an Event of
Default under any of the Loan Documents shall be an Event of Default under
each and every of the other Loan Documents.
16.7 Counterparts/Construction/Time of Essence. This Agreement and any
attached consents or exhibits requiring signatures may be executed in any
number of counterparts, each of which, when so executed, shall be deemed an
original, but all of which shall constitute one and the same agreement.
Section headings and paragraph titles used in this Agreement are for
reference only and shall not affect or limit the interpretation of meaning
of any provisions of this Agreement. As used in this Agreement, the word
"include(s)" means "include(s), without limitation", and the word
"including" means "including, but not limited to".
16.8 Severability. If any court of competent jurisdiction determines any
provision of this Agreement or any provision in any of the other Loan
Documents to be invalid, illegal or unenforceable, that portion shall be
deemed severed from the rest, which shall remain in full force and effect.
16.9 Exchange of Information. Borrowers agree that Bank may exchange or
disclose financial information about any Borrower with or to any
BankAmerica Corporation affiliates or other related entities.
16.10 Governing Law/Rights in Event of Litigation. This Agreement shall be
governed by and construed according to the laws of the State of Nevada.
Borrowers hereby submit to jurisdiction and venue in Clark County, Nevada,
and agrees that any and all litigation or arbitration proceeding shall be
maintained in Clark County, Nevada. In the event of judicial proceedings,
Borrowers agree that all issues in such judicial proceeding litigation
(including defenses, cross-claims and counter-claims) shall be resolved by
a judge and not a jury and, therefore, Borrowers waive their rights to a
jury trial which they otherwise would have had.
16.11 Attorneys' Fees. In any lawsuit or arbitration proceeding between
Bank and any Borrower which relates to, arises out of, or involves in any
way this Agreement or any of the other Loan Documents, the prevailing party
in said action shall be entitled to recover all of its attorneys' fees
(including any allocated fees of in-house counsel) and costs (including but
not limited to "taxable costs" as defined by statute) associated with such
suit or arbitration.
16.12 Successors and Assigns. This Agreement shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns; provided, however,
Borrowers may not transfer their rights under the Loan Documents without
the prior written consent of Bank. Bank may transfer its rights under the
Loan Documents to any successor in interest.
16.13 No Waiver/Cumulative Remedies/Survival. No failure to exercise or no
delay in exercising any right, power or remedy hereunder or under any of
the Loan Documents shall impair any rights power or remedy that Bank may
have, nor shall such delay be construed to be a waiver of any of such
rights, powers or remedies. Bank shall not be deemed to have waived any
right, power or remedy except in writing signed by an officer of Bank
expressly stating that it is a waiver of same right, power or remedy. The
rights, powers and remedies of Bank under the Loan Documents are cumulative
and not exclusive of any rights, powers or remedies that Bank would
otherwise have, and may be pursued at any time and from time to time and in
such order as Bank shall determine in its sole discretion. The
representations, warranties, acknowledgments and agreements set forth
herein shall survive the date of this Agreement.
16.14 Mutual Agreement. The parties hereto agree that the terms and
provisions of this Agreement embody their mutual intent and that such terms
and provisions are not to be construed more liberally in favor, nor more
strictly against, any party. This Agreement shall not be construed as if
it had been prepared by one of the parties, but rather as if it had been
prepared by all of the parties.
16.15 GAAP. Except as otherwise stated in this Agreement, all financial
information provided to Bank and all financial covenants will be made under
generally accepted account principles, consistently applied.
16.16 Disposition of Schedules. Reports, Etc. Delivered by Borrowers.
Bank will not be obligated to return any schedules, invoices, statements,
budgets, forecasts, reports or other papers delivered by Borrowers. Bank
will destroy or otherwise dispose of such materials at such time as Bank,
in its discretion, deems appropriate.
16.17 Returned Merchandise. Until Bank exercises its rights to collect
the accounts receivable as provided under any security agreement required
under this Agreement, Borrowers may continue their present policies for
returned merchandise and adjustments. Credit adjustments with respect to
returned merchandise shall be made immediately upon receipt of the
merchandise by Borrowers or upon such other disposition of the merchandise
by the debtor in accordance with Borrowers' instructions.
16.18 Verification of Receivables. Bank may at any time, either orally
or in writing, request confirmation from any debtor of the current amount
and status of the accounts receivable upon which such debtor is obligated.
16.19 Indemnification. Borrowers agree to indemnify Bank against, and hold
Bank harmless from, all claims, actions, losses, costs and expenses
(including attorneys' fees and allocated costs for in-house legal services)
incurred by Bank and arising from any contention whether well-founded or
otherwise, that there has been a failure to comply with any law regulating
Borrowers' sales or leases to or performance of services for debtors
obligated upon Borrowers' accounts receivable and disclosures in connection
therewith. This indemnity will survive repayment of Borrowers'
obligations to Bank and termination of this Agreement.
16.20 Notices. All notices required under this Agreement shall be
personally delivered or sent by first class mail, postage prepaid, to the
addresses on the signature page of this Agreement, or to such other
addresses as Bank and Borrowers may specify from time to time.
16.21 Prior Agreement Superseded. This Agreement supersedes the Original
Loan Agreement, which was subsequently modified on December 6, 1995,
December 11, 1995, March 10, 1996, July 1, 1996, and August 15, 1996, and
any credit outstanding thereunder shall be deemed outstanding under this
Agreement.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed on the dates set forth below to be effective as of the day and
year set forth above.
Bank of America National TJ Systems Corporation,
Trust and Savings Association a Delaware corporation
By: /s/ David B. Strong By: /s/ Michael F. Daniels
------------------------- -----------------------
David B. Strong, its Michael F. Daniels, its
Vice President President
TJ Computer Services, Inc.
a Delaware corporation
By: /s/ Michael F. Daniels
----------------------
Michael F. Daniels, its
President
Address where notices to Address to where notices to the
the Bank are to be sent: Borrowers are to be sent:
101 North First Avenue, 6540 South Pecos Road, Suite 103
Dept. 4934 Las Vegas, NV 89120
ATTN.: Gary L. Richerson
Phoenix , Arizona 85003
EXHIBIT 10.16
LOAN MODIFICATION AGREEMENT
EFFECTIVE DATE: July 24, 1997
PARTIES: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
successor by merger to Bank of America Nevada (hereinafter
collectively referred to herein as the "Bank"); and
TJ Systems Corporation, a Delaware corportion (hereinafter
referred to as "TJS") and TJ Computer Services, Inc., a Delaware
corporation (hereinafter referred to as "TJCS"). TJS and TJCS
are sometimes referred to hereinafter individually as the
"Borrower" and collectively as the "Borrowers".
RECITALS:
A. Borrowers' business consists of acquiring new computer and
telecommunications equipment ("Leased Equipment") for lease to unaffiliated
third parties ("Lessees"), creating equipment leases ("Equipment Leases")
between Borrowers, as lessor, and such Lessees for the Leased Equipment.
From time to time, Borrowers will assign such Equipment Leases ("Lease
Assignments") to other unaffiliated third party investors ("Assignees") for
negotiated fees ("Assignment Fees"). Pursuant to said Lease Assignments,
Borrowers retain title to the Leased Equipment and grants to said Assignee
a security interest in said Leased Equipment.
B. Bank and Borrowers are parties to that certain Business Loan Agreement
dated as of July II, 1995 (the "Original Loan Agreement"'), which
established a revolving line of credit in the original maximum principal
amount of Two Million Five Hundred Thousand and NO 100 Dollars
($2,500,000.00) (the "Loan"). The Original Loan Agreement was subsequently
modified on December 6, 1995, December 11, 1995, March 10, 1996, July 1,
1996, and August 15, 1996; and subsequently amended and restated by that
certain Amended and Restated Business Loan Agreement dated February 28,
1997 (the "Agreement"). Capitalized terms used herein without
definition shall have the same meanings given in the Original Loan
Agreement and the Agreement.
C. In connection with the Loan, TJS and TJCS each executed a Security
Agreement dated July 11, 1995, in favor of Bank, granting to Bank
collateral defined therein (the "Security Agreement").
D. In connection with the Loan, TJS executed Uniform Commercial Code
Financing Statements on Form UCC-1 dated July 11, 1995, (a) filed in the
office of the of State of the State of Nevada on July 28, 1995, as Filing
No. 9510581, (b) filed in the office of the Secretary of State of the State
of New York on July 31, 1995, as Filing No. 154451, and (c) recorded in the
Official Records of Clark County, Nevada on August 9, 1995, in Book No.
950809, Instrument No. 01433; and (ii) TJCS executed Uniform Commercial
Code Financing Statements on Form UCC-1 dated July 11, 1995, (a) filed in
the office of the Secretary of State of the State of Nevada on July 28,
1995, as Filing No. 9510582, (b) filed in the office of the Secretary of
State of the State of New York on July 31, 1995, as Filing No. 154452, and
(c) recorded in the Official Records of Clark County, Nevada on August 9,
1995, in Book No. 950809, Instrument No. 01432 (collectively, the "UCCs").
E. In connection with the Loan, Bank and IBM CREDIT CORPORATION ("IBM
Credit") entered into that certain Intercreditor and Subordination
Agreement made as of July 20, 1995, whereby IBM Credit agreed to
subordinate certain of its security interests to the security interests of
Bank under the Loan.
F. All of the documents, certificates or agreements executed in connection
with the Loan, including, without limitation, those listed above and those
which evidence, guaranty, secure or modify the Loan, as any or all of them
may have been amended or modified to date, shall hereinafter be
collectively referred to as the "Existing Loan Documents". This
Modification Agreement (the "Modification"), all other documents executed
in connection with this Modification, and the Existing Loan Documents, as
modified hereby, are herein collectively referred to as the "Loan
Documents".
G. As of July 25, 1997, Borrowers were indebted to Bank under the Existing
Loan Documents in the principal amount of One Million Nine Hundred Eleven
Thousand Three Hundred Sixty-Five and No/100 Dollars ($1,911,365.00), plus
accrued and unpaid interest of Sixteen Thousand Four Hundred Sixty-Seven
and 97/100 Dollars ($16,467.97) (collectively, the "Present Debt'), which
Present Debt is which Present Debt is due and payable to Bank without
offset, counterclaim or any defense of any kind or nature. This principal
balance is calculated without regard to any principal payments which are
required under this Agreement.
H. Borrowers have requested that Bank modify the Loan as set forth below.
Bank, although under no obligation to do so, is willing to so modify the
Loan, subject to the terms and conditions set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
AGREEMENTS:
1. Reaffirmation/No Impairment. Borrowers reaffirm all of their
obligations under the Loan Documents and the Loan. Except as specifically
hereby amended, the Loan Documents shall each remain in full force and
effect. Borrowers' payment and performance obligations pursuant to the
Loan Documents, including all extensions, amendments, renewals or
replacements thereof, shall continue to be secured by the security
interests and liens arising under the Loan Documents.
2. Modifications. The existing Loan Documents are hereby modified and
amended as described below. In the event of a conflict between terms of
the Existing Loan Documents and the terms of this Modification, this
Modification shall control:
2.1. Required Principal Reductions. The August 15, 1997 payment required
under Section 3.3(c) of the Agreement is amended to reduce the payment from
$125,000.00 to $55,000.00. Bank hereby acknowledges that the restructure of
the August 15, 1997 Required Principal Reduction satisfies the requirements
under Section 3.3(c) of the Agreement to extend the Maturity Date of the
loan to January 1, 1998. Borrower shall also be required to make the
following scheduled principal reduction payments in addition to the
payments listed in Sections 3.7 and 8.24 of the Agreement.
<TABLE>
<CAPTION>
Date Due Principal Reduction
- --------------------------- ---------------------
<S> <C>
September 15, 1997 $40,000.00
October 15, 1997 $30,000.00
</TABLE>
All principal reductions in payments shall be applied to the most remote
due under the Agreement.
2.2 Corporate Certificate. Concurrently with the execution of this
Agreement, TJS and TJCS shall execute and deliver to Bank a Certificate of
the Secretary authorizing Borrowers to enter into this Modification, in a
form acceptable to Bank in Bank's sole discretion (the "Certificate").
3. Conditions Precedent. Before this Agreement becomes effective and any
party becomes obligated under it, all of the following conditions shall
have been satisfied at Borrowers' sole cost and expense in a manner
acceptable to Bank in the exercise of Bank's sole judgement and discretion:
3.1 Receipt of Documents. Bank shall have received fully executed, and
where appropriate, acknowledged originals of the following:
(a) this Agreement;
(b) the Certificate;
(c) Articles of Incorporation, Certificate of Good Standings, and Bylaws
for LEC Technologies, Inc.; and,
(d) any other documents Bank may reasonably require or request in
accordance with this Modification or the other Loan Documents, all
in such form as Bank may require in the exercise of Bank's sole
judgment and discretion.
3.2 Extension Fee. Bank shall have received a fully earned and
nonrefundable extension fee in the amount of Five Thousand and
No/100 Dollars ($5,000.00).
3.3 Reimbursement of Bank's Costs and Expenses. Bank shall have
received reimbursement, in immediately available funds, of all costs and
expenses incurred by Bank in connection with this Modification, including
charges of Seventy-Four and No/100 Dollars ($74.00) for recording and/or
filing of any UCC Financing Statement amendments, One Hundred Fifty and
No/100 Dollars ($150.00) for legal fees, costs and expenses of Bank's
counsel and Three Hundred and no/100 Dollars ($300.00) for document
preparation fee (the "Document Preparation Fee"). Such costs and
expenses may include the allocated costs for services for Bank's
in-house staffs, such as legal and appraisal.
4. Representations, Warranties and Acknowledgements. Borrowers represent,
warrant and acknowledge to Bank as follows:
4.1 Recitals. The recitals set forth above are true, complete, accurate
and correct, and such recitals are incorporated herein by this reference.
4.2 No Default. No Event of Default has occurred and is continuing, and no
event has occurred and is continuing which, with notice or the passage of
time or both, would be an Event of Default.
4.3 Loan Documents. All representations and warranties made and given by
Borrowers in the Loan Documents are true, complete, accurate and correct,
as if given as of the date of this agreement.
4.4 Property. Borrowers lawfully possess and hold a 100% ownership
interest in all of the Collateral granted by Borrowers for the Loan, free
and clear of any defects, reservations of title or conditional sales
contracts, and also free and clear of any security interest or liens other
than those in favor of Bank.
4.5 Enforceable Loan Documents. The Loan Documents, including this
Agreement, to which Borrowers are a party are legal, valid and
binding agreements of Borrowers, enforceable in accordance with
their respective terms, and any instrument or agreement required
hereunder or thereunder, when executed and delivered, will be similarly
legal, valid, binding and enforceable.
4.6 . Financial Information. All financial and other information that has
been or will be supplied to Bank is: (a) sufficiently complete to give Bank
accurate knowledge of Borrowers' financial condition; (b) in form and
content required by Bank and in accordance with Generally Accepted
Accounting Practices ("GAAP"); and (c) in compliance with all applicable
government regulations. No material adverse change has occurred in the
business assets, or financial condition of Borrowers since Borrowers last
supplied financial statements or information to Bank.
4.7 No Claims or Defenses. The Present Debt is due and payable to Bank, and
Borrowers have no claim, offset, counterclaim or defense with respect to:
(a) the payment of the Present Debt; (b) the payment of any other sums due
under the Loan Documents; (c) the performance of Borrowers' obligations
under the Loan Documents; or (d) any liability under any of the Loan
Documents.
4.8 No Breach by Bank. Bank (including all of its predecessors) has not
breached any duty to Borrowers in connection with the Loan, and Bank
(including all of its predecessors) has fully performed all obligations it
may have had or now has to Borrowers.
4.9 Interest and Other Charges. All interest or other fees or charges
which have been imposed, accrued or collected by Bank (including all of its
predecessors) under the Loan Documents or in connection with the Loan
through the date of this Modification, and the of computing the same, were
and are proper and agreed to by Borrowers and were properly computed and
collected.
4.10 Claims, Disputes, Impairments. Borrowers have no pending
litigations, tax claims, proceedings or disputes that may adversely affect
Borrowers' financial condition or impair Borrowers' ability to perform
under the Loan Documents.
4.11 Borrowing Entity. Borrowers are a corporation, which is duly
organized, validly existing and in good standing under the laws of the
State of Delaware. There have been no changes in the organization,
composition, ownership, structure or formation of documents of Borrowers
since the inception of the Loans. In each state in which Borrowers do
business, it is properly licensed and in good standing. This Modification,
and any instrument of agreement required hereunder are within Borrowers'
with any of Borrowers' organizational papers.
5. No Waiver. Except as specifically provided herein, by entering into
this Modification, Bank does not waive any previous or existing default or
any default hereafter occurring, or become obligated to waive any condition
or obligation in any agreement between or among any of the parties hereto.
6. No Future Obligations. Bank has no obligation to make any additional
loan or extension of credit to or for the benefit of Borrowers, and Bank
has no obligation to further extend the maturity date of any credit
extended to Borrowers.
7. No Third Party Beneficiaries. This agreement is not intended for, and
shall not be construed to be for, the benefit of any person not a signatory
thereto.
8. Release of Bank. In consideration of the agreements and of Bank set
forth in this Modification, Borrowers, and all of their respective heirs,
personal representatives, predecessors, successors and assigns
(individually and collectively, the "Releasors"), hereby fully release,
remise,and forever discharge Bank, the parent of Bank and all other
affiliates and predecessors of Bank, and all past and present officers,
directors,,agents, employees, servants, partners, shareholders, attorneys
and managers of Bank, the parent of Bank, and all other affiliates, and
predecessors of Bank and all of their respective heirs, personal
representatives, predecessors, successors and assigns, for, from, and
against any and all claims, liens, demands, causes of action,
controversies, offsets, obligations, losses, damages and liabilities of
every kind and character whatsoever, including, without limitation, any
action, omission, misrepresentation or other basis of liability founded
either in tort or contract and the duties arising thereunder, that the
Releasors, or any one of more of them, has had in the past, or now has,
whether known or unknown, whether asserted or unasserted, by reason of any
matter, cause or thing set forth in, relating to or arising out of, or in
any way connected with or resulting from, the Loan or the Loan Documents.
9. Incorporation. This agreement shall form a part of each of the Loan
Documents, and all references to one of the Loan documents shall mean
that-document as hereby modified. This Modification shall not prejudice
any rights or remedies of Bank under the Loan
Documents.
10. Purpose and Effect of Bank's Approval. Bank's approval of any
matter in connection with the Loan shall be for the sole purpose of
protecting Bank's security and rights. No such approval shall result in a
waiver of any default of Borrowers or Guarantor. In no event shall Bank's
approval be a representation of any kind with regard to the matter being
approved.
11. Integration. The Loan Documents, including this Modification,
constitute the entire agreement and final expression between the parties
with respect to the terms and conditions set forth in the Loan Documents,
including this Modification. No supplement modification or amendment of
this Modification or the other Loan Documents shall be effective unless in
writing and signed by Bank and Borrowers.
12. Counterparts/Construction/Time of Essence. This Modification may be
executed in any number of counterparts, each of which, when so executed,
shall be deemed an original, but all of which shall constitute one and the
same agreement. Section headings and paragraph titles used in this
Modification are for reference only and shall not affect or limit the
interpretation of meaning of any provisions of this Modification. As used
in this Modification, the word "include(s)" means "include(s), without
limitation", and the word "including" means "including, but not limited
to". Time is of the essence of this Modification and the other Loan
Documents.
13.Governing Law/Rights in Event of Litigation/Invalidity. This
Modification shall be governed by and construed according to the laws of
the State of Arizona. Borrowers hereby submits to jurisdiction and venue
in Clark County, Nevada, and agrees that any and all litigation or
arbitration proceeding shall be maintained in Clark County, Nevada. In the
event of judicial proceeding litigation (including defenses, cross-claims
and counter-claims) shall be resolved by a judge and not a jury and,
therefore, Borrowers waives their rights to a jury trail which it otherwise
would have had. If any court of competent jurisdiction determines any
provision of this Modification or any provision in any of the other Loan
Document to be invalid, illegal or unenforceable, that portion shall be
deemed severed from the rest, which shall remain in full force and effect.
14. Attorneys' Fees. In any lawsuit or arbitration proceeding between
Bank and Borrowers, which relates to, arises out of, or involves in any way
this Modification or any of the other Loan Documents, if Bank prevails, in
whole or in part, in said action, Bank shall be entitled to recover all of
its attorneys' fees (including any allocated fees of in-house counsel) and
costs (including but not limited to "taxable costs" as defined by statute)
associated with such suit or arbitration.
15. Successors and Assigns. This Modification shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns; provided, however,
Borrowers may not transfer their rights under the Loan Documents without
the prior written consent of Bank. Bank may transfer its rights under the
Loan Documents to any successor in interest.
16. No Waiver/Cumulative Remedies/Survival. No failure to exercise or no
delay in exercising any right, power or remedy hereunder or under any of
the Loan Documents shall impair any right, power or remedy that Bank may
have, nor shall such delay be construed to be a waiver of any such rights,
powers or remedies. Bank shall not be deemed to have waived any right,
power or remedy except in writing signed by an authorized officer of bank
expressly stating that it is a waiver of same right, power or remedy. The
rights, powers and remedies of Bank under the Loan Documents are cumulative
and not exclusive of any rights, powers or remedies that Bank would
otherwise have, and may be pursued at any time and from time to time and in
such order as Bank shall determine in its sole discretion. The
representations, warranties, acknowledgements and agreements set forth
herein shall survive the date of this Modification.
17. Mutual Agreement. The parties hereto agree that the terms and
provisions of this Modification embody their mutual intent and that
such terms and provisions are not to be construed more liberally in
favor, nor more strictly against, any party. This Modification shall not
be construed as if it had been prepared by one of the parties, but rather
as if it had been prepared by all of the parties.
18. Rights in the Event of Bankruptcy. If there shall be filed by or
against Borrowers a petition (whether voluntary or involuntary) under any
chapter of the United States Bankruptcy Code (the "Code") on or after the
date of Us Modification, it is the intention of Borrowers and Bank that the
terms and conditions of this Modification with respect to Borrowers shall
be incorporated into a plan of reorganization under Section I 1 29 of Code
(a "Plan"'). Borrowers agrees that under any potential Plan which may be
filed in the future (i) this Modification shall represent a necessary
element of such Plan, (ii) Borrowers will not seek to alter or amend any of
terms and conditions of this Modification, (iii) such terms and conditions
are necessary for Bank's adequate protection, and (iv) such terms and
conditions win remain binding upon Borrowers in any such Plan. If
Borrowers fails to obtain confirmation of a plan of reorganization
incorporating the terms of this Modification within one hundred twenty
(120) days after a petition is filed, Bank is entitled to the automatic and
absolute lifting of any automatic stay as to the enforcement of any of the
Loan Documents against the collateral, including specifically, but not
limited to, the stay imposed by Section 362 of the Code. Borrowers hereby
consents to the immediate lifting of any such automatic stay, and will not
contest any motion by Bank to lift such stay. Borrowers acknowledges that
Bank's interest in the collateral can be adequately protected only if a
plan of reorganization incorporating the terms of this Modification
is confirmed within one hundred twenty (120) days after the petition is
filed. Bank reserves its right to seek all remedies available to credits
under the Code, including, but not limited to, the right to move for relief
from the automatic stay at any time.
19. Hazardous Waste Indemnification. Borrowers will indemnify, protect,
defend and hold harmless Bank for, from and against any loss or liability
directly or indirectly arising out of the use generation, manufacture,
production, storage, release, threatened release, discharge, disposal or
presence of a hazardous substance. This indemnity will apply whether the
hazardous substance is on, under or about Borrowers' property or operations
or property leased to Borrowers. This indemnity includes, but is not
limited to, attorneys' fees (including the reasonable estimate of the
allocated cost of in-house counsel and staff). This indemnity extends to
Bank, its parent, subsidiaries and all of their directors, officers,
employees, agents, successors, attorneys and assigns. The term "hazardous
substances" ("Hazardous Substances") means any substance which is or
becomes designated as "hazardous" or "toxic" under any federal, state or
local law, or any petroleum products, including crude oil and any produce
derived directly or indirectly from, or any fraction or distillate of,
crude oil. This indemnity will survive repayment of the Borrowers'
obligations to Bank.
21. Reference and Arbitration.
21.1 Mandatory Arbitration. Unless expressly prohibited by law, any
controversy or claim between or among the parties, including those arising
out of or relating to this Modification or the Loan Documents and any claim
based on or arising from an alleged tort, shall at the request of any party
be determined by arbitration. The arbitration shall be conducted in
accordance with the United States Arbitration Act (Title 9, U.S. Code),
notwithstanding any choice of law provision in this Modification, and under
the Commercial Rules of the AAA. The arbitrator(s) shall give effect to
statutes of limitation in determining any claim. Any controversy
concerning whether an issue is arbitrable shall be determined by the
arbitrator(s). Judgment upon the arbitration award may be entered in any
court having jurisdiction. The institution and maintenance of an action
for judicial relief or pursuit of a provisional or ancillary remedy shall
not constitute a waiver of the right of any party, including the plaintiff,
to submit the controversy or claim to arbitration if any other party
contests such action for judicial relief.
21.2 Provisional Remedies, Self-Help and Foreclosure. No provision of this
Section [21] shall limit the right of any party to this Modification to
exercise self-help remedies such as setoff, foreclosure against or sale of
any real or personal property or collateral or security, or obtaining
provisional or ancillary remedies from a court of competent jurisdiction
before, after, or during the pendency of any arbitration or other
proceeding. The exercise of a remedy does not waive the right of either
party to resort to arbitration or reference. At Bank's option, foreclosure
under a deed of trust or mortgage may be accomplished either by exercise of
power of sale under the deed of trust or by judicial foreclosure of the
deed of trust or mortgage. Arbitration.
22. Cross Default. Any default under this Modification or an Event of
Default under any of the Loan Documents shall be an Event of Default under
each and every of the other Loan Documents.
IN WITNESS WHEREOF, the parties hereto have caused this Modification to be
executed on the dates set forth below to be effective as of the day and
year set forth above.
"BANK"
BANK OF ANMRICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
Executed: August 1, 1997 By: /s/ Gary L. Richerson
-------------- ------------------------
Name: Gary L. Richerson
Title: Vice President
"BORROWERS"
TJ Systems Corporation, a
Delaware corporation
Executed: August 1, 1997 By: /s/ Michael F. Daniels
-------------- ------------------------
Name: Michael F. Daniels
Title: President
TJ Computer Services, Inc.,
a Delaware corporation
Executed: August 1, 1997 By: /s/ Michael F. Daniels
-------------- ------------------------
Name: Michael F. Daniels
Title: President
EXHIBIT 10.17
SECOND LOAN MODIFICATION AGREEMENT
EFFECTIVE DATE: February 5, 1998
PARTIES: BANK OF AMERICA NATIONAL TRUST AND SAVINGS ASSOCIATION,
successor by merger to Bank of America Nevada (hereinafter
collectively referred to herein as the "Bank"); and
LEC TECHNOLOGIES, INC., a Delaware corporation, formerly
known as Leasing Edge Corporation, formerly known as TJ
Systems Corporation (hereinafter referred to as "LEC")
and TJ COMPUTER SERVICES, INC., a New York corporation
(hereinafter referred to as "TJCS"). LEC and TJCS are
sometimes referred to hereinafter individually as the
"Borrower" and collectively as the "Borrowers".
A. Borrowers' business consists of acquiring new computer and
telecommunications equipment ("Leased Equipment"') for lease to
unaffiliated third parties ("Lessees"), creating equipment leases
("Equipment Leases") between Borrowers, as lessor, and such Lessees for the
Leased Equipment. From time to time, Borrowers will assign such Equipment
Leases ("Lease Assignments") to other unaffiliated third party investors
("Assignees") for negotiated monetary considerations ("Assignment Fees").
Pursuant to said Lease Assignments, Borrowers retain title to the Leased
Equipment and grants to said Assignee a security interest in said Leased
Equipment.
B. Bank and Borrowers were parties to that certain Business Loan Agreement
dated as of July 11, 1995, and subsequently modified on December 6, 1995,
December 11, 1995, March 10, 1996, July 1, 1996, and August 15, 1996
(collectively the "Original Loan Agreement"), which established a revolving
line of credit in the original maximum principal amount of Two Million Five
Hundred Thousand and No/100 Dollars ($2,500,000.00) (the "RLC"). The
Original Loan Agreement was subsequently amended and restated by that
certain Amended and Restated Business Loan Agreement dated February 28,
1997, as amended by that certain Loan Modification Agreement dated July 24,
1997 (collectively the "Restated Agreement"). Pursuant to the items of the
Restated Agreement, the RLC was converted to a term loan (the "Loan").
Capitalized terms used herein without definition shall have the same
meanings given in the Restated Agreement.
C. In connection with the Loan, LEC and TJCS each executed a Security
Agreement dated July 11, 1995, in favor of Bank, granting to Bank
collateral defined therein (the "Security Agreement").
D. In connection with the Loan, LEC executed Uniform Commercial Code
Financing Statements on Form UCC- I dated July II, 1995, (a) filed in the
office of the Secretary of State of the State of Nevada on July 28, 1995,
as Filing No. 9510581, (b) filed in the office of the Secretary of State of
the State of New York on July 31, 1995, as Filing No. 154451, and (c)
recorded in the Official Records of Clark County, Nevada on August 9, 1995,
in Book No. 950809, Instrument No. 01433; and (ii) TJCS executed Uniform
Commercial Code Financing Statements on Form UCC-1 dated July 11, 1995, (a)
filed in the office of the Secretary of State of the State of Nevada on
July 28, 1995, as Filing No. 9510582, (b) filed in the office of the
Secretary of State of the State of New York on July 31, 1995, as Filing No.
154452, and (c) recorded in the Official Records of Clark County, Nevada on
August 9, 1995, in Book No. 950809, Instrument No. 01432 (collectively, the
"UCCs").
E. In connection with the Loan, Bank and IBM CREDIT CORPORATION ("IBM
Credit"') entered into that certain Intercreditor and Subordination
Agreement made as of July 20, 1995, whereby IBM Credit agreed to
subordinate certain of its security interests to the security interests of
Bank under the Loan.
F. All of the documents, certificates or agreements executed in
connection with the Loan, including, without limitation, those listed above
and those which evidence, guaranty, secure or modify the Loan, as any or
all of them may have been amended or modified to date, shall hereinafter be
collectively referred to as the "Existing Loan Documents". This Second
Modification Agreement (the "Modification"), all other documents executed
in connection with this Modification, and the Existing Loan Documents, as
modified hereby, are herein collectively referred to as the "Loan
Documents".
G. As of February 5, 1998, Borrowers were indebted to Bank under the
Existing Loan Documents in the principal amount of One Million Three
Hundred Sixty-Six Thousand Three Hundred Sixty-Five and No/100 Dollars
($1,366,365.00), plus accrued and unpaid interest of Thirty-One Thousand
Nine Hundred Thirty-Seven and 53/100 Dollars ($31,937.53) (collectively,
the "Present Debt"), which Present Debt is due and payable to Bank without
offset, counterclaim or any defense of any kind or nature. This principal
balance is calculated without regard to any principal payments which are
required under this Agreement.
H. Borrowers have requested that Bank modify the Loan as set forth below.
Bank, although under no obligation to do so, is willing to so modify the
Loan, subject to the terms and conditions set forth below.
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties agree as follows:
AGREEMENTS:
1. Reaffirmation/No Impairment. Borrowers reaffirm all of their
obligations under the Loan Documents and the Loan. Except as specifically
hereby amended, the Loan Documents shall each remain in full force and
effect. Borrowers' payment and performance obligations pursuant to the
Loan Documents, including all extensions, amendments, renewals or
replacements thereof, shall continue to be secured by the security
interests and liens arising under the Loan Documents.
2. Modifications. The Existing Loan Documents are hereby modified and
amended as described below. In the event of a conflict between terms of
the Existing Loan Documents and the terms of this Modification, this
Modification shall control:
2.1. Maturity Date. The maturity date of the Loan is hereby extended to
June 15, 1999. All sums owing under the Loan shall be due an payable no
later than this extended maturity date.
2.2 Interest Rate. The unpaid principal balance of the Loan outstanding
from time to time shall bear interest at the rates described below:
(a) Effective January 1, 1998 through June 15, 1998, interest shall
accrue on the unpaid principal balance of the Loan at an annual interest
rate equal to the Reference Rate in effect from time to time plus four
hundred (400) basis points;
(b) Effective June 16, 1998 through December 15, 1998, interest shall
accrue on the unpaid principal balance of the Loan at an annual interest
rate equal to the Reference Rate in effect from time to time plus five
hundred (500) basis points; and,
(c) Effective December 16, 1998 through June 15, 1999, interest shall
accrue on the unpaid principal balance of the Loan at an annual interest
rate equal to the Reference Rate in effect from time to time plus six
hundred (600) basis points.
2.3 Payment. Beginning January 15, 1998, installments of principal, each
in the amount specified below for the due date specified below, shall be
due and payable on the 15th day of each month, plus interest accrued
through the last day of the immediately preceding month at the applicable
Interest Rate in effect pursuant to Section 2.2 of this Modification. The
principal payment schedules listed below do not include the principal
reductions required under Section 8.24 of the Restated Agreement.
<TABLE>
<CAPTION>
Date Due Principal Payment
- --------------------------------------- --------------------
<S> <C>
January 15, 1998 through June 15, 1998 $ 45,546.00
July 15, 1998 through December 15, 1998 $ 72,873.00
January 15, 1999 through May 15, 1999 $109,309.00
June 15, 1999 all remaining unpaid
principal, accrued and
unpaid interest, and
any unpaid fees and
expenses
</TABLE>
Any principal payments made to Bank pursuant to Section 8.24 of the
Restated Agreement will be in addition to the monthly principal payments
described above, and will not be credited towards any such monthly
payments.
2.4 Tangible Net Worth. Section 8.3 of the Restated Agreement is
amended as follows: Borrowers agree, until Bank is repaid in full to
maintain on a consolidated basis quarterly Tangible Net Worth equal to at
least the amounts specified below for the periods specified below:
<TABLE>
<CAPTION>
Period Amount
- ---------------------------------------- -------------
<S> <C>
December 31, 1997 through March 31, 1998 $3,750,000.00
June 30, 1998 $3,500,000.00
September 30, 1998 through December 31,
1998 $3,250,000.00
March 31, 1999 $3,000,000.00
</TABLE>
"Tangible Net Worth" means the gross book value of the Borrowers' assets
(excluding goodwill, patents, trademarks, trade names, organizational
expense, treasury stock, unamortized debt discount and expense, deferred
research and development costs, deferred marketing expense and other like
intangibles) less total liabilities, including but not limited to accrued
and deferred income taxes, and any like reserves against assets.
2.5 Other Debts. Section 8.5 of the Restated Agreement is amended as
follows: Not to have outstanding or incur any direct or contingent debts
(other than those to Bank) or become liable for the debts of others without
Bank's written consent. "Debts" are defined as borrowing transactions
between Borrowers and third parties or capital investment transactions
financed by third parties. This does not prohibit:
(a) Acquiring goods, supplies or merchandise on normal trade credit.
(b) Endorsing negotiable instruments received in the usual course of
business.
(c) Obtaining surety bonds in the usual course of business.
(d) Debts and lease obligations for business purposes in existence as of
the date hereof ("Existing Debt"), and additional debts and lease
obligations for business purposes ("Additional Debts"); provided the total
of all Existing Debt plus Additional Debt does not exceed a total principal
amount of Two Million and No/100 Dollars ($2,000,000.00) outstanding at any
one time.
2.6 Additional Negative Covenants. Section 8.19(c) of the Agreement is
amended in its entirety to read as follows:
(c) transfer any of Borrowers' assets to, provide monetary assistance to,
invest in, finance or enter into any consolidation, merger, pool, joint
venture, syndicate or other combination. This does not prohibit:
1. The payment by Borrowers of expenses incurred by Borrower on behalf
of any of Borrowers affiliated entities (for example, the payment by
Borrowers of invoices for consolidated property and liability
insurance, etc.) provided that such expenses are allocated back to the
affiliated entity through appropriate intercompany charges.
2. The reimbursement of expenses incurred by any of Borrowers
affiliated entities on behalf of Borrowers provided that such
expenses are allocated back to Borrowers through appropriate
intercompany charges.
3. Conditions Precedent. Before this Agreement becomes effective and any
party becomes obligated under it, all of the following conditions shall
have been satisfied at Borrowers' sole cost and expense in a manner
acceptable to Bank in the exercise of Bank's sole judgment and discretion:
3.1 Receipt of Documents. Bank shall have received fully executed, and
where appropriate, acknowledged originals of the this Agreement
and any other documents Bank may reasonably require or request in
accordance with this Modification or the other Loan Documents, all
in such form as Bank may require in the exercise of Bank's sole
judgement and discretion.
3.2 Extension Fee. Bank shall have received a fully earned and
nonrefundable extension fee in the amount of Twenty Thousand Four Hundred
Ninety-Five and 48/100 Dollars ($20,495.48).
3.3 Reimbursement of Bank's Costs and Expenses. Bank shall have
received reimbursement, in immediately available funds, of all costs and
expenses incurred by Bank in connection with this Modification, including
legal fees, costs and expenses of Bank's counsel. Such costs and expenses
may include the allocated costs for services for Bank's in-house staffs,
such as legal and appraisal.
4. Representations, Warranties and Acknowledgements. Borrowers represent,
warrant and acknowledge to Bank as follows:
4.1 Recitals. The recitals set forth above are true, complete, accurate
and correct, and such recitals are incorporated herein by this reference.
4.2 No Default. No Event of Default has occurred and is continuing, and no
event has occurred and is continuing which, with notice or the passage of
time or both, would be an Event of Default.
4.3 Loan Documents. All representations and warranties made and
given by Borrowers in the Loan Documents are true, complete, accurate and
correct, as if given as of the date of this agreement.
4.4 Property. Borrowers lawfully possess and hold a 100% ownership
interest in all of the Collateral granted by Borrowers for the Loan, free
and clear of any defects, reservations of title or conditional sales
contracts, and also free and clear of any security interest or liens other
than those approved by Bank or those in favor of Bank.
4.5 Enforceable Loan Documents. The Loan Documents, including this
Agreement, to which Borrowers are a party are legal, valid and
binding agreements of Borrowers, enforceable in accordance with
their respective terms, and any instrument or agreement required
hereunder or thereunder, when executed and delivered, will be
similarly legal, valid, binding and enforceable.
4.6 Financial Information. All financial and other information that has
been or will be supplied to Bank is: (a) sufficiently complete to give Bank
accurate knowledge of Borrowers' financial condition; (b) in form and
content required by Bank and in accordance with Generally Accepted
Accounting Practices ("GAAP"); and (c) in compliance with all applicable
government regulations. No material adverse change has occurred in the
business assets, or financial condition of Borrowers since Borrowers last
supplied financial statements or information to Bank.
4.7 No Claims or Defenses. The Present Debt is due and payable to
Bank, and Borrowers have no claim, offset, counterclaim or defense
with respect to: (a) the payment of the Present Debt; (b) the payment of
any other sums due under the Loan Documents; (c) the performance of
Borrowers' obligations under the Loan Documents; or (d) any liability under
any of the Loan Documents.
4.8 No Breach by Bank. Bank (including all of its predecessors) has not
breached any duty to Borrowers in connection with the Loan, and Bank
(including all of its predecessors) has fully performed all obligations it
may have had or now has to Borrowers.
4.9 Interest and Other Charges. All interest or other fees or charges
which have been imposed, accrued or collected by Bank (including all of its
predecessors) under the Loan Documents or in connection with the Loan
through the date of this Modification, and the method of computing the
same, were and are proper and agreed to by Borrowers and were properly
computed and collected.
4.10 Claims, Disputes, Impairments. To the best of Borrowers' knowledge,
Borrowers have no pending litigation, tax claims, proceedings or disputes
that may adversely affect Borrowers' financial condition or impair
Borrowers' ability to perform under the Loan Documents.
4.11 Borrowing Entity. Borrowers are a corporation, which is duly
organized, validly existing and in good standing under the laws of the
State of Delaware (with respect to LEC Technologies, Inc.) and the State of
New York (with respect to TJ Computer Services, Inc.). There have been no
changes in the organization, composition, ownership, structure or formation
of documents of Borrowers since the inception of the Loans. In each state
in which Borrowers do business, it is properly licensed and in good
standing. This Modification, and any instrument of agreement required
hereunder are within Borrowers' powers, have been duly authorized, and do
not conflict with any of Borrowers' organizational papers.
5. No Waiver. By entering into this, Bank does not waive any previous or
existing default unknown to the Bank, or any default hereafter occurring,
or become obligated to waive any condition or obligation in any agreement
between or among any of the parties hereto.
6. No Future Obligations. Bank has no obligation to make any additional
loan or extension of credit to or for the benefit of Borrowers, and Bank
has no obligation to further extend the maturity date of any credit
extended to Borrowers.
7. No Third Party Beneficiaries. This agreement is not intended for, and
shall not be construed to be for, the benefit of any person not a signatory
thereto.
8. Release of Bank. In consideration of the agreements and of Bank set
forth in this Modification, Borrowers, and all of their respective heirs,
personal representatives, predecessors, successors and assigns
(individually and collectively, the "Releasors"), hereby fully release,
remise, and forever discharge Bank, the parent of Bank and all other
affiliates and predecessors of Bank, and all past and present officers,
directors, agents, employees, servants, partners, shareholders, attorneys
and managers of Bank, the parent of Bank, and all other affiliates, and
predecessors of Bank and all of their respective heirs, personal
representatives, predecessors, successors and assigns, for, from, and
against any and all claims, liens, demands, causes of action,
controversies, offsets, obligations, losses, damages and liabilities of
every kind and character whatsoever, including, without limitation, any
action, omission, misrepresentation or other basis of liability founded
either in tort or contract and the duties arising thereunder, that
the Releasors, or any one of more of them, has had in the past, or now has,
whether known or unknown, whether asserted or unasserted, by reason of any
matter, cause or thing set forth in, relating to or arising out of, or in
any way connected with or resulting from, the Loan or the Loan Documents.
9. Incorporation. This agreement shall form a part of each of the Loan
Documents, and all references to one of the Loan documents shall mean that
document as hereby modified. This Modification shall not prejudice any
rights or remedies of Bank under the Loan Documents.
10. Purpose and Effect of Bank's Approval. Bank's approval of any matter
in connection with the Loan shall be for the sole purpose of protecting
Bank's security and rights. No such approval shall result in a waiver of
any default of Borrowers or Guarantor. In no event shall Bank's approval
be a representation of any kind with regard to the matter being approved.
11. Integration. The Loan Documents, including this Modification,
constitute the entire agreement and final expression between the parties
with respect to the terms and conditions set forth in the Loan Documents,
including this Modification. No supplement, modification or amendment of
this Modification or the other Loan Documents shall be effective unless in
writing and signed by Bank and Borrowers.
12. Counterparts/Construction/Time of Essence. This Modification may be
executed in any number of counterparts, each of which, when so executed,
shall be deemed an original, but all of which shall constitute one and the
same agreement. Section headings and paragraph titles used in this
Modification are for reference only and shall not affect or limit the
interpretation of meaning of any provisions of this Modification. As used
in this Modification, the work "include(s)" means "include(s), without
limitations', and the word "including" means "including, but not limited
to". Time is of the essence of this Modification and the other Loan
Documents.
13. Governing Law/Rights in Event of Litigation/Invalidity. This
Modification shall be governed by and construed according to the laws of
the State of Arizona. Borrowers hereby submits to jurisdiction and venue
in Clark County, Nevada, and agrees that any and all litigation or
arbitration proceeding shall be maintained in Clark County, Nevada. In the
event of judicial proceedings, Borrowers agrees that all issues in such
judicial proceeding litigation (including defenses, cross-claims and
counter-claims) shall be resolved by a judge and not a jury and, therefore,
Borrowers waives their rights to a jury trial which it otherwise would have
had. If any court of competent jurisdiction determines any provision of
this Modification or any provision in any of the other Loan Documents to be
invalid, illegal or unenforceable, that portion shall be deemed severed
from the rest, which shall remain in full force and effect.
14. Attorneys' Fees. In any lawsuit or arbitration proceeding between
Bank and Borrowers, which relates to, arises out of, or involves in any way
this Modification or any of the other Loan Documents, if Bank prevails, in
whole or in part, in said action, Bank shall be entitled to recover all of
its attorneys' fees (including any allocated fees of in-house counsel) and
costs (including but not limited to "taxable costs" as defined by statute)
associated with such suit or arbitration.
15. Successors and Assigns. This Modification shall be binding upon and
inure to the benefit of the parties hereto and their respective heirs,
personal representatives, successors and assigns; provided, however,
Borrowers may not transfer their rights under the Loan Documents without
the prior written consent of Bank. Bank may transfer its rights under the
Loan Documents to any successor in interest.
16. No Waiver/Cumulative Remedies/Survival. No failure to exercise or no
delay in exercising any right power or remedy hereunder or under any of the
Loan Documents shall impair any right, power or remedy that Bank may have,
nor shall such delay be construed to be a waiver of any of such rights,
powers or remedies. Bank shall not be deemed to have waived any right
power or remedy except in writing signed by an authorized officer of Bank
expressly stating that it is a waiver of same right, power or remedy. The
rights, powers and remedies of Bank under the Loan Documents are cumulative
and not exclusive of any rights, powers or remedies that Bank would
otherwise have, and may be pursued at any time and from time to time and in
such order as Bank shall determine in its sole discretion. The
representations, warranties, acknowledgments and agreements set forth
herein shall survive the date of this Modification.
17. Mutual Agreement. The parties hereto agree that the terms and
provisions of this Modification embody their mutual intent and that
such terms and provisions are not to be construed (the "Code') on or after
the date of this Modification, it is the intention of Borrowers and Bank
that the terms and conditions of this Modification with respect to
Borrowers shall be incorporated into a plan of reorganization under Section
1129 of Code (a"Plan"). Borrowers agrees that under any potential Plan
which may be filed in the future (i) this Modification shall represent a
necessary element of such Plan, (ii) Borrowers will not seek to after or
amend any of terms and conditions of this Modification, (iii) such terms
and conditions are necessary for Bank's adequate protection, and (iv) such
terms and conditions will remain binding upon Borrowers in any such Plan.
If Borrowers falls to obtain confirmation of a plan of reorganization
incorporating the terms of this Modification within one hundred twenty
(120) days after a petition is filed, Bank is entitled to the automatic and
absolute lifting of any automatic stay as to the enforcement of any of the
Loan Documents against the collateral including specifically, but not
limited to, the stay imposed by Section 362 of the Code. Borrowers hereby
consents to the immediate lifting of any such automatic stay, and will not
contest any motion by Bank to lift such stay. Borrowers acknowledges that
Bank's interest in the collateral can be adequately protected only if a
plan of reorganization incorporating the terms of this Modification is
confirmed, within one hundred twenty (120) days after the petition
is filed. Bank reserves its right to seek all remedies available to
credits under the Code, including, but not limited to, the right to move
for relief from the automatic stay at any time.
19. Hazardous Waste Indemnification. Borrowers will indemnify, protect,
defend and hold harmless Bank for, from and against any loss or liability
directly or indirectly arising out of the use, generation, manufacture,
production, storage, release, threatened release, discharge, disposal or
presence of a hazardous substance. This indemnity will apply whether the
hazardous substance is on, under or about Borrowers' property or operations
or property leased to Borrowers. This indemnity includes, but is not
limited to, attorneys' fees (including the reasonable estimate of the
allocated cost of in-house counsel and staff). This indemnity extends to
Bank, its parent, subsidiaries and all of their directors, officers,
employees, agents, successors, attorneys and assigns. The term "hazardous
substances" (Hazardous Substances") means any substance which is or becomes
designated as "hazardous' or "toxic" under any federal state or local law,
or any petroleum products, including crude oil and any produce derived
directly or indirectly from or any fraction or distillate of, crude oil.
This indemnity will survive repayment of the Borrowers' obligations to
Bank.
20. Arbitration.
20.1 Mandatory Arbitration. Unless expressly prohibited by law, any
controversy or claim between or among the parties, including those arising
out of or relating to this Modification or the Loan Documents and any claim
based on or arising from an alleged tort, shall at the request of any party
be determined by arbitration. The arbitration shall be conducted in
accordance with the United States Arbitration Act (Title 9, U.S. Code),
notwithstanding any choice of law provision in this Modification, and under
the Commercial Rules of the AAA. The arbitrator(s) shall give effect to
statutes of limitation in determining any claim. Any controversy
concerning whether an issue is arbitrable shall be determined by the
arbitrator(s). Judgment upon the arbitration award may be entered in any
court having jurisdiction. The institution and maintenance of an action
for judicial relief or pursuit of a provisional or ancillary remedy shall
not constitute a waiver of the right of any party, including the plaintiff,
to submit the controversy or claim to arbitration if any other party
contests such action for judicial relief.
20.2 Provisional Remedies, Self-Help and Foreclosure. No provision of this
Section 20 shall limit the right of any party to this Modification to
exercise self-help remedies such as setoff, foreclosure against or sale of
any real or personal property or collateral or security, or obtaining
provisional or ancillary remedies from a court of competent jurisdiction
before, after, or during the pendency of any arbitration or other
proceeding. The exercise of a remedy does not waive the right of either
party to resort to arbitration or reference.
21. Cross Default. Any default under this Modification or an Event of
Default under any of the Loan Documents shall be an Event of Default under
each and every of the other Loan Documents.
IN WITNESS WHEREOF, the parties hereto have caused this Modification to be
on the does set forth below to be effective as of the day and year set
forth above.
"BANK"
BANK OF AMERICA NATIONAL TRUST
AND SAVINGS ASSOCIATION
Executed: February 13, 1998 By: /s/ Gary L. Richerson
----------------- -------------------------
Name: Gary L. Richerson
Title: Vice President
"BORROWERS"
LEC TECHNOLOGIES, INC., a
Delaware corporation
Executed: February 12, 1998 By: /s/ Michael F. Daniels
----------------- -------------------------
Name: Michael F. Daniels
Title: President
TJ Computer Services, Inc.,
a New York corporation
Executed: February 12, 1998 By: /s/ Michael F. Daniels
----------------- -------------------------
Name: Michael F. Daniels
Title: President
EXHIBIT 10.21
Private Client Group
Merrill Lynch Business
Financial Services Inc.
33 West Monroe Street 22nd Floor
Chicago, Illinois 60603
312/845-1020
FAX 312/201-0210
October 8, 1997
MERRILL LYNCH
Pacific Mountain Computer Products, Inc.
21250 Califa Street, Building 102
Woodland Hills, CA 91367
Re: WCMA Term-Out
Dear Mr. Vargas:
This Letter Agreement will serve to confirm certain agreements of Merrill
Lynch Business Financial Services Inc. ("MLBFS") and Pacific Mountain
Computer Products, Inc. ("Customer") with respect to: (i) that certain WCMA
NOTE, LOAN AND SECURITY AGREEMENT NO. 839-07G75 between MLBFS and Customer
(including any previous amendments and extensions thereof, and (ii) all
other agreements between MLBFS and Customer or any party who has guaranteed
or provided collateral for Customer's obligations to MLBFS ("Guarantor") in
connection therewith (collectively, the "Loan Documents"). Capitalized
terms used herein and not defined herein shall have the meaning set forth
in the Loan Documents.
The WCMA Line of Credit has expired and will not be renewed. Subject to
the terms hereof, the parties have agreed that the balance outstanding
under the WCMA Line of Credit may be paid in accordance with the terms of a
certain Collateral Installment Note executed by Customer concurrently
herewith (the "New Note").
Accordingly, the Loan Documents are hereby amended effective as of the
"Effective Date" as follows:
1. Customer acknowledges and agrees that it has no further right to, and
will not, directly or indirectly borrow funds under the Loan Documents, by
check, wire transfer, Visa charge, FTS, or otherwise, and that the WCMA
Line of Credit has been in all respects terminated.
2. The WCMA Note included in the Loan Documents is hereby superseded and
replaced as of the Effective Date by the New Note; it being understood that
as of the Effective Date all indebtedness of Customer under the WCMA Note
included in the Loan Documents shall be deemed evidenced by and owing under
the New Note.
3. As used in the Loan Documents, the term "Obligations" shall include,
without limitation, the obligations of Customer under the New Note.
Customer hereby agrees to pay the New Note in accordance with its terms.
4. Any failure of Customer to strictly comply with the payment and other
requirements of the New Note and this Letter Agreement shall constitute an
Event of Default under the Loan Documents.
Pacific Mountain Computer Products, Inc.
October 8, 1997
Page No. 2
5. It is expressly understood and agreed that: (i) the New Note is being
accepted by MLBFS as part of a restructure of existing indebtedness, and
(ii) in no event shall the New Note or any such acceptance by MLBFS be
construed as a novation or as otherwise creating any new indebtedness.
6. Concurrently with its execution hereof, Customer shall pay to MLBFS a
non-refundable documentation fee in an amount equal to $600.00 and a
restructure fee in an amount equal to $500.00. No such fee(s) shall be paid
by check drawn upon or other charge to Customer's WCMA Account.
7. Customer hereby agrees to and shall continue in its best efforts to
obtain outside financing (with "outside financing" defined as financing
with a third party other than MLBFS) and will not request an extension or
restructure of its New Note at its maturity.
Except as expressly modified hereby, the Loan Documents shall continue in
full force and effect upon all of their terms and conditions. Without
limiting the foregoing, except as expressly amended hereby nothing herein
shall be deemed to supersede the security agreement included in the Loan
Documents.
By its execution of this Letter Agreement, the below-named Guarantor hereby
consents to the foregoing modifications to the Loan Documents, and hereby
agrees that the "Obligations" under its Unconditional Guaranty and/or
agreement providing collateral shall extend to and include the Obligations
of Customer under the Loan Documents, as amended hereby.
Customer and said Guarantor acknowledge, warrant and agree, as a primary
inducement to MLBFS to enter into this Agreement, that: (i) no default or
Event of Default has occurred and is continuing under the Loan Documents;
(ii) each of the warranties of Customer in the Loan Documents are true and
correct as of the date hereof and shall be deemed remade as of the date
hereof; (iii) neither Customer nor said Guarantor has any claim against
MLBFS orany of its affiliates arising out of or in connection with the Loan
Documents or any other matter whatsoever; and (iv) neither Customer nor
said Guarantor has any defense to payment of any amounts owing, or any
right of counterclaim for any reason under, the Loan Documents.
Provided that no further Event of Default, or event which with the giving
of notice, passage of time, or both, would constitute an Event of Default,
shall then have occurred and be continuing under the terms of the Loan
Documents, the amendments and agreements in this Letter Agreement will
become effective on the date (the "Effective Date") upon which: (i)
Customer and the Guarantor shall have executed and returned the duplicate
copy of this Letter Agreement and the other documents enclosed herewith,
including the original Note, together with Customer's check(s) for $600.00
for the documentation fee and $500.00 for the restructure fee referred to
above; (ii) an officer of MLBFS shall have reviewed and approved this
Letter Agreement and such other documents as being consistent in all
respects with the original internal authorization hereof; and (iii) to the
extent applicable, MLBFS shall have entered such amendments and agreements
in its computer system (which MLBFS agrees to do promptly after the receipt
of such executed duplicate copy and other documents and fee).
Notwithstanding the foregoing, if for any reason other than the sole fault
of MLBFS the Effective Date shall not occur within 7 days from the date of
this Letter
Pacific Mountain Computer Products, Inc.
October 8, 1997
Page No. 3
Agreement, then all of said amendments and agreements herein will, at the
sole option of MLBFS, be void.
Very truly yours,
Merrill Lynch Business Financial Services Inc.
By: /s/ James F. Nielsen
-----------------------
James Nielsen
Special Assets Supervisor
Accepted:
Pacific Mountain Computer Products, Inc.
By: /s/ Michael F. Daniels
---------------------------
Printed Name: Michael F. Daniels
Title: Chairman of the Board
Approved:
Leasing Edge
By: /s/ Michael F. Daniels
---------------------------
Printed Name: Michael F. Daniels
Title: President & CEO
TJ Computer Services, Inc.
By: /s/ Michael F. Daniels
---------------------------
Printed Name: Michael F. Daniels
Title: President & CEO
TJ Systems Corporation
By: /s/ Michael F. Daniels
---------------------------
Printed Name: Michael F. Daniels
Title President & CEO
MERRILL LYNCH
=================================================================
$443,847.79 October 8, 1997
COLLATERAL INSTALLMENT NOTE
FOR VALUE RECEIVED, PACIFIC MOUNTAIN COMPUTER PRODUCTS, INC., a
corporation organized and existing under the laws of the State of
California ("Customer"), hereby promises to pay to the order of MERRILL
LYNCH BUSINESS FINANCIAL SERVICES INC. ("MLBFS"), in lawful money of the
United States, the principal sum of $443,847.79 or, if more or less, the
aggregate amount owed by Customer to MLBFS pursuant to the "Loan Documents"
on the "Effective Date", as those terms are defined in the Letter Agreement
referred to below (the "Term Loan Amount"); together with interest on the
unpaid balance of the Term Loan Amount, from the Effective Date until
payment,
at the Interest Rate.
(i) Said indebtedness shall be payable in 3 consecutive monthly
installments commencing on the first day of the calendar week following the
calendar week (with a"calendar week" defined as a Monday through Sunday
period) in which the Effective Date shall occur, and continuing on the
first day of each calendar month thereafter until this Note shall be paid
in full. Installments one through 2 shall be in an amount equal to the sum
of (i) accrued interest at the Interest Rate and (ii) $25,000.00, and the
final installment shall be in an amount equal to the then balance of the
principal of and interest on this Note. As used herein, the term "Interest
Rate" shall mean the sum of (i) 1.00% per annum, and (ii) the Prime Rate.
"Prime Rate" shall mean, as of the date of any determination, the interest
rate then most recently published in the"Money Rates" section of the Wall
Street Journal as the Prime Rate (or if more than one rate is published as
the Prime Rate, then the highest of such rates). The Interest Rate will
change as of the date of publication in the Wall Street Journal of a Prime
Rate that is different from that published on the preceding Business Day.
In the event that The Wall Street Journal shall, for any reason, fail or
cease to publish the Prime Rate, MLBFS will choose a reasonably comparable
index or source to use as the basis for the Interest Rate. Each payment
received hereunder shall be applied first to interest at the Interest Rate,
with the balance applied on account of the Term Loan Amount. Any part of
the principal hereof or interest hereon not paid within 5 days of the
overdue amount of (ii) the maximum amount permitted by law. All interest
shall be computed on the basis of actual days elapsed over a 360-day year.
All sums payable hereunder shall be payable at the office of MLBFS at 33
West Monroe Street, Chicago, Illinois 60603, or at such other place or
places as the holder hereof may from time to time appoint in writing.
Customer may prepay this Note at any time in whole or in part without
premium or penalty. Any partial prepayment shall be applied to
installments of the Term Loan Amount in inverse order of maturity.
This Note is the "New Note" referred to in that certain Letter Agreement
between MLBFS and Customer dated as of the date hereof (the "Letter
Agreement") and is entitled to all of the benefits of the "Loan Documents",
as that term is defined in and amended by the Letter Agreement.
Capitalized terms used herein and not defined herein shall have the meaning
set forth in the Letter Agreement or Loan Documents. If Customer shall
fail to pay when due any installment or other sum due hereunder, or if any
other "Event of Default", as that term is defined in the Loan Documents,
shall occur, then at the option of the holder hereof, and in addition to
all other rights and remedies available to such holder under the Loan
Documents and otherwise, the entire Term Loan Amount at such time remaining
unpaid, together with accrued interest thereon may be declared to be and
thereby become immediately due and payable.
It is expressly understood, however, that nothing contained in the Letter
Agreement, Loan Documents, any other agreement, instrument or document
executed by Customer, or otherwise, shall affect or impair the right, which
is unconditional and absolute, of the holder hereof to enforce payment of
all sums due under this Note at or after maturity, whether by acceleration
or otherwise, or shall affect the obligation of Customer, which is also
unconditional and absolute, to pay the sums payable under this Note in
accordance with its terms.
Customer hereby waives presentment, demand for payment, protest and notice
of protest, notice of dishonor and all other notices and formalities in
connection with this Note. Wherever possible each provision of this Note
shall be interpreted in such manner as to be effective and valid under
applicable law, but if any provision of this Note shall be prohibited by or
invalid under such law, such provision shall be ineffective to the extent
of such prohibition or invalidity without invalidating the remainder of
such provision or the remaining provisions of this Note. Notwithstanding
anything herein to the contrary, in no event shall any interest charged
hereunder exceed the highest rate permissible under any law which a court
of competent jurisdiction shall, in a final determination, deem applicable
hereto. In the event that such a court determines that MLBFS has received
interest hereunder in excess of the highest rate applicable hereto, MLBFS
shall promptly refund such excess interest to Customer without charge or
penalty. This Note shall be construed in accordance with the laws of the
State of Illinois and may be enforced by the holder hereof in any
jurisdiction in which the Loan Documents may be enforced.
IN WITNESS WHEREOF, Customer has caused this Note to be executed pursuant
to due authorization as of the day and year first above written.
PACIFIC MOUNTAIN COMPUTER PRODUCTS, INC.
By: /s/ Michael F. Daniels /s/ William J. Vargas
------------------------------------------------------------
Signature (1) Signature (2)
Michael F. Daniels William J. Vargas
------------------------------------------------------------
Printed Name Printed Name
Chairman of the Board CFO, Treasurer & Secretary
-------------------------------------------------------------
Title Title
EXHIBIT 10.23
REVOLVING CREDIT AGREEMENT
REVOLVING CREDIT AGREEMENT, dated as of March 9, 1998 between ATLANTIC
DIGITAL INTERNATIONAL, INC., a Nevada corporation having its principal
office at 6S40 South Pecos Road, Las Vegas, Nevada (hereinafter called the
"Borrower") and EXCEL BANK, N.A., national banking association,
(hereinafter called the "Bank").
The Borrower has requested the Bank to extend revolving credit to it in the
aggregate principal amount up to $500,000, the proceeds of which the
Borrower intends to use for its working capital requirements.
The Bank is willing to extend such credit to the Borrower up the terms and
conditions set forth in this Agreement. Accordingly the parties agree as
follows:
Section 1. CERTAIN DEFINITIONS. As used herein:
A. "Borrowing Base Limit" means at any time, an amount equal to 75% of the
book value of Eligible Receivables plus 40% of the book value of Eligible
Inventory. "Book value" as used in this definition means the dollar value
of such asset on Borrower's books, subject to audit confirmation by the
Bank.
B. "Business day" means a day other than a Saturday Sunday or legal holiday
observed by the Bank.
C. "Credit Facility" means the revolving credit provided for in Section 3.
D. "Eligible Inventory" means the dollar value on the Borrower's books
(subject to credit confirmation by the Bank) of inventory held by the
Borrower for use in the ordinary course of its business.
E. "Eligible Receivables" means accounts receivable of the Borrower, each
of which represents a bona fide sale or lease by the Borrower of its
customary inventory, which sale has been made thereby within 75 days or
less prior to the date of a requested advance by the Borrower under Section
3.
F. "Guarantee" means a guarantee executed and delivered by a Guarantor
pursuant to Section 6.A.5 hereof.
G. "Guarantor" means LEC Technologies, Inc. (formerly Leasing Edge Corp.).
H. "Note" means the promissory note of the Borrower substantially in the
form of Exhibit A to this Agreement evidencing its liability for all
indebtedness incurred under the credit facility provided for in Section 3.
I. "Prime Rate" means the lending rate called the Prime Rate by The Wall
Street Journal and published thereby. The Prime Rate for any computation
of interest under this Agreement and the Notes, means the Prime Rate
published on the day of such computation or, if the Prime Rate is not
published on such day, the Prime Rate last previously published.
J. "Subsidiary" mean any corporation more than 50% of whose issued and
outstanding voting stock (except directors' qualifying shares, if required
by law) at the time is owned by the Borrower or Guarantor (as the case may
be), directly or through one or more Subsidiaries.
Section 2. REPRESENTATIONS. The Borrower represents, covenants and
warrants that:
A. Corporate Existence and Power. It is duly incorporated and validly
existing and in good standing under the laws of the jurisdiction of its
incorporation, has the corporate power to own its assets and to transact
the business in which it is presently engaged, and is duly qualified as a
foreign corporation and in good standing under the laws of each
jurisdiction where its ownership or lease of property or the conduct of its
business requires such qualification.
B. Corporate Authority. The making and performance by the Borrower of this
Agreement has been duly authorized by all necessary corporate action and
will not violate any provision of law or of its Certificate of
Incorporation or By-Laws or result in the breach of or constitute a default
under any indenture or other material agreement to which it is a party or
by which it or its property may be bound or affected.
C.Financial Condition. The statements of income, reconciliation of capital
accounts, reconciliation and the balance sheet of the Borrower, certified
by Chief Financial Officer of the Guarantor, heretofore furnished to the
Bank, is complete and correct in all material respects, and fairly presents
the financial condition of such Borrower at the date of such balance sheet.
The Borrower does not have any contingent liabilities, liabilities for
taxes, unusual forward or long-term commitments or unrealized or
anticipated losses from any unfavorable commitments which are substantial
in amount in relation to the financial condition of the Borrower except as
reflected or provided for in said balance sheet. Since September 30, 1997,
there has been no material adverse change in the financial condition of the
Borrower from that shown on its balance sheet as of that date.
D. Use of Proceeds. The Credit Facility will be used by the Borrower to
finance its general business purposes and no part of the proceeds will be
used to purchase or carry any "margin stock" (as such term or terms of
similar import and effect shall be defined in Regulation U of the Board of
Governors of the Federal Reserve System from time to time in effect) or to
extend credit to others for the purpose of carrying any such margin stock
or for any purpose which violates, or which is inconsistent with, the
provisions of Regulation X of said Board of Governors.
E . Titles, Etc. The Company has good and marketable title to all of their
properties and assets, real and personal, and none of such properties and
assets are subject to any mortgage, lien, pledge, charge, encumbrance,
security interest or title retention or other security agreement or
arrangement of any nature whatsoever except as permitted in Subsection 7.E
hereof.
F. Litigation. There is no suit or proceeding pending, or to the knowledge
of the Borrower threatened, against or affecting it, which suit or
proceeding exceeds $50,000 in aggregate damages claimed and, in the opinion
of the Borrower, is likely to have a material adverse effect on the ability
of the Borrower to repay the Credit Facility and interest and other charges
thereon.
G. ERISA Matters. Neither the Borrower nor any entity under common control
(within the meaning of the Employee Retirement Income Security Act of 1974,
as amended from time to time ("ERISA") with the Borrower has incurred, nor
to its knowledge is it likely to incur with the passage of time liability
in respect of any employee benefit plan (within the meaning of ERISA),
which would, in the reasonable opinion of the Bank, have a material adverse
effect on the ability of the Borrower to repay the Credit Facility and
interest and other charges thereon.
H. Year 2000 Compliance. In connection with its computer software relevant
for the normal operation of its business, the Borrower (i) is aware of the
risks associated with the date change from December 31, 1999 to January 1,
2000, (ii) is taking, or has taken, appropriate steps to remedy any
problems relating to the year 2000 date change that might adversely affect
its business, both prior to and following January 1, 2000, (iii) is taking,
or has taken, steps to assure that its clients, counter parties and
suppliers, including technology, telecommunications and software providers,
are able to meet the requirements of the year 2000 date change, as
applicable, and (iv) will complete all modifications, validation and
implementation required by the year 2000 date change by not later than
December 31, 1998.
I. Consents of Other Parties. No consent of any other person or entity is
required in connection with the execution, delivery, performance, validity
or enforceability of the Agreement or of any of the loan documents required
to be executed and delivered in connection herewith, except for the consent
of the Bank of America which has been obtained.
Section 3. CREDIT FACILITY. The Bank agrees, on the terms of this
Agreement, to make advances to the Borrower under this Section 3 from time
to time prior to October 15, 1998, at such time and in such amount as to
each advance as the Borrower shall request, up to but not exceeding in
aggregate principal amount at any one time outstanding $500,000. Within
such limit, and provided that the Bank does not demand repayment prior
thereto pursuant to Section 8, Borrower may borrow, prepay and reborrow
under this Section 3 from the date of execution of this Agreement to and
including October 15, 1998. The following provisions will apply to
advances under this Section 3:
A. Note, Advances, Term. Each advance from the Bank shall be in a minimum
amount of $10,000. The loan under this Section 3 shall be evidenced by,
and repaid with interest in accordance with the Note, dated the date of
this Agreement and payable on October 15, 1998.
B. Borrowing Base Limit.
(1) No advance by the Bank will be made to the Borrower if at the time
thereof the aggregate principal and interest outstanding on the Credit
Facility would, or by the making of such advance, exceed the Borrowing Base
Limits.
(2) The Borrower will provide to the Bank an accounts receivable aging
report and an inventory report, on or before the 10th day of each month,
with respect to the last preceding calendar inventory report, on or before
the 10th day of each month. Such report shall be in form and content
acceptable to the Bank.
(3) If, at any time, the aggregate principal and interest outstanding on
the Credit Facility exceeds the Borrowing Base Limit the Borrower will make
an immediate repayment to the Bank in reduction of the balance outstanding
on the Line to eliminate such excess.
C. Loan Account. The Bank shall open and maintain on its books a loan
account in the Borrower, s name showing the amount of each advance,
repayments, the computation and payment of interest, and any other amounts
due and sums paid hereunder. Such loan account shall be conclusive and
binding on the Borrower and the Bank as to the amount at any time due from
the Borrower, absent manifest error.
Section 4. MANNER OF BORROWING. The Borrower will give the Bank notice,
at the Bank's office referred to above, in accordance with written
instructions accepted by the Bank, specifying the amount and date of a
requested borrowing under Section 3. The Bank will deposit in the general
deposit account of the Borrower with the Bank the amount requested pursuant
to such section.
Section 5. PAYMENTS, ETC. All payments of principal, interest and other
charges hereunder will be made in lawful money of the United States of
America, in immediately available funds. Interest on the Note and other
charges will be calculated on the basis of actual interest on any Note
falls due on a Saturday, Sunday or public holiday observed by the Bank,
then such due date will be extended extended to the next succeeding full
business day of the Bank at such place and interest will be payable in
respect of such extension.
Section 6. CONDITIONS OF LENDING.
A. Initial Advance. The obligation of the Bank to make the initial advance
to be made by it hereunder is subject to the following conditions
precedent:
1. Signatures. The Borrower shall have certified to the Bank the name and
signature of signature of each officer of the Borrower authorized to sign
the Note and borrow hereunder. The Bank may conclusively rely on such
certification until it receives notice in writing to the contrary and has
had a reasonable opportunity to implement such change.
2. Opinion of Counsel. The Bank shall have received from a law firm
acceptable to the Bank, a favorable written legal opinion in a form of
satisfactory to the Bank and its counsel.
3. Proof of Corporate Action. The Bank shall have received certified
copies of all corporate action taken by the Borrower to authorize the
execution, delivery and performance of this Agreement and the Note and
borrowings hereunder, and such other documents as the Bank shall reasonably
require.
4. Security Agreement. The Borrower shall have executed and delivered to
the Bank a security agreement, in substantially the form of Exhibit B,
granting to the Bank a security interest in the Borrower's personal
property, including without limitation, all inventory, accounts receivable,
contract rights, general intangibles, leases, deposit accounts, and all
other business assets as security for the payment of all of the obligations
of the Borrower to the Bank.
5. Guarantees. Each Guarantor shall' have executed and delivered to the
Bank its unconditional guarantee of payment of the obligations of the
Borrower herein and hereafter incurred, in substantially the form of
Exhibit C.
6. Insurance in Force. The Borrower shall have in effect insurance of its
property against hazard and extended coverage and of its assets and
business, against liability, hazards and interruption in form and amount
acceptable to the Bank. Such insurance shall name the Bank as loss payee
as its interests may appear. The Borrower shall have provided to the Bank
a certificate or certificates from issuers of such insurance identifying
such insurance, wherein such insurers agree to give the Bank 10 days
written notice prior to any cancellation or material modification thereof.
7. Bank's Counsel. All legal matters incident to the transactions hereby
contemplated shall be satisfactory to counsel to the Bank.
B. Each Advance. The obligations of the Bank to make each advance to be
made by it under Section 3 (including the initial advance) is subject to
the following conditions precedent:
1. Defaults, etc. No event of default specified in 9 below, and no event
which with notice or lapse of time or both would become such an event of
default, shall have occurred and be continuing; the representations of the
Borrower in Section 2 shall be true on and as of the date of the making of
such loan with the same force and effect as if made on and as of such date.
2. Litigation. No lawsuit or proceeding shall be pending against the
Borrower which is likely to have a material adverse effect upon its
financial condition or upon its ability to carry out the transactions
contemplated hereby.
Section 7. PARTICULAR COVENANTS OF THE BORROWER. From the date hereof and
until the payment in full of the Notes outstanding hereunder and the
performance of all other obligations of the Borrower, Borrower agrees that,
unless the Bank shall otherwise consent in writing:
A. Financial Statements. Borrower will, and will cause each Guarantor to
deliver to the Bank:
1 . As soon as available, but in any event not later than 90 days after the
close of each fiscal year of the Borrower, a copy of the annual report for
such year for the Borrower, including therein balance sheets of the
Borrower at the end of such fiscal year, and related statements of income
and retained earnings of the Borrower for such fiscal year, setting forth
in each case in comparative form the corresponding figures for the
preceding fiscal period, all in reasonable detail, prepared in accordance
with generally accepted accounting principles applied on a basis
consistently maintained throughout the period involved and with prior
periods, each such financial statements prepared by Chief Financial
Officer.
2. As soon as available, but in any event not later than 90 days after the
close of each fiscal year of the Guarantor, a copy of the annual audit
report for such year for the Guarantor and its Subsidiaries, including
therein a consolidated balance sheets of the Guarantor and its Subsidiaries
as at the end of such fiscal year, and related consolidated statement of
income and retained earnings of the Guarantor and its Subsidiaries for such
fiscal year, setting forth in each case in comparative form the
corresponding figures for the preceding fiscal period, all in reasonable
detail, prepared in accordance with generally accepted accounting
principles applied on a basis consistently maintained throughout the period
involved and with prior periods, such financial statements being certified
by independent certified public accountants of recognized standing selected
by the Guarantor and acceptable to the Bank.
3. As soon as available, but in any event not later than 60 days after the
end of each of the first three quarterly periods of each fiscal year of the
Borrower/Guarantor, unaudited balance sheets of the Borrower/Guarantor as
at the end of such fiscal quarter, and unaudited statements of income and
retained earnings of the Borrower/Guarantor for the period from the
beginning of such fiscal year to the end of such fiscal quarter, setting
forth in comparative form the corresponding figures for the preceding
fiscal period, all in reasonable detail, prepared in accordance with
generally accepted accounting principles applied on a basis
consistently maintained throughout the period involved and with prior
periods and prepared by the chief financial officer of the
Borrower/Guarantor (subject to normal year-end audit adjustment).
C. Payment If Control Or Management Changes. If, during the continuance of
this Agreement, LEC Technologies, Inc. shall cease to be engaged in the
active management thereof, or shall own less than 100% of the aggregate
stock of the Borrower entitled to vote on its management and affairs, the
Borrower will immediately notify the Bank and will, upon demand by the
Bank, pay the entire principal amount outstanding under the Note, without
premium, together with accrued interest and other fees thereon, on the date
specified in such demand, which shall be not less than 30 days after such
demand.
D. Indebtedness. Borrower will not incur, assume', allow to exist or have
outstanding or otherwise become directly or indirectly liable in respect of
any indebtedness for borrowed money or for the deferred purchase price of
property purchased, except (i) that which was reflected in the financial
statements referred to in Section 2.C; and (ii) accounts payable incurred
in the ordinary course of business.
E. Liens, etc. Borrower will not create, assume, or allow any security
interest or lien (including judicial liens) on any property or interest in
property (real or personal, tangible or intangible) Borrower now owns or
hereafter acquires, except (i) mortgages, deeds of trust and security
agreements in favor of the Bank; (ii) liens for taxes not overdue; (iii)
liens outstanding on the date of this Agreement.
F. Capital Expenditures. Borrower shall not make any additional capital
expenditures exceeding $50,000 in the aggregate in any fiscal year of
Borrower.
G. Contingent Liabilities. Borrower shall not guarantee, endorse,
contingently agree to purchase or otherwise become or be contingently
liable upon the obligation or in connection with the stock or dividends of
any other person, firm or corporation, except a guarantee of the
obligations to the Bank of LEC Technologies, Inc.
H. Payments, Distributions and Loans. Borrower shall not make:
1. Loans to any person or business entity, except in the ordinary course of
its business, nor directly or indirectly make any distributions in cash or
kind or pay any dividend on its stock or redeem or retire any of its stock,
whether now or hereafter outstanding except for distributions or dividends
to the Guarantor;
2. Salary or bonus payments other than commissions, directly or indirectly,
to any officer, director or stockholder of the Borrower or any affiliate of
the Borrower or to a Guarantor, in excess of an aggregate of $250,000;
3. Principal repayments or interest payments to any officer, director,
stockholder or to a Guarantor.
I. Mergers, Etc. Borrower shall not merge or consolidate with any
corporation, or sell, lease, assign, transfer or otherwise dispose of
(whether in one transaction or in a series of related transactions) any of
its assets, whether now owned or hereafter acquired, if the aggregate value
thereof represents a material part of the aggregate value of all assets
ofBorrower, nor will it acquire by purchase or otherwise all or
substantially all of the assets of any business entity, except that
Borrower may sell inventory (as defined in the Uniform Commercial Code) in
the ordinary course of business.
J. Taxes. Borrower will pay and discharge all taxes, assessments and
governmental charges or levies, imposed on it or on its income or profits
or on any of its property, prior to the date on which penalties attach
thereto, except that Borrower will not be required hereby to pay any such
tax, assessment, charge or levy the payment of which is being contested in
good faith and by proper proceedings.
K. Litigation. Borrower will promptly give notice in writing to the Bank
of all litigation and of all proceedings before any governmental or
regulatory agencies directly affecting the Borrower, except any litigation
or proceeding which, if adversely determined, would not involve a liability
of $50,000 or more or. which is fully covered by effective insurance.
L. Insurance. Borrower will maintain in effect and in good standing the
insurance referred to in Section 6.A.(6).
M. Deposits. Borrower will maintain a deposit account at the Bank upon
the same terms and conditions (including interest and charges) as are
available to all other depositors of the Bank on identical types of
accounts.
N. Stock and Debt. Borrower will not sell or otherwise dispose of its
stock or indebtedness.
Section 8. DEFAULTS. If any one of the following "events of default" shall
occur and be continuing, namely:
A. Any representation or warranty made by Borrower in Section 2 shall prove
to have been incorrect in any material respect or shall be breached; or
B. Default in the payment when due of any principal of or interest on the
Note and the continuation thereof beyond any grace period provided for the
curing thereof; or
C. Default by Borrower in the performance of any agreement in subsections
of Section 7 and the continuation thereof beyond any grace period provided
for the curing thereof; or
D . Except as otherwise provided below in Section 8.E hereof, default by
Borrower or a Guarantor in the performance of any other agreement which
shall remain unremedied for thirty days; or
E . Default by any Guarantor of any of its present or future obligations,
liabilities or indebtedness to the Bank and the continuation thereof beyond
any grace period provided for the curing thereof.
F. Any bond, debenture, note or other evidence of indebtedness of Borrower
shall become due before stated maturity thereof by reason of default or
shall become due by its terms and shall not, within twenty days following
such due date, be paid, extended or stayed by order of a court of competent
jurisdiction; or
G. Borrower or any Guarantor shall (1) apply for or consent to the
appointment of a receiver, trustee or liquidator of itself or of its
property, (2) be unable or admit in writing its inability, to pay its debts
as they mature, (3) make a general assignment for the benefit of creditors,
(4) be adjudicated a bankrupt or insolvent, or (5) file a voluntarily
petition in bankruptcy or a petition or answer seeking reorganization or
an, arrangement with creditors or to take advantage of any insolvency law
or an answer admitting the material allegations of a petition filed against
it in any bankruptcy, reorganization or insolvency proceeding, or corporate
action shall be taken by it to effect any of the foregoing; or
H. An order, judgment or decree shall be entered, without the application,
approval or consent of Borrower or a Guarantor, by any court or
governmental agency of competent jurisdiction, approving a petition seeking
its reorganization, or appointing a receiver, trustee liquidator,
intervenor or the like thereof, or of all or a substantial part of its
assets, and such order, judgment or decree shall continue unstayed and in
effect for any period of 30 consecutive days.
THEREUPON, in case of an event of default set forth in Section 8.G. or H.,
the principal and interest on the Note shall be immediately due and payable
without notice or demand, and if such event is any other event of default
specified above, the Bank may, by written notice to the Borrower, declare
the principal of and interest on the Note to be forthwith due and payable,
whereupon the same will become forthwith due and payable, without protest,
presentment, notice or demand, all of which are expressly waived by
Borrower.
Section 9. NOTICES. All notices, requests and demands will be given to or
made upon the respective parties hereto at their respective addresses
specified below or, as to any party, at such other address as may be
designated by it in a written notice to all other parties. All notices,
requests, consents and demands hereunder will be effective when duly
deposited in the mails postage prepaid for certified or registered
delivery, or delivered to a reputable delivery agency with instructions for
delivery to the addressee within twenty four hours, or when received if
transmitted by telephone facsimile, addressed as aforesaid, except that
notices to the Bank under Section 3 will not be effective until received:
Atlantic Digital International, Inc.
c/o LEC Technologies, Inc.
6540 South Pecos Road
Las Vegas, NV 89120
Att: Mr. William Vargas
Telephone: 702-454-7900
Fax. No. 702-454-7779
Excel Bank, N.A.:
2 Park Avenue
New York, New York 10016
Att: Ms. Susan M.R. Gomez, Vice President
Telephone (212)337-8247
Fax No. (212)337-8269
Section 10. MISCELLANEOUS.
A. Entire Agreement. This is the entire agreement of the parties with
respect to the revolving credit facility extended by the Bank to the
Borrower and supersedes all other action taken and/or letters, agreements
and representations relating to the subject matter.
B. Waivers, Etc. No failure on the part of the Bank to exercise, and no
delay in exercising, any right hereunder will operate as a waiver thereof,
nor will any single or partial exercise of any right hereunder preclude any
other or further exercise thereof or the exercise of any other right. The
remedies herein provided are cumulative and not exclusive of any remedies
provided by law.
C. Amendments. This agreement may not be amended or modified except in
writing signed by the parties.
D. Expenses. The Borrower will be responsible for paying, whether or not
any loan is made hereunder (1) all expenses of the Bank in connection with
the preparation, execution and delivery hereof and of the Note and all
other documents and instruments hereunder, and the administration thereof
(including without limitation, the reasonable fees of counsel to the Bank),
and (2) all reasonable costs of collection, including reasonable fees,
incurred by the Bank if default is made under this Agreement.
E. Offsets, etc. Nothing in this Agreement deemed a waiver or prohibition
of the Bank's right of banker's lien or offset.
F. Governing Law. This Agreement and the Note will be construed in
accordance with and governed by the law of the State of New York, without
regard to the principles of conflict of laws thereof.
G. Submission to Jurisdiction. (a) The Borrower hereby irrevocably agrees
that any legal action or proceedings against it with respect to this
Agreement or the Note may be brought in any court of the State of New York
or any Federal Court of the United States of America located in the City
and State of New York, United States of America, or both, as the Bank may
elect, and by execution and delivery of this Agreement the Borrower hereby
submits to and accepts with regard to any such action or proceeding service
of process by the mailing of copies thereof by registered or certified
airmail, postage prepaid, to the Borrower at its address set forth in
Section 9.
(b) The Borrower hereby irrevocably waives any objection which it may now
or hereafter have to the laying of the venue of any suit, action or
proceeding arising out of or relating to this Agreement or the Note in the
State of New York and hereby further irrevocably waives any claim that the
State of New York is not a convenient forum for any such suit, action or
proceeding.
H. Counterparts. This Agreement may be executed in Counterparts, which
taken together will constitute one agreement. The parties hereto may
execute this Agreement by signing any such counterpart.
I. Assignment. The Borrower shall not assign any of its rights or
obligations under this Credit Agreement nor the loan proceeds hereunder,
without the Bank's prior written consent. The Bank, without notice to or
the consent of the Borrower, may assign to and participate with one or more
financial institutions its rights and obligations under this Credit
Agreement and may receive servicing, brokerage and/or other fees.
J. Severability of Provisions. Any provision of this Agreement, the Note
and any other document or instrument prepared hereunder, which is
unenforceable in any jurisdiction shall, as to such jurisdiction, be
ineffective to the extent of unenforceability without affecting the
enforceability of provision in any other jurisdiction.
IN WITNESS WHEREOF, the parties hereto have caused Agreement to
be duly executed as of the day and year first written.
ATLANTIC DIGITAL INTERNATIONAL, INC.
By: /s/ Michael F. Daniels
------------------------------
Title: Chairman
By: /s/ William J. Vargas
------------------------------
Title: Chief Financial Officer
EXCEL BANK, N.A.
By: /s/ Susan Gomez
------------------------------
Title: Vice President
Exhibit 21.1
List of Subsidiaries
Pacific Mountain Computer Products, Inc.; incorporated in the State of
California on June 22, 1978; and doing business as Pacific Mountain
Computer Products, Inc.
TJ Computer Services, Inc.; incorporated in the State of New York on March
4, 1980; and doing business as Leasing Edge Corporation.
Superior Computer Systems, Inc.; incorporated in the State of Minnesota on
January 13, 1995; and doing business as Superior Computer Systems, Inc.
Atlantic Digital International, Inc.; incorporated in the State of Nevada
on November 10, 1997; and doing business as Atlantic Digital International,
Inc.
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<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> DEC-31-1997
<CASH> 208,639
<SECURITIES> 0
<RECEIVABLES> 2,529,564
<ALLOWANCES> 157,405
<INVENTORY> 2,039,685
<CURRENT-ASSETS> 0<F1>
<PP&E> 674,348
<DEPRECIATION> 310,378
<TOTAL-ASSETS> 29,073,600
<CURRENT-LIABILITIES> 0<F1>
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0
2,290
<COMMON> 48,823
<OTHER-SE> 5,665,689
<TOTAL-LIABILITY-AND-EQUITY> 29,073,600
<SALES> 19,495,224
<TOTAL-REVENUES> 30,714,624
<CGS> 16,493,634
<TOTAL-COSTS> 25,222,060
<OTHER-EXPENSES> 0
<LOSS-PROVISION> (13,294)
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<INCOME-PRETAX> 329,531
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<EPS-PRIMARY> 0.02
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<FN>
<F1>UNCLASSIFIED BALANCE SHEET
</FN>
</TABLE>
