U.S. Securities and Exchange Commission
Washington D. C., 20549
FORM 10-QSB
(MARK ONE)
( X ) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1998
( ) TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE
EXCHANGE ACT
For the transition period from __________ to __________.
Commission file number 0-20924
-------
RECONDITIONED SYSTEMS, INC.
-----------------------------------------------------------------
(Exact name of small business issuer as specified in its charter)
ARIZONA 86-0576290
- ------------------------------- -------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
444 WEST FAIRMONT, TEMPE, ARIZONA 85282
----------------------------------------
(Address of principal executive offices)
602-968-1772
---------------------------
(Issuer's telephone number)
----------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
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 [ ].
State the number of shares outstanding of each of the issuer's classes of common
equity, as of the latest practicable date: As of July 31, 1998, the number of
shares outstanding of the Registrant's common stock was 1,473,950.
<PAGE>
PART 1 - FINANCIAL STATEMENTS
ITEM 1
RECONDITIONED SYSTEMS, INC.
UNAUDITED FINANCIAL STATEMENTS
JUNE 30, 1998
2
<PAGE>
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
BALANCE SHEETS
JUNE 30, 1998 AND 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
1998 1997
---------- ----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 695,781 $ 129,632
Accounts receivable - trade, net of allowance
for doubtful accounts of $27,250 and
$33,000, respectively 1,254,644 1,051,646
Inventory 942,360 943,922
Prepaid expenses and other current assets 44,170 21,529
---------- ----------
TOTAL CURRENT ASSETS 2,936,955 2,146,729
PROPERTY AND EQUIPMENT; net of accumulated
depreciation of $349,675 and
$350,274, respectively 136,522 171,465
OTHER ASSETS
Notes receivable - Officers 150,000 --
Other assets 29,150 15,835
---------- ----------
$3,252,627 $2,334,029
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Revolving line of credit (Note 2) $ -- $ 129,188
Current maturities of long-term debt 23,160 50,840
Accounts payable 436,973 365,145
Customer deposits 136,195 74,491
Accrued expenses and other current liabilities 198,198 169,497
---------- ----------
TOTAL CURRENT LIABILITIES 794,526 789,161
LONG-TERM DEBT, LESS CURRENT MATURITIES -- 20,036
STOCKHOLDERS' EQUITY 2,458,101 1,524,832
---------- ----------
$3,252,627 $2,334,029
========== ==========
3
<PAGE>
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF OPERATIONS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
1998 1997
----------- -----------
Sales $ 2,653,092 $ 2,267,362
Cost of sales 2,028,782 1,688,163
----------- -----------
Gross profit 624,310 579,199
Selling & administrative expenses 392,884 420,469
----------- -----------
Income from operations 231,426 158,730
----------- -----------
Other income (expense):
Interest income 10,441 171
Interest expense (639) (13,595)
Other 1,319 3,502
----------- -----------
11,121 (9,922)
----------- -----------
Net income $ 242,547 $ 148,808
=========== ===========
Basic earnings per share (Notes 1 and 3) .16 .10
=========== ===========
Basic weighted average number
of shares outstanding 1,473,950 1,473,950
=========== ===========
Diluted earnings per common
and common equivalent share (Notes 1 and 3) .14 .09
=========== ===========
Diluted weighted average number
of shares outstanding 1,691,411 1,578,510
=========== ===========
4
<PAGE>
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED MARCH 31, 1998 AND THE THREE MONTH PERIOD ENDED JUNE 30, 1998
(UNAUDITED)
- --------------------------------------------------------------------------------
COMMON COMMON RETAINED TREASURY
STOCK STOCK EARNINGS STOCK TOTAL
SHARES AMOUNT (DEFICIT) (134 SHARES)
------ ------ --------- ------------ ----------
Balance at
March 31, 1997 1,473,950 $4,586,982 $(3,207,204) $ (3,754) $1,376,024
Net income -- 0 839,530 0 839,530
--------- ---------- ----------- ----------- ----------
Balance at
March 31, 1998 1,473,950 $4,586,982 $(2,367,674) $ (3,754) $2,215,554
Net income -- 0 242,547 0 242,547
--------- ---------- ----------- ----------- ----------
BALANCE AT
JUNE 30, 1998 1,473,950 $4,586,982 $(2,125,127) $ (3,754) $2,458,101
========= ========== =========== =========== ==========
5
<PAGE>
RECONDITIONED SYSTEMS, INC.
- --------------------------------------------------------------------------------
STATEMENTS OF CASH FLOWS
FOR THE THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
(UNAUDITED)
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
1998 1997
--------- ---------
Cash and cash equivalents
provided (used) by operating
activities $ (14,501) $ 321,313
Cash and cash equivalents
used by investing
activities (13,017) (6,219)
Cash and cash equivalents
used by financing activities (9,732) (327,586)
--------- ---------
Decrease in cash
and cash equivalents (37,250) (12,492)
Cash and cash equivalents,
beginning of period 733,031 142,124
--------- ---------
Cash and cash equivalents,
end of period $ 695,781 $ 129,632
========= =========
6
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 1.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
BASIS OF PRESENTATION:
The unaudited financial statements include only the accounts and
transactions of the Company.
INTERIM FINANCIAL STATEMENTS:
The unaudited interim financial statements include all adjustments
(consisting of normal recurring accruals) which, in the opinion of
management, are necessary in order to make the financial statements
not misleading. Operating results for the three months ended June 30,
1998, are not necessarily indicative of the results that may be
expected for the entire year ending March 31, 1999. These financial
statements have been prepared in accordance with the instructions to
Form 10-QSB and do not contain certain information required by
generally accepted accounting principles. These statements should be
read in conjunction with financial statements and notes thereto
included in the Company's Form 10-KSB for the year ended March 31,
1998.
EARNINGS PER COMMON AND COMMON EQUIVALENT SHARE:
Basic earnings per share include no dilution and are computed by
dividing income available to common stockholders by the weighted
average number of shares outstanding for the period.
Diluted earnings per share amounts are computed based on the weighted
average number of shares actually outstanding plus the shares that
would be outstanding assuming the exercise of dilutive stock options,
all of which are considered to be common stock equivalents. The number
of shares that would be issued from the exercise of stock options has
been reduced by the number of shares that could have been purchased
from the proceeds at the average market price of the Company's stock.
- --------------------------------------------------------------------------------
NOTE 2.
REVOLVING LINE OF CREDIT
- --------------------------------------------------------------------------------
Effective July 31, 1998 the Company renegotiated and renewed its $1,000,000 line
of credit agreement with M&I Thunderbird Bank. Under this new agreement,
interest is payable at the bank's base rate. Borrowings on the line of credit
may not exceed 75% of eligible accounts receivable and 30% of eligible inventory
up to $300,000. The line of credit is collateralized by accounts receivable,
inventory, property and equipment, and intangibles. The agreement contains
various covenants by the Company, including covenants that the Company will
maintain certain net worth thresholds and ratios, will meet certain debt service
coverage ratios, and will not enter into or engage in various types of
agreements or business activities without approval from M&I Thunderbird Bank.
7
<PAGE>
RECONDITIONED SYSTEMS, INC.
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
- --------------------------------------------------------------------------------
NOTE 3.
EARNINGS PER SHARE
- --------------------------------------------------------------------------------
THREE MONTHS ENDED
JUNE 30,
1998 1997
---------- ----------
BASIC EPS
Net Income $ 242,547 $ 148,808
========== ==========
Weighted average number
of shares outstanding 1,473,950 1,473,950
========== ==========
Basic earnings per share $ 0.16 $ 0.10
========== ==========
DILUTED EPS
Net Income $ 242,547 $ 148,808
========== ==========
Weighted average number
of shares outstanding 1,473,950 1,473,950
Effect of dilutive securities:
Stock options 217,461 104,560
---------- ----------
Total common shares + assumed
conversions 1,691,411 1,578,510
========== ==========
Per-Share Amount $ 0.14 $ 0.09
========== ==========
8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATIONS
The statements contained in this report that are not historical facts may
constitute "forward-looking statements" within the meaning of Section 27A of the
Securities Exchange Act of 1933, as amended, and Section 21E of the Securities
Exchange Act of 1934, as amended, and are subject to the safe harbors created
thereby. These forward-looking statements involve risks and uncertainties,
including, but not limited to, the risk that the Company may not be able to
geographically diversify its operations on a profitable basis, the risk that the
Company may not be able to continue to increase sales, maximize its production
capacity, maintain adequate inventory levels at an acceptable cost and employ
qualified personnel in response to rising sales. In addition, the Company's
business, operations and financial condition are subject to substantial risks
that are described in the Company's reports and statements filed from time to
time with the Securities and Exchange Commission. These reports and statements
include the Company's Annual Report on Form 10-KSB for the fiscal year ended
March 31, 1998.
RESULTS OF OPERATIONS
Reconditioned Systems, Inc. (the "Company") reported net income for the three
month period ended June 30, 1998 (hereinafter the "reporting period") of
$242,547 as compared to $148,808 for the three month period ended June 30, 1997
(hereinafter the "comparable period"). This $93,739 or 62.9% increase is a
result of increased sales and lower selling, administrative and interest
expenses over the comparable period.
The Company reported sales for the reporting period of $2,653,092 as compared to
$2,267,362 for comparable period, resulting in an increase of $385,730 or 17%.
This increase was primarily attributable to increased wholesale sales.
Approximately 60% of the total sales for the reporting period were wholesale
sales and 40% were retail sales. Sales during the comparable period were
approximately 50% wholesale and 50% retail.
Wholesale sales totaled $1,638,584 for the reporting period, an increase of
$481,946 or 42% over the comparable period. This was a result of expansion of
the wholesale division and implementation of a new marketing plan aimed at
increasing the Company's wholesale customer-base. The Company began targeting
the larger metropolitan areas throughout the western United States and has had
success in developing new dealership/broker relationships in these areas. The
Company's wholesale division has been very successful in the California market
and hopes to achieve similar results in other western states.
Retail sales in the Phoenix and Tucson markets totaled $1,014,508 during the
reporting period, a decrease of 9% over the comparable period. This decrease was
primarily a result of turnover within the retail sales department. During the
reporting period, the Company hired and trained four new sales representatives
to replace those lost through attrition and to add to the existing sales staff.
The complexity and demand for accuracy within the Company's industry require
that the sales staff have proper training and product knowledge. The Company has
developed a formal training program designed to equip new salespeople with the
skills necessary to succeed; however, these skills take time to develop. While
the Company believes these newly hired sales representatives will be successful
in developing the necessary skills to achieve their sales goals, there can be no
certainty that they will meet those expectations.
9
<PAGE>
The Company's gross profit margin for the reporting period was 23.5%, as
compared to a gross profit margin of 25.5% for the comparable period. This 2%
decrease in the gross margin was primarily attributed to the increased
percentage of wholesale sales to retail sales.
The Company's selling and administrative expenses were reduced from 18.5% of
sales in the comparable period to 14.8% for the reporting period. The 3.7%
decrease was primarily a result of a lower overall percentage of fixed expenses
and the wholesale/retail sales mix. The Company's wholesale sales generally have
lower selling expenses than those of retail sales.
The Company's other income and expenses, which consists primarily of interest
income and expense, improved by $21,043 from the comparable period to the
reporting period. This improvement was primarily due to the elimination of the
Company's interest expense and minimum interest requirements associated with its
previous line of credit agreement and increased interest income. Effective July
30, 1997, the Company entered into a new borrowing agreement with M&I
Thunderbird Bank, lowering the Company's borrowing rate and eliminating the
minimum interest payments assessed under the previous line of credit. The
Company now carries a zero dollar balance on the new line of credit and believes
it has built a strong working relationship with M&I Thunderbird. In addition,
the Company earned interest income of $10,441 on interest-bearing accounts and
notes receivable from officers.
INCOME TAXES
As of March 31, 1998, the Company had federal loss carryforwards of
approximately $2,120,000 and state loss carryforwards of approximately
$1,920,000. During the quarters ended June 30, 1998 and 1997, the Company
benefited from these loss carryforwards in the approximate amounts of $97,000
and $60,000, respectively.
FINANCIAL CONDITION AND LIQUIDITY
As of June 30, 1998, the Company's cash and cash equivalents totaled $694,781.
In addition, the Company's net worth and working capital totaled $2,458,101 and
$2,142,429, respectively. The Company has no material long-term debt and
$1,000,000 available on its line of credit through M&I Thunderbird Bank.
While cash generated from operations has been sufficient to finance the
company's growth over the past few years, the Company reported negative cash
flows from operations of $14,501 during the reporting period. This was primarily
a result of the necessity to finance increased sales during the reporting
period.
The Company's sales growth resulted in increasing the Company's accounts
receivable balances by $292,522 at June 30, 1998 as compared to March 31, 1998.
The Company's collection rate remained fairly constant. The average days sales
in accounts receivable at June 30, 1998 was 38, as compared to 37 at March 31,
1998. The Company hopes to maintain a collection rate at or near 30 days.
The increased accounts receivables were partially offset by the company's strong
operating results and increased inventory turns during the reporting period.
Annualized inventory turns for the reporting period were 8.7, as compared to
6.75 for the year ended March 31, 1998. This improvement was primarily a result
10
<PAGE>
of the Company's ability to increase sales without increasing inventory levels.
Management believes any additional sales increases may require the Company to
increase current inventory levels.
FUTURE OUTLOOK
Management is pleased with the operating results achieved during this reporting
period. The Company reported a 17% increase in revenues and a 62.9% increase in
net income. Management plans to pursue gradual and focused growth; in order to
facilitate this growth, the Company intends to expand its warehouse, office and
showroom space at the Tempe, Arizona location. This modest expansion and
improvements are expected to be completed by December, 1998.
The Company continues to pursue growth in both the wholesale and retail markets.
The wholesale division is expanding with new and existing dealer/broker
relationships. In addition to nurturing the accounts established in the
California markets, the Company will continue to concentrate on targeted growth
in other markets throughout the western United States. The retail division's
primary goal is to hire, train and maintain a qualified and competent sales
staff. In addition, the Company plans continued development of its advertising
and promotional programs designed to increase local and regional exposure.
Furthermore, now that the Company has strengthened its financial condition and
liquidity, management believes a conservative acquisition program is a viable
alternative for additional sales growth and increased share value.
The Company is currently investigating and taking corrective action to protect
itself from any potential computer hardware and software difficulties related to
Year 2000 computer problems. The Company intends to complete all corrective
action by June, 1999. The effect on the Company's future results of operations
is not expected to be material.
11
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is not party to any pending legal proceeding other than routine
litigation incidental to the business.
ITEM 2. CHANGES IN SECURITIES
Effective June 30, 1997, the Company's Class B Warrants expired.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
12
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) The following exhibits are filed herewith pursuant to Regulation S-B:
<TABLE>
<CAPTION>
NO. DESCRIPTION REFERENCE
<S> <C> <C>
3.1 Articles of Incorporation of the Registrant, as amended and restated 3
3.2 Bylaws of Registrant, as amended and restated 3
4.1 Form of Common Stock Certificate 1
4.5 Registration Rights Agreements 2
*4.9 Options issued to Wayne R. Collignon 5
*4.10 Options issued to Dirk D. Anderson 5
*4.11 Amendment to Options issued to Wayne Collignon 6
*4.12 Amendment to Options issued to Dirk D. Anderson 6
*4.13 Options issued to Wayne R. Collignon 6
*4.14 Options issued to Dirk D. Anderson 6
*4.15 Options issued to Scott W. Ryan 6
*4.16 Options issued to Scott W. Ryan 6
10.1 Lease Agreement, dated April 12, 1990 between Boston Safe
Deposit and Trust Company, as Lessor, and Registrant as Lessee 1
10.17 Loan documents between National Bank of Arizona and the Registrant 2
*10.21 Employment Agreement between the Registrant and Wayne R. Collignon 3
*10.22 Employment Agreement between the Registrant and Dirk D. Anderson 3
10.23 Third amendment to the Lease between the Registrant, as Lessee, and
Newhew Associates, as Lessor 3
10.24 Loan documents between the Registrant and Norwest Business Credit, Inc. 3
*10.25 Amendment to Employment Agreement between Registrant and Wayne Collignon 5
*10.26 Amendment to Employment Agreement between Registrant and Dirk Anderson 5
10.27 Amendments to Loan document between Norwest Business Credit and Registrant 5
10.28 Amendment to Loan document between Norwest Business Credit and Registrant 6
10.29 Loan document between Registrant and M&I Thunderbird Bank 7
*10.30 Loan document between Registrant and Wayne R. Collignon 8
*10.31 Loan document between Registrant and Dirk D. Anderson 8
10.32 Loan document between M&I Thunderbird Bank and the Registrant 9
(1) Filed with Registration Statement on Form S-18, No. 33-51980-LA,
under the Securities Act of 1933, as declared effective on
December 17, 1992
(2) Filed with Form 10-KSB on July 13, 1995
(3) Filed with Form 10-KSB on July 2, 1996
(4) Filed with Proxy Statement on July 15, 1996
(5) Filed with Form 10-QSB on November 14, 1996
(6) Filed with 10-KSB on June 26, 1997
(7) Filed with 10-QSB on November 14, 1997
(8) Filed with 10-QSB on February 10, 1998
(9) Filed herein
(*) Indicates a compensatory plan or arrangement
</TABLE>
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter ended June 30, 1998.
13
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
RECONDITIONED SYSTEMS, INC.
Date: August 14, 1998 /s/ Wayne R. Collignon
-------------------------------------
Wayne R. Collignon, President and CEO
Date: August 14, 1998 /s/ Dirk D. Anderson
-------------------------------------
Dirk D. Anderson, CFO
14
EXHIBIT 10.32
M&I THUNDERBIRD BANK
LOAN AGREEMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$1,000,000.00 07-31-1999 1001 - R1 09400069235 JLL
- ---------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of
this document to any particular loan or items.
- ---------------------------------------------------------------------------------------------------
BORROWER: RECONDITIONED SYSTEMS, INC. LENDER: M&I THUNDERBIRD BANK, AN ARIZONA CORPORATION
444 WEST FAIRMONT SCOTTSDALE RD. & THUNDERBIRD OFFICE (10)
TEMPE, AZ 85282 C/O LOAN SUPPORT DEPARTMENT
ONE EAST CAMELBACK ROAD
PHOENIX, AZ 85012-1647
===================================================================================================
</TABLE>
THIS LOAN AGREEMENT BETWEEN RECONDITIONED SYSTEMS, INC. ("BORROWER") AND M&I
THUNDERBIRD BANK, AN ARIZONA CORPORATION ("LENDER") IS MADE AND EXECUTED ON THE
FOLLOWING TERMS AND CONDITIONS. BORROWER HAS RECEIVED PRIOR COMMERCIAL LOANS
FROM LENDER OR HAS APPLIED TO LENDER FOR A COMMERCIAL LOAN OR LOANS AND OTHER
FINANCIAL ACCOMMODATIONS, INCLUDING THOSE WHICH MAY BE DESCRIBED ON ANY EXHIBIT
OR SCHEDULE ATTACHED TO THIS AGREEMENT. ALL SUCH LOANS AND FINANCIAL
ACCOMMODATIONS, TOGETHER WITH ALL FUTURE LOANS AND FINANCIAL ACCOMMODATIONS FROM
LENDER TO BORROWER, ARE REFERRED TO IN THIS AGREEMENT INDIVIDUALLY AS THE "LOAN"
AND COLLECTIVELY AS THE "LOANS." BORROWER UNDERSTANDS AND AGREES THAT (A) IN
GRANTING, RENEWING, OR EXTENDING ANY LOAN, LENDER IS RELYING UPON BORROWER'S
REPRESENTATIONS, WARRANTIES, AND AGREEMENTS, AS SET FORTH IN THIS AGREEMENT; (B)
THE GRANTING, RENEWING, OR EXTENDING OF ANY LOAN BY LENDER AT ALL TIMES SHALL BE
SUBJECT TO LENDER'S SOLE JUDGMENT AND DISCRETION; AND (C) ALL SUCH LOANS SHALL
BE AND SHALL REMAIN SUBJECT TO THE FOLLOWING TERMS AND CONDITIONS OF THIS
AGREEMENT.
TERM. This Agreement shall be effective as of JULY 31, 1998, and shall continue
thereafter until all Indebtedness of Borrower to Lender has been performed in
full and the parties terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Loan Agreement, as this Loan
Agreement may be amended or modified from time to time, together with all
exhibits and schedules attached to this Loan Agreement from time to time.
ACCOUNT. The word "Account" means a trade account, account receivable, or
other right to payment for goods sold or services rendered owing to
Borrower (or to a third party grantor acceptable to Lender).
ACCOUNT DEBTOR. The words "Account Debtor" mean the person or entity
obligated upon an Account.
ADVANCE. The word "Advance" means a disbursement of Loan funds under this
Agreement.
BORROWER. The word "Borrower" means RECONDITIONED SYSTEMS, INC.. The word
"Borrower" also includes, as applicable, all subsidiaries and affiliates of
Borrower as provided below in the paragraph titled "Subsidiaries and
Affiliates."
BORROWING BASE. The words "Borrowing Base" mean as determined by Lender
from time to time, the lessor of (a) $1,000,000.00; or (b) the sum of (i)
75.000% of the aggregate amount of Eligible Accounts, plus (ii) 30.000% of
the aggregate amount of Eligible Inventory, capped at $300,000.00.
BUSINESS DAY. The words "Business Day" mean a day on which commercial banks
are open for business in the State of Arizona.
CERCLA. The word "CERCLA" means the Comprehensive Environmental Response,
Compensation, and Liability Act of 1980, as amended.
CASH FLOW. The words "Cash Flow" mean net income after taxes, and exclusive
of extraordinary gains and income, plus depreciation and amortization.
COLLATERAL. The word "Collateral" means and includes without limitation all
property and assets granted as collateral security for a Loan, whether real
or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a security
interest, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise. The
word "Collateral" includes without limitation all collateral described
below in the section titled "COLLATERAL."
DEBT. The word "Debt" means all of Borrower's liabilities excluding
Subordinated Debt.
ELIGIBLE ACCOUNTS. The words "Eligible Accounts" mean, at any time, all of
Borrower's Accounts which contain selling terms and conditions acceptable
to Lender. The net amount of any Eligible Account against which Borrower
may borrow shall exclude all returns, discounts, credits, and offsets of
any nature. Unless otherwise agreed to by Lender in writing, Eligible
Accounts do not include:
(a) Accounts with respect to which the Account Debtor is an officer,
an employee or agent of Borrower.
(b) Accounts with respect to which the Account Debtor is a subsidiary
of, or affiliated with or related to Borrower or its shareholders,
officers, or directors.
(c) Accounts with respect to which goods are placed on consignment,
guaranteed sale, or other terms by reason of which the payment by the
Account Debtor may be conditional.
(d) Accounts with respect to which the Account Debtor is not a
resident of the United States, except to the extent such Accounts are
supported by insurance, bonds or other assurances satisfactory to
Lender.
(e) Accounts with respect to which Borrower is or may become liable to
the Account Debtor for goods sold or services rendered by the Account
Debtor to Borrower.
(f) Accounts which are subject to dispute, counterclaim, or setoff.
(g) Accounts with respect to which the goods have not been shipped or
delivered, or the services have not been rendered, to the Account
Debtor.
(h) Accounts with respect to which Lender, in its sole discretion,
deems the creditworthiness or financial condition of the Account
Debtor to be unsatisfactory.
<PAGE>
07-31-1998 LOAN AGREEMENT Page 2
Loan No 1001-R1 (Continued)
================================================================================
(i) Accounts of any Account Debtor who has filed or has had filed
against it a petition in bankruptcy or an application for relief under
any provision of any state or federal bankruptcy, insolvency, or
debtor-in-relief acts; or who has had appointed a trustee, custodian,
or receiver for the assets of such Account Debtor; or who has made an
assignment for the benefit of creditors or has become insolvent or
fails generally to pay its debts (including its payrolls) as such
debts become due.
j) Accounts with respect to which the Account Debtor is the United
States government or any department or agency of the United States.
(k) Accounts which have not been paid in full within 90 DAYS from the
invoice date. The entire balance of all Accounts of any single Account
debtor will be ineligible whenever the portion of the Account which
has not been paid within 90 DAYS from the invoice date is in excess of
10.000% of the total amount outstanding on the Account.
ELIGIBLE INVENTORY. The words "Eligible Inventory" mean, at any time, all
of Borrower's Inventory as defined below except:
(a) Inventory which is not owned by Borrower free and clear of all
security interests, liens, encumbrances, and claims of third parties.
(b) Inventory which Lender, in its sole discretion, deems to be
obsolete, unsalable, damaged, defective, or unfit for further
processing.
ERISA. The word "ERISA" means the Employee Retirement Income Security Act
of 1974, as amended.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "EVENTS OF DEFAULT."
EXPIRATION DATE. The words "Expiration Date" mean the date of termination
of Lender's commitment to lend under this Agreement.
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all Borrowers
granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation each
and all of the guarantors, sureties, and accommodation parties in
connection with any Indebtedness.
INDEBTEDNESS. The word "Indebtedness" means and includes without limitation
all Loans, together with all other obligations, debts and liabilities of
Borrower to Lender, or any one or more of them, as well as all claims by
Lender against Borrower, or any one or more of them; whether now or
hereafter existing, voluntary or involuntary, due or not due, absolute or
contingent, liquidated or unliquidated; whether Borrower may be liable
individually or jointly with others; whether Borrower may be obligated as a
guarantor, surety, or otherwise; whether recovery upon such Indebtedness
may be or hereafter may become barred by any statute of limitations; and
whether such Indebtedness may be or hereafter may become otherwise
unenforceable.
INVENTORY. The word "Inventory" means all of Borrowers raw materials, work
in process, finished goods, merchandise, parts and supplies, of every kind
and description, and goods held for sale or lease or furnished under
contracts of service in which Borrower now has or hereafter acquires any
right, whether held by Borrower or others, and all documents of title,
warehouse receipts, bills of lading, and all other documents of every type
covering all or any part of the foregoing. Inventory includes inventory
temporarily out of Borrower's custody or possession and all returns on
Accounts.
LENDER. The word "Lender" means M&I Thunderbird Bank, an Arizona
corporation, its successors and assigns.
LINE OF CREDIT. The words "Line of Credit" mean the credit facility
described in the Section titled "LINE OF CREDIT" below.
LIQUID ASSETS. The words "Liquid Assets" mean Borrower's cash on hand plus
Borrower's readily marketable securities.
LOAN. The word "Loan" or "Loans" means and includes without limitation any
and all commercial loans and financial accommodations from Lender to
Borrower, whether now or hereafter existing, and however evidenced,
including without limitation those loans and financial accommodations
described herein or described on any exhibit or schedule attached to this
Agreement from time to time.
NOTE. The word "Note" means and includes without limitation Borrower's
promissory note or notes, if any, evidencing Borrower's Loan obligations in
favor of Lender, as well as any substitute, replacement or refinancing note
or notes therefor.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages, deeds
of trust, and all other instruments, agreements and documents, whether now
or hereafter existing, executed in connection with the indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include without
limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended as
a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
SARA. The word "SARA" means the Superfund Amendments and Reauthorization
Act of 1986 as now or hereafter amended.
SUBORDINATED DEBT. The words "Subordinated Debt" mean indebtedness and
liabilities of Borrower which have been subordinated by written agreement
to indebtedness owed by Borrower to Lender in form and substance acceptable
to Lender.
TANGIBLE NET WORTH. The words "Tangible Net Worth" mean Borrower's total
assets excluding all intangible assets (i.e., goodwill, trademarks,
patents, copyrights, organizational expenses, and similar intangible items,
but including leaseholds and leasehold improvements) less total Debt.
WORKING CAPITAL. The words "Working Capital" mean Borrower's current
assets, excluding prepaid expenses, less Borrower's current liabilities.
LINE OF CREDIT. Lender agrees to make Advances to Borrower from time to time
from the date of this Agreement to the Expiration Date, provided the aggregate
amount of such Advances outstanding at any time does not exceed the Borrowing
Base. Within the foregoing limits, Borrower may borrow, partially or wholly
prepay, and reborrow under this Agreement as follows.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make any
Advance to or for the account of Borrower under this Agreement is subject
to the following conditions precedent, with all documents, instruments,
opinions, reports, and other items required under this Agreement to be in
form and substance satisfactory to Lender:
(a) Lender shall have received evidence that this Agreement and all
Related Documents have been duly authorized, executed, and delivered
by Borrower to Lender.
(b) Lender shall have received such opinions of counsel, supplemental
opinions, and documents as Lender may request.
(c) The security interests in the Collateral shall have been duly
authorized, created, and perfected with first lien priority and shall
be in full
<PAGE>
07-31-1998 LOAN AGREEMENT Page 3
Loan No 1001-R1 (Continued)
================================================================================
force and effect.
(d) All guaranties required by Lender for the Line of Credit shall
have been executed by each Guarantor, delivered to Lender, and be in
full force and effect.
(e) Lender, at its option and for its sole benefit, shall have
conducted an audit of Borrower's Accounts, Inventory, books, records,
and operations, and Lender shall be satisfied as to their condition.
(f) Borrower shall have paid to Lender all fees, costs, and expenses
specified in this Agreement and the Related Documents as are then due
and payable.
(g) There shall not exist at the time of any Advance a condition which
would constitute an Event of Default under this Agreement, and
Borrower shall have delivered to Lender the compliance certificate
called for in the paragraph below titled "Compliance Certificate."
MAKING LOAN ADVANCES. Advances under the Line of Credit may be requested
either orally or in writing by authorized persons. Lender may, but need
not, require that all oral requests be confirmed in writing. Each Advance
shall be conclusively deemed to have been made at the request of and for
the benefit of Borrower (a) when credited to any deposit account of
Borrower maintained with Lender or (b) when advanced in accordance with the
instructions of an authorized person. Lender, at its option, may set a
cutoff time, after which all requests for Advances will be treated as
having been requested on the next succeeding Business Day.
MANDATORY LOAN REPAYMENTS. If at any time the aggregate principal amount of
the outstanding Advances shall exceed the applicable Borrowing Base,
Borrower, immediately upon written or oral notice from Lender, shall pay to
Lender an amount equal to the difference between the outstanding principal
balance of the Advances and the Borrowing Base. On the Expiration Date,
Borrower shall pay to Lender in full the aggregate unpaid principal amount
of all Advances then outstanding and all accrued unpaid interest, together
with all other applicable fees, costs and charges, if any, not yet paid.
LOAN ACCOUNT. Lender shall maintain on its books a record of account in
which Lender shall make entries for each Advance and such other debits and
credits as shall be appropriate in connection with the credit facility.
Lender shall provide Borrower with periodic statements of Borrower's
account, which statements shall be considered to be correct and
conclusively binding on Borrower unless Borrower notifies Lender to the
contrary within thirty (30) days after Borrower's receipt of any such
statement which Borrower deems to be incorrect.
COLLATERAL. To secure payment of the Line of Credit and performance of all other
Loans, obligations and duties owed by Borrower to Lender, Borrower (and others,
if required) shall grant to Lender Security Interests in such property and
assets as Lender may require (the "Collateral"), including without limitation
Borrower's present and future Accounts, general intangibles, and Inventory.
Lender's Security Interests in the Collateral shall be continuing liens and
shall include the proceeds and products of the Collateral, including without
limitation the proceeds of any insurance. With respect to the Collateral,
Borrower agrees and represents and warrants to Lender:
PERFECTION OF SECURITY INTERESTS. Borrower agrees to execute such financing
statements and to take whatever other actions are requested by Lender to
perfect and continue Lender's Security Interests in the Collateral. Upon
request of Lender, Borrower will deliver to Lender any and all of the
documents evidencing or constituting the Collateral, and Borrower will note
Lender's interest upon any and all chattel paper if not delivered to Lender
for possession by Lender. Contemporaneous with the execution of this
Agreement, Borrower will execute one or more UCC financing statements and
any similar statements as may be required by applicable law, and will file
such financing statements and all such similar statements in the
appropriate location or locations. Borrower hereby appoints Lender as its
irrevocable attorney-in-fact for the purpose of executing any documents
necessary to perfect or to continue any Security Interest. Lender may at
any time, and without further authorization from Borrower, file a carbon,
photograph, facsimile, or other reproduction of any financing statement for
use as a financing statement. Borrower will reimburse Lender for all
expenses for the perfection, termination, and the continuation of the
perfection of Lender's security interest in the Collateral. Borrower
promptly will notify Lender of any change in Borrower's name including any
change to the assumed business names of Borrower. Borrower also promptly
will notify Lender of any change in Borrower's Social Security Number or
Employer Identification Number. Borrower further agrees to notify Lender in
writing prior to any change in address or location of Borrower's principal
governance office or should Borrower merge or consolidate with any other
entity.
COLLATERAL RECORDS. Borrower does now, and at all times hereafter shall,
keep correct and accurate records of the Collateral, all of which records
shall be available to Lender or Lender's representative upon demand for
inspection and copying at any reasonable time. With respect to the
Accounts, Borrower agrees to keep and maintain such records as Lender may
require, including without limitation information concerning Eligible
Accounts and Account balances and aging. With respect to the Inventory,
Borrower agrees to keep and maintain such records as Lender may require,
including without limitation information concerning Eligible Inventory and
records itemizing and describing the kind, type, quality, and quantity of
Inventory, Borrower's Inventory costs and selling prices, and the daily
withdrawals and additions to Inventory.
COLLATERAL SCHEDULES. Concurrently with the execution and delivery of this
Agreement, Borrower shall execute and deliver to Lender schedules of
Accounts and Inventory and Eligible Accounts and Eligible Inventory, in
form and substance satisfactory to the Lender. Thereafter Borrower shall
execute and deliver to Lender such supplemental schedules of Eligible
Accounts and Eligible Inventory and such other matters and information
relating to the Accounts and Inventory as Lender may request. Supplemental
schedules shall be delivered according to the following schedule: WITHIN
FIFTEEN (15) DAYS AFTER EACH MONTH END TO INCLUDE ACCOUNTS RECEIVABLE AND
ACCOUNTS PAYABLE AGINGS AND BORROWER'S CERTIFICATION AND RECONCILIATION
FORM.
REPRESENTATIONS AND WARRANTIES CONCERNING ACCOUNTS. With respect to the
Accounts, Borrower represents and warrants to Lender: (a) Each Account
represented by Borrower to be an Eligible Account for purposes of this
Agreement conforms to the requirements of the definition of an Eligible
Account; (b) All Account information listed on schedules delivered to
Lender will be true and correct, subject to immaterial variance; and (c)
Lender, its assigns, or agents shall have the right at any time and at
Borrower's expense to inspect, examine, and audit Borrower's records and to
confirm with Account Debtors the accuracy of such Accounts.
REPRESENTATIONS AND WARRANTIES CONCERNING INVENTORY. With respect to the
Inventory, Borrower represents and warrants to Lender: (a) All Inventory
represented by Borrower to be Eligible Inventory for purposes of this
Agreement conforms to the requirements of the definition of Eligible
Inventory; (b) All Inventory values listed on schedules delivered to Lender
will be true and correct, subject to immaterial variance; (c) The value of
the Inventory will be determined on a consistent accounting basis; (d)
Except as agreed to the contrary by Lender in writing, all Eligible
Inventory is now and at all times hereafter will be in Borrower's physical
possession and shall not be held by others on consignment, sale on
approval, or sale or return: (e) Except as reflected in the Inventory
schedules delivered to Lender, all Eligible Inventory is now and at all
times hereafter will be of good and merchantable quality, free from
defects; (f) Eligible Inventory is not now and will not at any time
hereafter be stored with a bailee, warehouseman, or similar party without
Lender's prior written consent, and, in such event, Borrower will
concurrently at the time of bailment cause any such bailee, warehouseman,
or similar party to issue and deliver to Lender, in form acceptable to
Lender, warehouse receipts in Lender's name evidencing the storage of
Inventory; and (g) Lender, its assigns, or agents shall have the right at
any time and at Borrower's expense to inspect and examine the Inventory and
to check and test the same as to quality, quantity, value, and condition.
REMITTANCE ACCOUNT. Borrower agrees that Lender may at any time require
Borrower to institute procedures whereby the payments and other proceeds of
the Accounts shall be paid by the Account Debtors under a remittance
account or lock box arrangement with Lender, or Lender's agent, or with one
or more financial institutions designated by Lender. Borrower further
agrees that, if no Event of Default exists under this
<PAGE>
07-31-1998 LOAN AGREEMENT Page 4
Loan No 1001-R1 (Continued)
================================================================================
Agreement, any and all of such funds received under such a remittance
account or lock box arrangement shall, at Lender's sole election and
discretion, either be (a) paid or turned over to Borrower; (b) deposited
into one or more accounts for the benefit of Borrower (which deposit
accounts shall be subject to a security assignment in favor of Lender); (c)
deposited into one or more accounts for the joint benefit of Borrower and
Lender (which deposit accounts shall likewise be subject to a security
assignment in favor of Lender); (d) paid or turned over to Lender to be
applied to the Indebtedness in such order and priority as Lender may
determine within its sole discretion; or (e) any combination of the
foregoing as Lender shall determine from time to time. Borrower further
agrees that, should one or more Events of Default exist, any and all funds
received under such a remittance account or lock box arrangement shall be
paid or turned over to Lender to be applied to the Indebtedness, again in
such order and priority as Lender may determine within its sole discretion.
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Arizona and
is validly existing and in good standing in all states in which Borrower is
doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
and all Related Documents by Borrower, to the extent to be executed,
delivered or performed by Borrower, have been duly authorized by all
necessary action by Borrower; do not require the consent or approval of any
other person, regulatory authority or governmental body; and do not
conflict with, result in a violation of, or constitute a default under (a)
any provision of its articles of incorporation or organization, or bylaws,
or any agreement or other instrument binding upon Borrower or (b) any law,
governmental regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrowers financial condition as of
the date of the statement, and there has been no material adverse change in
Borrower's financial condition subsequent to the date of the most recent
financial statement supplied to Lender. Borrower has no material contingent
obligations except as disclosed in such financial statements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
PROPERTIES. Except for Permitted Liens, Borrower owns and has good title to
all of Borrower's properties free and clear of all Security Interests, and
has not executed any security documents or financing statements relating to
such properties. All of Borrower's properties are titled in Borrower's
legal name, and Borrower has not used, or filed a financing statement
under, any other name for at least the last five (5) years.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal," "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the "CERCLA," "SARA," the
Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et seq.,
the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901, et
seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing. Except as disclosed to and
acknowledged by Lender in writing, Borrower represents and warrants that:
(a) During the period of Borrower's ownership of the properties, there has
been no use, generation, manufacture, storage, treatment, disposal, release
or threatened release of any hazardous waste or substance by any person on,
under, about or from any of the properties. (b) Borrower has no knowledge
of, or reason to believe that there has been (i) any use, generation,
manufacture, storage, treatment, disposal, release, or threatened release
of any hazardous waste or substance on, under, about or from the properties
by any prior owners or occupants of any of the properties, or (ii) any
actual or threatened litigation or claims of any kind by any person
relating to such matters. (c) Neither Borrower nor any tenant, contractor,
agent or other authorized user of any of the properties shall use,
generate, manufacture, store, treat, dispose of, or release any hazardous
waste or substance on, under, about or from any of the properties; and any
such activity shall be conducted in compliance with all applicable federal,
state, and local laws, regulations, and ordinances, including without
limitation those laws, regulations and ordinances described above. Borrower
authorizes Lender and its agents to enter upon the properties to make such
inspections and tests as Lender may deem appropriate to determine
compliance of the properties with this section of the Agreement. Any
inspections or tests made by Lender shall be at Borrower's expense and for
Lender's purposes only and shall not be construed to create any
responsibility or liability on the part of Lender to Borrower or to any
other person. The representations and warranties contained herein are based
on Borrower's due diligence in investigating the properties for hazardous
waste and hazardous substances. Borrower hereby (a) releases and waives any
future claims against Lender for indemnity or contribution in the event
Borrower becomes liable for cleanup or other costs under any such laws, and
(b) agrees to indemnify and hold harmless Lender against any and all
claims, losses, liabilities, damages, penalties, and expenses which Lender
may directly or indirectly sustain or suffer resulting from a breach of
this section of the Agreement or as a consequence of any use, generation,
manufacture, storage, disposal, release or threatened release of a
hazardous waste or substance on the properties. The provisions of this
section of the Agreement, including the obligation to indemnify, shall
survive the payment of the indebtedness and the termination or expiration
of this Agreement and shall not be affected by Lender's acquisition of any
interest in any of the properties, whether by foreclosure or otherwise.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TAXES. To the best of Borrower's knowledge, all tax returns and reports of
Borrower that are or were required to be filed, have been filed, and all
taxes, assessments and other governmental charges have been paid in full,
except those presently being or to be contested by Borrower in good faith
in the ordinary course of business and for which adequate reserves have
been provided.
LIEN PRIORITY. Unless otherwise previously disclosed to Lender in writing,
Borrower has not entered into or granted any Security Agreements, or
permitted the filing or attachment of any Security Interests on or
affecting any of the Collateral directly or indirectly securing repayment
of Borrower's Loan and Note, that would be prior or that may in any way be
superior to Lender's Security Interests and rights in and to such
Collateral.
BINDING EFFECT. This Agreement, the Note, all Security Agreements directly
or indirectly securing repayment of Borrower's Loan and Note and all of the
Related Documents are binding upon Borrower as well as upon Borrower's
successors, representatives and assigns, and are legally enforceable in
accordance with their respective terms.
COMMERCIAL PURPOSES. Borrower intends to use the Loan proceeds solely for
business or commercial related purposes.
EMPLOYEE BENEFIT PLANS. Each employee benefit plan as to which Borrower may
have any liability complies in all material respects with all applicable
requirements of law and Regulations and (i) no Reportable Event nor
Prohibited Transaction (as defined in ERISA) has occurred with respect to
any such plan, (ii) Borrower has not withdrawn from any such plan or
initiated steps to do so, (iii) no steps have been taken to terminate any
such plan, and (iv) there are no unfunded liabilities other than those
previously disclosed to Lender in writing.
LOCATION OF BORROWER'S OFFICES AND RECORDS. Borrower's place of business,
or Borrower's Chief executive office, if Borrower has more than one place
of business, is located at 444 West Fairmont, Tempe, AZ 85282. Unless
Borrower has designated otherwise in writing this location is also the
office or offices where Borrower keeps its records concerning the
Collateral.
<PAGE>
07-31-1998 LOAN AGREEMENT Page 5
Loan No 1001-R1 (Continued)
================================================================================
INFORMATION. All information heretofore or contemporaneously herewith
furnished by Borrower to Lender for the purposes of or in connection with
this Agreement or any transaction contemplated hereby is, and all
information hereafter furnished by or on behalf of Borrower to Lender will
be, true and accurate in every material respect on the date as of which
such information is dated or certified; and none of such information is or
will be incomplete by omitting to state any material fact necessary to make
such information not misleading.
SURVIVAL OF REPRESENTATIONS AND WARRANTIES. Borrower understands and agrees
that Lender, without independent investigation, is relying upon the above
representations and warranties in extending Loan Advances to Borrower.
Borrower further agrees that the foregoing representations and warranties
shall be continuing in nature and shall remain in full force and effect
until such time as Borrower's indebtedness shall be paid in full, or until
this Agreement shall be terminated in the manner provided above, whichever
is the last to occur.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of
any Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis,
and permit Lender to examine and audit Borrower's books and records at all
reasonable times.
FINANCIAL STATEMENTS. Furnish Lender with, as soon as available, but in no
event later than one hundred twenty (120) days after the end of each fiscal
year, Borrower's balance sheet and income statement for the year ended,
audited by a certified public accountant satisfactory to Lender, and, as
soon as available, but in no event later than forty five (45) days after
the end of each month, Borrower's balance sheet and profit and loss
statement for the period ended, prepared and certified as correct to the
best knowledge and belief by Borrower's chief financial officer or other
officer or person acceptable to Lender. All financial reports required to
be provided under this Agreement shall be prepared in accordance with
generally accepted accounting principles, applied on a consistent basis,
and certified by Borrower as being true and correct.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports
with respect to Borrower's financial condition and business operations as
Lender may request from time to time.
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and
ratios:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not less
than $1,150,000.00.
NET WORTH RATIO. Maintain a Tangible Net Worth in excess of 1.500% of
Total Assets.
CURRENT RATIO. Maintain a ratio of Current Assets to Current
Liabilities in excess of 1.50 to 1.00.
The following provisions shall apply for purposes of determining compliance with
the foregoing financial covenants and ratios: MONTHLY. Except as provided above,
all computations made to determine compliance with the requirements contained in
this paragraph shall be made in accordance with generally accepted accounting
principles, applied on a consistent basis, and certified by Borrower as being
true and correct.
INSURANCE. Maintain fire and other risk insurance, public liability
insurance, and such other insurance as Lender may require with respect to
Borrower's properties and operations, in form, amounts, coverages and with
insurance companies reasonably acceptable to Lender. Borrower, upon request
of Lender, will deliver to Lender from time to time the policies or
certificates of insurance in form satisfactory to Lender, including
stipulations that coverages will not be canceled or diminished without at
least ten (10) days' prior written notice to Lender. Each insurance policy
also shall include an endorsement providing that coverage in favor of
Lender will not be impaired in any way by any act, omission or default of
Borrower or any other person. In connection with all policies covering
assets in which Lender holds or is offered a security interest for the
Loans, Borrower will provide Lender with such loss payable or other
endorsements as Lender may require.
INSURANCE REPORTS. Furnish to Lender, upon request of Lender, reports on
each existing insurance policy showing such information as Lender may
reasonably request, including without limitation the following: (a) the
name of the insurer; (b) the risks insured; (c) the amount of the policy;
(d) the properties insured; (e) the then current property values on the
basis of which insurance has been obtained, and the manner of determining
those values; and (f) the expiration date of the policy. In addition, upon
request of Lender (however not more often than annually), Borrower will
have an independent appraiser satisfactory to Lender determine, as
applicable, the actual cash value or replacement cost of any Collateral.
The cost of such appraisal shall be paid by Borrower.
OTHER AGREEMENTS. Comply with all terms and conditions of all other
agreements, whether now or hereafter existing, between Borrower and any
other party and notify Lender immediately in writing of any default in
connection with any other such agreements.
LOAN PROCEEDS. Use all Loan proceeds solely for Borrower's business
operations, unless specifically consented to the contrary by Lender in
writing.
TAXES, CHARGES AND LIENS. Pay and discharge when due all of its
indebtedness and obligations, including without limitation all assessments,
taxes, governmental charges, levies and liens, of every kind and nature,
imposed upon Borrower or its properties, income, or profits, prior to the
date on which penalties would attach, and all lawful claims that, if
unpaid, might become a lien or charge upon any of Borrower's properties,
income, or profits. Provided however, Borrower will not be required to pay
and discharge any such assessment, tax, charge, levy, lien or claim so long
as (a) the legality of the same shall be contested in good faith by
appropriate proceedings, and (b) Borrower shall have established on its
books adequate reserves with respect to such contested assessment, tax,
charge, levy, lien, or claim in accordance with generally accepted
accounting practices. Borrower, upon demand of Lender, will furnish to
Lender evidence of payment of the assessments, taxes, charges, levies,
liens and claims and will authorize the appropriate governmental official
to deliver to Lender at any time a written statement of any assessments,
taxes, charges, levies, liens and claims against Borrower's properties,
income, or profits.
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in the Related Documents in a timely
manner, and promptly notify Lender if Borrower learns of the occurrence of
any event which constitutes an Event of Default under this Agreement or
under any of the Related Documents.
OPERATIONS. Maintain executive and management personnel with substantially
the same qualifications and experience as the present executive and
management personnel; provide written notice to Lender of any change in
executive and management personnel; conduct its business affairs in a
reasonable and prudent manner and in compliance with all applicable
federal, state and municipal laws, ordinances, rules and regulations
respecting its properties, charters, businesses and operations, including
without limitation, compliance with the Americans With Disabilities Act and
with all minimum funding standards and other requirements of ERISA and
other laws applicable to Borrower's employee benefit plans.
INSPECTION. Permit employees or agents of Lender at any reasonable time to
inspect any and all Collateral for the Loan or Loans and Borrower's other
properties and to examine or audit Borrower's books, accounts, and records
and to make copies and memoranda of Borrower's books, accounts, and
records. If Borrower now or at any time hereafter maintains any records
(including without limitation computer generated records and computer
software programs for the generation of such records) in the possession of
a third party, Borrower, upon request of Lender, shall notify such party to
permit Lender free access to such records at all reasonable times and to
provide Lender with copies of any records it may
<PAGE>
07-31-1998 LOAN AGREEMENT Page 6
Loan No 1001-R1 (Continued)
================================================================================
request, all at Borrower's expense.
COMPLIANCE CERTIFICATE. Unless waived in writing by Lender, provide Lender
WITHIN FIFTEEN (15) DAYS AFTER EACH MONTH END and at the time of each
disbursement of Loan proceeds with a certificate executed by Borrower's
chief financial officer, or other officer or person acceptable to Lender,
certifying that the representations and warranties set forth in this
Agreement are true and correct as of the date of the certificate and
further certifying that, as of the date of the certificate, no Event of
Default exists under this Agreement.
ENVIRONMENTAL COMPLIANCE AND REPORTS. Borrower shall comply in all respects
with all environmental protection federal, state and local laws, statutes,
regulations and ordinances; not cause or permit to exist, as a result of an
intentional or unintentional action or omission on its part or on the part
of any third party, on property owned and/or occupied by Borrower, any
environmental activity where damage may result to the environment, unless
such environmental activity is pursuant to and in compliance with the
conditions of a permit issued by the appropriate federal, state or local
governmental authorities; shall furnish to Lender promptly and in any event
within thirty (30) days after receipt thereof a copy of any notice,
summons, lien, citation, directive, letter or other communication from any
governmental agency or instrumentality concerning any intentional or
unintentional action or omission on Borrower's part in connection with any
environmental activity whether or not there is damage to the environment
and/or other natural resources.
ADDITIONAL ASSURANCES. Make, execute and deliver to Lender such promissory
notes, mortgages, deeds of trust, security agreements, financing
statements, instruments, documents and other agreements as Lender or its
attorneys may reasonably request to evidence and secure the Loans and to
perfect all Security Interests.
RECOVERY OF ADDITIONAL COSTS. If the imposition of or any change in any law,
rule, regulation or guideline, or the interpretation or application of any
thereof by any court or administrative or governmental authority (including any
request or policy not having the force of law) shall impose, modify or make
applicable any taxes (except U.S. federal, state or local income or franchise
taxes imposed on Lender), reserve requirements, capital adequacy requirements or
other obligations which would (a) increase the cost to Lender for extending or
maintaining the credit facilities to which this Agreement relates, (b) reduce
the amounts payable to Lender under this Agreement or the Related Documents, or
(c) reduce the rate of return on Lender's capital as a consequence of Lender's
obligations with respect to the credit facilities to which this Agreement
relates, then Borrower agrees to pay Lender such additional amounts as will
compensate Lender therefor, within five (5) days after Lender's written demand
for such payment, which demand shall be accompanied by an explanation of such
imposition or charge and a calculation in reasonable detail of the additional
amounts payable by Borrower, which explanation and calculations shall be
conclusive in the absence of manifest error.
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrower's assets,
or (c) sell with recourse any of Borrower's accounts, except to Lender.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c) pay
any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower may
pay cash dividends on its stock to its shareholders from time to time in
amounts necessary to enable the shareholders to pay income taxes and make
estimated income tax payments to satisfy their liabilities under federal
and state law which arise solely from their status as Shareholders of a
Subchapter S Corporation because of their ownership of shares of stock of
Borrower, or (d) purchase or retire any of Borrower's outstanding shares or
alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money or
assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
CESSATION OF ADVANCES. If Lender has made any commitment to make any Loan to
Borrower, whether under this Agreement or under any other agreement, Lender
shall have no obligation to make Loan Advances or to disburse Loan proceeds if:
(a) Borrower or any Guarantor is in default under the terms of this Agreement or
any of the Related Documents or any other agreement that Borrower or any
Guarantor has with Lender; (b) Borrower or any Guarantor becomes insolvent,
files a petition in bankruptcy or similar proceedings, or is adjudged a
bankrupt; (c) there occurs a material adverse change in Borrower's financial
condition, in the financial condition of any Guarantor, or in the value of any
Collateral securing any Loan; (d) any Guarantor seeks, claims or otherwise
attempts to limit, modify or revoke such Guarantor's guaranty of the Loan or any
other loan with Lender; or (e) Lender in good faith deems itself insecure, even
though no Event of Default shall have occurred.
ADDITIONAL PROVISIONS.
The following additional provisions are a part of this Agreement:
SERVICE CHARGE. In addition to the required payments under the Indebtedness
and this Agreement, Borrower shall pay Lender's then current service charges for
servicing, examining, and inspecting in connection with this Agreement.
ADDITIONAL INFORMATION. Borrower shall provide Lender with complete copies
of Borrower's Federal income tax returns, as filed, as soon as available, but in
no event later than thirty (30) days after each return has been filed.
LENDER EXAMS. Annual Lender exams may be performed, at Lender's option, or
at Lender's request, by Lender designated personnel, at Borrower's expense.
Security and Exchange Commission Reports. Borrower shall provide Lender with
Security and Exchange Commission Report's 10K.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking, savings, or some other account), including without limitation
all accounts held jointly with someone else and all accounts Borrower may open
in the future, excluding however all IRA and Keogh accounts, and all trust
accounts for which the grant of a security interest would be prohibited by law.
Borrower authorizes Lender, to the extent permitted by applicable law, to charge
or setoff all sums owing on the Indebtedness against any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
DEFAULT IN FAVOR OF THIRD PARTIES. Should Borrower or any Grantor default
under any loan, extension of credit, security agreement, purchase or sales
agreement, or any other agreement, in favor of any other creditor or person
that may materially affect any of Borrower's property or
<PAGE>
07-31-1998 LOAN AGREEMENT Page 7
Loan No 1001-R1 (Continued)
================================================================================
Borrower's or any Grantor's ability to repay the Loans or perform their
respective obligations under this Agreement or any of the Related
Documents.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
anytime thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related Documents
ceases to be in full force and effect (including failure of any Security
Agreement to create a valid and perfected Security Interest) at any time
and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any creditor
of any Grantor against any collateral securing the Indebtedness, or by any
governmental agency. This includes a garnishment, attachment, or levy on or
of any of Borrower's deposit accounts with Lender. However, this Event of
Default shall not apply if there is a good faith dispute by Borrower or
Grantor, as the case may be, as to the validity or reasonableness of the
claim which is the basis of the creditor or forfeiture proceeding, and if
Borrower or Grantor gives Lender written notice of the creditor or
forfeiture proceeding and furnishes reserves or a surety bond for the
creditor or forfeiture proceeding satisfactory to Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with respect
to any Guarantor of any of the Indebtedness or any Guarantor dies or
becomes incompetent, or revokes or disputes the validity of, or liability
under, any Guaranty of the Indebtedness. Lender, at its option, may, but
shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of the
Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (12) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within thirty (30)
days; or (b) if the cure requires more than thirty (30) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
EFFECT OF AN EVENT OF DEFAULT. If any Event of Default shall occur, except where
otherwise provided in this Agreement or the Related Documents, all commitments
and obligations of Lender under this Agreement or the Related Documents or any
other agreement immediately will terminate (including any obligation to make
Loan Advances or disbursements), and, at Lenders option, all Indebtedness
immediately will become due and payable, all without notice of any kind to
Borrower, except that in the case of an Event of Default of the type described
in the "Insolvency" subsection above, such acceleration shall be automatic and
not optional. In addition, Lender shall have all the rights and remedies
provided in the Related Documents or available at law, in equity, or otherwise.
Except as may be prohibited by applicable law, all of Lender's rights and
remedies shall be cumulative and may be exercised singularly or concurrently.
Election by Lender to pursue any remedy shall not exclude pursuit of any other
remedy, and an election to make expenditures or to take action to perform an
obligation of Borrower or of any Grantor shall not affect Lender's right to
declare a default and to exercise its rights and remedies.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to the
matters set forth in this Agreement. No alteration of or amendment to this
Agreement shall be effective unless given in writing and signed by the
party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED BY
LENDER IN THE STATE OF ARIZONA. IF THERE IS A LAWSUIT, BORROWER AGREES UPON
LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF MARICOPA
COUNTY, THE STATE OF ARIZONA. THIS AGREEMENT SHALL BE GOVERNED BY AND
CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for all obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation whatsoever,
to any one or more purchasers, or potential purchasers, any information or
knowledge Lender may have about Borrower or about any other matter relating
to the Loan, and Borrower hereby waives any rights to privacy it may have
with respect to such matters. Borrower additionally waives any and all
notices of sale of participation interests, as well as all notices of any
repurchase of such participation interests. Borrower also agrees that the
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the rights
granted under the participation agreement or agreements governing the sale
of such participation interests. Borrower further waives all rights of
offset or counterclaim that it may have now or later against Lender or
against any purchaser of such a participation interest and unconditionally
agrees that either Lender or such purchaser may enforce Borrower's
obligation under the Loans irrespective of the failure or insolvency of any
holder of any interest in the Loans. Borrower further agrees that the
purchaser of any such participation interests may enforce its interests
irrespective of any personal claims or defenses that Borrower may have
against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile (unless otherwise required
by law), and shall be effective when actually delivered or when deposited
with a nationally recognized overnight courier or deposited in the United
States mail, first class, postage prepaid, addressed to the party to whom
the notice is to be given at the address shown above. Any party may
<PAGE>
07-31-1998 LOAN AGREEMENT Page 8
Loan No 1001-R1 (Continued)
================================================================================
change its address for notices under this Agreement by giving formal
written notice to the other parties, specifying that the purpose of the
notice is to change the party's address. To the extent permitted by
applicable law, if there is more than one Borrower, notice to any Borrower
will constitute notice to all Borrowers. For notice purposes, Borrower will
keep Lender informed at all times of Borrower's current address(es).
SEVERABILITY. It a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SUBSIDIARIES AND AFFILIATES OF BORROWER. To the extent the context of any
provisions of this Agreement makes it appropriate, including without
limitation any representation, warranty or covenant, the word "Borrower" as
used herein shall include all subsidiary and affiliates of Borrower.
Notwithstanding the foregoing however, under no circumstances shall this
Agreement be construed to require Lender to make any Loan or other
financial accommodation to any subsidiary or affiliate of Borrower.
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure to
the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any Certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made by
Lender or on Lender's behalf.
TIME IS OF THE ESSENCE. Time is of the essence in the performance of this
Agreement.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender of
a provision of this Agreement shall not prejudice or constitute a waiver of
Lender's right otherwise to demand strict compliance with that provision or
any other provision of this Agreement. No prior waiver by Lender, nor any
course of dealing between Lender and Borrower, or between Lender and any
Grantor, shall constitute a waiver of any of Lender's rights or of any
obligations of Borrower or of any Grantor as to any future transactions.
Whenever the consent of Lender is required under this Agreement, the
granting of such consent by Lender in any instance shall not constitute
continuing consent in subsequent instances where such consent is required,
and in all cases such consent may be granted or withheld in the sole
discretion of Lender.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS LOAN AGREEMENT, AND
BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JULY 31, 1998.
BORROWER:
RECONDITIONED SYSTEMS, INC.
By: /s/ DIRK ANDERSON
- --------------------------------------------
DIRK ANDERSON, CFO
LENDER:
M&I THUNDERBIRD BANK, AN ARIZONA CORPORATION
By: /s/ JEFFREY LeBAR
- --------------------------------------------
Authorized Officer
<PAGE>
M & I THUNDERBIRD BANK
CHANGE IN TERMS AGREEMENT
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$1,000,000.00 07-31-1999 1001 - R1 09400069235 JLL
- ---------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of
this document to any particular loan or items.
- ---------------------------------------------------------------------------------------------------
BORROWER: RECONDITIONED SYSTEMS, INC. LENDER: M&I THUNDERBIRD BANK, AN ARIZONA CORPORATION
444 WEST FAIRMONT SCOTTSDALE RD. & THUNDERBIRD OFFICE (10)
TEMPE, AZ 85282 C/O LOAN SUPPORT DEPARTMENT
ONE EAST CAMELBACK ROAD
PHOENIX, AZ 85012-1647
===================================================================================================
</TABLE>
PRINCIPAL AMOUNT: $1,000,000 DATE OF AGREEMENT: JULY 31, 1998
DESCRIPTION OF EXISTING INDEBTEDNESS. Promissory Note originally dated July 30,
1997, in the original principal amount of $1,000,000.00, and any renewals
thereof.
DESCRIPTION OF CHANGE IN TERMS. The maturity date is hereby extended to July 31,
1999. The interest rate is hereby changed as described in the Variable Interest
Rate section of this Agreement.
PROMISE TO PAY. RECONDITIONED SYSTEMS, INC. ("BORROWER") PROMISES TO PAY TO M&I
THUNDERBIRD BANK, AN ARIZONA CORPORATION ("LENDER"), OR ORDER, IN LAWFUL MONEY
OF THE UNITED STATES OF AMERICA, THE PRINCIPAL AMOUNT OF ONE MILLION & 00/100
DOLLARS ($1,000,000.00) OR SO MUCH AS MAY BE OUTSTANDING, TOGETHER WITH INTEREST
ON THE UNPAID OUTSTANDING PRINCIPAL BALANCE OF EACH ADVANCE. INTEREST SHALL BE
CALCULATED FROM THE DATE OF EACH ADVANCE UNTIL REPAYMENT OF EACH ADVANCE.
PAYMENT. BORROWER WILL PAY THIS LOAN IN ONE PAYMENT OF ALL OUTSTANDING PRINCIPAL
PLUS ALL ACCRUED UNPAID INTEREST ON JULY 31, 1999. IN ADDITION, BORROWER WILL
PAY REGULAR MONTHLY PAYMENTS OF ACCRUED UNPAID INTEREST BEGINNING AUGUST 29,
1998, AND ALL SUBSEQUENT INTEREST PAYMENTS ARE DUE ON THE SAME DAY OF EACH MONTH
AFTER THAT. The annual interest rate for this Agreement is computed on a 365/360
basis; that is, by applying the ratio of the annual interest rate over a year of
360 days, multiplied by the outstanding principal balance, multiplied by the
actual number of days the principal balance is outstanding. Borrower will pay
Lender at Lender's address shown above or at such other place as Lender may
designate in writing. Unless otherwise agreed or required by applicable law,
payments will be applied first to any unpaid collection costs and any late
charges, then to any unpaid interest, and any remaining amount to principal.
VARIABLE INTEREST RATE. The interest rate on this Agreement is subject to change
from time to time based on changes in an index which is Lender's Prime Rate (the
"Index"). This is the rate Lender charges, or would charge, on 90-day unsecured
loans to the most creditworthy corporate customers. This rate may or may not be
the lowest rate available from Lender at any given time. Lender will tell
Borrower the current Index rate upon Borrower's request. Borrower understands
that Lender may make loans based on other rates as well. The interest rate
change will not occur more often than each day. THE INDEX CURRENTLY IS 8.500%
PER ANNUM. THE INTEREST RATE TO BE APPLIED TO THE UNPAID PRINCIPAL BALANCE OF
THIS AGREEMENT WILL BE AT A RATE EQUAL TO THE INDEX, RESULTING IN AN INITIAL
RATE OF 8.500% PER ANNUM. NOTICE: Under no circumstances will the interest rate
on this Agreement be more than the maximum rate allowed by applicable law.
PREPAYMENT. Borrower agrees that all loan fees and other prepaid finance charges
are earned fully as of the date of the loan and will not be subject to refund
upon early payment (whether voluntary or as a result of default), except as
otherwise required by law. Except for the foregoing, Borrower may pay without
penalty all or a portion of the amount owed earlier than it is due. Early
payments will not, unless agreed to by Lender in writing, relieve Borrower of
Borrower's obligation to continue to make payments of accrued unpaid interest.
Rather, they will reduce the principal balance due.
LATE CHARGE. If a payment is 10 DAYS OR MORE LATE, Borrower will be charged
5.000% OF THE REGULARLY SCHEDULED PAYMENT.
DEFAULT. Borrower will be in default if any of the following happens: (a)
Borrower fails to make any payment when due. (b) Borrower breaks any promise
Borrower has made to Lender, or Borrower fails to comply with or to perform when
due any other term, obligation, covenant, or condition contained in this
Agreement or an agreement related to this Agreement, or in any other agreement
or loan Borrower has with Lender. (c) Borrower defaults under any loan,
extension of credit, security agreement, purchase or sales agreement, or any
other agreement, in favor of any other creditor or person that may materially
affect any of Borrower's property or Borrower's ability to repay this Note or
perform Borrower's obligations under this Note or any of the Related Documents.
(d) Any representation or statement made or furnished to Lender by Borrower or
on Borrower's behalf is false or misleading in any material respect either now
or at the time made or furnished. (e) Borrower becomes insolvent, a receiver is
appointed for any part of Borrower's property, Borrower makes an assignment for
the benefit of creditors, or any proceeding is commenced either by Borrower or
against Borrower under any bankruptcy or insolvency laws. (f) Any creditor tries
to take any of Borrower's property on or in which Lender has a lien or security
interest. This includes a garnishment of any of Borrower's accounts with Lender.
(g) Any guarantor dies or any of the other events described in this default
section occurs with respect to any guarantor of this Agreement. (h) A material
adverse change occurs in Borrower's financial condition, or Lender believes the
prospect of payment or performance of the Indebtedness is impaired. (I) Lender
in good faith deems itself insecure.
If any default, other than a default in payment, is curable and if Borrower has
not been given a notice of a breach of the same provision of this Agreement
within the preceding twelve (12) months, it may be cured (and no event of
default will have occurred) if Borrower, after receiving written notice from
Lender demanding cure of such default: (a) cures the default within thirty (30)
days; or (b) if the cure requires more than thirty (30) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be sufficient
to cure the default and thereafter continues and completes all reasonable and
necessary steps sufficient to produce compliance as soon as reasonably
practical.
LENDER'S RIGHTS. Upon default, Lender may declare the entire unpaid principal
balance on this Agreement and all accrued unpaid interest immediately due,
without notice, and then Borrower will pay that amount. Upon default, including
failure to pay upon final maturity, Lender, at its option, may also, if
permitted under applicable law, increase the variable interest rate on this
Agreement to 5.000 percentage points over the Index. The interest rate will not
exceed the maximum rate permitted by applicable law. Lender may hire or pay
someone else to help collect this Agreement if Borrower does not pay. Borrower
also will pay Lender that amount. This includes, subject to any limits under
applicable law, Lender's attorneys' fees and Lender's legal expenses whether or
not there is a lawsuit, including attorneys' fees and legal expenses for
bankruptcy proceedings (including efforts to modify or vacate any automatic stay
or injunction), appeals, and any anticipated post-judgment collection services.
If not prohibited by applicable law, Borrower also will pay any court costs, in
addition to all other sums provided by law. THIS AGREEMENT HAS BEEN DELIVERED TO
LENDER AND ACCEPTED BY LENDER IN THE STATE OR ARIZONA. IF THERE IS A LAWSUIT,
BORROWER AGREES UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE
COURTS OF MARICOPA COUNTY, THE STATE OF ARIZONA. THIS AGREEMENT SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF ARIZONA.
RIGHT OF SETOFF. Borrower grants to Lender a contractual security interest in,
and hereby assigns, conveys, delivers, pledges, and transfers to Lender all
Borrower's right, title and interest in and to, Borrower's accounts with Lender
(whether checking savings, or some other account), including
<PAGE>
07-31-1998 CHANGES IN TERMS AGREEMENT PAGE 2
LOAN NO 1001-R1 (CONTINUED)
================================================================================
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on this Agreement against any
and all such accounts.
LINE OF CREDIT. This Agreement evidences a revolving line of credit. Advances
under this Agreement may be requested either orally or in writing by Borrower or
by an authorized person. Lender may, but need not, require that all oral
requests be confirmed in writing. All communications, instructions, or
directions by telephone or otherwise to Lender are to be directed to Lender's
office shown above. The following party or parties are authorized to request
advance under the line of credit until Lender receives from Borrower at Lender's
address shown above written notice of revocation of their authority: WAYNE
COLLIGNON, PRESIDENT; AND DIRK ANDERSON, CFO. Borrower agrees to be liable for
all sums either: (a) advanced in accordance with the instructions of an
authorized person or (b) credited to any of Borrower's accounts with Lender. The
unpaid principal balance owing on this Agreement at any time may be evidenced by
endorsements on this Agreement or by Lender's internal records, including daily
computer print-outs. Lender will have no obligation to advance funds under this
Agreement if: (a) Borrower or any guarantor is in default under the terms of
this Agreement or any agreement that Borrower or any guarantor has with Lender,
including any agreement made in connection with the signing of this Agreement;
(b) Borrower or any guarantor ceases doing business or is insolvent; (c) any
guarantor seeks, claims or otherwise attempts to limit, modify or revoke such
guarantor's guarantee of this Agreement or any other loan with Lender; (d)
Borrower has applied funds provided pursuant to his Agreement for purposes other
than those authorized by Lender; or (e) Lender in good faith deems itself
insecure under this Agreement or any other agreement between Lender and
Borrower.
CONTINUING VALIDITY. Except as expressly changed by this Agreement, the terms of
the original obligation or obligations, including all agreements evidenced or
securing the obligation(s), remain unchanged and in full force and effect.
Consent by Lender to this Agreement does not waive Lender's right to strict
performance of the obligation(s) as changed, nor obligate Lender to make any
future change in terms. Nothing in this Agreement will constitute a satisfaction
of the obligation(s). It is the intention of Lender to retain as liable parties
all makers and endorsers of the original obligations(s),including accommodation
parties, unless a party is expressly released by Lender in writing. Any maker or
endorser, including accommodation makers, will not be released by virtue of this
Agreement. If any person who signed the original obligation does not sign this
Agreement below, then all persons signing below acknowledge that this Agreement
is given conditionally, based on the representation to Lender that the
non-signing party consents to the changes and provisions of this Agreement or
otherwise will not be released by it. This waiver applies not only to any
initial extension, modification or release, but also to all such subsequent
actions.
ADDITIONAL PROVISIONS. NOTICE TO ALL COMMERCIAL LOAN CUSTOMERS WITH LOANS
GREATER THAT $250,000.00: Effective September 5, 1989, only agreements IN
WRITING are enforceable in the event there are disagreements over this loan.
This includes all agreements or understandings to loan money, to grant or extend
credit, or to extend, renew, or modify a loan. For further information, please
refer to A.R.S. 44-101-9, or contact your loan officer.
MISCELLANEOUS PROVISIONS. Lender may delay or forgo enforcing any of its rights
or remedies under this Agreement without losing them. Borrower and any other
person who signs, guarantees or endorse this Agreement, to the extent allowed by
law, waive presentment, demand for payment, protest and notice of dishonor. Upon
any change in the terms of this Agreement, and unless otherwise expressly stated
in writing, no party who signs this Agreement, whether as maker, guarantor,
accommodation maker or endorser, shall be released from liability. All such
parties agree that Lender may renew or extend (repeatedly and for any length of
time) this loan, or release any party or guarantor or collateral; or impair,
fail to realize anyone. All such parties also agree that Lender may modify this
loan without the consent of or notice to anyone other than the party with whom
the modification is made.
EFFECTIVE RATE. Borrower agrees to an effective rate of interest that is the
rate specified in this Note plus any additional rate resulting from any other
charges in the nature of interest paid or to be paid in connection with this
Note.
PRIOR TO SIGNING THIS AGREEMENT, BORROWER READ AND UNDERSTOOD ALL THE PROVISIONS
OF THIS AGREEMENT, INCLUDING THE VARIABLE INTEREST RATE PROVISIONS. BORROWER
AGREES TO THE TERMS OF THE AGREEMENT AND ACKNOWLEDGES RECEIPT OF A COMPLETED
COPY OF THE AGREEMENT.
BORROWER:
RECONDITIONED SYSTEMS, INC.
By: /s/ DIRK ANDERSON
- ----------------------------------------
DIRK ANDERSON, CFO
<PAGE>
M&I THUNDERBIRD BANK
DISBURSEMENT REQUEST AND AUTHORIZATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Principal Loan Date Maturity Loan No Call Collateral Account Officer Initials
$1,000,000.00 07-31-1999 1001 - R1 09400069235 JLL
- ---------------------------------------------------------------------------------------------------
References in the shaded area are for Lender's use only and do not limit the applicability of
this document to any particular loan or items.
- ---------------------------------------------------------------------------------------------------
BORROWER: RECONDITIONED SYSTEMS, INC. LENDER: M&I THUNDERBIRD BANK, AN ARIZONA CORPORATION
444 WEST FAIRMONT SCOTTSDALE RD. & THUNDERBIRD OFFICE (10)
TEMPE, AZ 85282 C/O LOAN SUPPORT DEPARTMENT
ONE EAST CAMELBACK ROAD
PHOENIX, AZ 85012-1647
===================================================================================================
</TABLE>
LOAN TYPE. This is a Variable Rate (at M&I Thunderbird Bank Fluctuating Prime
Rate, making an initial rate of 8.500%), Revolving Line of Credit Loan to a
Corporation for $1,000,000.00 due on July 31, 1999.
PRIMARY PURPOSE OF LOAN. The primary purpose of this loan is for:
[ ] PERSONAL, FAMILY, OR HOUSEHOLD PURPOSES OR PERSONAL INVESTMENT.
[X] BUSINESS ( INCLUDING REAL ESTATE INVESTMENT).
SPECIFIC PURPOSE. The specific purpose of this loan is: Support A/R, Inv.
purchases and working capital.
DISBURSEMENT INSTRUCTIONS. Borrower understands that no loan proceeds will be
disbursed until all of Lender's conditions for making the loan have been
satisfied. Please disburse the loan proceeds of $1,000,000.00 as follows:
AMOUNT PAID TO OTHERS ON BORROWER'S BEHALF: $1,000,000.00
$1,000,000.00 Renew Note #1001 with balance as directed
-------------
NOTE PRINCIPAL: $1,000,000.00
CHARGES PAID IN CASH. Borrower has paid or will pay in cash as agreed the
following charges:
PREPAID FINANCE CHARGES PAID IN CASH: $ 3,750.00
$3,750.00 Loan Fees
-------------
TOTAL CHARGES PAID IN CASH: $ 3,750.00
APPRAISAL. If this credit is secured by a lien on a dwelling and an appraisal
report is used in connection with this application, you will receive a copy of
the Appraisal Report within thirty (30) days of our receipt of the report or our
reimbursement for the report, whichever occurs last.
FINANCIAL CONDITION. BY SIGNING THIS AUTHORIZATION, BORROWER REPRESENTS AND
WARRANTS TO LENDER THAT THE INFORMATION PROVIDED ABOVE IS TRUE AND CORRECT AND
THAT THERE HAS BEEN NO MATERIAL ADVERSE CHANGE IS BORROWER'S FINANCIAL CONDITION
AS DISCLOSED IN BORROWER'S MOST RECENT FINANCIAL STATEMENT TO LENDER. THIS
AUTHORIZATION IS DATED JULY 31, 1998.
BORROWER:
RECONDITIONED SYSTEMS, INC.
By: /s/ DIRK ANDERSON
- ----------------------------------------
DIRK ANDERSON, CFO
<TABLE> <S> <C>
<ARTICLE> 5
<CIK> 0000891915
<NAME> RECONDITIONED SYSTEMS, INC.
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> MAR-31-1999
<PERIOD-START> APR-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 695,781
<SECURITIES> 0
<RECEIVABLES> 1,281,894
<ALLOWANCES> (27,250)
<INVENTORY> 942,360
<CURRENT-ASSETS> 2,936,955
<PP&E> 486,197
<DEPRECIATION> (349,675)
<TOTAL-ASSETS> 3,252,627
<CURRENT-LIABILITIES> 794,526
<BONDS> 0
0
0
<COMMON> 4,586,982
<OTHER-SE> (2,128,881)
<TOTAL-LIABILITY-AND-EQUITY> 3,252,627
<SALES> 2,653,092
<TOTAL-REVENUES> 2,653,092
<CGS> (2,028,782)
<TOTAL-COSTS> (2,421,666)
<OTHER-EXPENSES> 11,760
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (639)
<INCOME-PRETAX> 242,547
<INCOME-TAX> 0
<INCOME-CONTINUING> 242,547
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 242,547
<EPS-PRIMARY> .16
<EPS-DILUTED> .14
</TABLE>
