UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number 0-21138
September 30, 1998
BOCA RESEARCH, INC.
(Exact name of registrant as specified in its charter)
Florida 59-2479377
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1377 Clint Moore Road
Boca Raton, Florida
(Address of principal 33487
executive offices) (Zip Code)
Registrant's telephone number, including area code:
(561) 997-6227
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No___
-
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Outstanding as of
Class November 13, 1998
----- -----------------
Common stock, par value
$.01 per share 8,756,487
- 1 -
<PAGE>
BOCA RESEARCH, INC.
Form 10-Q/A For The Quarter Ended September 30, 1998
INDEX
Page
----
Part I. FINANCIAL INFORMATION
Item 1. Financial Statements
Condensed Consolidated Balance Sheets
(unaudited) as of September 30, 1998
(As Restated) and December 31, 1997 ...................... 3
Condensed Consolidated Statements of Income
(unaudited) for the three and nine months
ended September 30, 1998 (As Restated) and 1997 .......... 4
Condensed Consolidated Statements of Cash Flows
(unaudited) for the nine months ended
September 30, 1998 (As Restated) and 1997 ................ 5
Notes to Condensed Consolidated
Financial Statements (unaudited) ......................... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations ......................................... 13
Part II. OTHER INFORMATION
Item 1. Legal Proceedings............................... 26
Items 2-3. Not applicable ................................. 26
Item 4. Submission of Matters to a Vote of
Security Holders .............................. 26
Item 5. Other Information .............................. 26
Item 6. Exhibits and Reports on Forms 8-K .............. 27
Signatures .................................................. 28
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<PAGE>
PART I. Item 1.
BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share and per share data)
<TABLE>
<CAPTION>
September 30,
1998 December 31,
As Restated 1997
----------- ----
ASSETS
<S> <C> <C>
Current assets:
Cash and cash equivalents ............................... $ 5,328 $ 8,205
Trade receivables, net .................................. 20,151 11,723
Inventory, net .......................................... 9,098 14,876
Prepaid expenses and other current assets ............... 820 470
Prepaid and deferred income taxes ....................... 2,052 9,214
------ ------
Total current assets .................................. 37,449 44,488
Property and equipment, net ............................. 4,092 5,540
Goodwill and other intangible assets .................... 5,374 --
Other assets ............................................ 627 191
------ ------
Total assets .......................................... $ 47,542 $ 50,219
====== ======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable ........................................ $ 11,365 $ 6,546
Notes payable ........................................... 5,955 --
Accrued expenses and other current liabilities .......... 4,290 3,092
----- -----
Total current liabilities ............................. $ 21,610 $ 9,638
------ -----
Commitments and contingencies
Stockholders' equity:
Common stock, 25,000,000 $.01 par value shares
authorized, 8,756,487 issued and outstanding
at September 30, 1998, 8,725,079 issued and
outstanding at December 31, 1997 ....................... 87 87
Additional paid-in capital .............................. 26,045 25,915
Retained earnings ....................................... (200) 14,579
------ ------
Total stockholders' equity............................. 25,932 40,581
------ ------
Total liabilities and stockholders' equity......... $ 47,542 $ 50,219
====== ======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
(In thousands except per share data)
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
As Restated As Restated
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net sales ................................................. $22,789 $18,549 $51,615 $53,660
Cost of goods sold ........................................ 19,221 17,138 51,227 51,320
------ ------ ------ ------
Gross profit .............................................. 3,568 1,411 388 2,340
----- ----- --- -----
Operating expenses:
Research and development ................................ 872 690 2,105 2,104
Selling, general and administrative ..................... 4,880 3,431 10,803 12,384
In-process research and development ..................... -- -- 2,800 --
----- ----- ------ ------
Total operating expenses .............................. 5,752 4,121 15,708 14,488
----- ----- ------ ------
Loss from operations ...................................... (2,184) (2,710) (15,320) (12,148)
Non-operating income, net ................................. 169 241 541 603
----- ----- ------ ------
Loss before income tax benefit ............................ (2,015) (2,469) (14,779) (11,545)
Income tax benefit ........................................ -- (864) -- (4,041)
----- ----- ------ -----
Net loss................................................... ($ 2,015) ($ 1,605) ($14,779) ($ 7,504)
===== ===== ====== =====
Net loss per share (Basic and Diluted)..................... ($0.23) ($0.18) ($1.69) ($0.86)
==== ==== ==== ====
Weighted average shares outstanding........................ 8,756 8,725 8,747 8,716
===== ===== ===== =====
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
BOCA RESEARCH, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine Months
Ended September 30,
-------------------
As Restated
1998 1997
---- ----
<S> <C> <C>
Cash provided by (used in):
Operating activities:
Net loss ................................................ ($14,779) ($7,504)
Adjustments for non-cash charges ........................ 5,612 2,202
Changes in assets and liabilities ....................... 10,984 8,474
------ -----
Net cash provided by operating activities ............. 1,817 3,172
----- -----
Investing activities:
Cash paid for acquisition............................... (4,580) --
Capital expenditures.................................... (244) (987)
----- ---
Net cash used in investing activities................. (4,824) (987)
----- ---
Financing activities - Exercise of options ............... 130 321
----- -----
Net increase (decrease) in cash and cash equivalents ..... (2,877) 2,506
Cash and cash equivalents, beginning of period ........... 8,205 7,826
----- -----
Cash and cash equivalents, end of period ................. $ 5,328 $10,332
===== ======
</TABLE>
See notes to condensed consolidated financial statements.
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<PAGE>
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Basis of Presentation
The condensed consolidated financial statements have been prepared by
the Company in accordance with the rules and regulations of the Securities and
Exchange Commission regarding interim financial reporting and, accordingly, they
do not include all of the information and disclosures required by generally
accepted accounting principles. In the opinion of management, the condensed
consolidated financial statements contain all adjustments (consisting of only
normal recurring accruals) necessary to present fairly the financial position of
the Company as of September 30, 1998, and the results of its operations and its
cash flows for the three and nine month periods ended September 30, 1998 and
1997. These results have been determined on the basis of generally accepted
accounting principles and practices applied consistently with those used in the
preparation of the Company's 1997 audited consolidated financial statements.
The accompanying financial statements should be read in conjunction with
the Company's most recent audited consolidated financial statements and notes
thereto for the year ended December 31, 1997. The results of operations for the
three and nine month periods ended September 30, 1998 are not necessarily
indicative of the results to be expected for the full year.
Certain prior year amounts have been reclassified to conform to the
current presentation.
Supplemental Cash Flow Information
Cash payments (net of refunds) for income taxes were ($7,162,438) and
($1,339,171) in the nine month periods ended September 30, 1998 and 1997,
respectively.
Comprehensive Income (Loss)
Comprehensive income includes all changes in equity during a period
except those resulting from investment by owners and distributions to owners.
The Company's comprehensive income (loss) equals its net loss for the three and
nine months ended September 30, 1998 and 1997, and net loss is the only
component of comprehensive income (loss) for such periods.
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<PAGE>
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't)
(Unaudited)
Current Assets
Accounts receivable are included in the condensed consolidated balance
sheets net of allowances and consist of the following (in thousands):
September 30, December 31,
1998 1997
---- ----
Accounts receivable ............................ $24,885 $14,423
Allowance for sales returns, allowances and
price protection .............................. (2,304) (1,300)
Allowance for doubtful accounts ................ (2,430) (1,400)
----- -----
$20,151 $11,723
====== ======
Included in the accounts receivable balance is $190,402 in receivables
from PowerTelBOCA Pvt., Ltd. ("PowerTel"), a joint venture in India in which the
Company has a 20% ownership interest. Sales to MBf/Boca Asia Pacific Sdn Bhd, a
joint venture in Malaysia in which the Company has a 50% ownership interest, and
PowerTel in the three and nine month periods ended September 30, 1997 were
approximately $708,000 and $2,517,000, respectively. Sales to these related
parties in the three and nine month periods ended September 30, 1998 were
approximately $57,000 and $229,000, respectively. The Company has agreed to
payment terms of 180 days for PowerTel. MBf Boca Asia Pacific is in the process
of winding down its operations.
Inventories included in the condensed consolidated balance sheets
consist of the following (in thousands):
September 30, December 31,
1998 1997
---- ----
Raw materials .................................. $ 9,005 $11,075
Work in process ................................ 3,454 4,925
Finished goods ................................. 1,819 2,376
Inventory reserves ............................. (5,180) (3,500)
----- -----
$ 9,098 $14,876
===== ======
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<PAGE>
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't)
(Unaudited)
Property and Equipment
Property and equipment is included in the condensed consolidated balance
sheets net of accumulated depreciation of $12,984,966 at September 30, 1998 and
$10,709,231 at December 31, 1997.
Line of Credit
The Company entered into a two-year secured revolving line of credit
agreement on November 9, 1998, which permits borrowings of the lesser of
$5,000,000 or 60% of qualified accounts receivable and 20% of eligible
inventory. The interest rate during the first year of the agreement is 1% in
excess of the prime rate. The loan agreement requires the Company to maintain
certain financial ratios, limits the incurrence of additional debt, and
prohibits payment of dividends without the lender's consent.
Commitments and Contingencies
As reported in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, the Company received correspondence from IBM
Corporation ("IBM") alleging that certain of the Company's products infringed
the patent rights of IBM. The Company has resolved the matter by entering into a
licensing agreement with IBM. This licensing agreement grants the Company, in
return for an annual royalty, a license to the patented intellectual property
with respect to which IBM alleged patent infringement as well as a broader
portfolio of IBM's technology. The royalty payable under the licensing agreement
is variable depending upon the Company's annual revenues and is anticipated to
be $25,000 in 1998.
As reported in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, a former shareholder of the Company filed an
action in the United States District Court for the Southern District of Florida
against the Company and Anthony F. Zalenski, its President and Chief Executive
Officer in March, 1997. The former shareholder claimed that he relied on certain
statements made directly to him by Mr. Zalenski and certain other statements in
deciding not to sell his shares of the Company's Common Stock. The former
shareholder claimed that such statements were false and misleading and give rise
to claims under the Federal securities law and Florida common law. The former
shareholder sought damages for his trading losses, which were alleged to be in
excess of $1 million. Such action was settled in September, 1998 by payment made
by the Company's directors and officers liability insurance carrier.
- 8 -
<PAGE>
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't)
(Unaudited)
The Company receives communications from time to time alleging that
certain of the Company's products infringe the patent rights of other third
parties. The Company cannot predict the outcome of any such claim which may
arise in the future, or the effect of any such claim on the Company's operating
results or financial condition.
On June 2, 1998, the Company entered into a lease agreement for a 45,647
sq. ft. building located in Sunnyvale, California. The lease term is for 85
months beginning October 1, 1998 at a base rate of $73,035 per month. The base
rate will be increased for tenant improvements and the property operating
expenses. This facility will be used for research and development, sales and
marketing, technical support and administration.
Stockholders' Equity
In January and July 1998, 31,408 shares were issued in connection with
the exercise of options granted under the 1992 Stock Purchase Plan. Aggregate
proceeds received from these exercises were $130,704.
Stock Option Plan
During the nine month period ended September 30, 1998, the Company
granted options to purchase 692,381 shares at exercise prices ranging from $1.59
to $6.69 to both new and existing employees and directors.
During the nine month period ended September 30, 1998, 406,118 stock
options were canceled.
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<PAGE>
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't)
(Unaudited)
Acquisition
On June 18, 1998, the Company consummated, through a wholly-owned
subsidiary, the acquisition of the modem business of Global Village
Communication, Inc. ("Global Village"), in exchange for $9,855,206 in cash and
notes. A $4,000,000 cash payment was made at closing and two additional payments
of $3,000,000 each are due Global Village on September 30, 1998 and on December
31, 1998. The notes payable relating to the two $3,000,000 payments are
non-interest bearing and interest on these notes has been imputed at the rate of
6%. The $3,000,000 payment due on September 30, 1998 was paid on October 2,
1998. The Company purchased intellectual property, including the Global Village
name, logo and trademarks, as well as the modem hardware and software products,
and the inventory, receivables and other assets of the modem business. The
Company also assumed the liabilities of the modem business, including
responsibility for product warranty, technical support, product returns, ongoing
marketing and sales programs, and certain accounts payable and accrued
liabilities. The Company also received a warrant to purchase up to 425,000
shares of Global Village common stock at an exercise price of $1.0003 per share.
Subsequent to the closing of the transaction, Global Village changed its
corporate name to OneWorld Systems, Inc.
The acquisition was recorded as a purchase with the purchase price
allocated to the acquired assets, assumed liabilities and in-process research
and development as follows:
Accounts receivable, net $8,740,743
Inventory 2,131,822
Other current assets 62,000
Property, plant and equipment 589,435
Tradename/marketing intangible asset 2,300,000
Existing technology intangible asset 1,500,000
Goodwill 1,425,206
Warrants 140,000
Accounts payable (7,776,000)
Accrued expenses (2,058,000)
In-process research and development 2,800,000
---------
$9,855,206
=========
Direct acquisition costs associated with this transaction, totalling
$580,000, have also been capitalized to goodwill. Goodwill is being amortized
over a five year period. Existing technology is being amortized over a two year
period. The tradename/marketing intangible asset is being amortized over a seven
year period.
- 10 -
<PAGE>
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't)
(Unaudited)
The allocation of the purchase price is subject to adjustment as
additional information with respect to certain estimates made of the acquired
assets and assumed liabilities is determined.
Restatement of the Three and Nine Month Periods ended September 30, 1998
Subsequent to the issuance of the Company's September 30, 1998
financial statements, the Company's management revised the amount of the
purchase price which was allocated to in-process research and development in
accounting for the acquisition of the modem business of Global Village on June
18, 1998. The revised allocation is based upon methods prescribed in a letter
from the Securities and Exchange Commission ("SEC") sent to the American
Institute of Certified Public Accountants in September 1998. The letter sets
forth the SEC's views regarding the valuation methodology to be used in
allocating a portion of the purchase price to acquired in-process research and
development at the date of acquisition. As a result of the revised allocation,
the Company's financial statements for the three and nine month periods ended
September 30, 1998 have been restated to reduce the amount of the acquired
in-process research and development expensed by $ 1,000,000 and to increase
goodwill by $ 1,000,000. The change had no impact on net cash flows provided by
operations. The effect of the restatement on the accompanying financial
statements is as follows:
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<PAGE>
BOCA RESEARCH, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (con't)
(Unaudited)
<TABLE>
<CAPTION>
(In thousands except for per share data)
As Previously As
Reported Restated
-------- --------
<S> <C> <C>
At September 30, 1998
Goodwill and other intangible assets................. $4,432 $5,374
Total assets......................................... 46,600 47,542
Retained earnings (deficit).......................... (1,142) (200)
Total stockholders' equity........................... 25,000 25,932
Total liabilities and stockholders' equity........... 46,600 47,542
For the three months
ended September 30, 1998
Selling, general and administrative.................. $4,830 $4,880
Total operating expenses............................. 5,702 5,752
Loss from operations................................. (2,134) (2,184)
Loss before income tax benefit....................... (1,965) (2,015)
Net loss............................................. (1,965) (2,015)
Net loss per share (Basic and Diluted)............... (0.22) (0.23)
For the nine months
ended September 30, 1998
Selling, general and administrative.................. $10,745 $10,803
In-process research and development.................. 3,800 2,800
Total operating expenses............................. 16,650 15,708
Loss from operations................................. (16,262) (15,320)
Loss before income tax benefit....................... (15,721) (14,779)
Net loss............................................. (15,721) (14,779)
Net loss per share (Basic and Diluted)............... (1.80) (1.69)
</TABLE>
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<PAGE>
Item 2.
BOCA RESEARCH, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The discussion and analysis below contains trend analysis and other
forward-looking statements within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The
Company's actual results could differ materially from those anticipated in these
forward-looking statements as a result of certain factors set forth below and
elsewhere in this Report.
As an aid to reviewing the Company's results of operations for the three
and nine months ended September 30, 1998 and 1997, the following table sets
forth the financial information as a percent of net sales and as a percent of
change when compared to the earlier period:
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
As Restated Percent As Restated Percent
1998 1997 Change 1998 1997 Change
---- ---- ------ ---- ---- ------
<S> <C> <C> <C> <C> <C> <C>
Net sales ................................... 100.0% 100.0% 22.9% 100.0% 100.0% (3.8)%
Cost of goods sold .......................... 84.3 92.4 12.2 99.2 95.6 (0.2)
---- ---- ---- ----
Gross profit .............................. 15.7 7.6 152.9 0.8 4.4 (83.4)
---- --- --- ---
Operating expenses:
Research and development .................. 3.8 3.7 26.4 4.1 3.9 0.1
Selling, general and administrative ....... 21.4 18.5 42.2 20.9 23.1 (12.8)
In-process research & development ......... 0.0 0.0 * 5.4 0.0 *
---- ---- ---- ----
Total operating expenses ................ 25.2 22.2 39.6 30.4 27.0 8.4
---- ---- ---- ----
Loss from operations ........................ (9.5) (14.6) (19.4) (29.6) (22.6) 26.1
Non-operating income, net ................... 0.7 1.3 (29.9) 1.0 1.1 (10.3)
--- ---- ---- ----
Loss before income tax benefit .............. (8.8) (13.3) (18.4) (28.6) (21.5) 28.0
Income tax benefit .......................... 0.0 (4.7) * 0.0 (7.5) *
--- --- ---- ----
Net loss .................................... (8.8)% (8.7)% 25.5% (28.6)% (14.0)% 96.9%
=== === ==== ====
*Not applicable
</TABLE>
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<PAGE>
Results of Operations
NET SALES. The Company's net sales increased by 22.9% to $22,789,000 in the
three months ended September 30, 1998 from $18,549,000 in the three months ended
September 30, 1997. For the nine months ended September 30, 1998, net sales
decreased by 3.8% to $51,615,000 from $53,660,000 for the comparable period in
1997. The sales fluctuations in the three and nine month periods ended September
30, 1998 over the comparable period in 1997 is shown below by product category.
Included in the data communications product category below is net sales of
$12,418,000 of Global Village branded product during the third quarter of 1998.
The Company acquired the modem business of Global Village as of June 18, 1998.
Net sales of the Global Village branded product for the period from June 18 to
June 30, 1998 amounted to $1,434,000.
<TABLE>
<CAPTION>
Three Months Nine Months
Ended September 30, Ended September 30,
------------------- -------------------
1998 1997 1998 1997
---- ---- ---- ----
(In Millions)
<S> <C> <C> <C> <C>
Data Communications ........... $18.4 $10.5 $33.1 $38.9
Custom Manufacturing .......... 2.4 4.4 11.3 4.4
Multimedia .................... -- 0.1 -- 0.9
Networking .................... 0.4 1.3 1.3 3.0
Video Graphics ................ 0.2 0.5 0.7 1.4
I/O, IDE & Multiport .......... 1.1 1.7 3.6 4.7
Video Conferencing ............ -- -- 0.2 0.3
ISDN .......................... -- -- -- 0.1
Internet Access Device ........ 0.3 -- 1.4 --
--- ---- ---- ----
$22.8 $18.5 $51.6 $53.7
==== ==== ==== ====
</TABLE>
Excluding the net sales associated with the acquisition of the modem
business of Global Village, the sales decrease in the three months and nine
months ended September 30, 1998 compared to the comparable periods in 1997 was
primarily attributable to decrease in sales of data communications products,
however the product categories of networking, video graphics, I/O, IDE, and
Multiport also experienced a decline in sales. The decrease in sales in these
categories was partially offset by an increase in sales in the category of
custom manufacturing and Internet access devices.
During the third quarter of 1998, net sales of the Global Village
branded product were $12,418,000. Of this total, $5,128,000 represented sales to
Apple Computer, Inc. This amount represents approximately 23% of net sales
during the third quarter of 1998. Thus far in the fourth quarter of 1998 there
are no sales to Apple, and the Company is uncertain as to the outlook for any
recurrent Apple sales.
The Company manufactures several categories of Internet access devices
which allow for Internet access via a TV, including a product manufactured for a
major electronic manufacturing customer. For the nine months ended September 30,
1998 revenue of
- 14 -
<PAGE>
$2,700,000 for sales of this particular Internet access device to such customer
is included in custom manufacturing. The revenue of $2,700,000 was recorded
entirely in the three months ended March 31, 1998 and the Company did not derive
any revenue from this customer in the quarters ended June 30, 1998 and September
30, 1998 and does not anticipate deriving any revenues from this customer for
the balance of 1998. For the three months ended September 30, 1998 sales in the
custom manufacturing category were to one customer.
Included in the category of Internet access devices are sales of a
model of this product which was developed by the Company and sold under the Boca
Research name or co-branded. The Company is placing emphasis on this category,
however sales decreased from $647,000 in the three months ended June 30, 1998 to
$260,000 in the three months ended September 30, 1998.
Sales for the three months ended September 30, 1998 and the nine month
period ended September 30, 1998 were adversely affected by several factors,
including pricing pressure on all modem products, excess industry-wide channel
inventories of pre-standard 56Kbps product, and the slow adoption of 56Kbps
technology by consumers who realize that the 56Kbps product does not
significantly increase Internet downloading speed capability over the 33.6Kbps
product. The Company's diversification into Internet access devices and custom
manufacturing has not met expectations and has not offset the decline in the
Company's traditional core business.
International sales were approximately $5.1 million for the three
months ended September 30, 1998 compared to $2.8 million for the three months
ended September 30, 1997. For the nine months ended September 30, 1998
international sales were $9.9 million compared to $11.3 million for the nine
months ended September 30, 1997.
GROSS PROFIT. Gross profit was $3,568,000 for the three months ended
September 30, 1998 as compared to $1,411,000 for the three months ended
September 30, 1997 and increased as a percentage of net sales to 15.7% in the
three months ended September 30, 1998 from 7.6% in the three months ended
September 30, 1997. For the nine months ended September 30, 1998, gross profit
decreased to $388,000 from $2,340,000 in the nine months ended September 30,
1997. Gross profit as a percentage of net sales decreased to 0.8% for the nine
months ended September 30, 1998 from 4.4% for the nine months ended September
30, 1997. The gross profit percentage for the three months ended September 30,
1998 and nine months ended September 30, 1998 is being affected by several
factors including low utilization of the Company's manufacturing facilities,
aggressive channel pricing to reduce channel inventories of 33.6Kbps product and
prestandard 56Kbps product, competitive pressure in the OEM channel and the
custom manufacturing product category requiring the Company to compete with
offshore manufacturers which the Company believes have a cost advantage because
of currency devaluations and better purchasing power because of their larger
volumes. Most of the above factors have been adversely affecting the Company's
gross profit percentage since January 1, 1997. In the three months ended
September 30, 1998 the Company's gross profit was also impacted favorably by net
sales of $12,418,000 of the Global Village branded product, which have higher
gross margins associated with them
- 15 -
<PAGE>
as compared to sales of Boca Research branded products. Of this total,
$5,128,000 represented sales to Apple Computer, Inc. This amount represents
approximately 23% of net sales during the third quarter of 1998. Thus far in the
fourth quarter of 1998 there are no sales to Apple, and the Company is uncertain
as to the outlook for any recurrent Apple sales. For the nine months ended
September 30, 1998 the Company recorded write downs of inventory and increases
in the inventory reserve as a charge to cost of goods sold in the amount of
$4,780,000. This was the result of excess inventories in the Company of older
technology product that has been determined to have limited sales value. In
particular the Company has seen a significant slow down in sales of 33.6Kbps
product and pre-standard 56Kbps product along with significant price erosion.
This has resulted in additional price protection, rebates and other allowances
to the distribution channel in order to reduce channel inventories which has a
negative impact on gross margins.
The gross profit margins for the Company's products depend on a number
of factors, such as the degree of competition in the market for such products,
the product and channel mix (wholesale distributors and retailers versus OEM's),
component costs and manufacturing efficiencies and capacity utilization. In
addition gross profit margins on product categories differ. In particular,
custom manufacturing is typically a low profit margin business. Accordingly, the
Company's gross profit has varied substantially from quarter to quarter in the
past, and can be expected to continue to do so in the future. There will be
circumstances, which management anticipates will occur in the fourth quarter, in
which the Company accepts lower margin sales for purposes such as to reduce
inventories, and to utilize manufacturing capacity.
RESEARCH AND DEVELOPMENT EXPENSES. Research and development expenses
increased to $872,000 in the three months ended September 30, 1998 from $690,000
in the three months ended September 30, 1997. This represents an increase in
research and development expense as a percentage of net sales to 3.8% for the
three months ended September 30, 1998 from 3.7% for the three months ended
September 30, 1997. Research and development expenses increased to $2,105,000
for the nine months ended September 30, 1998 from $2,104,000 for the nine months
ended September 30, 1997. This represents an increase in research and
development expense as a percentage of net sales to 4.1% for the nine months
ended September 30, 1998 from 3.9% for the nine months ended September 30, 1997.
Research and development expenses increased in the three months ended September
30, 1998 versus the comparable period in 1997 primarily as the result of the
acquisition of the modem business of Global Village.
SELLING, GENERAL, AND ADMINISTRATIVE EXPENSES. Selling, general and
administrative expenses increased to $4,880,000 in the three months ended
September 30, 1998 from $3,431,000 in the three months ended September 30, 1997.
Selling, general and administrative expenses as a percentage of net sales
increased to 21.4% in the three months ended September 30, 1998 from 18.5% in
the three months ended September 30, 1997. Selling, general and administrative
expenses decreased to $10,803,000 in the nine months ended September 30, 1998
from $12,384,000 in the nine months ended September 30, 1997. Selling, general
and administrative expenses as a
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<PAGE>
percentage of net sales decreased to 20.9% in the nine months ended September
30, 1998 from 23.1% in the nine months ended September 30, 1997. Selling,
general and administrative expenses increased in the three months ended
September 30, 1998 versus the comparable period in 1997 primarily as the result
of the acquisition of the modem business of Global Village. The Company's
expenses for the nine months ended September 30, 1998 compared to the nine
months ended September 30, 1997 were $260,000 lower for consulting fees and
expenses with ArgoQUEST, Inc. and $1,215,000 lower for advertising.
IN-PROCESS RESEARCH AND DEVELOPMENT EXPENSES. On June 18, 1998, the
Company completed its acquisition of the modem business of Global Village in
exchange for $9,855,026 in cash and notes. The Company purchased certain of
Global Village's assets, technology, operations and assumed certain of its
liabilities. This transaction was accounted for using the purchase method of
accounting with the purchase price being partially allocated to purchased
technologies and intangible assets. $2,800,000 of the total purchase price
represented the value of in-process research and development that had not yet
reached technological feasibility and had no alternative future use and, as
such, was recorded as a non-recurring charge for in-process research and
development. The value attributed to the in-process research and development was
determined by an independent appraisal.
LIQUIDITY AND CAPITAL RESOURCES
In the nine months ended September 30, 1998, the Company's working
capital decreased by $19,011,000 from December 31, 1997. This decrease was
represented by a decrease in inventories of $5,778,000, other current assets of
$6,812,000 and cash of $2,877,000, and an increase in current liabilities of
$11,972,000 offset by an increase in accounts receivables of $8,428,000. The
Company's operations provided cash of $1,817,000 for the nine months ended
September 30, 1998. In May 1998, the Company received a federal income tax
refund in the amount of $7,125,000 from the Internal Revenue Service which
accounted for the decrease in other current assets noted above.
The Company entered into a two-year secured revolving line of credit
agreement on November 9, 1998, which permits borrowings of the lesser of
$5,000,000 or 60% of qualified accounts receivable and 20% of eligible
inventory. The interest rate during the first year of the agreement is 1% in
excess of the prime rate. The loan agreement requires the Company to maintain
certain financial ratios, limits the incurrence of additional debt, and
prohibits payment of dividends without the lender's consent.
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<PAGE>
On June 18, 1998, the Company consummated the acquisition of the modem
business of Global Village in exchange for $9,855,206 in cash and notes. A
$4,000,000 cash payment was made at closing and two additional payments of
$3,000,000 each are due Global Village on September 30, 1998 and on December 31,
1998. The notes payable relating to the two $3,000,000 payments are non-interest
bearing and interest on these notes has been imputed at the rate of 6%. The
$3,000,000 payment due on September 30, 1998 was paid on October 2, 1998.
The Company regularly evaluates acquisitions of business, technologies
or products complementary to the Company's business. In the event that the
Company effects one or more acquisitions, the Company's cash balances may be
utilized to finance such acquisitions and additional sources of liquidity such
as debt or equity financing may be required to finance such acquisitions or to
meet working capital needs. There can be no assurance that additional capital
beyond the amounts currently forecasted by the Company will not be required nor
that any such required capital will be available on terms acceptable to the
Company, if at all, at such time or times as required by the Company.
YEAR 2000 MATTERS.
Many currently installed computer systems and software products are
coded to accept only two-digit entries in the date code field and cannot
distinguish 21st century dates from 20th century dates. These date code fields
will need to distinguish 21st century dates from 20th century dates and, as a
result, many companies' software and computer systems may need to be upgraded or
replaced in order to comply with such "Year 2000" requirements.
STATE OF READINESS. The Company is in the process of evaluating the year
2000 readiness of the information technology systems used in its operations ("IT
Systems") and its non-IT Systems, such as building security, voice mail and
other systems. The Company currently anticipates that the Project will cover the
following phases: (i) evaluation of all IT Systems, and non-IT Systems; (ii)
assessment of repair or replacement requirements; (iii) repair or replacement;
(iv) testing; (v) implementation; and (vi) creation of contingency plans in the
event of year 2000 failures.
The Company has completed its assessment of all current versions of its
Products and believes they are year 2000 compliant. The Company has also
evaluated all hardware products sold since 1995 and determined them to be year
2000 compliant. Even so, the assessment of whether a complete system or device
in which a Product is embedded will operate correctly for an end-user depends in
large part on the year 2000 compliance of the system's other components, most of
which are supplied by parties other than the Company. The supplier of the
Company's current financial and accounting software has informed the Company
that such software is year 2000 compliant. This supplier has undergone an
independent year 2000 compliance audit and the Company has received a copy of
their year 2000 compliant certification. The Company's employees have also
successfully tested this software and agree that it is
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<PAGE>
year 2000 compliant. The Company relies, both domestically and internationally,
upon various vendors, governmental agencies, utility companies,
telecommunications service companies, delivery service companies and other
service providers who are outside of the Company's control. There is no
assurance that such parties will not suffer a year 2000 business disruption,
which could have a material adverse effect on the Company's financial condition
and results of operations.
During the first half of fiscal 1999, the Company intends to circulate
a questionnaire to vendors and customers with whom the Company has material
relationships to obtain information about their year 2000 compliance and the
Company plans to continue its evaluation of its IT Systems and non-IT Systems.
Until such information is obtained, the Company will not be able to effectively
evaluate whether any remediation efforts will be required with respect to its IT
Systems or non-IT Systems.
COSTS. To date, the Company has not incurred any material expenditures in
connection with identifying or evaluating year 2000 compliance issues. At this
time, the Company does not possess the information necessary to estimate the
potential impact of year 2000 compliance issues relating to its IT-Systems,
non-IT Systems, prior versions of its Products, its vendors, its customers, and
other parties. Such impact, including the effect of a year 2000 business
disruption, could have a material adverse effect on the Company's financial
condition and results of operations.
CONTINGENCY PLAN. The Company has not yet developed a year 2000-specific
contingency plan. The Company intends to prepare a contingency plan with respect
to its financial and accounting software no later than mid-1999. In addition, if
further year 2000 compliance issues are discovered, the Company then will
evaluate the need for one or more contingency plans relating to such issues.
CERTAIN FACTORS THAT MAY AFFECT FUTURE PERFORMANCE.
In addition to the other information contained in this Report, the
following are important factors that should be considered carefully in
evaluating the Company and its business.
NEW PRODUCTS, TECHNOLOGICAL CHANGES AND INVENTORY MANAGEMENT. The markets
for the Company's products are characterized by rapidly changing technology,
evolving industry standards and short product life cycles. The Company's success
depends upon its ability to enhance its existing products and to introduce new
products with features that meet changing end user requirements. Moreover,
because of short product life cycles coupled with long lead times for many
components used in the Company's products, the Company may not be able to
quickly reduce its production or inventory levels in response to unexpected
shortfalls in sales or, conversely, to increase production or inventory levels
in response to unexpected demand. There can be no assurance that the Company
will be successful in identifying new markets, in developing, manufacturing and
marketing new products, or in enhancing its existing
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<PAGE>
products, either internally or through strategic relationships with third
parties. The Company's business would be adversely affected if the Company were
to incur delays in developing new products or enhancing existing products, if
the Company experiences delays in obtaining any required regulatory approvals
for its products or if such new products or enhancements did not gain market
acceptance. In addition, there can be no assurance that products or technologies
developed by others will not render the Company's products or technologies
noncompetitive or obsolete. The recent introduction of competing technologies on
the 56Kbps modem and the marketing activities to promote the advantages of such
technology heightened the competitive pressures in the industry. Each increase
in speed in modem technology has had transition issues; however, the Company
believes that the transition to 56Kbps technology is resulting in more extensive
upgrade policies which may result in lower gross margins. Moreover, price
decreases have occurred earlier in the 56Kbps product cycle than occurred with
14.4Kbps and 28.8Kbps products.
Sales of individual products and product lines are typically
characterized by rapid declines in sales, pricing and margins toward the end of
the respective product's life cycle, the precise timing of which may be
difficult to predict. As new products are planned and introduced, the Company
attempts to monitor closely the inventory of older products and to phase out
their manufacture in a controlled manner. Nevertheless, the Company could
experience unexpected reductions in sales of older generation products as
customers anticipate the availability of new products. These reductions could
give rise to additional charges for obsolete or excess inventory, returns of
older generation products by distributors or substantial price protection
charges. To the extent that the Company is unsuccessful in managing product
transitions, its business and operating results could be materially adversely
affected.
Because the majority of the Company's products are used in PCs and
computer networks, the Company's future operating results could be adversely
affected by changes in the PC and computer networking markets, including major
technological developments or fluctuations in the growth rate. In addition,
there is a trend in original PC system manufacturing to integrate additional
functionality onto the system board of the PC or to utilize chipsets which
incorporate additional functionality, thereby decreasing the market for PC
enhancement products. Moreover, it is a concern in the PC industry that the
penetration of PCs into the home has flattened at 40% and that PC sales growth
will slow as PCs become more of a replacement market. This could impact modem
sales to the Company's OEM customers in the future. Any decrease in the markets
for PC enhancement or networking products or reduction in the growth rates in
such markets could have a material adverse effect on the Company's operating
results.
POTENTIAL FLUCTUATIONS IN QUARTERLY RESULTS. The Company's quarterly
operating results have varied significantly, and may continue to vary
significantly, depending on a number of factors, some of which could adversely
affect the Company's operating results and the trading price of the Company's
Common Stock. These factors include the level of demand for the Company's
products, competitive pricing pressures, the timing of orders from and shipments
to major customers, the timing of new product
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<PAGE>
introductions by the Company and its competitors, the availability and pricing
of components for the Company's products, the timing of phase-outs of the
Company's products, variations in the Company's product mix and component costs,
variations in the proportion of sales made to wholesale distributors, OEMs and
retailers, product returns or price protection charges from customers, the
timing of sales of the Company's products to end users by the Company's
customers, seasonal promotions by the Company, its customers and competitors,
economic conditions prevailing within the computer industry and economic
conditions generally. Quarterly sales depend on the volume and timing of orders
received during a quarter, which are difficult to forecast. Customers generally
order products on an as-needed basis, and accordingly the Company has
historically operated with a relatively small backlog. Moreover, as is typical
for companies in the PC industry, a disproportionate percentage of the Company's
net sales in any quarter are typically generated in the last month of a quarter.
As a result, a shortfall in net sales in any quarter as compared to expectations
may not be identifiable until the end of the quarter. In addition, from time to
time, a significant portion of the Company's sales are derived from a limited
number of customers, the loss of one or more of which could adversely impact
operating results. There can be no assurance that the Company will be able to
return to its growth in sales or to profitability on a quarterly or annual
basis. The Company's expense levels are based, in part, on its expectations as
to future sales. If sales levels are below expectations, operating results may
be adversely affected, which would likely have an adverse effect on the trading
price of the Company's Common Stock.
DEPENDENCE ON CUSTOM MANUFACTURING SALES. In the third quarter of 1997, the
Company began manufacturing products on a contract basis for other companies.
Custom manufacturing sales accounted for approximately 12% of the Company's net
sales for the year ended December 31, 1997 and increased to 22% of sales for the
nine months ended September 30, 1998. The Company has only recently begun custom
manufacturing and, accordingly, the Company has limited experience in the
management and operation of custom manufacturing services. Moreover, the
contract manufacturing industry is highly fragmented and intensely competitive.
In addition, the level and timing of orders placed by the Company's contract
manufacturing customers vary due to customer attempts to manage inventory,
changes in the customer's manufacturing strategy and variation in demand for the
product. For all of these reasons, there can be no assurance that the Company
will be successful in developing its custom manufacturing services. The
inability of the Company to expand its custom manufacturing services could
adversely affect the Company's business, results of operations or financial
condition. As of September 30, 1998 the Company has only one custom
manufacturing customer. Sales to this customer will most likely be less in the
fourth quarter of 1998 than they were in the third quarter of 1998.
ACQUISITIONS. The Company may from time to time pursue the acquisition of
other companies, assets, technologies or product lines that would complement or
expand its existing business, such as the acquisition of the Global Village
modem business. Certain of these acquisitions may involve businesses in which
the Company lacks experience. Acquisitions involve a number of risks that could
adversely affect the
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<PAGE>
Company's operating results, including the diversion of management's attention,
the assimilation of the operations, products and personnel of the acquired
companies, the amortization of acquired intangible assets and the potential loss
of key employees of the acquired companies. There can be no assurance that the
Company will be able to identify businesses that would complement or expand its
existing business or complete such acquisitions, manage one or more acquisitions
successfully, or that the Company will be able to integrate the operations,
products or personnel gained through such acquisition without a material adverse
impact on the Company's business, financial condition and results of operations,
particularly in the quarters immediately following such acquisitions.
INTERNATIONAL OPERATIONS. The Company's international sales are subject to
the risks inherent in international sales, including various regulatory
requirements (including the need to obtain certification for the Company's data
communications products), political and economic changes and disruptions,
tariffs or other barriers, difficulties in staffing and managing foreign
operations, and potentially adverse tax consequences. In addition, fluctuations
in exchange rates may render the Company's products less competitive relative to
local product offerings or expose the Company to foreign currency exchange
losses. The strength of the U.S. dollar has had a negative impact for the nine
months ended September 30, 1998. One or more of thesefactors may have a material
adverse effect on the Company's future international sales and, consequently, on
the Company's operating results.
DEPENDENCE ON SUPPLIERS. The major components of the Company's products
include circuit boards, microprocessors, chipsets and memory components. Most of
the components used in the Company's products are available from multiple
sources. However, certain components used in the Company's products are
currently obtained from single sources. Certain chipsets used in the Company's
data communications products in the past have been in short supply and are
frequently on allocation by semiconductor manufacturers. Similar to others in
the computer industry, the Company has, from time to time, experienced
difficulty in obtaining certain components. The Company has no guaranteed supply
arrangements with any of its suppliers and there can be no assurance that these
suppliers will continue to meet the Company's requirements. Shortages of
components not only limit the Company's production capacity but also could
result in higher costs due to the higher costs of components in short supply or
the need to utilize higher cost substitute components. An extended interruption
in the supply of any of these components or a reduction in their quality or
reliability would have a material adverse effect on the Company's operating
results. While the Company believes that with respect to its single source
components it could obtain similar components from other sources, it could be
required to alter product designs to use alternative components. There can be no
assurance that severe shortages of components will not occur in the future which
could increase the cost or delay the shipment of the Company's products and have
a material adverse effect on the Company's operating results. Significant
increases in the prices of these components could also have a material adverse
effect on the Company's operating results since the Company may not be able to
adjust product pricing to reflect the increases in component costs. Moreover,
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<PAGE>
a number of components for the Company's products are obtained from foreign
suppliers. Increases in tariffs on such components or fluctuations in exchange
rates could result in increases in the prices paid by the Company for these
components, which could impact the Company's ability to compete with foreign
manufacturers and have a material adverse effect on the Company's operating
results.
SALES CHANNEL RISKS. The Company sells its products to OEMs, national,
regional and international wholesale distributors and retailers and catalog
companies. Sales to OEMs accounted for approximately 45% of net sales in the
year 1997 and 57% of net sales for the nine months ended September 30, 1998.
OEMs have significantly different requirements, and in most cases, more
stringent purchasing procedures and quality standards than wholesale
distributors and other resellers. There can be no assurance that the Company
will be successful in developing products for, and delivering products to, the
OEM market, or that it will be successful in establishing and maintaining an
effective distribution and customer support system for OEMs. The Company's
business could be adversely affected if it is unsuccessful in developing,
manufacturing and marketing product pricing which could have a material adverse
effect on the Company's operating results. A decline in sales to large customers
or a delay or default in payment by one or more of such customers could have a
material adverse effect on the Company's results of operations or financial
condition.
The Company's three largest wholesale distributors accounted for
approximately 18% of the Company's net sales in 1997 and 27% of net sales for
the nine months ended September 30, 1998. The PC distribution industry has been
characterized by rapid change, including consolidations and financial
difficulties of wholesale distributors and the emergence of alternative
distribution channels. The Company is dependent upon the continued viability and
financial stability of its wholesale distributors. The loss or ineffectiveness
of any of the Company's three largest wholesale distributors or a number of its
smaller wholesale distributors could have a material adverse effect on the
Company's operating results. In addition, an increasing number of vendors are
competing for access to wholesale distributors which could adversely affect the
Company's ability to maintain its existing relationships with its wholesale
distributors or could negatively impact sales to such distributors. The
Company's sales to wholesale distributors declined in absolute dollars from 1995
to 1996 and from 1996 to 1997.
During the third quarter of 1998, the Company improved the distribution
of Boca Research branded products by leveraging the strong retail position of
its Global Village line of modems. Sales to the retail channel in the nine
months ended September 30, 1998 were 6% of net sales.
COMPETITION. The markets for the Company's products are intensely
competitive resulting in constant pricing pressures. Some of the Company's
competitors have significantly greater financial, technical, product
development, manufacturing or marketing resources than the Company. The Company
believes that its ability to compete depends on a number of factors, including
price, product quality and reliability, product availability, credit terms, name
recognition, delivery time, and post-sale service
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<PAGE>
and support. There can be no assurance that the Company will be able to continue
to compete successfully with respect to these factors. A variety of companies
currently offer products that compete directly with the Company's products.
These competitors could take pricing action that could result in price
reductions in the Company's products or that could have a material adverse
effect on the Company's operating results. In addition, as the Company enters
into new product markets, such as Internet TV appliances, cable modems and video
conferencing, the Company anticipates that it will encounter competition from a
number of well-established companies, many of which have greater financial,
technical, product development, manufacturing or marketing resources and
experience.
PROPRIETARY RIGHTS; DEPENDENCE ON SOFTWARE LICENSES. The Company receives
from time to time, and may receive in the future, communications from third
parties asserting intellectual property rights relating to the Company's
products and technologies. There can be no assurance that in the future the
Company will be able to obtain licenses of any intellectual property rights
owned by third parties with respect to the Company's products or that any such
licenses can be obtained on terms favorable to the Company. If the Company is
unable to obtain licenses of protected technology, it could be prohibited from
manufacturing and marketing products incorporating that technology. The Company
could also incur substantial costs in redesigning its products or in defending
any legal action taken against it. Should the Company be found to infringe the
proprietary rights of others, the Company could be required to pay damages to
the infringed party which could have a material adverse effect on the Company's
operating results.
In certain of its products, the Company includes software licensed from
third parties. The Company's operating results could be adversely affected by a
number of factors relating to this third party software, including lack of
market acceptance, failure by the licensors to promote or support the software,
delays in shipment of the Company's products as a result of delays in the
introduction of licensed software or errors in the licensed software, or excess
customer support costs or product returns experienced by the Company due to
errors in the licensed software. Moreover, any impairment or termination of the
Company's relationship with any licensors of third party software could have a
material adverse effect on the Company's operating results.
RELIANCE ON CENTRALIZED MANUFACTURING. All of the Company's manufacturing
occurs at its leased headquarters facility in Boca Raton, Florida. The Company's
manufacturing operations utilize certain equipment which, if damaged or
otherwise rendered inoperable, would result in the disruption of the Company's
manufacturing operations. Although the Company maintains business interruption
insurance which the Company believes is adequate, any extended interruption of
the operations at this facility would have a material adverse effect on the
Company's operating results.
PRODUCT RETURNS, PRICE PROTECTION AND WARRANTY CLAIMS. Like other
manufacturers of computer products, the Company is exposed to the risk of
product returns from wholesale distributors and retailers, either through
contractual stock
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<PAGE>
rotation privileges or as a result of the Company's interest in assisting
customers in balancing inventories. Although the Company attempts to monitor and
manage the volume of sales to wholesale distributors and retailers, large
shipments in anticipation of sales by wholesale distributors and retailers can
lead to substantial overstocking by the Company's wholesale distributors and
retailers and to higher than normal returns. Moreover, the risk of product
returns may increase if demand for the Company's products declines. When the
Company reduces its prices, the Company credits its wholesale distributors and
retailers for the difference between the purchase price of products remaining in
their inventory and the Company's reduced price for such products on terms
negotiated with the Company, the result of which could have a material adverse
effect on the Company's operating results. The Company's limited five-year
warranty permits customers to return any product for repair or replacement if
the product does not perform as warranted. The Company to date has not
encountered material warranty claims or liabilities. The Company seeks to
continually introduce new and enhanced products, which could result in higher
product returns and warranty claims due to the risks inherent in the
introduction of such products. The Company has established reserves for product
returns, price protection and warranty claims which management believes are
adequate. There can be no assurance that product returns, price protection and
warranty claims will not have a material adverse effect on future operating
results.
VOLATILITY OF STOCK PRICE. The price of the Company's Common Stock
historically has been volatile due to fluctuations in operating results and
other factors relating to the Company's operations, the market's changing
expectations for the Company's growth, overall equity market conditions relating
to the market for technology stocks generally and other factors unrelated to the
Company's operations, including announcements by or relating to the Company's
competitors. Such fluctuations are expected to continue. In addition, stock
markets have experienced more price volatility in recent years. This volatility
has had a substantial effect on the market prices of securities issued by many
technology companies, often for reasons unrelated to the operating performance
of the specific companies.
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<PAGE>
PART II.
BOCA RESEARCH, INC.
OTHER INFORMATION
Item 1. Legal Proceedings
As reported in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, the Company received correspondence from IBM
Corporation ("IBM") alleging that certain of the Company's products infringed
the patent rights of IBM. The Company has resolved the matter by entering into a
licensing agreement with IBM. This licensing agreement grants the Company, in
return for an annual royalty, a license to the patented intellectual property
with respect to which IBM alleged patent infringement as well as a broader
portfolio of IBM's technology. The royalty payable under the licensing agreement
is variable depending upon the Company's annual revenues and is anticipated to
be $25,000 in 1998.
As reported in the Company's Annual Report on Form 10-K for the fiscal
year ended December 31, 1997, a former shareholder of the Company filed an
action in the United States District Court for the Southern District of Florida
against the Company and Anthony F. Zalenski, its President and Chief Executive
Officer in March, 1997. The former shareholder claimed that he relied on certain
statements made directly to him by Mr. Zalenski and certain other statements in
deciding not to sell his shares of the Company's Common Stock. The former
shareholder claimed that such statements were false and misleading and give rise
to claims under the Federal securities law and Florida common law. The former
shareholder sought damages for his trading losses, which were alleged to be in
excess of $1 million. Such action was settled in September, 1998 by payment made
by the Company's directors and officers liability insurance carrier.
Items 2-3.
Not applicable.
Item 4. Submission of Matters to a Vote of Security Holders
There were no matters submitted to a vote of security holders during the
quarter ended September 30, 1998.
Item 5. Other information
None.
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<PAGE>
BOCA RESEARCH, INC.
OTHER INFORMATION (Con't)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
10.1 - Loan and Security Agreement dated as of November 9, 1998
between Boca Research, Inc. and Finova Business Credit.
11 - Calculation of shares used in determining earnings per share.
27 - Financial Data Schedule
(b) Reports on Form 8-K
On September 3, 1998, the Company filed a Form 8-K/A which amended
the Form 8-K previously filed by the Company to report the
acquisition of certain assets of Global Village Communications
Inc.
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<PAGE>
BOCA RESEARCH, INC.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf of the
undersigned thereunto duly authorized.
Dated: March 24, 1999 /S/ ANTHONY F. ZALENSKI
-----------------------
Anthony F. Zalenski
President and Chief Executive Officer
(Principal Executive Officer)
Dated: March 24, 1998 /S/ NAVROZE S. MEHTA
--------------------
Navroze S. Mehta
Executive Vice President and
General Manager
(Principal Financial and
Accounting Officer)
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<PAGE>
Exhibit 10.1
LOAN AND SECURITY
AGREEMENT
Boca Research, Inc.
Borrower
1377 Clint Moore Road
Boca Raton, Florida 33487
-------------------------
Address
59-2479377
----------
Borrower Fed ID Tax No.
$5,000,000.00
-------------
Credit Limit
November ____, 1998
Date
================================================================================
FINOVA BUSINESS CREDIT
<PAGE>
THIS LOAN AND SECURITY AGREEMENT (collectively with the Schedule to Loan
Agreement (the "Schedule") attached hereto, the "Agreement") dated the date set
forth on the cover page, is entered into by and between the borrower named on
the cover page (jointly and severally, the "Borrower"), whose address is set
forth on the cover page and FINOVA Capital Corporation ("FINOVA"), whose address
is 111 West 40th Street, 14th Floor, New York, NY 10018.
1. DEFINITIONS.
1.1 Defined Terms. As used in this Agreement, the following terms have
the definitions set forth below:
"ADA" has the meaning set forth in Section 4.1(aa) hereof.
"Additional Sums" has the meaning set forth in Section 2.8(a) hereof.
"Affiliate" means any Person controlling, controlled by or under common
control with Borrower. For purposes of this definition, "control" means the
possession, directly or indirectly, of the power to direct or cause direction of
the management and policies of any Person, whether through ownership of common
or preferred stock or other equity interests, by contract or otherwise. Without
limiting the generality of the foregoing, each of the following shall be an
Affiliate: any officer, director, employee or other agent of Borrower, any
shareholder, member or subsidiary of Borrower, and any other Person with whom or
which Borrower has common shareholders, officers or directors.
"Agreement" has the meaning set forth in the preamble.
"Applicable Law" has the meaning set forth in Section 8.2(a) hereof.
"Applicable Usury Law" has the meaning set forth in Section 2.8(b)
hereof.
"Blocked Account" has the meaning set forth in Section 2.9(c) hereof.
"Borrowing Event" shall mean a condition during which the Revolving
Credit Loans equal or exceed $2,500,000.00 at a time during which the Borrower's
availability for further Revolving Credit Advances under the Revolving Credit
Limit is less than $2,500,000.00.
"Business Day" means any day on which commercial banks in both New
York, New York and Phoenix, Arizona are open for business.
"Capital Expenditures" means all expenditures made and liabilities
incurred for the acquisition of any fixed asset or improvement, replacement,
substitution or addition thereto which has a useful life of more than one year
and including, without limitation, those arising in connection with Capital
Leases.
"Capital Lease" means any lease of property by Borrower that, in
accordance with GAAP, should be capitalized for financial reporting purposes and
reflected as a liability on the balance sheet of Borrower.
"Closing Fee" has the meaning set forth in the Schedule.
"Closing Date" means the date set forth on the cover page of this
Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in
the State of Arizona from time to time.
"Collateral" has the meaning set forth in Section 3.1 hereof.
"Collateral Monitoring Fee" has the meaning set forth in the Schedule.
"Deposit Accounts" has the meaning set forth in Section 9105 of the
Code.
"Dominion Account" has the meaning set forth in Section 2.9(c) hereof.
"Eligible Inventory" means Inventory which FINOVA, in its Permitted
Discretion, deems Eligible Inventory, based on such considerations as FINOVA may
from time to time deem appropriate. Without limiting the generality of the
foregoing, no Inventory shall be Eligible Inventory unless, in FINOVA's
Permitted Discretion, such Inventory (i) consists of raw materials in good, new
and salable condition which are not obsolete or unmerchantable, and are not
comprised of work in process, packaging materials or supplies; (ii) meets all
standards imposed by any governmental agency or authority; (iii) conforms in all
respects to the warranties and representations set forth herein; (iv) is at all
times subject to FINOVA's duly perfected, first priority security interest; and
(v) is situated at a location in compliance with Section 5.16 hereof.
"Eligible Receivables" means Receivables arising in the ordinary course
of Borrower's business from the sale of goods or rendition of services, which
FINOVA, in its Permitted Discretion, shall deem eligible based on such
considerations as FINOVA may from time to time deem
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appropriate. Without limiting the foregoing, a Receivable shall not be deemed to
be an Eligible Receivable if (i) the account debtor has failed to pay the
Receivable within a period of ninety (90) days after invoice date or sixty (60)
days from the due date of the invoice, to the extent of any amount remaining
unpaid after such period; (ii) the account debtor has failed to pay more than
25% of all outstanding Receivables owed by it to Borrower within ninety (90)
days after invoice date or sixty (60) days from the due date of the invoice;
(iii) the account debtor is an Affiliate of Borrower; (iv) the goods relating
thereto are placed on consignment, guaranteed sale, "bill and hold," "COD" or
other terms pursuant to which payment by the account debtor may be conditional;
(v) the account debtor is not located in the United States, unless the
Receivable is supported by a letter of credit or other form of guaranty or
security, in each case in form and substance satisfactory to FINOVA; (vi) the
account debtor is the United States or any department, agency or instrumentality
thereof or any State, city or municipality of the United States; (vii) Borrower
is or may become liable to the account debtor for goods sold or services
rendered by the account debtor to Borrower; (viii) the account debtor's total
obligations to Borrower exceed [15%] of all Eligible Receivables, to the extent
of such excess; (ix) the account debtor disputes liability or makes any claim
with respect thereto (up to the amount of such liability or claim), or is
subject to any insolvency or bankruptcy proceeding, or becomes insolvent, fails
or goes out of a material portion of its business; (x) the amount thereof
consists of late charges or finance charges; (xi) the amount thereof consists of
a credit balance more than ninety (90) days past due; (xii) the face amount
thereof exceeds [$70,000], unless accompanied by evidence of shipment of the
goods relating thereto satisfactory to FINOVA in its Permitted Discretion;
(xiii) the invoice constitutes a progress billing on a project not yet
completed, except that the final billing at such time as the matter has been
completed and delivered to the customer may be deemed an Eligible Receivable; or
(xiv) the amount thereof is not yet represented by an invoice or bill issued in
the name of the applicable account debtor.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"Environmental Costs" has the meaning set forth in Section 8.2(b)
hereof.
"ERISA" means the Employment Retirement Income Security Act of 1974, as
amended, and the regulations thereunder.
"ERISA Affiliate" means each trade or business (whether or not
incorporated and whether or not foreign) which is or may hereafter become a
member of a group of which Borrower is a member and which is treated as a single
employer under ERISA Section 4001(b)(1), or IRC Section 414.
"Event of Default" means any of the events set forth in Section 7.1 of
this Agreement.
"Examination Fee" has the meaning set forth in the Schedule.
"Facility Fee" has the meaning set forth in the Schedule.
"FINOVA Affiliate" has the meaning set forth in Section 9.22 hereof.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time as set forth in the opinions
and pronouncements of the Accounting Principles Board and the American Institute
of Certified Public Accountants and the statements and pronouncements of the
Financial Accounting Standards Boards which are applicable to the circumstances
as of the date of determination consistently applied, except that, for the
financial covenants set forth in this Agreement, GAAP shall be determined on the
basis of such principles in effect on the date hereof and consistent with those
used in the preparation of the audited financial statements delivered to Lender
prior to the date hereof.
"General Intangibles" means all general intangibles of Borrower,
whether now owned or hereafter created or acquired by Borrower, including,
without limitation, all choses in action, causes of action, corporate or other
business records, Deposit Accounts, inventions, designs, drawings, blueprints,
Trademarks, Licenses and Patents, names, trade secrets, goodwill, copyrights,
registrations, licenses, franchises, customer lists, security and other
deposits, rights in all litigation presently or hereafter pending for any cause
or claim (whether in contract, tort or otherwise), and all judgments now or
hereafter arising therefrom, all claims of Borrower against FINOVA, rights to
purchase or sell real or personal property, rights as a
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licensor or licensee of any kind, royalties, telephone numbers, proprietary
information, purchase orders, and all insurance policies and claims (including
without limitation credit, liability, property and other insurance) tax refunds
and claims, computer programs, discs, tapes and tape files, claims under
guaranties, security interests or other security held by or granted to Borrower
to secure payment of any of the Receivables by an account debtor, all rights to
indemnification and all other intangible property of every kind and nature
(other than Receivables).
"Hazardous Substance" has the meaning set forth in Section 8.2(a) hereof.
"Indebtedness" means all of Borrower's present and future obligations,
liabilities, debts, claims and indebtedness, contingent, fixed or otherwise,
however evidenced, created, incurred, acquired, owing or arising, whether under
written or oral agreement, operation of law or otherwise, and includes, without
limiting the foregoing (i) the Obligations, (ii) obligations and liabilities of
any Person secured by a lien, claim, encumbrance or security interest upon
property owned by Borrower, even though Borrower has not assumed or become
liable therefor, (iii) obligations and liabilities created or arising under any
lease (including Capital Leases) or conditional sales contract or other title
retention agreement with respect to property used or acquired by Borrower, even
though the rights and remedies of the lessor, seller or lender are limited to
repossession, (iv) all unfunded pension fund obligations and liabilities and (v)
deferred taxes.
"Initial Term" has the meaning set forth on the Schedule.
"Inventory" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
under any contract of service or held for sale or lease, all raw materials, work
in process, finished goods and materials and supplies of any kind, nature or
description which are or might be used or consumed in Borrower's business or
used in connection with the manufacture, packing, shipping, advertising, selling
or finishing of such goods, merchandise or other personal property, and all
documents of title or other documents representing them.
"Inventory Loans" has the meaning set forth in the Schedule.
"IRC" means the Internal Revenue Code of 1986, as amended, and the
regulations thereunder.
"Loans" has the meaning set forth in Section 2.2 hereof.
"Loan Documents" means, collectively, this Agreement, any note or notes
executed by Borrower and payable to FINOVA, and any other present or future
agreement entered into in connection with this Agreement, together with all
alterations, amendments, changes, extensions, modifications, refinancings,
refundings, renewals, replacements, restatements, or supplements, of or to any
of the foregoing.
"Loan Party" means Borrower, each Guarantor, each Subordinating
Creditor and each other party (other than FINOVA) to any Loan Document.
"Loan Reserves" means, as of any date of determination, such amounts as
FINOVA may from time to time establish and revise in good faith reducing the
amount of Revolving Credit Loans and Letters of Credit which would otherwise be
available to Borrower under the lending formula(s) provided in the Schedule: (a)
to reflect events, conditions, contingencies or risks which, as determined by
FINOVA in good faith, do or may affect either (i) the Collateral or any other
property which is security for the Obligations or its value, (ii) the assets,
business or prospects of Borrower or any Guarantor or (iii) the security
interests and other rights of FINOVA in the Collateral (including the
enforceability, perfection and priority thereof) or (b) to reflect FINOVA's good
faith belief that any collateral report or financial information furnished by or
on behalf of Borrower or any Guarantor to FINOVA is or may have been incomplete,
inaccurate or misleading in any material respect or (c) in respect of any state
of facts which FINOVA determines in good faith constitutes an Event of Default
or may, with notice or passage of time or both, constitute an Event of Default."
"Loan Year" means each twelve month period commencing on the Closing
Date.
"Maximum Interest Rate" has the meaning set forth in Section 2.8(b)
hereof.
"Multiemployer Plan" means a "multiemployer plan" as defined in ERISA
Sections 3(37) or 4001(a)(3) or IRC Section 414(f) which covers employees of
Borrower or any ERISA Affiliate.
"Obligations" means all present and future loans, advances, debts,
liabilities, obligations, covenants, duties and indebtedness at any time owing
by Borrower to FINOVA, whether evidenced by this Agreement, any note or other
instrument or document, whether arising from an
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extension of credit, opening of a letter of credit, banker's acceptance, loan,
guaranty, indemnification or otherwise, whether direct or indirect (including,
without limitation, those acquired by assignment and any participation by FINOVA
in Borrower's debts owing to others), absolute or contingent, due or to become
due, including, without limitation, all interest, charges, expenses, fees,
attorney's fees, expert witness fees, Examination Fee, letter of credit fees,
Collateral Monitoring Fee, Closing Fee, Facility Fee, Termination Fee, Minimum
Interest Charge and any other sums chargeable to Borrower hereunder or under any
other agreement with FINOVA.
"Overadvance" has the meaning set forth in Section 2.3.
"Overline" has the meaning set forth in Section 2.3.
"PBGC" means the Pension Benefit Guarantee Corporation.
"Permitted Discretion" means FINOVA's judgment exercised in good faith
based upon its consideration of any factor which FINOVA believes in good faith:
(i) will or could adversely affect the value of any Collateral, the
enforceability or priority of FINOVA's liens thereon or the amount which FINOVA
would be likely to receive (after giving consideration to delays in payment and
costs of enforcement) in the liquidation of such Collateral; (ii) suggests that
any collateral report or financial information delivered to FINOVA by any Person
on behalf of the Borrower is incomplete, inaccurate or misleading in any
material respect; (iii) materially increases the likelihood of a bankruptcy,
reorganization or other insolvency proceeding involving the Borrower, any Loan
Party or any of the Collateral, or (iv) creates or reasonably could be expected
to create an Event of Default. In exercising such judgment, FINOVA may consider
such factors already included in or tested by the definition of Eligible
Receivables or Eligible Inventory, as well as any of the following: (i) the
financial and business climate of the Borrower's industry and general
macroeconomic conditions, (ii) changes in collection history and dilution with
respect to the Receivables, (iii) changes in demand for, and pricing of,
Inventory, (iv) changes in any concentration of risk with respect to Receivables
and/or Inventory, and (v) any other factors that change the credit risk of
lending to the Borrower on the security of the Receivables and Inventory. The
burden of establishing lack of good faith hereunder shall be on the Borrower.
"Permitted Encumbrance" means each of the liens, mortgages and other
security interests set forth on the Schedule.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation, limited
liability company, government, or any agency or political division thereof, or
any other entity.
"Plan" means any plan described in ERISA Section 3(2) maintained for
employees of Borrower or any ERISA Affiliate, other than a Multiemployer Plan.
"Prepared Financials" means the balance sheets of Borrower as of the
date set forth in the Schedule in the section entitled 'Reporting Requirements'
, and as of each subsequent date on which audited balance sheets are delivered
to FINOVA from time to time hereunder, and the related statements of operations,
changes in stockholder's equity and changes in cash flow for the periods ended
on such dates.
"Prime Rate" has the meaning set forth in the Schedule.
"Prohibited Transaction" means any transaction described in Section 406
of ERISA which is not exempt by reason of Section 408 of ERISA, and any
transaction described in Section 4975(c) of the IRC which is not exempt by
reason of Section 4975(c)(2) of the IRC.
"Property" has the meaning set forth in Section 8.2(a) hereof.
"Receivable Loans" has the meaning set forth on the Schedule.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), proceeds of any letters of
credit naming Borrower as beneficiary, contract rights, chattel paper,
instruments, documents and all other forms of obligations at any time owing to
Borrower, all guaranties and other security therefor, whether secured or
unsecured, all merchandise returned to or repossessed by Borrower, and all
rights of stoppage in transit and all other rights or remedies of an unpaid
vendor, lienor or secured party.
"Renewal Term" has the meaning set forth on the Schedule.
"Reportable Event" means a reportable event described in Section 4043
of ERISA or the regulations thereunder, a withdrawal from a Plan described in
Section 4063 of ERISA, or a cessation of operations described in Section 4068(f)
of ERISA.
"Revolving Credit Loans" has the meaning set forth in the Schedule.
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"Revolving Credit Limit" has the meaning set forth in the Schedule.
"Revolving Interest Rate" has the meaning set forth in the Schedule.
"Schedule" has the meaning set forth in the preamble.
"Start Date" has the meaning set forth in the Schedule.
"Subordinated Debt" means liabilities of Borrower the repayment of
which is subordinated, to the payment and performance of the Obligations,
pursuant to a subordination agreement acceptable to FINOVA in its permitted
discretion.
"Tangible Net Worth" at any date means the Borrower's tangible net
worth as determined in accordance with GAAP.
"Term Loans" has the meaning set forth in the Schedule.
"Termination Fee" has the meaning set forth in Section 9.2(d) hereof.
"Total Contractual Debt Service" means, for any period, the sum of
payments made (or, as to clause (i) of this sentence, required to be made) by
Borrower during such period for (i) Senior Contractual Debt Service, (ii)
pursuant to the Seller Note and/or Noncompete Agreement, and (iii) interest and
scheduled principal payments due on any and all other Indebtedness of Borrower,
including without limitation the Subordinated Indebtedness.
"Total Facility" has the meaning set forth in Section 2.1 hereof.
"Trademarks, Copyrights, Licenses and Patents" means all of Borrower's
right, title and interest in and to, whether now owned or hereafter acquired:
(i) trademarks, trademark registrations, trade names, trade name registrations,
and trademark or trade name applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, (d) all rights corresponding thereto throughout the
world, and (e) the goodwill of the business operated by Borrower connected with
and symbolized by any trademarks or trade names; (ii) copyrights, copyright
registrations and copyright applications, including without limitation such as
are listed on the Schedule attached hereto and made a part hereof, as the same
may be amended from time to time, and (a) renewals thereof, (b) all income,
royalties, damages and payments now and hereafter due and/or payable with
respect thereto, including without limitation, damages and payments for past or
future infringements thereof, (c) the right to sue for past, present and future
infringements thereof, and (d) all rights corresponding thereto throughout the
world; (iii) license agreements, including without limitation such as are listed
on the Schedule attached hereto and made a part hereof, and the right to prepare
for sale, sell and advertise for sale any Inventory now or hereafter owned by
Borrower and now or hereafter covered by such licenses; and (iv) patents and
patent applications, registered or pending, including without limitation such as
are listed on the Schedule attached hereto, together with all income, royalties,
shop rights, damages and payments thereto, the right to sue for infringements
thereof, and all rights thereto throughout the world and all reissues,
divisions, continuations, renewals, extensions and continuations-in-part
thereof.
"Unused Line Fee" has the meaning set forth in the Schedule.
1.2 Other Terms. All accounting terms used in this Agreement, unless
otherwise indicated, shall have the meanings given to such terms in accordance
with GAAP. All other terms contained in this Agreement, unless otherwise
indicated, shall have the meanings provided by the Code, to the extent such
terms are defined therein.
2. LOANS; INTEREST RATE AND OTHER CHARGES.
2.1 Total Facility. Upon the terms and conditions set forth herein and
provided that no Event of Default or event which, with the giving of notice or
the passage of time, or both, would constitute an Event of Default, shall have
occurred and be continuing, FINOVA shall, upon Borrower's request, make advances
to Borrower from time to time in an aggregate outstanding principal amount not
to exceed the Total Facility amount (the "Total Facility") set forth on the
Schedule hereto, subject to deduction of reserves for accrued interest and such
other reserves as FINOVA deems proper from time to time, and less amounts FINOVA
may be obligated to pay in the future on behalf of Borrower. The Schedule is an
integral part of this Agreement and all references to "herein", "herewith" and
words of similar import shall for all purposes be deemed to include the
Schedule.
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2.2 Loans. Advances under the Total Facility ("Loans" and individually,
a "Loan") shall be comprised of the amounts shown on the Schedule.
2.3 Overlines; Overadvances. If at any time or for any reason the
outstanding amount of advances (including all Letters of Credit) extended or
issued pursuant hereto exceeds any of the dollar limitations ("Overline") or
percentage limitations ("Overadvance") in the Schedule, then Borrower shall,
upon FINOVA's demand, immediately pay to FINOVA, in cash, the full amount of
such Overline or Overadvance which, at FINOVA's option, may be applied to reduce
the outstanding principal balance of the Loans and/or cash collateralize all or
any part of any outstanding Letters of Credit. Without limiting Borrower's
obligation to repay to FINOVA on demand the amount of any Overline or
Overadvance, Borrower agrees to pay FINOVA interest on the outstanding principal
amount of any Overline or Overadvance, on demand, at the rate set forth on the
Schedule and applicable to the Revolving Credit Loans.
2.4 Loan Account. All advances made hereunder (including without
limitation all advances made by FINOVA under or in connection with any Letter of
Credit) shall be added to and deemed part of the Obligations when made. FINOVA
may from time to time charge all Obligations of Borrower to Borrower's loan
account with FINOVA.
2.5 Interest; Fees. Borrower shall pay FINOVA interest on the daily
outstanding balance of the Obligations at the per annum rate set forth on the
Schedule. Borrower shall also pay FINOVA the fees set forth on the Schedule.
2.6 Default Interest Rate. Upon the occurrence and during the
continuation of an Event of Default, Borrower shall pay FINOVA interest on the
daily outstanding balance of the Obligations and any L/C Fee at a rate per annum
which is two percent (2%) in excess of the rate which would otherwise be
applicable thereto pursuant to the Schedule.
2.7 Examination Fee. Borrower agrees to pay to FINOVA the Examination
Fee in the amount set forth on the Schedule in connection with each audit or
examination of Borrower performed by FINOVA prior to or after the date hereof.
Without limiting the generality of the foregoing, Borrower shall pay to FINOVA
an initial Examination Fee in an amount equal to the amount set forth on the
Schedule. Such initial Examination Fee shall be deemed fully earned at the time
of payment and due and payable upon the closing of this transaction, and shall
be deducted from any good faith deposit paid by Borrower to FINOVA prior to the
date of this Agreement.
2.8 Excess Interest.
(a) The contracted for rate of interest of the loan contemplated
hereby, without limitation, shall consist of the following: (i) the interest
rate set forth on the Schedule, calculated and applied to the principal balance
of the Obligations in accordance with the provisions of this Agreement; (ii)
interest after an Event of Default, calculated and applied to the amount of the
Obligations in accordance with the provisions hereof; and (iii) all Additional
Sums (as herein defined), if any. Borrower agrees to pay an effective contracted
for rate of interest which is the sum of the above-referenced elements. The
Examination Fee, attorneys fees, expert witness fees, letter of credit fees,
collateral monitoring fees, closing fees, facility fees, Termination Fees,
Minimum Interest Charges, other charges, goods, things in action or any other
sums or things of value paid or payable by Borrower (collectively, the
"Additional Sums"), whether pursuant to this Agreement or any other documents or
instruments in any way pertaining to this lending transaction, or otherwise with
respect to this lending transaction, that under any applicable law may be deemed
to be interest with respect to this lending transaction, for the purpose of any
applicable law that may limit the maximum amount of interest to be charged with
respect to this lending transaction, shall be payable by Borrower as, and shall
be deemed to be, additional interest and for such purposes only, the agreed upon
and "contracted for rate of interest" of this lending transaction shall be
deemed to be increased by the rate of interest resulting from the inclusion of
the Additional Sums.
(b) It is the intent of the parties to comply with the usury laws of
the State of Arizona (the "Applicable Usury Law"). Accordingly, it is agreed
that notwithstanding any provisions to the contrary in this Agreement, or in any
of the documents securing payment hereof or otherwise relating hereto, in no
event shall this Agreement or such documents require the payment or permit the
collection of interest in excess of the maximum contract rate permitted by the
Applicable Usury Law (the "Maximum Interest Rate"). In the event (a) any such
excess of interest otherwise would be contracted for, charged or received from
Borrower or otherwise in connection with the loan evidenced hereby, or (b) the
maturity of the Obligations is accelerated in whole or in part, or (c) all or
part of the Obligations shall be prepaid, so that under any of such
circumstances the amount of interest
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contracted for, shared or received in connection with the loan evidenced hereby,
would exceed the Maximum Interest Rate, then in any such event (1) the
provisions of this paragraph shall govern and control, (2) neither Borrower nor
any other Person now or hereafter liable for the payment of the Obligations
shall be obligated to pay the amount of such interest to the extent that it is
in excess of the Maximum Interest Rate, (3) any such excess which may have been
collected shall be either applied as a credit against the then unpaid principal
amount of the Obligations or refunded to Borrower, at FINOVA's option, and (4)
the effective rate of interest shall be automatically reduced to the Maximum
Interest Rate. It is further agreed, without limiting the generality of the
foregoing, that to the extent permitted by the Applicable Usury Law; (x) all
calculations of interest which are made for the purpose of determining whether
such rate would exceed the Maximum Interest Rate shall be made by amortizing,
prorating, allocating and spreading during the period of the full stated term of
the loan evidenced hereby, all interest at any time contracted for, charged or
received from Borrower or otherwise in connection with such loan; and (y) in the
event that the effective rate of interest on the loan should at any time exceed
the Maximum Interest Rate, such excess interest that would otherwise have been
collected had there been no ceiling imposed by the Applicable Usury Law shall be
paid to FINOVA from time to time, if and when the effective interest rate on the
loan otherwise falls below the Maximum Interest Rate, to the extent that
interest paid to the date of calculation does not exceed the Maximum Interest
Rate, until the entire amount of interest which would otherwise have been
collected had there been no ceiling imposed by the Applicable Usury Law has been
paid in full. Borrower further agrees that should the Maximum Interest Rate be
increased at any time hereafter because of a change in the Applicable Usury Law,
then to the extent not prohibited by the Applicable Usury Law, such increases
shall apply to all indebtedness evidenced hereby regardless of when incurred;
but, again to the extent not prohibited by the Applicable Usury Law, should the
Maximum Interest Rate be decreased because of a change in the Applicable Usury
Law, such decreases shall not apply to the indebtedness evidenced hereby
regardless of when incurred.
2.9 Principal Payments; Proceeds of Collateral.
(a) Principal Payments. Except where evidenced by notes or other
instruments issued or made by Borrower to FINOVA specifically containing payment
provisions which are in conflict with this Section 2.10 (in which event the
conflicting provisions of said notes or other instruments shall govern and
control), that portion of the Obligations consisting of principal payable on
account of Loans shall be payable by Borrower to FINOVA immediately upon the
earliest of (i) the receipt by FINOVA or Borrower of any proceeds of any of the
Collateral, to the extent of said proceeds, (ii) the occurrence of an Event of
Default in consequence of which FINOVA elects to accelerate the maturity and
payment of such loans, or (iii) any termination of this Agreement pursuant to
Section 9.2 hereof; provided, however, that any Overadvance or Overline shall be
payable on demand pursuant to the provisions of Section 2.3 hereof.
(b) Collections. Upon the occurrence of an Event of Default or upon the
occurrence of a Borrowing Event, Borrower shall receive all payments as trustee
of FINOVA and immediately deliver all payments to FINOVA in their original form
as set forth below, duly endorsed in blank or cause the same to be deposited
into a Blocked Account Dominion Account of Receivables or sums as trustee of
FINOVA and immediately deliver all such payments or sums to FINOVA in their
original form, duly endorsed in blank or cause the same to be deposited into a
Blocked Account or Dominion Account. FINOVA or its designee may, at any time,
notify account debtors that the Receivables have been assigned to FINOVA and of
FINOVA's security interest therein, and may collect the Receivables directly and
charge the collection costs and expenses to Borrower's loan account. Borrower
agrees that, in computing the charges under this Agreement, all items of payment
shall be deemed applied by FINOVA on account of the Obligations on the Business
Day after receipt by FINOVA of good funds which have been finally credited to
FINOVA's account, whether such funds are received directly from Borrower or from
the Blocked Account bank or the Dominion Account bank, pursuant to Section
2.10(c) hereof, and this provision shall apply regardless of the amount of the
Obligations outstanding or whether any Obligations are outstanding; provided,
that if any such good funds are received after 12:00 p.m. noon (New York time)
on any Business Day or at any time on any day not constituting a Business Day,
such funds shall be deemed received on the immediately following Business Day.
FINOVA is not, however, required to credit Borrower's account for the amount of
any item of payment which is unsatisfactory to FINOVA in its Permitted
Discretion and FINOVA may charge Borrower's loan account for the amount of any
item of payment which is returned to FINOVA unpaid.
(c) Establishment of a Lockbox Account or Dominion Account. Upon the
occurrence of an Event of
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Default or upon the occurrence of a Borrowing Event and if directed by FINOVA in
writing, Borrower shall cause all proceeds of Collateral to be deposited into a
lockbox account, or such other "blocked account" as FINOVA may require (each, a
"Blocked Account") pursuant to an arrangement with such bank as may be selected
by Borrower and be acceptable to FINOVA which proceeds, unless otherwise
provided herein, shall be applied in payment of the Obligations in such order as
FINOVA determines in its sole discretion. Borrower shall issue to any such bank
an irrevocable letter of instruction directing said bank to transfer such funds
so deposited to FINOVA, either to any account maintained by FINOVA at said bank
or by wire transfer to appropriate account(s) of FINOVA. All funds deposited in
a Blocked Account shall immediately become the sole property of FINOVA and
Borrower shall obtain the agreement by such bank to waive any offset rights
against the funds so deposited. FINOVA assumes no responsibility for any Blocked
Account arrangement, including without limitation, any claim of accord and
satisfaction or release with respect to deposits accepted by any bank
thereunder. Alternatively, FINOVA may establish depository accounts in the name
of FINOVA at a bank or banks for the deposit of such funds (each, a "Dominion
Account") and Borrower shall deposit all proceeds of Receivables and all cash
proceeds of any sale of Inventory or, to the extent permitted herein, Equipment
or cause same to be deposited, in kind, in such Dominion Accounts of FINOVA in
lieu of depositing same to Blocked Accounts, and, unless otherwise provided
herein, all such funds shall be applied by FINOVA to the Obligations in such
order as FINOVA determines in its sole discretion.
(d) Payments Without Deductions. Borrower shall pay principal,
interest, and all other amounts payable hereunder, or under any other Loan
Document, without any deduction whatsoever, including, but not limited to, any
deduction for any setoff or counterclaim.
(e) Monthly Accountings. FINOVA shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by FINOVA), unless Borrower
notifies FINOVA in writing to the contrary within thirty (30) days after each
account is rendered, describing the nature of any alleged errors or admissions.
2.10 Application of Collateral. Except as otherwise provided herein,
FINOVA shall have the continuing and exclusive right to apply or reverse and
reapply any and all payments to any portion of the Obligations in such order and
manner as FINOVA shall determine in its sole discretion. To the extent that
Borrower makes a payment or FINOVA receives any payment or proceeds of the
Collateral for Borrower's benefit which is subsequently invalidated, declared to
be fraudulent or preferential, set aside or required to be repaid to a trustee,
debtor in possession, receiver or any other party under any bankruptcy law,
common law or equitable cause, or otherwise, then, to such extent, the
Obligations or part thereof intended to be satisfied shall be revived and
continue as if such payment or proceeds had not been received by FINOVA.
2.11 Application of Payments. The amount of all payments or amounts
received by FINOVA with respect to the Loan shall be applied to the extent
applicable under this Agreement: (i) first, to accrued interest through the date
of such payment, including any Default Interest; (ii) then, to any late fees,
overdue risk assessments, Examination Fee and expenses, collection fees and
expenses and any other fees and expenses due to FINOVA hereunder; and (iii)
last, the remaining balance, if any, to the unpaid principal balance of the
Loan; provided however, while an Event of Default exists under this Agreement,
or under any other Loan Document, each payment hereunder shall be (x) held as
cash collateral to secure Obligations relating to any Letters of Credit or other
contingent obligations arising under the Loan Documents and/or (y) applied to
amounts owed to FINOVA by Borrower as FINOVA in its sole discretion may
determine. In calculating interest and applying payments as set forth above: (a)
interest shall be calculated and collected through the date a payment is
actually applied by FINOVA under the terms of this Agreement; (b) interest on
the outstanding balance shall be charged during any grace period permitted
hereunder; (c) at the end of each month, all accrued and unpaid interest and
other charges provided for hereunder shall be added to the principal balance of
the Loan; and (d) to the extent that Borrower makes a payment or FINOVA receives
any payment or proceeds of the Collateral for Borrower's benefit that is
subsequently invalidated, set aside or required to be repaid to any other
Person, then, to such extent, the Obligations intended to be satisfied shall be
revived and continue as if such payment or proceeds had not been received by
FINOVA and FINOVA may adjust the Loan balances as FINOVA, in its sole
discretion, deems appropriate under the circumstances.
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3. SECURITY.
3.1 Security Interest in the Collateral. To secure the payment and
performance of the Obligations when due, Borrower hereby grants to FINOVA a
first priority security interest (subject only to Permitted Encumbrances) in all
of Borrower's now owned or hereafter acquired or arising Inventory, Equipment,
Receivables, life insurance policies and the proceeds thereof, Trademarks,
Copyrights, Licenses and Patents, Investment Property (as defined in Section
9-115 of the Code) and General Intangibles, including, without limitation, all
of Borrower's Deposit Accounts, money, any and all property now or at any time
hereafter in FINOVA's possession (including claims and credit balances), and all
proceeds (including proceeds of any insurance policies, proceeds of proceeds and
claims against third parties), all products and all books and records and
computer data related to any of the foregoing (all of the foregoing, together
with all other property in which FINOVA may be granted a lien or security
interest, is referred to herein, collectively, as the "Collateral").
3.2 Perfection and Protection of Security Interest. Borrower shall, at
its expense, take all actions requested by FINOVA at any time to perfect,
maintain, protect and enforce FINOVA's first priority security interest and
other rights in the Collateral and the priority thereof from time to time,
including, without limitation, (i) executing and filing financing or
continuation statements and amendments thereof and executing and delivering such
documents and titles in connection with motor vehicles as FINOVA shall require,
all in form and substance satisfactory to FINOVA, (ii) maintaining a perpetual
inventory and complete and accurate stock records, (iii) delivering to FINOVA
warehouse receipts covering any portion of the Collateral located in warehouses
and for which warehouse receipts are issued, and transferring Inventory to
warehouses designated by FINOVA, (iv) placing notations on Borrower's books of
account to disclose FINOVA's security interest therein and (v) delivering to
FINOVA all letters of credit on which Borrower is named beneficiary. FINOVA may
file, without Borrower's signature, one or more financing statements disclosing
FINOVA's security interest under this Agreement. Borrower agrees that a carbon,
photographic, photostatic or other reproduction of this Agreement or of a
financing statement is sufficient as a financing statement. If any Collateral is
at any time in the possession or control of any warehouseman, bailee or any of
Borrower's agents or processors, Borrower shall notify such Person of FINOVA's
security interest in such Collateral and, upon FINOVA's request, instruct them
to hold all such Collateral for FINOVA's account subject to FINOVA's
instructions. From time to time, Borrower shall, upon FINOVA's request, execute
and deliver confirmatory written instruments pledging the Collateral to FINOVA,
but Borrower's failure to do so shall not affect or limit FINOVA's security
interest or other rights in and to the Collateral. Until the Obligations have
been fully satisfied and FINOVA's obligation to make further advances hereunder
has terminated, FINOVA's security interest in the Collateral shall continue in
full force and effect.
3.3 Preservation of Collateral. FINOVA may, in its Permitted
Discretion, at any time discharge any lien or encumbrance on the Collateral or
bond the same, pay any insurance, maintain guards, pay any service bureau,
obtain any record or take any other action to preserve the Collateral and charge
the cost thereof to Borrower's loan account as an Obligation.
3.4 Insurance. Borrower will maintain and deliver evidence to FINOVA of
such insurance as is required by FINOVA, written by insurers, in amounts, and
with lender's loss payee, additional insured, and other endorsements,
satisfactory to FINOVA. All premiums with respect to such insurance shall be
paid by Borrower as and when due. Accurate and certified copies of the policies
shall be delivered by Borrower to FINOVA. If Borrower fails to comply with this
Section, FINOVA may (but shall not be required to) procure such insurance and
endorsements at Borrower's expense and charge the cost thereof to Borrower's
loan account as an Obligation.
3.5 Collateral Reporting; Inventory.
(a) Invoices. Borrower shall not re-date any invoice or sale from the
original date thereof or make sales on extended terms beyond those customary in
Borrower's industry, or otherwise extend or modify the term of any Receivable.
If Borrower becomes aware of any matter affecting any Receivable, including
information affecting the credit of the account debtor thereon, Borrower shall
promptly notify FINOVA in writing.
(b) Instruments. In the event any Receivable is or becomes evidenced by
a promissory note, trade acceptance or any other instrument for the payment of
money, Borrower shall immediately deliver such instrument to FINOVA
appropriately endorsed to FINOVA and, regardless of the form of any presentment,
demand, notice of dishonor, protest and notice of protest with respect thereto,
Borrower shall remain liable thereon until such instrument is paid in full.
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(c) Physical Inventory. Borrower shall conduct a physical count of the
Inventory at such intervals as FINOVA requests (at such time as Borrower has
implemented a cycle count inventory program reasonably satisfactory to FINOVA
then in such event FINOVA may only request a physical inventory if there exists
an Event of Default or FINOVA has reason to believe an Event of Default may
exist) and promptly supply FINOVA with a copy of such accounts accompanied by a
report of the value (calculated at the lower of cost or market value on a first
in, first out basis) of the Inventory and such additional information with
respect to the Inventory as FINOVA may request from time to time.
(d) Returns. For so long as no Event of Default has occurred and is
continuing and subject to the provisions of Section 3.6(b), if any account
debtor returns any Inventory to Borrower in the ordinary course of its business,
Borrower shall promptly determine the reason for such return and promptly issue
a credit memorandum to the account debtor (sending a copy to FINOVA) in the
appropriate amount. In the event any attempted return occurs after the
occurrence of any Event of Default, Borrower shall (i) hold the returned
Inventory in trust for FINOVA, (ii) segregate all returned Inventory from all of
Borrower's other property, (iii) conspicuously label the returned Inventory as
FINOVA's property, and (iv) immediately notify FINOVA of the return of any
Inventory, specifying the reason for such return, the location and condition of
the returned Inventory, and on FINOVA's request deliver such returned Inventory
to FINOVA.
(e) Borrower shall not consign any Inventory.
3.6 Receivables.
(a) Eligibility. (i) Borrower represents and warrants that each
Receivable covers and shall cover a bona fide sale or lease and delivery by it
of goods or the rendition by it of services in the ordinary course of its
business, and shall be for a liquidated amount and FINOVA's security interest
shall not be subject to any offset, deduction, counterclaim, rights of return or
cancellation, lien or other condition. If any representation or warranty herein
is breached as to any Receivable or any Receivable ceases to be an Eligible
Receivable for any reason other than payment thereof, then FINOVA may, in
addition to its other rights hereunder, designate any and all Receivables owing
by that account debtor as not Eligible Receivables; provided, that FINOVA shall
in any such event retain its security interest in all Receivables, whether or
not Eligible Receivables, until the Obligations have been fully satisfied and
FINOVA's obligation to provide loans hereunder has terminated. (ii) FINOVA at
any time shall be entitled to (i) establish and increase or decrease reserves
against Eligible Receivables and Eligible Inventory, (ii) reduce the advance
rates in the Schedule or restore such advance rates to any level equal to or
below the advance rates set forth in the Schedule or (iii) impose additional
restrictions (or eliminate the same) to the standards of eligibility set forth
in the definitions of "Eligible Receivables" and "Eligible Inventory," in the
exercise of its Permitted Discretion. FINOVA may but shall not be required to
rely on the schedules an/or reports delivered to FINOVA in connection herewith
in determining the then eligibility of Receivables and Inventory. Reliance
thereon by FINOVA from time to time shall not be deemed to limit the right of
FINOVA to revise advance rates or standards of eligibility as provided above.
(b) Disputes. Borrower shall notify FINOVA promptly of all disputes or
claims and settle or adjust such disputes or claims at no expense to FINOVA, but
no discount, credit or allowance shall be granted to any account debtor and no
returns of merchandise shall be accepted by Borrower without FINOVA's consent,
except for discounts, credits and allowances made or given in the ordinary
course of Borrower's business. FINOVA may, at any time after the occurrence of
an Event of Default, settle or adjust disputes or claims directly with account
debtors for amounts and upon terms which FINOVA considers advisable in its
reasonable credit judgment and, in all cases, FINOVA shall credit Borrower's
loan account with only the net amounts received by FINOVA in payment of any
Receivables.
3.7 Equipment. Borrower shall keep and maintain the Equipment in good
operating condition and repair and make all necessary replacements thereto to
maintain and preserve the value and operating efficiency thereof at all times
consistent with Borrower's past practice, ordinary wear and tear excepted.
Borrower shall not permit any item of Equipment to become a fixture (other than
a trade fixture) to real estate or an accession to other property.
3.8 Other Liens; No Disposition of Collateral. Borrower represents,
warrants and covenants that except for FINOVA's security interest, Permitted
Encumbrances, and such other liens, claims and encumbrances as may be permitted
by FINOVA in its sole discretion from time to time in writing, (a) all
Collateral is and shall continue to be owned by it free and clear of all liens,
claims and encumbrances whatsoever and (b) Borrower shall not, without FINOVA's
prior written approval, sell, encumber or dispose of or permit the sale,
encumbrance or disposal of any Collateral or all or any
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substantial part of any of its other assets (or any interest of Borrower
therein), except for the sale of Inventory in the ordinary course of Borrower's
business. In the event FINOVA gives any such prior written approval with respect
to any such sale of Collateral, the same may be conditioned on the sale price
being equal to, or greater than, an amount acceptable to FINOVA. The proceeds of
any such sales of Collateral shall be remitted to FINOVA pursuant to this
Agreement for application to the Obligations.
3.9 Collateral Security. The Obligations shall constitute one loan
secured by the Collateral. FINOVA may, in its sole discretion, (i) exchange,
enforce, waive or release any of the Collateral, (ii) apply Collateral and
direct the order or manner of sale thereof as it may determine, and (iii)
settle, compromise, collect or otherwise liquidate any Collateral in any manner
without affecting its right to take any other action with respect to any other
Collateral.
4. CONDITIONS OF CLOSING.
4.1 Initial Advance. The obligation of FINOVA to make the initial
advance hereunder or to issue or arrange for the issuance of the initial Letter
of Credit hereunder is subject to the fulfillment, to the satisfaction of FINOVA
and its counsel, of each of the following conditions on or prior to the date set
forth on the Schedule:
(a) Loan Documents. FINOVA shall have received each of the following
Loan Documents: (i) the Agreement fully and properly executed by Borrower; (ii)
promissory notes in such amounts and on such terms and conditions as FINOVA
shall specify, executed by Borrower; (iii) such security agreements,
intellectual property assignments, pledge agreements, mortgages and deeds of
trust as FINOVA may require with respect to this Agreement and any Guaranties,
executed by each of the parties thereto and, if applicable, duly acknowledged
for recording or filing in the appropriate governmental offices; (iv)
Subordination Agreements in form and substance acceptable to FINOVA, executed by
each of the Subordinating Creditors, together with copies of all instruments
subject thereto showing a legend indicating such subordination; (v) such Blocked
Account or Dominion Account agreements as it shall determine; and (vi) such
other documents, instruments and agreements in connection herewith as FINOVA
shall require, executed, certified and/or acknowledged by such parties as FINOVA
shall designate;
(b) Terminations by Existing Lender. Borrower's existing lender(s)
shall have executed and delivered UCC termination statements and other
documentation evidencing the termination of its liens and security interests in
the assets of Borrower or a subordination agreement in form and substance
satisfactory to FINOVA in its sole discretion;
(c) Charter Documents. FINOVA shall have received copies of Borrower's
By-laws and Articles or Certificate of Incorporation, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
(d) Good Standing. FINOVA shall have received a certificate of
corporate status with respect to Borrower, dated within ten (10) days of the
Closing Date, by the Secretary of State of the state of incorporation of
Borrower, which certificate shall indicate that Borrower is in good standing in
such state;
(e) Foreign Qualification. FINOVA shall have received certificates of
corporate status with respect to Borrower and each other Loan Party, each dated
within ten (10) days of the Closing Date, issued by the Secretary of State of
each state in which such party's failure to be duly qualified or licensed would
have a material adverse effect on its financial condition or assets, indicating
that such party is in good standing;
(f) Authorizing Resolutions and Incumbency. FINOVA shall have received
a certificate from the Secretary of Borrower attesting to (i) the adoption of
resolutions of Borrower's Board of Directors, and shareholders or members if
necessary, authorizing the borrowing of money from FINOVA and execution and
delivery of this Agreement and the other Loan Documents to which Borrower is a
party, and authorizing specific officers of Borrower to execute same, and (ii)
the authenticity of original specimen signatures of such officers;
(g) Insurance. FINOVA shall have received the insurance certificates
and certified copies of policies required by Section 3.4 hereof, in form and
substance satisfactory to FINOVA and its counsel, together with an additional
insured endorsement in favor of FINOVA with respect to all liability policies
and a lender's loss payable endorsement in favor of FINOVA with respect to all
casualty and business interruption policies, each in form and substance
acceptable to FINOVA and its counsel;
(h) Title Insurance. FINOVA shall have received binding commitments to
issue such title insurance with respect to Collateral or security for Guaranties
which is comprised of real property as it shall determine;
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(i) Searches; Certificates of Title. FINOVA shall have received
searches reflecting the filing of its financing statements and fixture filings
in such jurisdictions as it shall determine, and shall have received
certificates of title with respect to the Collateral which shall have been duly
executed in a manner sufficient to perfect all of the security interests granted
to FINOVA;
(j) Landlord, Bailee and Mortgagee Waivers. FINOVA shall have received
landlord, bailee and/or mortgagee waivers from the lessors, bailees and/or
mortgagees of all locations where any Collateral is located;
(k) Fees. Borrower shall have paid all fees payable by it on the
Closing Date pursuant to this Agreement;
(l) Opinion of Counsel. FINOVA shall have received an opinion of
Borrower's counsel covering such matters as FINOVA shall determine in its sole
discretion;
(m) Officer Certificate. FINOVA shall have received a certificate of
the President and the Chief Financial Officer or similar official of Borrower,
attesting to the accuracy of each of the representations and warranties of
Borrower set forth in this Agreement and the fulfillment of all conditions
precedent to the initial advance hereunder;
(n) Solvency Certificate. If requested, FINOVA shall have received a
signed certificate of the Borrower's duly elected Chief Financial Officer
concerning the solvency and financial condition of Borrower, on FINOVA's
standard form;
(o) Blocked Account. The Blocked Account referred to in Section 2.10(c)
hereof shall have been established to the satisfaction of FINOVA in its sole
discretion;
(p) Environmental Certificate. FINOVA shall have received an
Environmental Certificate from Borrower, in form and substance satisfactory to
FINOVA in its permitted discretion, with respect to all locations of Collateral;
(q) Search and References. FINOVA shall have received and approved the
results of UCC, tax lien, litigation, judgment, and bankruptcy searches
regarding Buyer, Borrower, Seller, Investors and such members of the senior
management of Seller as shall remain with Borrower, and shall have received
satisfactory customer, vendor and credit reference checks on Seller.
(r) Landlord's Consent. FINOVA shall require that Seller enter in a
Landlord's Consent Agreement and Estoppel Certificate, in form and substance
satisfactory to FINOVA to cure defaults under such lease and continue in
occupancy of such premises in the event of defaults by Borrower pursuant either
to the Lease or the Loan Documents.
(s) No Material Adverse Changes. Prior to the Closing Date, there shall
have occurred no material adverse change in the financial condition of Seller or
Borrower, or in the condition of the assets of Seller, from that shown on the
draft financial statements for Seller dated on the date set forth in the
Schedule. At the closing, Borrower shall deliver to FINOVA an officer's
certification confirming that Borrower is unaware of the existence of any such
material adverse change in Seller's financial condition.
(t) Material Agreements. FINOVA shall have received, reviewed and
approved all material agreements to which Borrower shall be a party, including
any such agreements of Seller which Borrower shall assume.
(u) Projections. Borrower shall submit cash flow projections and pro
forma balance sheet with adjusting entries (i) showing that the proposed
financing will provide sufficient funds for the Borrower's projected working
capital needs, and (ii) showing: (1) that the Borrower will have reasonably
sufficient capital for the conduct of its business following the initial
funding, and (2) that the Borrower will not incur debts beyond its ability to
pay such debts as they mature.
(v) Opinions. To the extent any Person other than Borrower shall be
parties to the Loan Documents, FINOVA reserves the right to require satisfactory
opinions of counsel for each such Person concerning the proper organization of
such Person and the due authorization, execution, delivery, enforceability,
validity and binding effect of the Loan Documents to which such Person is a
party. Each such opinion of counsel shall confirm, to the satisfaction of
FINOVA, that the opinion is being delivered to FINOVA at the instruction of the
party represented by such counsel, that FINOVA is entitled to rely on such
opinion and that for purposes of such reliance, FINOVA is deemed to be in
privity with the opining counsel.
(w) ADA Compliance. If necessary, as of the Closing Date, Borrower
shall be in compliance with the Americans with Disabilities Act of 1990 ("ADA"),
or, if any renovations of Borrower's facilities or modifications of Borrower's
employment practices shall be required to bring them into compliance with the
ADA, review and approval by FINOVA of Borrower's proposed plan to come
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into such compliance. Borrower shall deliver representations and warranties to
FINOVA concerning Borrower's compliance with the ADA, and no evidence shall have
come to the attention of FINOVA indicating that Borrower is not in compliance
with the ADA (except to the extent that FINOVA has reviewed and approved
Borrower's plan to come into compliance).
(x) Schedule Conditions. Borrower shall have complied with all
additional conditions precedent as set forth in the Schedule attached hereto.
(y) Other Matters. All other documents and legal matters in connection
with the transactions contemplated by this Agreement shall have been delivered,
executed and recorded and shall be in form and substance satisfactory to FINOVA
and its counsel including, without limitation, each of the items listed on the
Closing Checklist attached as Exhibit 4.1 hereto.
4.2 Subsequent Advances. The obligation of FINOVA to make any advance
or issue or cause any Letter of Credit to be issued hereunder (including the
initial advance or Letter of Credit) shall be subject to the further conditions
precedent that, on and as of the date of such advance or Letter of Credit
issuance: (a) the representations and warranties of Borrower set forth in this
Agreement shall be accurate, before and after giving effect to such advance or
issuance and to the application of any proceeds thereof; (b) no Event of Default
and no event which, with notice or passage of time or both, would constitute an
Event of Default has occurred and is continuing, or would result from such
advance or issuance or from the application of any proceeds thereof; (c) no
material adverse change has occurred in the Borrower's business, operations,
financial condition, in the condition of the Collateral or other assets of
Borrower or in the prospect of repayment of the Obligations; and (d) FINOVA
shall have received such other approvals, opinions or documents as FINOVA shall
reasonably request.
5. REPRESENTATIONS AND WARRANTIES.
Borrower represents and warrants that:
5.1 Due Organization. It is a corporation duly organized, validly
existing and in good standing under the laws of the State set forth on the
Schedule, is qualified and authorized to do business and is in good standing in
all states in which such qualification and good standing are necessary in order
for it to conduct its business and own its property, and has all requisite power
and authority to conduct its business as presently conducted, to own its
property and to execute and deliver each of the Loan Documents to which it is a
party and perform all of its Obligations thereunder, and has not taken any steps
to windup, dissolve or otherwise liquidate its assets;
5.2 Other Names. Borrower has not, during the preceding five (5) years,
been known by or used any other corporate or fictitious name except as set forth
on the Schedule, nor has Borrower been the surviving corporation of a merger or
consolidation or acquired all or substantially all of the assets of any Person
during such time;
5.3 Due Authorization. The execution, delivery and performance by
Borrower of the Loan Documents to which it is a party have been authorized by
all necessary corporate action and do not and shall not constitute a violation
of any applicable law or of Borrower's Articles or Certificate of Incorporation
or By-Laws or any other document, agreement or instrument to which Borrower is a
party or by which Borrower or its assets are bound;
5.4 Binding Obligation. Each of the Loan Documents to which Borrower is
a party is the legal, valid and binding obligation of Borrower enforceable
against Borrower in accordance with its terms;
5.5 Intangible Property. Borrower possesses adequate assets, licenses,
patents, patent applications, copyrights, trademarks, trademark applications and
trade names for the present and planned future conduct of its business without
any known conflict with the rights of others, and each is valid and has been
duly registered or filed with the appropriate governmental authorities; each of
Borrower's patents, patent applications, copyrights, trademarks and trademark
applications which have been registered or filed with any governmental authority
(including the U.S. Patent and Trademark Office and the Library of Congress) are
listed by name, date and filing number on the Schedule;
5.6 Capital. Borrower has capital sufficient to conduct its business,
is able to pay its debts as they mature, and owns property having a fair salable
value greater than the amount required to pay all of its debts (including
contingent debts);
5.7 Material Litigation. Borrower has no pending or overtly threatened
litigation, actions or proceedings which would materially and adversely affect
its business, assets, operations, prospects or condition, financial or
otherwise, or the Collateral or any of FINOVA's interests therein;
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5.8 Title; Security Interests of FINOVA. Borrower has good,
indefeasible and merchantable title to the Collateral and, upon the execution
and delivery of the Loan Documents, the filing of UCC-1 Financing Statements,
delivery of the certificate(s) evidencing any pledged securities, the filing of
any collateral assignments or security agreements regarding Borrower,
Trademarks, Copyrights, Licenses and/or Patents, if any, with the appropriate
governmental offices and the recording of any mortgages or deeds of trust with
respect to real property, in each case in the appropriate offices, this
Agreement and such documents shall create valid and perfected first priority
liens in the Collateral, subject only to Permitted Encumbrances;
5.9 Restrictive Agreements; Labor Contracts. Borrower is not a party or
subject to any contract or subject to any charge, corporate restriction,
judgment, decree or order materially and adversely affecting its business,
assets, operations, prospects or condition, financial or otherwise, or which
restricts its right or ability to incur Indebtedness, and it is not party to any
labor dispute. In addition, no labor contract is scheduled to expire during the
Initial Term of this Agreement, except as disclosed to FINOVA in writing prior
to the date hereof;
5.10 Laws. Borrower is not in violation of any applicable statute,
regulation, ordinance or any order of any court, tribunal or governmental
agency, in any respect materially and adversely affecting the Collateral or its
business, assets, operations, prospects or condition, financial or otherwise;
5.11 Consents. Borrower has obtained or caused to be obtained or issued
any required consent of a governmental agency or other Person in connection with
the financing contemplated hereby;
5.12 Defaults. Borrower is not in default with respect to any note,
indenture, loan agreement, mortgage, lease, deed or other agreement to which it
is a party or by which it or its assets are bound, nor has any event occurred
which, with the giving of notice or the lapse of time, or both, would cause such
a default;
5.13 Financial Condition. The Prepared Financials fairly present
Borrower's financial condition and results of operations and those of such other
Persons described therein as of the date thereof in accordance with GAAP; there
are no material omissions from the Prepared Financials or other facts or
circumstances not reflected in the Prepared Financials; and there has been no
material and adverse change in such financial condition or operations since the
date of the initial Prepared Financials delivered to FINOVA hereunder;
5.14 ERISA. None of Borrower, any ERISA Affiliate, or any Plan is or
has been in violation of any of the provisions of ERISA, any of the
qualification requirements of IRC Section 401(a) or any of the published
interpretations thereunder, nor has Borrower or any ERISA Affiliate received any
notice to such effect. No notice of intent to terminate a Plan has been filed
under Section 4041 of ERISA, nor has any Plan been terminated under ERISA. The
PBGC has not instituted proceedings to terminate, or appointed a trustee to
administer, a Plan. No lien upon the assets of Borrower has arisen with respect
to a Plan. No prohibited transaction or Reportable Event has occurred with
respect to a Plan. Neither Borrower nor any ERISA Affiliate has incurred any
withdrawal liability with respect to any Multiemployer Plan. Borrower and each
ERISA Affiliate have made all contributions required to be made by them to any
Plan or Multiemployer Plan when due. There is no accumulated funding deficiency
in any Plan, whether or not waived;
5.15 Taxes. Borrower has filed all tax returns and such other reports
as it is required by law to file and has paid or made adequate provision for the
payment on or prior to the date when due of all taxes, assessments and similar
charges that are due and payable;
5.16 Locations; Federal Tax ID No. Borrower's chief executive office
and the offices and locations where it keeps the Collateral (except for
Inventory in transit) are at the locations set forth on the Schedule, except to
the extent that such locations may have been changed after notice to FINOVA in
accordance with Section 6.4 hereof; Borrower's federal tax identification number
is as shown on the Schedule;
5.17 Business Relationships. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change in,
the business relationship between Borrower and any customer or any group of
customers whose purchases individually or in the aggregate are material to the
business of Borrower, or with any material supplier, and there exists no present
condition or state of facts or circumstances which would materially and
adversely affect Borrower or prevent Borrower from conducting such business
after the consummation of the transactions contemplated by this Agreement in
substantially the same manner in which it has heretofore been conducted; and
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5.18 Year 2000. Borrower has taken all action necessary to assure that
there will be no material adverse change to Borrower's business by reason of the
advent of the year 2000, including, without limitation, that all computer-based
systems, embedded microchips and other processing capabilities effectively
recognize and process dates after April 1, 1999.
5.19 Reaffirmations. Each request for a loan made by Borrower pursuant
to this Agreement shall constitute (i) an automatic representation and warranty
by Borrower to FINOVA that there does not then exist any Event of Default and
(ii) a reaffirmation as of the date of said request of all of the
representations and warranties of Borrower contained in this Agreement and the
other Loan Documents.
6. COVENANTS.
6.1 Affirmative Covenants. Borrower covenants that, so long as any
Obligation remains outstanding and this Agreement is in effect, it shall:
6.1.1 Taxes. File all tax returns and pay or make adequate
provision for the payment of all taxes, assessments and other charges on or
prior to the date when due;
6.1.2 Notice of Litigation. Promptly notify FINOVA in writing of
any litigation, suit or administrative proceeding which may materially and
adversely affect the Collateral or Borrower's business, assets, operations,
prospects or condition, financial or otherwise, whether or not the claim is
covered by insurance;
6.1.3 ERISA. Notify FINOVA in writing (i) promptly upon the
occurrence of any event described in Paragraph 4043 of ERISA, other than a
termination, partial termination or merger of a Plan or a transfer of a Plan's
assets and (ii) prior to any termination, partial termination or merger of a
Plan or a transfer of a Plan's assets;
6.1.4 Change in Location. Notify FINOVA in writing forty-five (45)
days prior to any change in the location of Borrower's chief executive office or
the location of any Collateral, or Borrower's opening or closing of any other
place of business;
6.1.5 Corporate Existence. Maintain its corporate existence and
its qualification to do business and good standing in all states necessary for
the conduct of its business and the ownership of its property and maintain
adequate assets, licenses, patents, copyrights, trademarks and trade names for
the conduct of its business;
6.1.6 Labor Disputes. Promptly notify FINOVA in writing of any
labor dispute to which Borrower is or may become subject and the expiration of
any labor contract to which Borrower is a party or bound;
6.1.7 Violations of Law. Promptly notify FINOVA in writing of any
violation of any law, statute, regulation or ordinance of any governmental
entity, or of any agency thereof, applicable to Borrower which may materially
and adversely affect the Collateral or Borrower's business, assets, prospects,
operations or condition, financial or otherwise;
6.1.8 Defaults. Notify FINOVA in writing within five (5) Business
Days of Borrower's default under any note, indenture, loan agreement, mortgage,
lease or other agreement to which Borrower is a party or by which Borrower is
bound, or of any other default under any Indebtedness of Borrower;
6.1.9 Capital Expenditures. Promptly notify FINOVA in writing of
the making of any Capital Expenditure materially affecting Borrower's business,
assets, prospects, operations or condition, financial or otherwise, except to
the extent permitted in the Schedule;
6.1.10 Books and Records. Keep adequate records and books of
account with respect to its business activities in which proper entries are made
in accordance with GAAP, reflecting all of its financial transactions;
6.1.11 Leases; Warehouse Agreements. Provide FINOVA with (i)
copies of all agreements between Borrower and any landlord, warehouseman or
bailee which owns any premises at which any Collateral may, from time to time,
be located (whether for processing, storage or otherwise), and (ii) without
limiting the landlord, bailee and/or mortgagee waivers to be provided pursuant
to Section 4.1(j) hereof, additional landlord, bailee and/or mortgagee waivers
in form acceptable to FINOVA with respect to all locations where any Collateral
is hereafter located;
6.1.12 Additional Documents. At FINOVA's request, promptly execute
or cause to be executed and delivered to FINOVA any and all documents,
instruments or agreements deemed necessary by FINOVA to facilitate the
collection of the Obligations or the Collateral or otherwise to give effect to
or carry out the terms or intent of this Agreement or any of the other Loan
Documents. Without limiting the generality of the foregoing, if any of the
Receivables with a face value in excess of $1,000 arises out of a contract with
the United
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States of America or any department, agency, subdivision or instrumentality
thereof, Borrower shall promptly notify FINOVA of such fact in writing and shall
execute any instruments and take any other action required or requested by
FINOVA to comply with the provisions of the Federal Assignment of Claims Act;
and
6.1.13 Financial Covenants. Comply with the financial covenants
set forth on the Schedule.
6.2 Negative Covenants. Without FINOVA's prior written consent, which
consent FINOVA may withhold in its permitted discretion, so long as any
Obligation remains outstanding and this Agreement is in effect, Borrower shall
not:
6.2.1 Mergers. Merge or consolidate with or acquire any other
Person, or make any other material change in its capital structure or in its
business or operations which might adversely affect the repayment of the
Obligations;
6.2.2 Loans. Make advances, loans or extensions of credit to, or
invest in, any Person, except for loans or cash advances to employees which are
permitted in the Schedule;
6.2.3 Dividends. Declare or pay cash dividends upon any of its
stock or distribute any of its property or redeem, retire, purchase or acquire
directly or indirectly any of its stock;
6.2.4 Adverse Transactions. Enter into any transaction which
materially and adversely affects the Collateral or its ability to repay the
Obligations in full as and when due;
6.2.5 Indebtedness of Others. Guarantee or become directly or
contingently liable for the Indebtedness of any Person, except by endorsement of
instruments for deposit and except for the existing guarantees made by Borrower
prior to the date hereof, if any, which are set forth in the Schedule;
6.2.6 Repurchase. Make a sale to any customer on a bill-and-hold,
guaranteed sale, sale and return, sale on approval, consignment, or any other
repurchase or return basis (however, this shall not disallow customer returns in
the ordinary course of Borrower's business consistent with past practices);
6.2.7 Name. Use any corporate or fictitious name other than its
corporate name as set forth in its Articles or Certificate of Incorporation on
the date hereof or as set forth on the Schedule;
6.2.8 Prepayment. Prepay any Indebtedness other than trade
payables and other than the Obligations;
6.2.9 Capital Expenditure. Make or incur any Capital Expenditure
if, after giving effect thereto, the aggregate amount of all Capital
Expenditures by Borrower in any fiscal year would exceed the amount set forth on
the Schedule;
6.2.10 Compensation. Pay total compensation, including salaries,
withdrawals, fees, bonuses, commissions, drawing accounts and other payments,
whether directly or indirectly, in money or otherwise, during any fiscal year to
all of Borrower's executives, officers and directors (or any relative thereof)
in an amount in excess of the amount set forth on the Schedule plus bonuses in
accordance with the bonus plan attached hereto as exhibit 6.2.10 or any
subsequent replacement plan provided such replacement bonus plan's provisions
are materially consistent with such prior plan;
6.2.11 Indebtedness. Create, incur, assume or permit to exist any
Indebtedness (including Indebtedness in connection with Capital Leases) in
excess of the amount set forth on the Schedule, other than (i) the Obligations,
(ii) trade payables and other contractual obligations to suppliers and customers
incurred in the ordinary course of business, and (iii) other Indebtedness
existing on the date of this Agreement and reflected in the Prepared Financials
(except Indebtedness paid on the date of this Agreement from proceeds of the
initial advances hereunder), and (iv) Subordinated Debt;
6.2.12 Affiliate Transactions. Except as set forth below, sell,
transfer, distribute or pay any money or property to any Affiliate, or invest in
(by capital contribution or otherwise) or purchase or repurchase any stock or
Indebtedness, or any property, of any Affiliate, or become liable on any
guaranty of the indebtedness, dividends or other obligations of any Affiliate.
Notwithstanding the foregoing, Borrower may pay compensation permitted by
Section 6.2.10 to employees who are Affiliates and, if no Event of Default has
occurred, Borrower may (i) engage in transactions with Affiliates in the normal
course of business, in amounts and upon terms which are fully disclosed to
FINOVA and which are no less favorable to Borrower than would be obtainable in a
comparable arm's length transaction with a Person who is not an Affiliate, and
(ii) make payments to a Subordinating Creditor that is an Affiliate, subject to
and only to the extent expressly permitted in the Subordination Agreement
between such Subordinating Creditor and FINOVA;
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6.2.13 Nature of Business. Enter into any new business or make any
material change in any of Borrower's business objectives, purposes or
operations;
6.2.14 FINOVA's Name. Use the name of FINOVA in connection with
any of Borrower's business or activities, except in connection with internal
business matters or as required in dealings with governmental agencies and
financial institutions or with trade creditors of Borrower, solely for credit
reference purposes; or
6.2.15 Margin Security. Borrower will not (and has not in the
past) engaged principally, or as one of its important activities, in the
business of extending credit for the purpose of purchasing or carrying margin
stock (within the meaning of Regulation G or Regulation U issued by the Board of
Governors of the Federal Reserve System), and no proceeds of any Loan or other
advance will be used to purchase or carry any margin stock or to extend credit
to others for the purpose of purchasing or carrying any margin stock, or in any
manner which might cause such Loan or other advance or the application of such
proceeds to violate (or require any regulatory filing under) Regulation G,
Regulation T, Regulation U, Regulation X or any other regulation of the Board of
Governors of the Federal Reserve System, in each case as in effect on the date
or dates of such Loan or other advance and such use of proceeds. Further, no
proceeds of any Loan or other advance will be used to acquire any security of a
class which is registered pursuant to Section 12 of the Securities Exchange Act
of 1934.
6.2.16 Real Property. Purchase or acquire any real property
without FINOVA's prior written consent, a condition of which consent shall
include delivery of appropriate environmental reports and analysis, in form and
substance satisfactory to FINOVA and its counsel.
6.2.17 Year 2000. Borrower shall take all action necessary to
assure that there will be no material adverse change to Borrower's business by
reason of the advent of the year 2000, including, without limitation, that all
computer-based systems, embedded microchips and other processing capabilities
effectively recognize and process dates after April 1, 1999. At Lender's
request, Borrower shall provide to Lender assurance reasonably acceptable to
Lender that Borrower's computer-based systems, embedded microchips and other
processing capabilities are year 2000 compatible.
7. DEFAULT AND REMEDIES.
7.1 Events of Default. Any one or more of the following events shall
constitute an Event of Default under this Agreement:
(a) Borrower fails to pay when due and payable any portion of the
Obligations at stated maturity, upon acceleration or otherwise and such failure
is not cured within three (3) Business Days;
(b) Borrower or any other Loan Party fails or neglects to perform,
keep, or observe any Obligation including, but not limited to, any term,
provision, condition, covenant or agreement contained in any Loan Document to
which Borrower or such other Loan Party is a party;
(c) Any material adverse change occurs in Borrower's business, assets,
operations, prospects or condition, financial or otherwise;
(d) The prospect of repayment of any portion of the Obligations or the
value or priority of FINOVA's security interest in the Collateral is materially
impaired;
(e) Any portion of Borrower's assets is seized, attached, subjected to
a writ or distress warrant, is levied upon or comes into the possession of any
judicial officer;
(f) Borrower shall generally not pay its debts as they become due or
shall enter into any agreement (whether written or oral), or offer to enter into
any agreement, with all or a significant number of its creditors regarding any
moratorium or other indulgence with respect to its debts or the participation of
such creditors or their representatives in the supervision, management or
control of the business of Borrower;
(g) Any bankruptcy or other insolvency proceeding is commenced by
Borrower, or any such proceeding is commenced against Borrower and remains
undischarged or unstayed for forty-five (45) days;
(h) Any notice of lien, levy or assessment is filed of record with
respect to any of Borrower's assets;
(i) Any judgments are entered against Borrower in an aggregate amount
exceeding $25,000 in any fiscal year which are not stayed or bonded;
(j) Any default shall occur under (i) any material agreement between
Borrower and any third party including, without limitation, any default which
would result in a right by such third party to accelerate the maturity of any
Indebtedness of Borrower to such third party, or (ii) any Subordinated Debt;
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(k) Any representation or warranty made or deemed to be made by
Borrower, any Affiliate or any other Loan Party in any Loan Document or any
other statement, document or report made or delivered to FINOVA in connection
therewith shall prove to have been misleading in any material respect;
(l) Any Guarantor dies, terminates or attempts to terminate its
Guaranty or any security therefor or becomes subject to any bankruptcy or other
insolvency proceeding;
(m) Any Prohibited Transaction or Reportable Event shall occur with
respect to a Plan which could have a material adverse effect on the financial
condition of Borrower; any lien upon the assets of Borrower in connection with
any Plan shall arise; Borrower or any of its ERISA Affiliates shall fail to make
full payment when due of all amounts which Borrower or any of its ERISA
Affiliates may be required to pay to any Plan or any Multiemployer Plan as one
or more contributions thereto; Borrower or any of its ERISA Affiliates creates
or permits the creation of any accumulated funding deficiency, whether or not
waived; or
(n) Any transfer of more than ten percent (10%) of the issued and
outstanding shares of common stock or other evidence of ownership of Borrower.
NOTWITHSTANDING ANYTHING TO THE CONTRARY HEREIN, FINOVA RESERVES THE
RIGHT TO CEASE MAKING ANY LOANS DURING ANY CURE PERIOD STATED ABOVE, AND
THEREAFTER IF AN EVENT OF DEFAULT HAS OCCURRED.
7.2 Remedies. Upon the occurrence of an Event of Default, FINOVA may,
at its option and in its sole discretion and in addition to all of its other
rights under the Loan Documents, cease making Loans, terminate this Agreement
and/or declare all of the Obligations to be immediately payable in full.
Borrower agrees that FINOVA shall also have all of its rights and remedies under
applicable law, including, without limitation, the default rights and remedies
of a secured party under the Code, and upon the occurrence of an Event of
Default Borrower hereby consents to the appointment of a receiver by FINOVA in
any action initiated by FINOVA pursuant to this Agreement and to the
jurisdiction and venue set forth in Section 9.25 hereof, and Borrower waives
notice and posting of a bond in connection therewith. Further, FINOVA may, at
any time, take possession of the Collateral and keep it on Borrower's premises,
at no cost to FINOVA, or remove any part of it to such other place(s) as FINOVA
may desire, or Borrower shall, upon FINOVA's demand, at Borrower's sole cost,
assemble the Collateral and make it available to FINOVA at a place reasonably
convenient to FINOVA. FINOVA may sell and deliver any Collateral at public or
private sales, for cash, upon credit or otherwise, at such prices and upon such
terms as FINOVA deems advisable, at FINOVA's discretion, and may, if FINOVA
deems it reasonable, postpone or adjourn any sale of the Collateral by an
announcement at the time and place of sale or of such postponed or adjourned
sale without giving a new notice of sale. Borrower agrees that FINOVA has no
obligation to preserve rights to the Collateral or marshall any Collateral for
the benefit of any Person. FINOVA is hereby granted a license or other right to
use, without charge, Borrower's labels, patents, copyrights, name, trade
secrets, trade names, trademarks and advertising matter, or any similar
property, in completing production, advertising or selling any Collateral and
Borrower's rights under all licenses and all franchise agreements shall inure to
FINOVA's benefit. Any requirement of reasonable notice shall be met if such
notice is mailed postage prepaid to Borrower at its address set forth in the
heading to this Agreement at least five (5) days before sale or other
disposition. The proceeds of sale shall be applied, first, to all attorneys fees
and other expenses of sale, and second, to the Obligations in such order as
FINOVA shall elect, in its sole discretion. FINOVA shall return any excess to
Borrower and Borrower shall remain liable for any deficiency to the fullest
extent permitted by law.
7.3 Standards for Determining Commercial Reasonableness. Borrower and
FINOVA agree that the following conduct by FINOVA with respect to any
disposition of Collateral shall conclusively be deemed commercially reasonable
(but other conduct by FINOVA, including, but not limited to, FINOVA's use in its
sole discretion of other or different times, places and manners of noticing and
conducting any disposition of Collateral shall not be deemed unreasonable): Any
public or private disposition: (i) as to which on no later than the fifth
calendar day prior thereto written notice thereof is mailed or personally
delivered to Borrower and, with respect to any public disposition, on no later
than the fifth calendar day prior thereto notice thereof describing in general
nonspecific terms, the Collateral to be disposed of is published once in a
newspaper of general circulation in the county where the sale is to be conducted
(provided that no notice of any public or private disposition need be given to
the Borrower or published if the Collateral is perishable or threatens to
decline speedily in value or is of a type
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customarily sold on a recognized market); (ii) which is conducted at any place
designated by FINOVA, with or without the Collateral being present; and (iii)
which commences at any time between 8:00 a.m. and 5:00 p.m. Without limiting the
generality of the foregoing, Borrower expressly agrees that, with respect to any
disposition of accounts, instruments and general intangibles, it shall be
commercially reasonable for FINOVA to direct any prospective purchaser thereof
to ascertain directly from Borrower any and all information concerning the same,
including, but not limited to, the terms of payment, aging and delinquency, if
any, the financial condition of any obligor or account debtor thereon or
guarantor thereof, and any collateral therefor.
8. EXPENSES AND INDEMNITIES
8.1 Expenses. Borrower covenants that, so long as any Obligation
remains outstanding and this Agreement remains in effect, it shall promptly
reimburse FINOVA for all costs, fees and reasonable expenses incurred by FINOVA
in connection with the negotiation, preparation, execution, delivery,
administration and enforcement of each of the Loan Documents, including, but not
limited to, the attorneys' and paralegals' fees of in-house and outside counsel,
expert witness fees, lien, title search and insurance fees, appraisal fees, all
charges and expenses incurred in connection with any and all environmental
reports and environmental remediation activities, and all other costs, expenses,
taxes and filing or recording fees payable in connection with the transactions
contemplated by this Agreement, including without limitation all such costs,
fees and expenses as FINOVA shall incur or for which FINOVA shall become
obligated in connection with (i) any inspection or verification of the
Collateral, (ii) any proceeding relating to the Loan Documents or the
Collateral, (iii) actions taken with respect to the Collateral and FINOVA's
security interest therein, including, without limitation, the defense or
prosecution of any action involving FINOVA and Borrower or any third party, (iv)
enforcement of any of FINOVA's rights and remedies with respect to the
Obligations or Collateral and (v) consultation with FINOVA's attorneys and
participation in any workout, bankruptcy or other insolvency or other proceeding
involving any Loan Party or any Affiliate, whether or not suit is filed or the
issues are peculiar to federal bankruptcy or state insolvency laws. Borrower
shall also pay all FINOVA charges in connection with bank wire transfers,
forwarding of loan proceeds, deposits of checks and other items of payment,
returned checks, establishment and maintenance of lockboxes and other Blocked
Accounts, and all other bank and administrative matters, in accordance with
FINOVA's schedule of bank and administrative fees and charges in effect from
time to time.
8.2 Environmental Matters.
(a) Definitions. The following definitions apply to the provisions of
this Section 8.2: (a) the term "Applicable Law" shall include, but shall not be
limited to, all local, state and/or federal laws, rules, regulations or
ordinances, whether currently in existence or hereafter enacted, which govern,
to the extent applicable to the Property or to Borrower, (i) the existence,
cleanup and/or remedy of contamination on real property; (ii) the protection of
the environment from soil, air or water pollution, or from spilled, deposited or
otherwise emplaced contamination; (iii) the emission or discharge of hazardous
substances into the environment; (iv) the control of hazardous wastes; or (v)
the use, generation, transport, treatment, removal or recovery of Hazardous
Substances; (b) the term "Hazardous Substance" shall mean (i) any oil, flammable
substance, explosives, radioactive materials, hazardous wastes or substances,
toxic wastes or substances or any other wastes, materials or pollutants which
either pose a hazard to the Property or to persons on or about the Property or
cause the Property to be in violation of any Applicable Law; (ii) asbestos in
any form which is or could become friable, urea formaldehyde foam insulation,
transformers or other equipment which contain dielectric fluid containing levels
of polychlorinated biphenyls, or radon gas; (iii) any chemical, material or
substance defined as or included in the definition of "hazardous substances,"
"waste," "hazardous wastes," "hazardous materials," "extremely hazardous waste,"
"restricted hazardous waste," or "toxic substances" or words of similar import
under any Applicable Law; (iv) any other chemical, material or substance,
exposure to which is prohibited, limited or regulated by any governmental
authority which may or could pose a hazard to the health or safety of the
occupants of the Property or the owners and/or occupants of property adjacent to
or surrounding the Property, or any other person coming upon the Property or
adjacent property; and (v) any other chemical, materials or substance which may
or could pose a hazard to the environment; and (c) the term "Property" shall
mean all real property, wherever located, in which Borrower or any Affiliate of
Borrower has any right, title or interest, whether now existing or hereafter
arising, and including, without limitation, as owner, lessor or lessee.
(b) Covenants and Representations. (1) Borrower represents and warrants
that there have not been during the period of Borrower's possession of any
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interest in the Property and, to the best of its knowledge after reasonable
inquiry, there have not been at any other times, any activities on the Property
involving, directly or indirectly, the use, generation, treatment, storage or
disposal of any Hazardous Substances except in compliance with Applicable Law
(i) under, on or in the land included in the Property, whether contained in
soil, tanks, sumps, ponds, lagoons, barrels, cans or other containments,
structures or equipment, (ii) incorporated in the buildings, structures or
improvements included in the Property, including any building material
containing asbestos, or (iii) used in connection with any operations on or in
the Property. (2) Without limiting the generality of the foregoing and to the
extent not included within the scope of this Section 8.2(b), Borrower represents
and warrants that it is in full compliance with Applicable Law and has received
no notice from any Person or any governmental agency or other entity of any
violation by Borrower or its Affiliates of any Applicable Law. (3) Borrower
shall be solely responsible for and agrees to indemnify FINOVA, protect and
defend FINOVA with counsel reasonably acceptable to FINOVA, and hold FINOVA
harmless from and against any claims, actions, administrative proceedings,
judgments, damages, punitive damages, penalties, fines, costs, liabilities
(including sums paid in settlements of claims), interest or losses, attorneys'
fees (including any fees and expenses incurred in enforcing this indemnity),
consultant fees, expert fees, and other out-of-pocket costs or expenses actually
incurred by FINOVA (collectively, the "Environmental Costs"), that may, at any
time or from time to time, arise directly or indirectly from or in connection
with: (i) the presence, suspected presence, release or suspected release of any
Hazardous Substance whether into the air, soil, surface water or groundwater of
or at the Property, or any other violation of Applicable Law, or (ii) any breach
of the foregoing representations and covenants; except to the extent any of the
foregoing result from the actions of FINOVA, its employees, agents and
representatives. All Environmental Costs incurred or advanced by FINOVA shall be
deemed to be made by FINOVA in good faith and shall constitute Obligations
hereunder.
9. MISCELLANEOUS.
9.1 Examination of Records; Financial Reporting.
(a) Examinations. FINOVA shall at all reasonable times have full access
to and the right to examine, audit, make abstracts and copies from and inspect
Borrower's records, files, books of account and all other documents, instruments
and agreements relating to the Collateral and the right to check, test and
appraise the Collateral. Borrower shall deliver to FINOVA any instrument
necessary for FINOVA to obtain records from any service bureau maintaining
records for Borrower. All instruments and certificates prepared by Borrower
showing the value of any of the Collateral shall be accompanied, upon FINOVA's
request, by copies of related purchase orders and invoices. FINOVA may, at any
time after the occurrence of an Event of Default, remove from Borrower's
premises Borrower's books and records (or copies thereof) or require Borrower to
deliver such books and records or copies to FINOVA. FINOVA may, without expense
to FINOVA, use such of Borrower's personnel, supplies and premises as may be
reasonably necessary for maintaining or enforcing FINOVA's security interest.
(b) Reporting Requirements. Borrower shall furnish FINOVA, upon
request, such information and statements as FINOVA shall reasonably request from
time to time regarding Borrower's business affairs, financial condition and the
results of its operations. Without limiting the generality of the foregoing,
Borrower shall provide FINOVA with: (i) FINOVA's standard form collateral and
loan report, monthly (or more frequently if requested by FINOVA), unless there
are any Revolving Credit Loans outstanding in which event weekly or upon the
occurrence of a Borrowing Event in which event upon a daily basis, and upon
FINOVA's request, copies of sales journals, cash receipt journals, and deposit
slips; (ii) upon FINOVA's request, copies of sales invoices, customer statements
and credit memoranda issued, remittance advices and reports; (iii) copies of
shipping and delivery documents, upon request; (iv) on or prior to the date set
forth on the Schedule, monthly agings (aged from invoice date) and
reconciliations of Receivables (with listings of concentrated accounts),
payables reports, inventory reports, compliance certificates and unaudited
financial statements with respect to the prior month prepared on a basis
consistent with such statements prepared in prior months and otherwise in
accordance with GAAP; (v) audited annual consolidated and consolidating
financial statements, prepared in accordance with GAAP applied on a basis
consistent with the most recent Prepared Financials provided to FINOVA by
Borrower, including balance sheets, income and cash flow statements, accompanied
by the unqualified report thereon of independent certified public accountants
acceptable to FINOVA, as soon as available, and in any event, within ninety (90)
days after the end of each of Borrower's fiscal years; and (vi) such
certificates relating to the foregoing as FINOVA may request, including, without
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limitation, a monthly certificate from the president and the chief financial
officer of Borrower showing Borrower's compliance with each of the financial
covenants set forth in this Agreement, and stating whether any Event of Default
has occurred or event which, with giving of notice or the passage of time, or
both, would constitute an Event of Default, and if so, the steps being taken to
prevent or cure such Event of Default. All reports or financial statements
submitted by Borrower shall be in reasonable detail and shall be certified by
the principal financial officer of Borrower as being complete and correct.
(c) Guarantor's Financial Statements and Tax Returns. Borrower shall
cause each of the Guarantors to deliver to FINOVA such Guarantor's annual
financial statement (in form acceptable to FINOVA) and a copy of such
Guarantor's federal income tax return with respect to the corresponding year, in
each case on the date when such tax return is due or, if earlier, on the date
when available.
9.2 Term; Termination.
(a) Term. The Initial Term of the Revolving Credit Loans facility and
the obligation of FINOVA to made advances with respect thereto in accordance
with this Agreement shall be as set forth on the Schedule, and the Revolving
Credit Loans facility and this Agreement shall be automatically renewed for one
or more Renewal Term(s) as set forth in the Schedule, unless earlier terminated
as provided herein.
(b) Prior Notice. Each party shall have the right to terminate this
Agreement effective at the end of the Initial Term or at the end of any Renewal
Term by giving the other party written notice not less than sixty (60) days
prior to the effective date of such termination, by registered or certified
mail.
(c) Payment in Full. Upon the effective date of termination, the
Obligations shall become immediately due and payable in full in cash.
(d) Early Termination; Termination Fee. In addition to the procedure
set forth in Section 9.2(b), Borrower may terminate this Agreement at any time
but only upon sixty (60) days' prior written notice and prepayment of the
Obligations. Upon any such early termination by Borrower or any termination of
this Agreement by FINOVA upon the occurrence of an Event of Default, then, and
in any such event, Borrower shall pay to FINOVA upon the effective date of such
termination a fee (the "Termination Fee") in an amount equal to the amount shown
on the Schedule. Notwithstanding the foregoing, in the event that Borrower shall
desire to enter into any merger or acquisition of or with another Person and
FINOVA shall not consent to such merger or acquisition, FINOVA hereby agrees
that provided FINOVA would have maintained a first priority security interest in
all of the assets of the entire merged or acquired entity had FINOVA consented
to such merger or acquisition, Borrower may, upon the closing of such merger or
acquisition and payment in full of the Obligations, terminate this Agreement
without payment of a Termination Fee. Upon such payment in full of all
Obligations of Borrower to FINOVA, FINOVA will release its liens in the
Collateral.
9.3 Recourse to Security; Certain Waivers. All Obligations shall be
payable by Borrower as provided for herein and, in full, at the termination of
this Agreement; recourse to security shall not be required at any time. Borrower
waives presentment and protest of any instrument and notice thereof, notice of
default and, to the extent permitted by applicable law, all other notices to
which Borrower might otherwise be entitled.
9.4 No Waiver by FINOVA. Neither FINOVA's failure to exercise any
right, remedy or option under this Agreement, any supplement, the Loan Documents
or other agreement between FINOVA and Borrower nor any delay by FINOVA in
exercising the same shall operate as a waiver. No waiver by FINOVA shall be
effective unless in writing and then only to the extent stated. No waiver by
FINOVA shall affect its right to require strict performance of this Agreement.
FINOVA's rights and remedies shall be cumulative and not exclusive.
9.5 Binding on Successor and Assigns. All terms, conditions, promises,
covenants, provisions and warranties shall inure to the benefit of and bind
FINOVA's and Borrower's respective representatives, successors and assigns.
9.6 Severability. If any provision of this Agreement shall be
prohibited or invalid under applicable law, it shall be ineffective only to such
extent, without invalidating the remainder of this Agreement.
9.7 Amendments; Assignments. This Agreement may not be modified,
altered or amended, except by an agreement in writing signed by Borrower and
FINOVA. Borrower may not sell, assign or transfer any interest in this Agreement
or any other Loan Document, or any portion thereof, including, without
limitation, any of Borrower's rights, title, interests, remedies, powers and
duties hereunder or thereunder. Borrower hereby consents to FINOVA's
participation, sale, assignment, transfer or other disposition, at any time or
times hereafter, of this Agreement and any of the other Loan Documents, or of
any
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<PAGE>
portion hereof or thereof, including, without limitation, FINOVA's rights,
title, interests, remedies, powers and duties hereunder or thereunder. In
connection therewith, FINOVA may disclose all documents and information which
FINOVA now or hereafter may have relating to Borrower or Borrower's business. To
the extent that FINOVA assigns its rights and obligations hereunder to a third
party, FINOVA shall thereafter be released from such assigned obligations to
Borrower and such assignment shall effect a novation between Borrower and such
third party.
9.8 Integration. This Agreement, together with the Schedule (which is a
part hereof) and the other Loan Documents, reflect the entire understanding of
the parties with respect to the transactions contemplated hereby.
9.9 Survival. All of the representations and warranties of Borrower
contained in this Agreement shall survive the execution, delivery and acceptance
of this Agreement by the parties. No termination of this Agreement or of any
guaranty of the Obligations shall affect or impair the powers, obligations,
duties, rights, representations, warranties or liabilities of the parties hereto
and all shall survive such termination.
9.10 Evidence of Obligations. Each Obligation may, in FINOVA's
discretion, be evidenced by notes or other instruments issued or made by
Borrower to FINOVA. If not so evidenced, such Obligation shall be evidenced
solely by entries upon FINOVA's books and records.
9.11 Loan Requests. Each oral or written request for a loan by any
Person who purports to be any employee, officer or authorized agent of Borrower
shall be made to FINOVA on or prior to 11:00 a.m., New York time, on the
Business Day on which the proceeds thereof are requested to be paid to Borrower
and shall be conclusively presumed to be made by a Person authorized by Borrower
to do so and the crediting of a loan to Borrower's operating account shall
conclusively establish Borrower's obligation to repay such loan. Unless and
until Borrower otherwise directs FINOVA in writing, all loans shall be wired to
Borrower's operating account set forth on the Schedule.
9.12 Notices. Any notice required hereunder shall be in writing and
addressed to the Borrower and FINOVA at their addresses set forth at the
beginning of this Agreement. Notices hereunder shall be deemed received on the
earlier of receipt, whether by mail, personal delivery, facsimile, or otherwise,
or upon deposit in the United States mail, postage prepaid.
9.13 Brokerage Fees. Borrower represents and warrants to FINOVA that,
with respect to the financing transaction herein contemplated, no Person is
entitled to any brokerage fee or other commission and Borrower agrees to
indemnify and hold FINOVA harmless against any and all such claims.
9.14 Disclosure. No representation or warranty made by Borrower in this
Agreement, or in any financial statement, report, certificate or any other
document furnished in connection herewith contains any untrue statement of a
material fact or omits to state any material fact necessary to make the
statements herein or therein not misleading. There is no fact known to Borrower
or which reasonably should be known to Borrower which Borrower has not disclosed
to FINOVA in writing with respect to the transactions contemplated by this
Agreement which materially and adversely affects the business, assets,
operations, prospects or condition (financial or otherwise), of Borrower.
9.15 Publicity. FINOVA is hereby authorized to issue appropriate press
releases and to cause a tombstone to be published announcing the consummation of
this transaction and the aggregate amount thereof.
9.16 Captions. The Section titles contained in this Agreement are
without substantive meaning and are not part of this Agreement.
9.17 Injunctive Relief. Borrower recognizes that, in the event Borrower
fails to perform, observe or discharge any of its Obligations under this
Agreement, any remedy at law may prove to be inadequate relief to FINOVA.
Therefore, FINOVA, if it so requests, shall be entitled to temporary and
permanent injunctive relief in any such case without the necessity of proving
actual damages.
9.18 Counterparts; Facsimile Execution. This Agreement may be executed
in one or more counterparts, each of which taken together shall constitute one
and the same instrument, admissible into evidence. Delivery of an executed
counterpart of this Agreement by telefacsimile shall be equally as effective as
delivery of a manually executed counterpart of this Agreement. Any party
delivering an executed counterpart of this Agreement by telefacsimile shall also
deliver a manually executed counterpart of this Agreement, but the failure to
deliver a manually executed counterpart shall not affect the validity,
enforceability, and binding effect of this Agreement.
9.19 Construction. The parties acknowledge that each party and its
counsel have reviewed this Agreement and that the normal rule of construction to
the effect that any ambiguities are to be resolved against the
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<PAGE>
drafting party shall not be employed in the interpretation of this Agreement or
any amendments or exhibits hereto.
9.20 Time of Essence. Time is of the essence for the performance by
Borrower of the Obligations set forth in this Agreement.
9.21 Limitation of Actions. Borrower agrees that any claim or cause of
action by Borrower against FINOVA, or any of FINOVA's directors, officers,
employees, agents, accountants or attorneys, based upon, arising from, or
relating to this Agreement, or any other present or future agreement, or any
other transaction contemplated hereby or thereby or relating hereto or thereto,
or any other matter, cause or thing whatsoever, whether or not relating hereto
or thereto, occurred, done, omitted or suffered to be done by FINOVA, or by
FINOVA's directors, officers, employees, agents, accountants or attorneys,
whether sounding in contract or in tort or otherwise, shall be barred unless
asserted by Borrower by the commencement of an action or proceeding in a court
of competent jurisdiction by the filing of a complaint within one year after the
first act, occurrence or omission upon which such claim or cause of action, or
any part thereof, is based and service of a summons and complaint on an officer
of FINOVA or any other Person authorized to accept service of process on behalf
of FINOVA, within 30 days thereafter. Borrower agrees that such one-year period
of time is a reasonable and sufficient time for Borrower to investigate and act
upon any such claim or cause of action. The one-year period provided herein
shall not be waived, tolled, or extended except by a specific written agreement
of FINOVA. This provision shall survive any termination of this Loan Agreement
or any other agreement.
9.22 Liability. Neither FINOVA nor any FINOVA Affiliate shall be liable
for any indirect, special, incidental or consequential damages in connection
with any breach of contract, tort or other wrong relating to this Agreement or
the Obligations or the establishment, administration or collection thereof
(including without limitation damages for loss of profits, business
interruption, or the like), whether such damages are foreseeable or
unforeseeable, even if FINOVA has been advised of the possibility of such
damages. Neither FINOVA, nor any FINOVA Affiliate shall be liable for any
claims, demands, losses or damages, of any kind whatsoever, made, claimed,
incurred or suffered by the Borrower through the ordinary negligence of FINOVA,
or any FINOVA Affiliate. "FINOVA Affiliate" shall mean FINOVA's directors,
officers, employees, agents, attorneys or any other Person or entity affiliated
with or representing FINOVA. 9.23 Notice of Breach by FINOVA. Borrower agrees to
give FINOVA written notice of (i) any action or inaction by FINOVA or any
attorney of FINOVA in connection with any Loan Documents that may be actionable
against FINOVA or any attorney of FINOVA or (ii) any defense to the payment of
the Obligations for any reason, including, but not limited to, commission of a
tort or violation of any contractual duty or duty implied by law. Borrower
agrees that unless such notice is fully given as promptly as possible (and in
any event within thirty (30) days) after Borrower has knowledge, or with the
exercise of reasonable diligence should have had knowledge, of any such action,
inaction or defense, Borrower shall not assert, and Borrower shall be deemed to
have waived, any claim or defense arising therefrom.
9.24 Application of Insurance Proceeds. The net proceeds of any
casualty insurance insuring the Collateral, after deducting all costs and
expenses (including attorneys' fees) of collection, shall be applied, at
FINOVA's option, either toward replacing or restoring the Collateral, in a
manner and on terms satisfactory to FINOVA, or toward payment of the
Obligations. Any proceeds applied to the payment of Obligations shall be applied
in such manner as FINOVA may elect. In no event shall such application relieve
Borrower from payment in full of all installments of principal and interest
which thereafter become due in the order of maturity thereof.
9.25 Power of Attorney. Borrower appoints FINOVA and its designees as
Borrower's attorney, with the power to endorse Borrower's name on any checks,
notes, acceptances, money orders or other forms of payment or security that come
into FINOVA's possession; to sign Borrower's name on any invoice or bill of
lading relating to any Receivable, on drafts against customers, on assignments
of Receivables, on notices of assignment, financing statements and other public
records, on verifications of accounts and on notices to customers or account
debtors; to send requests for verification of Receivables to customers or
account debtors; after the occurrence of any Event of Default, to notify the
post office authorities to change the address for delivery of Borrower's mail to
an address designated by FINOVA and to open and dispose of all mail addressed to
Borrower; and to do all other things FINOVA deems necessary or desirable to
carry out the terms of this Agreement. Borrower hereby ratifies and approves all
acts of such attorney. Neither FINOVA nor any of its designees shall be liable
for any acts or omissions nor for any error of judgment or mistake of fact or
law while acting as Borrower's attorney. This power, being coupled with an
interest, is irrevocable until the Obligations have been fully
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<PAGE>
satisfied and FINOVA's obligation to provide loans hereunder shall have
terminated
9.26 Governing Law; Waivers. THIS AGREEMENT, INCLUDING WITHOUT
LIMITATION ENFORCEMENT OF THE OBLIGATIONS, SHALL BE INTERPRETED IN ACCORDANCE
WITH THE INTERNAL LAWS (AND NOT THE CONFLICT OF LAWS RULES) OF THE STATE OF
ARIZONA GOVERNING CONTRACTS TO BE PERFORMED ENTIRELY WITHIN SUCH STATE. BORROWER
HEREBY CONSENTS TO THE EXCLUSIVE JURISDICTION OF ANY STATE OR FEDERAL COURT
LOCATED WITHIN THE COUNTY OF MARICOPA IN THE STATE OF ARIZONA OR, AT THE SOLE
OPTION OF FINOVA, IN ANY OTHER COURT IN WHICH FINOVA SHALL INITIATE LEGAL OR
EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER JURISDICTION OVER THE MATTER
IN CONTROVERSY. BORROWER WAIVES ANY OBJECTION OF FORUM NON CONVENIENS AND VENUE.
BORROWER FURTHER WAIVES PERSONAL SERVICE OF ANY AND ALL PROCESS UPON IT, AND
CONSENTS THAT ALL SUCH SERVICE OF PROCESS BE MADE IN THE MANNER SET FORTH IN
SECTION 9.12 HEREOF FOR THE GIVING OF NOTICE. BORROWER FURTHER WAIVES ANY RIGHT
IT MAY OTHERWISE HAVE TO COLLATERALLY ATTACK ANY JUDGMENT ENTERED AGAINST IT.
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL. FINOVA AND BORROWER EACH
HEREBY WAIVES THE RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON,
ARISING OUT OF, OR IN ANY WAY RELATING TO: (i) THIS AGREEMENT; (ii) ANY OTHER
PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN FINOVA AND BORROWER; OR (iii)
ANY CONDUCT, ACTS OR OMISSIONS OF FINOVA OR BORROWER OR ANY OF THEIR DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH
FINOVA OR BORROWER; IN EACH OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT
OR TORT OR OTHERWISE. Borrower:
BOCA RESEARCH, INC.
Fed. Tax ID #______________________
By_______________________________
President or Vice President
On this ____ day of _______________, 1998, personally came before me
____________________ to me known, who being by me duly sworn, did depose and say
that he is the __________________ of ______________________ , the corporation
described in and which executed the foregoing instrument; that he knows the seal
of said corporation; that the seal affixed to said instrument is such corporate
seal; that it was so affixed by order of the Board of Directors of said
corporation, and that he signed his name thereto, by like order.
-------------------------------
Notary Public
FINOVA:
FINOVA CAPITAL CORPORATION
By_______________________________
Title______________________________
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<PAGE>
Schedule to
Loan and Security Agreement
Borrower: BOCA RESEARCH, INC.
Address: 1377 Clint Moore Road
Boca Raton, Florida 33487
Date: November ___, 1998
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
This Schedule forms an integral part of the Loan and Security Agreement between
the above Borrower and FINOVA Capital Corporation dated the above date, and all
references herein and therein to "this Agreement" shall be deemed to refer to
said Agreement and to this Schedule.
====================================================================================================================================
DEFINITIONS (SECTION 1):
"Permitted Senior Indebtedness" means the $3,000,000.00 obligation
evidenced by a promissory note incurred in connection with the
acquisition of the assets of Global Village Communications, Inc.
====================================================================================================================================
TOTAL FACILITY (SECTION 2.1):
$5,000,000.00
====================================================================================================================================
LOANS (SECTION 2.2):
Revolving Credit Loans: A revolving line of credit consisting of loans against Borrower's
Eligible Receivables ("Receivable Loans") and against Borrower's Eligible Inventory ("Inventory
Loans") (the Receivable Loans and the Inventory Loans shall be collectively referred to as the
"Revolving Credit Loans") in an aggregate outstanding principal amount not to exceed the lesser
of (a) or (b) below:
(a) Five Million Dollars ($5,000,000) (the "Revolving Credit
Limit"), less any Loan Reserves, or
(b) an amount equal to the following:
(i) an amount equal to (A) 60% of the net amount of Eligible Receivables,
less (B) the aggregate undrawn face amount of all Letters of Credit
issued under Section 2.4 of this Agreement; plus
(ii) an amount not to exceed the lesser of:
(A) 20% of the value of Borrower's Eligible Inventory, calculated at the
lower of cost or market value and determined on a first-in, first-out
basis, or
</TABLE>
- 1 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(B) $1,500,000; less
(iii) any Loan Reserves.
====================================================================================================================================
INTEREST AND FEES (SECTION 2.6):
Revolving Interest Rate. Borrower shall pay
FINOVA interest on the daily outstanding
balance of Borrower's Revolving Credit Loans
at a per annum rate of one percent (1)% in
excess of the rate of interest announced
publicly by Citibank, N.A., (or any
successor thereto), from time to time as its
"prime rate" (the " Prime Rate") which may
not be such institution's lowest rate. The
interest rate chargeable hereunder in
respect of the Revolving Credit Loans
(herein, the "Revolving Interest Rate")
shall be increased or decreased, as the case
may be, without notice or demand of any
kind, upon the announcement of any change in
the Prime Rate. Each change in the Prime
Rate shall be effective hereunder on the
first day following the announcement of such
change. Interest charges and all other fees
and charges herein shall be computed on the
basis of a year of 360 days and actual days
elapsed and shall be payable to FINOVA in
arrears on the first day of each month.
Notwithstanding the foregoing, in the event
Borrower has made no requests for any
Revolving Credit Advances during the first
year this Agreement is in effect and
provided there has not and does not exist an
Event of Default, the Revolving Interest
Rate shall be reduced to one half of one
percent (.5%) above the Prime Rate during
the second year of this Agreement.
Collateral Monitoring Fee. At the closing of
this transaction and on the first day of
each calendar month thereafter, Borrower
shall pay FINOVA a collateral monitoring fee
of $45,000 during the first year of this
Agreement and $25,000 during the second year
of this Agreement ("Collateral Monitoring
Fee"); the Collateral Monitoring Fee for
each year shall be paid in equal monthly
installments during such year on the first
day of each month commencing on the first
day of the month following the Closing Date.
Closing Fee. At the closing of this
transaction, Borrower shall pay to FINOVA a
closing fee in an amount equal to one (1%)
percent of the Total Facility ("Closing
Fee), which shall be deemed fully earned on
the date such payment is due.
Facility Fee. Borrower shall pay to FINOVA a
facility fee equal to one (1%) percent per
annum of the amount of the Total Facility
("Facility Fee"). The Facility Fee shall be
deemed fully earned at the time when due and
is otherwise due and payable annually,
commencing upon the first anniversary of the
date of this Agreement and continuing on
each subsequent anniversary thereof;
provided however that if (i) there does not
exist, and has not during the prior year
existed, an Event of Default, and (ii)
Borrower has had availability for revolving
credit loans of not less than $1,500,000.00
at all times during the then preceding six
(6) months,
</TABLE>
- 2 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
the Facility Fee payable on the first anniversary of this Agreement shall be
waived.
Success Fee: Borrower shall pay FINOVA a
success fee of $105,000 payable $30,000 on
the first anniversary date of this Agreement
and $75,000 on the second anniversary of
this Agreement, provided however that if
there does not exist, and has not during the
prior year existed, an Event of Default and
provided Borrower has not requested any
Revolving Credit Loans during the first year
of this Agreement the Success Fee of $30,000
payable on the first anniversary of this
Agreement shall be waived. Additionally, if
no Events of Default exist or have existed
and Borrower shows a net income on its
profit and loss statement for the three
months and nine months ended September 30,
2000, the Success Fee of $75,000 payable on
the second anniversary of this Agreement
shall be reduced to $50,000.
Examination Fee. Borrower agrees to pay to
FINOVA an examination fee in the amount of
$750.00 per person per day in connection
with each audit or examination of Borrower
performed by FINOVA prior to or after the
date hereof, plus all costs and expenses
incurred in connection therewith (the
"Examination Fee"). Without limiting the
generality of the foregoing, Borrower shall
pay to FINOVA an initial Examination Fee in
an amount equal to $750.00per person per
day, plus all costs and expenses incurred in
connection therewith. Such initial
Examination Fee shall be deemed fully earned
at the time of payment and due and payable
upon the closing of this transaction, and
shall be deducted from any good faith
deposit paid by Borrower to FINOVA prior to
the date of this Agreement.
====================================================================================================================================
CONDITIONS OF CLOSING (SECTION 4.1):
The obligation of FINOVA to make the initial
advance hereunder is subject to the
fulfillment, to the satisfaction of FINOVA
and its counsel, of each of the following
conditions, in addition to the conditions
set forth in Sections 4.1 and 4.2 above:
(a) Lease and Landlord's Consent (Section 4.1(t)). Location(s): 1377
Clint Moore Road, Boca Raton, FL 33484 and all other Florida
locations
(b) No Material Adverse Change
(Section 4.1(s)). Draft financial
statements for Seller dated as of
August 31, 1998. Further, no
material adverse change has occurred
in the Borrower's business,
operations, financial condition, or
assets or in the prospect of
repayment of the Obligations since
August 31, 1998.
Borrower shall cause the conditions
precedent set forth in Section 4.1
of this Agreement and set forth
above in this Schedule to be
satisfied, and shall provide
evidence to FINOVA that all such
conditions precedent have been
satisfied, on or before November 15,
1998.
====================================================================================================================================
</TABLE>
- 3 -
<PAGE>
BORROWER INFORMATION:
<TABLE>
<CAPTION>
<S> <C> <C>
Borrower's State of Incorporation (Section 5.1): FL
Borrower's copyrights, patents trademarks, and licenses (Section 5.5): Set Forth on Exhibit 5.5
Fictitious Names/Prior Corporate Names (Section 5.2):
Prior Corporate Names: None
Fictitious Names: None
Borrower Locations (Section 5.16)
1377 Clint Moore Road
Boca Raton, FL 33487
1601 Clint Moore Road
Boca Raton, FL 33487
6500 W. Rogers Circle
Boca Raton, FL 33487
1380 Bordeaux Drive
Sunnyvale, CA 94089
Borrower's Federal Tax Identification Number (Section 5.16): 59-2479377
Permitted Encumbrances (Section 1.1): None
====================================================================================================================================
FINANCIAL COVENANTS (SECTION 6.1.13):
Borrower shall comply with all of the following covenants. Compliance
shall be determined as of the end of each month or quarter (as
determined by FINOVA in its sole discretion), except as otherwise
specifically provided below:
Net Worth. Borrower shall maintain a minimum Tangible Net Worth of not less
--------- than Fifteen Million Dollars ($15,000,000) at all times;
====================================================================================================================================
NEGATIVE COVENANTS (SECTION 6.2):
Employee Advances: Borrower shall not make any loans or advances to Employees except in the
------------------ ordinary course of business and consistent with past practices of Borrower
in an aggregate amount not exceeding at any time $5,000.
Existing Guaranties: The Guaranty by Borrower of the lease for the premises occupied by
-------------------- Borrower's wholly owned subsidiary.
</TABLE>
- 4 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Capital Expenditures: Borrower shall not make or incur any Capital Expenditure if, after giving
--------------------- effect thereto, the aggregate amount of all Capital Expenditures by
Borrower in any fiscal year (beginning with
the 1999 fiscal year) would exceed $700,000.
Compensation: Borrower shall not (except as otherwise provided in Section 6.2.10) pay
------------- total compensation, including salaries, withdrawals, fees, bonuses,
commissions, drawing accounts and other
payments, whether directly or indirectly, in
money or otherwise, during any fiscal year
to all of Borrower's executives, officers
and directors (or any relative thereof) in
an amount in excess of 115% of such total
compensation paid in the immediately
preceding fiscal year.
Indebtedness: Borrower shall not create, incur, assume or permit to exist any
------------- Indebtedness (including Indebtedness in connection with Capital Leases)
in excess of $25,000 other than (i) the
Obligations, (ii) trade payables and other
contractual obligations to suppliers and
customers incurred in the ordinary course of
business.
====================================================================================================================================
REPORTING REQUIREMENTS (SECTION 9.1):
1. Borrower shall provide FINOVA with monthly
agings aged by invoice date and
reconciliations of Receivables within ten
(10) days after the end of each month.
2. Borrower shall provide FINOVA with monthly
accounts payable agings aged by invoice
date, outstanding or held check registers
and inventory certificates within ten (10)
days after the end of each month.
3. Borrower shall provide FINOVA with monthly
perpetual inventory reports for the
Inventory valued on a first-in, first-out
basis at the lower of cost or market (in
accordance with GAAP) or such other
inventory reports as are reasonably
requested by FINOVA, all within ten (10)
days after the end of each month.
4. Borrower shall provide FINOVA with monthly
unaudited financial statements within thirty
(30) days after the end of each month.
5. Borrower shall provide FINOVA with audited
consolidated and consolidating fiscal
financial statements within ninety (90) days
after the end of each fiscal year, as more
specifically described in Section 9.1(b)
hereof, and with an opinion issued by a
Certified Public Accountant which is
acceptable to FINOVA.
6. Borrower shall provide FINOVA with annual
operating budgets (including income
statements, balance sheets and cash flow
statements, by month) for the upcoming
fiscal year of Borrower within thirty (30)
days prior to the end of each fiscal year of
Borrower.
7. Borrower's balance sheets for purposes of
the definition of Prepared Financials shall
be as of August 31, 1998.
</TABLE>
================================================================================
TERM (SECTION 9.2):
- 5 -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C>
The initial term of this Agreement shall be
two (2) year(s) from the date hereof (the
"Initial Term") and shall be automatically
renewed for successive periods of one (1)
year each (each, a "Renewal Term"), unless
earlier terminated as provided in Section 7
or 9.2 above or elsewhere in this Agreement.
====================================================================================================================================
TERMINATION FEE (SECTION 9.2):
The Termination Fee shall be equal to the
then remaining balance of the Success Fee
(without any performance related adjustment
for the remaining balance of the Success Fee
then unpaid being applicable) plus an amount
equal to five percent (5%) of the Credit
Limit set forth on the cover page of this
Agreement during the first year of this
Agreement and four percent (4%) of the
Credit Limit during the second year of this
Agreement.
====================================================================================================================================
DISBURSEMENT (SECTION 9.11):
Unless and until Borrower otherwise directs
FINOVA in writing, all loans shall be wired
to Borrower's following operating account:
First Union Bank of Florida, Jackson, Florida
214 North Hogan Street
Jacksonville, FL 32202
(904) 361-1879
Account No. 2680907957072
ABA: 063-000-021
====================================================================================================================================
BORROWER: FINOVA:
BOCA RESEARCH, INC.
FINOVA CAPITAL CORPORATION
By_______________________________
President or Vice President
By_______________________
On this____day of November,1998, personally came Title_____________________
before me ____________________ to me known, who being
by me duly sworn, did depose and say that he is the
__________________ of ______________________ , the
corporation described in and which executed the foregoing
instrument; that he knows the seal of said corporation; that the
seal affixed to said instrument is such corporate seal; that it was
so affixed by order of the Board of Directors of said
corporation, and that he signed his name thereto, by like order.
___________________________
Notary Public
</TABLE>
- 6 -
<PAGE>
SCHEDULE 6.2
Permitted Indebtedness
- 7 -
<PAGE>
<TABLE>
<CAPTION>
TABLE OF CONTENTS
<S> <C> <C> <C> <C>
1. DEFINITIONS. ...................................................................................................1
1.1 Defined Terms..................................................................................1
1.2 Other Terms....................................................................................5
2. LOANS; INTEREST RATE AND OTHER CHARGES...........................................................................5
2.1 Total Facility.................................................................................5
2.2 Loans..........................................................................................6
2.3 Overlines; Overadvances........................................................................6
2.4 Loan Account...................................................................................6
2.5 Interest; Fees.................................................................................6
2.6 Default Interest Rate..........................................................................6
2.7 Examination Fee................................................................................6
2.8 Excess Interest................................................................................6
2.9 Principal Payments; Proceeds of Collateral....................................................7
2.10 Application of Collateral......................................................................8
2.11 Application of Payments........................................................................8
3. SECURITY.........................................................................................................9
3.1 Security Interest in the Collateral............................................................9
3.2 Perfection and Protection of Security Interest.................................................9
3.3 Preservation of Collateral.....................................................................9
3.4 Insurance......................................................................................9
3.5 Collateral Reporting; Inventory................................................................9
3.6 Receivables...................................................................................10
3.7 Equipment.....................................................................................10
3.8 Other Liens; No Disposition of Collateral....................................................10
3.9 Collateral Security...........................................................................11
4. CONDITIONS OF CLOSING...........................................................................................11
4.1 Initial Advance...............................................................................11
4.2 Subsequent Advances...........................................................................13
5. REPRESENTATIONS AND WARRANTIES..................................................................................13
5.1 Due Organization..............................................................................13
5.2 Other Names...................................................................................13
5.3 Due Authorization.............................................................................13
5.4 Binding Obligation............................................................................13
5.5 Intangible Property...........................................................................13
5.6 Capital.......................................................................................13
5.7 Material Litigation...........................................................................13
5.8 Title; Security Interests of FINOVA...........................................................14
5.9 Restrictive Agreements; Labor Contracts.......................................................14
5.10 Laws..........................................................................................14
5.11 Consents......................................................................................14
5.12 Defaults......................................................................................14
5.13 Financial Condition...........................................................................14
5.14 ERISA.........................................................................................14
5.15 Taxes.........................................................................................14
5.16 Locations; Federal Tax ID No..................................................................14
</TABLE>
- i -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
5.17 Business Relationships........................................................................14
5.18 Year 2000.....................................................................................15
5.19 Reaffirmations................................................................................15
6. COVENANTS.......................................................................................................15
6.1 Affirmative Covenants.........................................................................15
6.1.1 Taxes........................................................................15
6.1.2 Notice of Litigation.........................................................15
6.1.3 ERISA........................................................................15
6.1.4 Change in Location...........................................................15
6.1.5 Corporate Existence..........................................................15
6.1.6 Labor Disputes...............................................................15
6.1.7 Violations of Law............................................................15
6.1.8 Defaults.....................................................................15
6.1.9 Capital Expenditures.........................................................15
6.1.10 Books and Records...........................................................15
6.1.11 Leases; Warehouse Agreements................................................15
6.1.12 Additional Documents........................................................15
6.1.13 Financial Covenants.........................................................16
6.2 Negative Covenants............................................................................16
6.2.1 Mergers......................................................................16
6.2.2 Loans........................................................................16
6.2.3 Dividends....................................................................16
6.2.4 Adverse Transactions.........................................................16
6.2.5 Indebtedness of Others.......................................................16
6.2.6 Repurchase...................................................................16
6.2.7 Name.........................................................................16
6.2.8 Prepayment...................................................................16
6.2.9 Capital Expenditure..........................................................16
6.2.10 Compensation................................................................16
6.2.11 Indebtedness................................................................16
6.2.12 Affiliate Transactions......................................................16
6.2.13 Nature of Business..........................................................17
6.2.14 FINOVA's Name...............................................................17
6.2.15 Margin Security.............................................................17
6.2.16 Real Property...............................................................17
6.2.17 Year 2000............................................................................17
7. DEFAULT AND REMEDIES............................................................................................17
7.1 Events of Default.............................................................................17
7.2 Remedies......................................................................................18
7.3 Standards for Determining Commercial Reasonableness...........................................18
8. EXPENSES AND INDEMNITIES........................................................................................19
8.1 Expenses......................................................................................19
8.2 Environmental Matters........................................................................19
9. MISCELLANEOUS...................................................................................................20
9.1 Examination of Records; Financial Reporting...................................................20
9.2 Term; Termination.............................................................................21
9.3 Recourse to Security; Certain Waivers.........................................................21
</TABLE>
- ii -
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C>
9.4 No Waiver by FINOVA...........................................................................21
9.5 Binding on Successor and Assigns..............................................................21
9.6 Severability..................................................................................21
9.7 Amendments; Assignments.......................................................................21
9.8 Integration...................................................................................22
9.9 Survival......................................................................................22
9.10 Evidence of Obligations.......................................................................22
9.11 Loan Requests.................................................................................22
9.12 Notices.......................................................................................22
9.13 Brokerage Fees................................................................................22
9.14 Disclosure....................................................................................22
9.15 Publicity.....................................................................................22
9.16 Captions......................................................................................22
9.17 Injunctive Relief.............................................................................22
9.18 Counterparts; Facsimile Execution.............................................................22
9.19 Construction..................................................................................22
9.20 Time of Essence...............................................................................23
9.21 Limitation of Actions.........................................................................23
9.22 Liability.....................................................................................23
9.23 Notice of Breach by FINOVA....................................................................23
9.24 Application of Insurance Proceeds.............................................................23
9.25 Power of Attorney............................................................................23
9.26 Governing Law; Waivers........................................................................24
9.27 MUTUAL WAIVER OF RIGHT TO JURY TRIAL..........................................................24
</TABLE>
- iii -
BOCA RESEARCH, INC.
EXHIBIT 11 - CALCULATION OF SHARES USED IN
DETERMINING NET INCOME PER SHARE
(Unaudited)
September 30, 1998
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, 1998 September 30, 1998
------------------ ------------------
<S> <C> <C>
Shares outstanding at January 1, 1998 ......................... 8,725,079 8,725,079
Shares issued January 1, 1998 in connection with
the 1992 Employee Stock Purchase Plan ....................... 16,578 16,578
Shares issued July 1, 1998 in connection with
the 1992 Employee Stock Purchase Plan ....................... 14,830 4,943
--------- ---------
Weighted average shares outstanding ........................... 8,756,487 8,746,600
========= =========
September 30, 1997
Three Months Ended Nine Months Ended
September 30, 1997 September 30, 1997
------------------ ------------------
Shares outstanding at January 1, 1997 ......................... 8,678,883 8,768,883
Shares issued January 1, 1997 in
connection with the 1992 Employee
Stock Purchase Plan ......................................... 12,178 12,178
Shares issued in connection with a
non-qualified stock option plan ............................. 22,167 20,747
Shares issued July 1, 1997 in connection with
the 1992 Employee Stock Purchase Plan ....................... 11,851 3,950
--------- ---------
Weighted average shares outstanding ........................... 8,725,079 8,715,758
========= =========
</TABLE>
1
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEET AND THE CONSOLIDATED STATEMENT OF OPERATIONS
FILED AS PART OF THE QUARTERLY REPORT ON FORM 10-Q AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH QUARTERLY REPORT ON FORM 10-Q.
</LEGEND>
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<EXCHANGE-RATE> 1
<CASH> 5,328,000
<SECURITIES> 0
<RECEIVABLES> 24,885,000
<ALLOWANCES> 4,734,000
<INVENTORY> 9,098,000
<CURRENT-ASSETS> 37,449,000
<PP&E> 17,077,000
<DEPRECIATION> 12,985,000
<TOTAL-ASSETS> 47,542,000
<CURRENT-LIABILITIES> 21,610,000
<BONDS> 0
0
0
<COMMON> 87,000
<OTHER-SE> 25,845,000
<TOTAL-LIABILITY-AND-EQUITY> 47,542,000
<SALES> 22,789,000
<TOTAL-REVENUES> 22,798,000
<CGS> 19,221,000
<TOTAL-COSTS> 19,221,000
<OTHER-EXPENSES> 5,752,000
<LOSS-PROVISION> 630,000
<INTEREST-EXPENSE> 89,000
<INCOME-PRETAX> (2,015,000)
<INCOME-TAX> 0
<INCOME-CONTINUING> (2,015,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (2,015,000)
<EPS-PRIMARY> (0.23)
<EPS-DILUTED> (0.23)
</TABLE>
