<PAGE> 1
FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
/x/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended September 28, 1996
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________ to ___________
Commission file number: 0-21892
PINNACLE MICRO, INC.
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
Delaware 33-0238563
PINNACLE MICRO, INC.
19 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
(714) 789-3000
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 No X .
--- ---
As of November 6, 1996, there were outstanding 9,061,840 shares of Registrant's
Common Stock.
Page 1 of 14 pages
Exhibit Index appears on Page 13
<PAGE> 2
PINNACLE MICRO, INC.
INDEX
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Financial Statements 3
Condensed Balance Sheets at September 28, 1996
and December 30, 1995 3
Condensed Statements of Operations for the thirteen
weeks and thirty-nine weeks ended September 28, 1996
and September 30, 1995 4
Condensed Statements of Cash Flows for the thirty-nine
weeks ended September 28, 1996 and September 30, 1995 5
Notes to Condensed Financial Statements 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 8
Part II. Other Information
Item 1. Legal Proceedings 11
Item 4. Submission of Matters to a Vote of Security Holders 12
Item 5. Other Information 12
Item 6. Exhibits and Reports on Form 8-K 13
Signatures 14
</TABLE>
2
<PAGE> 3
PART I
FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
PINNACLE MICRO, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
September 28, December 30,
1996 1995
---- ----
(Unaudited)
<S> <C> <C>
Assets
Current assets:
Cash and cash equivalents $ 2,971,000 $ 3,606,000
Accounts receivable, net 10,272,000 11,354,000
Income taxes receivable 963,000 999,000
Inventories 12,317,000 11,413,000
Prepaid expenses and other current assets 705,000 961,000
Deferred income taxes 1,058,000 1,058,000
------------ ------------
Total current assets 28,286,000 29,391,000
Furniture and equipment, net 1,787,000 2,098,000
Deferred income taxes 213,000 213,000
Other assets 908,000 303,000
------------ ------------
Total assets $ 31,194,000 $ 32,005,000
============ ============
Liabilities and Stockholders' Equity
Current liabilities:
Accounts payable $ 11,831,000 $ 11,644,000
Accrued expenses 5,004,000 1,244,000
Payroll related liabilities 1,125,000 956,000
Note payable to bank and current
portion of long-term debt -- 6,000
------------ ------------
Total current liabilities 17,960,000 13,850,000
Long-term debt, less current portion 10,000,000 14,000
Other liabilities 829,000 1,400,000
Commitments and contingencies
Stockholders' equity:
Common stock 8,000 8,000
Additional paid-in capital 17,638,000 16,158,000
Retained earnings (14,860,000) 775,000
Foreign currency translation adjustment (381,000) (200,000)
------------ ------------
Total stockholders' equity 2,405,000 16,741,000
------------ ------------
Total liabilities and stockholders' equity $ 31,194,000 $ 32,005,000
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
3
<PAGE> 4
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
13 Weeks Ended 13 Weeks Ended 39 Weeks Ended 39 Weeks Ended
Sept. 28, 1996 Sept. 30, 1995 Sept. 28, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Net sales $ 14,259,000 $21,401,000 $ 44,026,000 $62,186,000
Cost of sales 11,646,000 15,490,000 36,132,000 45,192,000
------------ ----------- ------------ -----------
Gross profit 2,613,000 5,911,000 7,894,000 16,994,000
------------ ----------- ------------ -----------
Operating expenses:
Selling, general and administrative 4,451,000 4,325,000 14,132,000 13,123,000
Research and development 1,494,000 1,378,000 4,522,000 3,058,000
Nonrecurring charges 4,333,000 198,000 4,584,000 606,000
------------ ----------- ------------ -----------
Total operating expenses 10,278,000 5,901,000 23,238,000 16,787,000
------------ ----------- ------------ -----------
Operating income (loss) (7,665,000) 10,000 (15,344,000) 207,000
Interest income (expense) (142,000) 29,000 (288,000) 115,000
------------ ----------- ------------ -----------
Income (loss) before income taxes (7,807,000) 39,000 (15,632,000) 322,000
Income tax expense -- 15,000 3,000 124,000
------------ ----------- ------------ -----------
Net income (loss) $ (7,807,000) $ 24,000 $(15,635,000) $ 198,000
============ =========== ============ ===========
Net income (loss) per share $ (0.98) $ 0.00 $ (1.98) $ 0.02
============ =========== ============ ===========
Weighted average
common shares outstanding 7,926,000 8,121,000 7,904,000 7,995,000
============ =========== ============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
4
<PAGE> 5
PINNACLE MICRO, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
39 Weeks Ended 39 Weeks Ended
Sept. 28, 1996 Sept. 30, 1995
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $(15,635,000) $ 198,000
Adjustments to reconcile net income (loss)
to net cash used in operating activities:
Depreciation and amortization 979,000 682,000
Provision for doubtful accounts 306,000 113,000
Provision for product returns and price protection 831,000 (300,000)
Provision for inventory obsolescence 427,000 (304,000)
Deferred compensation recognized -- 13,000
Changes in operating assets and liabilities:
Accounts receivable (55,000) (2,916,000)
Income taxes receivable 36,000 (319,000)
Inventories (1,331,000) (1,567,000)
Prepaid expenses and other current assets 256,000 (740,000)
Other assets (29,000) (293,000)
Accounts payable and accrued expenses 3,761,000 2,905,000
Payroll related liabilities 169,000 175,000
Income taxes payable -- (294,000)
Other liabilities 829,000 --
------------ -----------
Net cash used in operating activities (9,456,000) (2,647,000)
------------ -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Sale of short-term investments -- 1,669,000
Purchase of furniture and equipment (644,000) (1,058,000)
------------ -----------
Net cash provided by (used in) investing activities (644,000) 611,000
------------ -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from issuance of convertible debentures 10,000,000 --
Payment of debt issuance costs (600,000) --
Principal payments on note payable to bank -- (1,400,000)
Principal payments on long-term debt (20,000) (19,000)
Proceeds from exercise of stock options 56,000 141,000
Tax benefit from exercise of stock options 4,000 49,000
Proceeds from issuance of stock through
the employee stock purchase plan 20,000 135,000
------------ -----------
Net cash provided by (used in) financing activities 9,460,000 (1,094,000)
------------ -----------
Effect of exchange rate changes on cash 5,000 (83,000)
------------ -----------
Decrease in cash and cash equivalents (635,000) (3,213,000)
Cash and cash equivalents at beginning of period 3,606,000 4,866,000
------------ -----------
Cash and cash equivalents at end of period $ 2,971,000 $ 1,653,000
============ ===========
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid during the period for:
Interest $ 178,000 $ 31,000
============ ===========
Income taxes $ -- $ 670,000
============ ===========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
5
<PAGE> 6
PINNACLE MICRO, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
SEPTEMBER 28, 1996
(UNAUDITED)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Interim Period Accounting Policies
The accompanying unaudited condensed financial statements have been
prepared in accordance with generally accepted accounting principles.
Certain information normally included in annual financial statements
prepared in accordance with generally accepted accounting principles
has been condensed or omitted pursuant to the rules and regulations of
the Securities and Exchange Commission, and these financial statements
should be read in conjunction with the Company's Form 10-K for the year
ended December 30, 1995. In the opinion of management, the accompanying
condensed financial statements reflect all material adjustments which
are necessary for a fair presentation of the financial position and
results of operations and cash flows as of and for the thirty-nine
weeks ended September 28, 1996 and September 30, 1995.
Revenue Recognition
The Company recognizes product sales revenue at the time of shipment
and records a reserve for estimated sales returns and price
adjustments. The Company has agreements with its resellers which, under
certain circumstances, provide for stock rotation for slow-moving items
and price protection for inventories held by the resellers at the time
of published price reductions.
Foreign Currency Transactions
Gains and losses from foreign currency transactions are included in
operating results in selling, general and administrative expenses.
Transaction gains increased operating income in the thirteen weeks
ended September 28, 1996 and September 30, 1995 by $52,000 and
$105,000, respectively. Transaction gains increased operating income in
the thirty-nine weeks ended September 28, 1996 by $230,000 while
transaction losses decreased operating income for the thirty-nine weeks
ended September 30, 1995 by $684,000.
2. INVENTORIES
Inventories consist of the following:
<TABLE>
<CAPTION>
September 28, December 30,
1996 1995
---- ----
<S> <C> <C>
Components and work-in-process $10,168,000 $ 9,522,000
Finished goods 2,149,000 1,891,000
----------- -----------
$12,317,000 $11,413,000
=========== ===========
</TABLE>
3. INCOME TAXES
The Company estimated an effective tax rate of 38.5% for the thirteen
weeks and thirty-nine weeks ended September 30, 1995. The Company did
not accrue a tax benefit for the operating losses incurred in the
thirteen week and thirty-nine week periods ended September 28, 1996.
6
<PAGE> 7
4. CONTINGENCIES
On March 15, 1996, a complaint was filed against the Company and
certain of its directors and then executive officers in a securities
class action lawsuit which alleges that Company management engaged in
improper accounting practices and made certain false and misleading
statements. The complaint was filed in the United States District Court
for the Central District of California under the case name Wills,
Cohen, et al. v. William Blum et al., Case No. SACV96-261GLT. The
Company denies all allegations and intends to vigorously contest the
suit. The ultimate outcome of this matter cannot presently be
determined. Accordingly, no provision for any liability that may result
has been made in the accompanying financial statements. However, any
adverse determination with respect to the pending lawsuit could have a
material adverse effect on the Company's financial statements. The
Company expects to incur significant legal costs relating to this suit
in 1996 and into 1997.
5. CONVERTIBLE DEBENTURES
The Company completed an offshore placement of $10,000,000 principal
amount of convertible subordinated 8% notes in July 1996. The
$10,000,000 placement was completed on July 19, 1996, yielding
aggregate net proceeds of $9,400,000 after commissions (fees) to First
Bermuda Securities Limited ("First Bermuda"). First Bermuda will also
receive additional compensation in the form of warrants exercisable for
five years at a strike price of 125% of the closing bid price on the
closing date. First Bermuda received customary piggyback registration
rights beginning 90 days from the closing date and demand rights after
two years. The note holders may convert the principal of the 8% notes
in thirds, at discounts from the then market price of 15%, 17.5% and
20%, in intervals commencing 60, 90 and 120 days after the closing.
The first agreed upon conversion date of the convertible debentures was
September 14, 1996. There were no conversions as of September 28, 1996.
As a result of the conversion requests received through October,
approximately $5,000,000 of the debentures had been converted into
approximately 1,137,000 shares of common stock at conversion prices
ranging from $4.55 to $6.44 per share. Prior to the first conversion
date, the Company had 7,924,850 shares of its common stock issued and
outstanding. The Company had approximately 9,062,000 shares outstanding
as of November 6, 1996, the increase resulting from share issuances
from debenture conversions. The new shares increased the Company's
issued and outstanding common stock by approximately 14.3% as compared
the issued and outstanding immediately prior to the first conversion
date.
A portion of the proceeds from this placement and cash on hand were
used to repay the bank loan with Bank of America, the Company's lender,
on July 17, 1996. The Company, which no longer has a lending
relationship with Bank of America, subsequently entered into a secured
lending relationship in September 1996 with Coast Business Credit which
provides for borrowings of up to $10,000,000. The Company had no
borrowings against this lending relationship at September 28, 1996 but
borrowed $3,000,000 as of November 6, 1996.
6. RESTRUCTURING CHARGES
During the third quarter of 1996, the Company recorded nonrecurring
charges of $4,333,000 which include a restructuring charge of
$2,731,000 for costs associated with the Company's planned
consolidation and transfer of manufacturing operations to Colorado
Springs, Colorado and the closing of its branch office in Japan, as
well as a charge of $1,602,000 primarily for changes to major component
contracts with two key suppliers. As a result of the manufacturing
consolidation, the Company expects the elimination of approximately 30
manufacturing positions in California, of which approximately half will
be replaced in Colorado. The majority of these liabilities should be
paid or settled by the end of the 1997 fiscal year.
7
<PAGE> 8
THIS REPORT CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANINGS OF SECTION
27A OF THE SECURITIES ACT OF 1933 AND SECTION 21E OF THE SECURITIES EXCHANGE ACT
OF 1934. ACTUAL RESULTS AND EVENTS COULD DIFFER MATERIALLY FROM THOSE PROJECTED
AS A RESULT OF THE RISK FACTORS SET FORTH IN THIS REPORT.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Net Sales
Net sales were $21,401,000 and $14,259,000 for the thirteen weeks ended
September 30, 1995 and September 28, 1996, respectively, representing a decrease
of 33%. Net sales were $62,186,000 and $44,026,000 for the thirty-nine weeks
ended September 30, 1995 and September 28, 1996, respectively, representing a
decrease of 29%. These decreases are primarily attributable to decreased unit
sales and average sales prices of the current recordable CD, Sierra and Tahoe
230 products. While the recordable CD product is facing increased competition,
the Sierra and Tahoe 230 products have reached the end of their product lives.
These decreases were partially offset by sales of the Vertex product which began
shipping at the end of the second quarter of 1996 and the Tahoe 640 product
which began shipping at the end of the third quarter of 1996.
Gross Profit
Gross profit decreased from $5,911,000 for the thirteen weeks ended September
30, 1995, to $2,613,000 for the thirteen weeks ended September 28, 1996, and
decreased as a percentage of net sales from 27.6% to 18.3%. Gross profit
decreased from $16,994,000 for the thirty-nine weeks ended September 30, 1995,
to $7,894,000 for the thirty-nine weeks ended September 28, 1996, and decreased
as a percentage of net sales from 27.3% to 17.9%. As noted above, the Company
has observed increased competition in the recordable CD market for its current
products and this competition placed additional pressures on selling prices and
gross margins during the first three quarters of 1996, and is expected to
continue placing pressure on gross margins in future periods for existing
recordable CD products. The reduction in gross profit is also attributable to
the Sierra and Tahoe 230 products which reached the end of their product lives.
The Company currently maintains manufacturing facilities in both California and
Colorado, each of which are currently underutilized. The overhead costs
associated with these facilities significantly reduced the Company's gross
margins in the current thirteen week and thirty-nine week periods. The Company
plans to consolidate all manufacturing operations into one facility located in
Colorado as part of the announced restructuring in order to reduce overhead
costs and increase efficiencies. (See Note 6 of Notes to Condensed Financial
Statements.)
Selling, General and Administrative
Selling, general and administrative expenses were $4,325,000 and $4,451,000 in
the thirteen weeks ended September 30, 1995 and September 28, 1996,
respectively, and represented 20.2% and 31.2% of net sales. Selling, general and
administrative expenses were $13,123,000 and $14,132,000 in the thirty-nine
weeks ended September 30, 1995 and September 28, 1996, respectively, and
represented 21.1% and 32.1% of net sales. The increase in expenditures resulted
primarily from increased advertising and promotional expenditures and the
expansion of the Company's sales and administrative staffs. In the thirteen
weeks ended September 30, 1995 and September 28, 1996, selling, general and
administrative expenses were decreased by $105,000 and $52,000, respectively,
because of Japanese Yen denominated transactions as the value of the U.S. dollar
fluctuated in relationship to the Japanese Yen. Selling, general and
administrative expenses were increased by $684,000 and decreased by $230,000 for
the thirty-nine weeks ended September 30, 1995 and September 28, 1996,
respectively, for the same reason. The Company has
8
<PAGE> 9
initiated a plan of restructuring intended to reduce its cost structure in 1997,
including the closing of its branch office in Japan. (See Note 6 of Notes to
Condensed Financial Statements.)
Research and Development
Research and development expenses were $1,378,000 and $1,494,000 for the
thirteen weeks ended September 30, 1995 and September 28, 1996, respectively, or
6.4% and 10.5% of net sales. Research and development expenses were $3,058,000
and $4,522,000 for the thirty-nine weeks ended September 30, 1995 and September
28 1996, respectively, or 4.9% and 10.3% of net sales. These increases resulted
from increased staffing at the Company's research and development facility,
along with expenses for Apex and Vertex prototypes and for ASIC development fees
paid to third parties. The Company expects to increase its research and
development expense during the next twelve months to fund new product
development projects.
Nonrecurring charges
Nonrecurring charges were $198,000 and $4,333,000 in the thirteen weeks ended
September 30, 1995 and September 28, 1996, respectively. Nonrecurring charges
were $606,000 and $4,584,000 in the thirty-nine weeks ended September 30, 1995
and September 28, 1996, respectively. Nonrecurring charges for the current
period also include $2,731,000 for costs associated with the Company's planned
restructuring and $1,602,000 primarily for changes to major component contracts
with two key suppliers. Also included in nonrecurring charges are certain
professional fees related to the restatements and related legal matters.
Management expects related legal fees to continue at noticeable levels through
1996 and into 1997. (See Note 4 and Note 6 of Notes to Condensed Financial
Statements).
LIQUIDITY AND CAPITAL RESOURCES
As of September 28, 1996, the Company had cash and cash equivalents of
$2,971,000 as compared to $3,606,000 at December 30, 1995. During the
thirty-nine weeks ended September 30, 1995, the Company's operations used
$2,647,000 in cash, while they used $10,056,000 in cash during the thirty-nine
weeks ended September 28, 1996. Inventories increased from $11,413,000 at
December 30, 1995 to $12,317,000 at September 28, 1996 as the Company procured
additional quantities of long lead time components used in the Vertex and Apex
products. Accrued expenses increased from $1,244,000 at December 30, 1995 to
$5,004,000 at September 28, 1996 as a result of accrued restructuring charges.
Accounts receivable decreased from $11,354,000 at December 30, 1995 to
$10,272,000 at September 28, 1996 as the Company experienced decreased sales in
the current period.
Portions of the Company's accounts payable balance typically include items
denominated in Japanese Yen. As the Japanese Yen generally strengthened during
the thirty-nine weeks ended September 30, 1995, the cost to repay these
liabilities in terms of U.S. Dollars increased substantially. The Company has
renegotiated most of its principal contracts with Japanese suppliers for payment
in U.S. Dollars. In contrast, as the Japanese Yen generally weakened during the
thirty-nine weeks ended September 28, 1996, the cost to repay these liabilities
in terms of U.S. Dollars decreased. (See "Selling, General and Administrative"
above for details of these expenses.) These Japanese Yen liabilities were not
hedged at September 28, 1996.
The Company's investing activities during this period included capital
expenditures of $644,000 primarily for test and manufacturing equipment
associated with the Company's manufacturing facility in Colorado.
In October 1996, the Company entered into a Loan and Security Agreement with
Coast Business Credit which permits the Company to borrow the lesser of
$10,000,000 at any one time or an available credit limit determined by a formula
based on the Company's receivables, inventory and equipment and a term loan
limitation. The loan agreement has a letter of credit sublimit of $3,500,000 and
all amounts outstanding bear interest at a rate equal to the "prime rate" (as
defined in the agreement) plus 1-3/4% per annum. The
9
<PAGE> 10
Company's obligations under the agreement are secured by assets of the Company.
The agreement contains various covenants and the scheduled maturity date of the
agreement is September 30, 1998, subject to renewal as provided for in the
agreement. As of November 6, 1996, the Company had borrowed approximately
$3,000,000 under the agreement.
In addition to the Loan and Security Agreement with Coast Business Credit, the
Company also plans an additional private placement of $8,000,000 of convertible
subordinated notes with First Bermuda to take place in the fourth quarter of
1996. The Company believes the liquidity provided by the lending relationship
with Coast Business Credit along with the additional $8,000,000 from the private
placement should provide adequate working capital for the Apex ramp-up of
manufacturing which is expected in the fourth quarter of 1996. If the Company
can not complete the planned fourth quarter offshore placement of subordinated
debentures it is likely to have serious liquidity problems. (See Note 5 of Notes
to Condensed Financial Statements.)
GENERAL AND RISK FACTORS
Vertex and Apex
Vertex 2.6 GB optical drive was relaunched in June 1996. Current production is
sufficient to satisfy the existing backlog of orders and meet current demand.
Apex 4.6 GB optical drive was in pilot release for evaluation before volume
production begins in November. As the scheduled Apex production date in the
fourth quarter has drawn nearer, customer demand for Vertex is softening. In the
third quarter, the Company began testing the credit card direct sales backlog
for Apex, some of which were booked more than one year ago. Verification of
orders is continuing, with approximately 30% of credit card orders (which is a
small part of the backlog) dropping out. Management may make changes in Vertex's
market position and in its sales strategy in the fourth quarter in an attempt to
improve Vertex sales in subsequent periods. Market acceptance of Apex is
critical to the Company's success in the near term.
Challenges
The Company's main challenges fall into three categories: technology, management
and liquidity. The Company's future success depends upon its R&D strategy and
investments and related identification and development of new markets for the
Company's products. The Company is still building the management team it needs.
Management is actively recruiting a Vice President of Marketing. The Company's
cash requirements will be high through 1996 and into the second quarter of 1997,
as the Company invests in R&D and manufacturing ramp-up. If the Company is
unable to raise capital through the planned second offshore private placement,
growth will be slowed.
The manufacturing consolidation and reorganization in Colorado Springs may not
be completed until the first quarter of next year due to a planned move to a new
facility.
Background Risks
The Company's quarterly operating results fluctuate significantly depending on
factors such as timing of product introductions by the Company and its
competitors, market acceptance of new products and enhanced versions of the
Company's existing products, changes in pricing policies by the Company and its
competitors, currency fluctuations and the timing of expenditures on
advertising, promotion and research and development.
In addition, the Company's component purchases, production and spending levels
are made based upon forecasted demand for the Company's products. Accordingly,
any inaccuracy in forecasting could adversely affect the Company's results of
operations. Demand for the Company's products could be adversely affected by a
slowdown in the overall demand for computer systems or data storage products.
Further, as is common in many high technology companies, the Company's shipments
tend to be
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<PAGE> 11
disproportionately higher in the latter part of each quarter. The
Company has historically experienced an increase in the number of orders and
shipments in the latter part of each calendar quarter and the Company expects
this pattern to continue in the future. The Company's failure to receive
anticipated orders or to complete shipments in the latter part of a quarter
could have a material adverse effect on the Company's results of operations for
that quarter. Past results are not necessarily indicative of future performance
for any particular period.
The Company continues to face competition from much larger magnetic and optical
storage device developers, including Fujitsu, Sony and Philips. These
competitors have larger R&D budgets and staffs, greater engineering and
manufacturing experience, and may be able to bring comparable or superior
products to market which could negatively impact the results of the Company.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company and certain former members of its senior management have been the
subject of an investigation by the Securities and Exchange Commission (the
"SEC") relating principally to the restatement of the Company's
previously-reported financial results. The Company and its management have been
cooperating fully with the investigation. The resignation of the Company's prior
independent public accountants on February 20, 1996, led to an additional
inquiry by the SEC, which additional inquiry is believed to be closed. The
Company is near final agreement on terms of a settlement with the Staff of the
Enforcement Division of the SEC. The proposed settlement does not provide for
any civil penalties.
On March 15, 1996, a complaint was filed against the Company and certain of its
directors and then executive officers in a securities class action lawsuit which
alleges that the Company's management engaged in improper accounting practices
and made certain false and misleading statements. The Company denies all
allegations and intends to vigorously contest the suit. (See Note 4 of Notes to
Condensed Financial Statements.)
The Company is also subject to other legal proceedings and claims which arise in
the normal course of business. While the outcome of these proceedings cannot be
predicted with certainty, the Company does not believe that the outcome of such
legal matters will have a material adverse effect on the Company's financial
condition.
11
<PAGE> 12
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
At the Annual Meeting of Stockholders of the Company, held on Thursday, August
29, 1996, the following directors were elected to the Board of Directors to
serve as directors until the next Annual Meeting of Stockholders or until their
successors are elected and qualified:
<TABLE>
<CAPTION>
Affirmative Withheld
Votes Votes
----- -----
<S> <C> <C>
Lawrence Goelman 4,335,715 300
Daryl White 4,335,715 300
Scott Blum 4,335,378 637
Charles A. Laverty 4,335,715 300
</TABLE>
In addition to the election of directors, the following proposals were approved
by stockholders at the Annual Meeting:
<TABLE>
<CAPTION>
Affirmative Negative
Votes Votes Abstentions
----- ----- -----------
<S> <C> <C> <C>
(1) 1996 Long Term Incentive Plan 4,332,750 1,637 1,628
(2) 1996 Non-Employee Directors Stock Option Plan 4,332,472 1,915 1,628
(3) Ratify the appointment of BDO Seidman, LLP as the 4,334,928 37 1,050
Company's independent certified public accountants
</TABLE>
ITEM 5. OTHER INFORMATION
SUBSEQUENT EVENTS
Scott Blum Resigns Employment
Scott Blum, a founder of the Company and Vice President, Marketing, resigned his
position as of September 30, 1996. Mr. Blum remains on the Board of Directors.
Advertising Agency
In the fourth quarter, management intends to select an outside advertising and
marketing services agency to take over advertising and marketing services
efforts previously handled internally.
New Director
Dr. John Koehler was elected to the Board of Directors by the Board as of
October 1, 1996.
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<PAGE> 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
<TABLE>
<CAPTION>
Exhibit Number Description Page Number
- -------------- ----------- -----------
<S> <C> <C>
10.35 Loan and Security Agreement with Coast
Business Credit dated September 18, 1996
27.1 Financial Data Schedule
</TABLE>
(b) Reports on Form 8-K:
The Company filed a Current Report on Form 8-K dated July 15,
1996, announcing the offshore placement of $10,000,000
principal amount of convertible subordinated notes.
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SIGNATURES
PINNACLE MICRO, INC.
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Date: November 11, 1996 By: /s/ LAWRENCE GOELMAN
----------------------------------
Lawrence Goelman
President and Chief Executive Officer
(Duly Authorized Officer)
Date: November 11, 1996 By: /s/ ROGER HAY
----------------------------------
Roger Hay
Executive Vice President and Chief Financial
Officer
(Principal Financial Officer and Principal
Accounting Officer)
14
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COAST
LOAN AND SECURITY AGREEMENT
BORROWER: PINNACLE MICRO, INC.,
A DELAWARE CORPORATION
ADDRESS: 19 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
DATE: SEPTEMBER 18, 1996
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association
("Coast"), a California corporation, with offices at 12121 Wilshire Boulevard,
Suite 1111, Los Angeles, California 90025, and the borrower(s) named above (the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall
for all purposes be deemed to be a part of this Agreement, and the same is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 LOANS. Coast will make loans to Borrower (the "Loans"), in amounts
determined by Coast, exercised in good faith, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing.
1.2 INTEREST. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Coast minimum quarterly interest during
the term of this Agreement with respect to the Receivable Loans and the
Inventory Loans in the amount set forth on the Schedule (the "Minimum Quarterly
Interest").
1.3 FEES. Borrower shall pay Coast the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Coast and are not
refundable.
1.4 CONDITIONS PRECEDENT. The obligation of Coast to make the Loans is
subject to the satisfaction, in the sole discretion of Coast, at or prior to the
first advance of funds hereunder, of each, every and all of the following
conditions:
(a) STATUS OF ACCOUNTS AT CLOSING. Except with respect to payments
to JVC as set forth on Schedule 1.4(a) hereto, and on substantially the same
terms as described therein, no accounts payable shall be due and unpaid ninety
(90) days past its due date except for such accounts payable being contested in
good faith in appropriate proceedings and for which adequate reserves have been
provided;
(b) MINIMUM AVAILABILITY. Borrower shall have minimum
availability at the time of the initial funding of the Loans of Seven Hundred
Fifty Thousand Dollars ($750,000);
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
(c) LANDLORD WAIVER. Coast shall have received duly executed
landlord waivers substantially in the form attached hereto as Exhibit A, and in
form for recording in the appropriate recording office, with respect to all
locations where Borrower maintains any inventory or equipment;
(d) EXECUTED LOAN DOCUMENTS. Coast shall have received this
Agreement duly executed and in form and substance satisfactory to Coast;
(e) OPINION OF BORROWER'S COUNSEL. Coast shall have received an
opinion of Borrower's counsel, substantially in the form attached hereto as
Exhibit B;
(f) PRIORITY OF COAST'S LIENS. Coast shall have received the results
of "of record" searches satisfactory to Coast in its commercially reasonable
judgment, reflecting its Uniform Commercial Code filings against Borrower
indicating that Coast has a perfected, first priority lien, insofar as filing
can accomplish perfection, in and upon all of the Collateral, subject only to
Permitted Liens;
(g) INSURANCE. Coast shall have received copies of the insurance
binders or certificates evidencing Borrower's compliance with Section 5.2
hereof, including lender's loss payee endorsements;
(h) APPRAISALS. Coast shall have received appraisals performed by an
appraiser acceptable to Coast with respect to the Equipment, in form and
substance satisfactory to Coast in its sole and absolute discretion;
(i) PROJECTIONS. Coast shall have received Borrower's corporate
projections for fiscal year 1996 and shall have received a certificate executed
by Borrower certifying that there have occurred no material changes to such
projections.
(j) ADDITIONAL EQUITY. Coast shall have received evidence of the
financing of convertible debt issued by Borrower, with net proceeds, after fees
and taxes, of at least Nine Million Four Hundred Thousand Dollars ($9,400,000);
(k) CORPORATE EXISTENCE. Coast shall have received copies of
Borrower's Articles or Certificate of Incorporation and all amendments thereto,
and a Certificate of Good Standing, each certified by the Secretary of State of
the state of Borrower's incorporation, and dated a recent date prior to the
Closing Date, and Coast shall have received Certificates of Foreign
Qualification for Borrower from the Secretary of State of each state wherein the
failure to be so qualified could have a Material Adverse Effect;
(l) CORPORATE DOCUMENTS. Coast shall have received copies of
Borrower's Bylaws and all amendments thereto, and Coast shall have received
copies of the resolutions of the board of directors of Borrower, authorizing the
execution and delivery of this Agreement and the other documents contemplated
hereby, and authorizing the transactions contemplated hereunder and thereunder,
and authorizing specific officers of Borrower to execute the same on behalf of
Borrower, in each case certified by the Secretary or other acceptable officer of
Borrower as of the Closing Date;
(m) DUE DILIGENCE. Coast shall have completed its due diligence with
respect to Borrower; and
(n) OTHER DOCUMENTS AND AGREEMENTS. Coast shall have received such
other agreements, instruments and documents, including, but not limited to,
UCC-1 financing statements, fixture filings, termination statements and security
agreements (including covering copyrights, patents and trademarks), as Coast may
require in connection with the transactions contemplated hereby, all in form and
substance satisfactory to Coast in Coast's sole and absolute discretion, and in
form for filing in the appropriate filing office.
1.5 LETTERS OF CREDIT. At the request of Borrower, Coast may, in its sole
discretion, arrange for the issuance of letters of credit for the account of
Borrower (collectively, "Letters of Credit"), by issuing guarantees to the
issuer of the letter of credit or by other means. All Letters of Credit shall be
in form and substance satisfactory to Coast in its sole discretion. The
aggregate face amount of all outstanding Letters of Credit from time to time
shall not exceed the amount shown on the Schedule (the "Letter of Credit
Sublimit"), and shall be reserved against Loans which would otherwise be
available hereunder. Borrower shall pay all bank charges for the issuance of
Letters of Credit. Any payment by Coast under or in connection with a Letter of
Credit shall constitute a Loan hereunder on the date such payment is made. Each
Letter of Credit shall have an expiry date no later than thirty days prior to
the Maturity Date. Borrower hereby agrees to indemnify, save, and hold Coast
harmless from any loss, cost, expense, or liability, including payments made by
Coast, expenses, and reasonable attorneys' fees incurred by Coast arising out of
or in connection with any Letters of Credit. Borrower agrees to be bound by the
regulations and interpretations of the issuer of any Letters of Credit
guarantied by Coast and opened for Borrower's account or by Coast's
interpretations of any Letter of Credit issued by Coast for Borrower's
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
account, and Borrower understands and agrees that Coast shall not be liable for
any error, negligence, or mistake, whether of omission or commission, in
following Borrower's instructions or those contained in the Letters of Credit or
any modifications, amendments, or supplements thereto. Borrower understands that
Letters of Credit may require Coast to indemnify the issuing bank for certain
costs or liabilities arising out of claims by Borrower against such issuing
bank. Borrower hereby agrees to indemnify and hold Coast harmless with respect
to any loss, cost, expense, or liability incurred by Coast under any Letter of
Credit as a result of Coast's indemnification of any such issuing bank. The
provisions of this Loan Agreement, as it pertains to Letters of Credit, and any
other present or future documents or agreements between Borrower and Coast
relating to Letters of Credit are cumulative.
2. SECURITY INTEREST.
2.1 SECURITY INTEREST. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Coast a security interest in all
of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located: All Receivables, Inventory, Equipment, and
General Intangibles, including, without limitation, all of Borrower's Deposit
Accounts, and all money, and all property now or at any time in the future in
Coast's possession (including claims and credit balances), and all proceeds of
any of the foregoing (including proceeds of any insurance policies, proceeds of
proceeds, and claims against third parties), all products of any of the
foregoing, and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make Loans,
except as set forth on the exhibits and schedules hereto, Borrower represents
and warrants to Coast as follows, and Borrower covenants that the following
representations will continue to be true, and that Borrower will at all times
comply with all of the following covenants:
3.1 CORPORATE EXISTENCE AND AUTHORITY. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will continue
to be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a Material Adverse Effect. The execution, delivery
and performance by Borrower of this Agreement, and all other documents
contemplated hereby (a) have been duly and validly authorized, (b) are
enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (c) do not violate Borrower's articles or certificate of
incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (d) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 NAME; TRADE NAMES AND STYLES. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast thirty (30) days' prior written notice before changing
its name or doing business under any other name. Borrower has complied, and will
in the future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 PLACE OF BUSINESS; LOCATION OF COLLATERAL. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 TITLE TO COLLATERAL; PERMITTED LIENS. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. Except as disclosed in the
Schedule as to motor vehicles, Coast now has, and will continue to have, a
first-priority perfected and enforceable security interest in all of the
Collateral, subject only to the Permitted Liens, and Borrower will at all times
defend Coast and the Collateral against all claims of others. None of the
Collateral now is or will be affixed to any real property in such a manner, or
with such intent, as to become a fixture. Borrower is not and will not become a
lessee under any real property lease pursuant to which the lessor may obtain any
rights in any of the Collateral and no such lease now prohibits, restrains,
impairs or will prohibit, restrain or
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
impair Borrower's right to remove any Collateral from the leased premises.
Whenever any Collateral is located upon premises in which any third party has an
interest (whether as owner, mortgagee, beneficiary under a deed of trust, lien
or otherwise), Borrower shall, whenever requested by Coast, use commercially
reasonable efforts to cause such third party to execute and deliver to Coast, in
form acceptable to Coast, such waivers and subordinations as Coast shall
specify, so as to ensure that Coast's rights in the Collateral are, and will
continue to be, superior to the rights of any such third party. Borrower will
keep in full force and effect, and will comply with all the terms of, any lease
of real property where any of the Collateral now or in the future may be
located.
3.5 MAINTENANCE OF COLLATERAL. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Coast in writing of any
material loss or damage to the Collateral.
3.6 BOOKS AND RECORDS. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 FINANCIAL CONDITION, STATEMENTS AND REPORTS. All financial statements
now or in the future delivered to Coast have been, and will be, prepared in
conformity with generally accepted accounting principles (except, in the case of
unaudited financial statements, for the absence of footnotes and subject to
normal year-end adjustments) and now and in the future will fairly reflect the
financial condition of Borrower, at the times and for the periods therein
stated. Between the last date covered by any such statement provided to Coast
and the date hereof, there has been no Material Adverse Effect. Borrower is now
and will continue to be Solvent.
3.8 TAX RETURNS AND PAYMENTS; PENSION CONTRIBUTIONS. Where the failure to
do so by Borrower would result in a Material Adverse Effect, Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in writing
of the commencement of, and any material development in, the proceedings, and
(iii) posts bonds or takes any other steps required to keep the contested taxes
from becoming a lien upon any of the Collateral. As of the date hereof, Borrower
is unaware of any material claims or adjustments proposed for any of Borrower's
prior tax years which could result in additional taxes becoming due and payable
by Borrower. Borrower has paid, and shall continue to pay all amounts necessary
to fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
3.9 COMPLIANCE WITH LAW. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal, state
and local laws and regulations relating to Borrower, including, but not limited
to, those relating to Borrower's ownership of real or personal property, the
conduct and licensing of Borrower's business, and environmental matters.
3.10 LITIGATION. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in a Material Adverse Effect.
Borrower will promptly inform Coast in writing of any claim, proceeding,
litigation or investigation in the future threatened or instituted by or against
Borrower involving any single claim of Two Hundred Fifty Thousand Dollars
($250,000) or more, or involving Five Hundred Thousand Dollars ($500,000) or
more in the aggregate.
3.11 USE OF PROCEEDS. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
4. RECEIVABLES.
4.1 REPRESENTATIONS RELATING TO RECEIVABLES. Borrower represents and
warrants to Coast as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, subject
only to warranty claims and stock rotation by dealers consistent with the
conduct of Borrower's business in the ordinary course.
4.2 REPRESENTATIONS RELATING TO DOCUMENTS AND LEGAL COMPLIANCE. Borrower
represents and warrants to Coast as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's books and records are and
shall be genuine and in all respects what they purport to be. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and endorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine to the extent Borrower
relies on the genuineness of such documents, instruments and agreements in the
ordinary course of business, and all such documents, instruments and agreements
are and shall be legally enforceable in accordance with their terms.
4.3 SCHEDULES AND DOCUMENTS RELATING TO RECEIVABLES. Borrower shall
deliver to Coast transaction reports and loan requests, schedules of
Receivables, and schedules of collections, all on Coast's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit Coast's security interest and other rights in all of
Borrower's Receivables, nor shall Coast's failure to advance or lend against a
specific Receivable affect or limit Coast's security interest and other rights
therein. Loan requests received after 10:30 AM may not be considered by Coast
until the next Business Day. Together with each such schedule, or later if
requested by Coast, Borrower shall furnish Coast with copies of all contracts,
orders, invoices, and other similar documents, and all original shipping
instructions, delivery receipts, bills of lading, and other evidence of
delivery, for any goods the sale or disposition of which gave rise to such
Receivables, and Borrower warrants the genuineness of all of the foregoing to
the extent Borrower relies on the genuineness of such documents in the ordinary
course of business. Borrower shall also furnish to Coast an aged accounts
receivable trial balance in such form and at such intervals as Coast shall
request. In addition, Borrower shall deliver to Coast the originals of all
instruments, chattel paper, security agreements, guarantees and other documents
and property evidencing or securing any Receivables, upon receipt thereof and in
the same form as received, with all necessary endorsements, all of which shall
be with recourse. Borrower shall also provide Coast with copies of all credit
memos as and when requested by Coast.
4.4 COLLECTION OF RECEIVABLES. Borrower shall have the right to collect
all Receivables, unless and until an Event of Default has occurred. Borrower
shall hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower shall deliver all such payments and proceeds to Coast within one
Business Day after receipt by Borrower, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall determine.
Coast may, in its discretion, require that all proceeds of Collateral be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Coast may specify, pursuant to a blocked account agreement in such form as Coast
may specify. Coast or its designee may, upon two (2) Business Days' notice to
Borrower if no Default or Event of Default has occurred (otherwise at any time),
notify Account Debtors that Coast has been granted a security interest in the
Receivables.
4.5 REMITTANCE OF PROCEEDS. All proceeds arising from the disposition of
any Collateral shall be delivered to Coast within one Business Day after receipt
by Borrower, in their original form, duly endorsed to Coast, to be applied to
the Obligations in such order as Coast shall determine. Borrower agrees that it
will not commingle proceeds of Collateral with any of Borrower's other funds or
property, but will hold such proceeds separate and apart from such other funds
and property and in an express trust for Coast. Nothing in this Section limits
the restrictions on disposition of Collateral set forth elsewhere in this
Agreement.
4.6 DISPUTES. Borrower shall notify Coast promptly of all disputes or
claims relating to Receivables which could result in a Material Adverse Effect.
Borrower shall not forgive (completely or partially), compromise or settle any
Receivable for less than payment in full, except in connection with Borrower's
return and warranty policy in the ordinary course of business, or agree to do
any of the foregoing, except that Borrower may do so, provided that: (a)
Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to Coast on the regular reports provided to Coast; (b) no Default or
Event of Default has occurred and is continuing; and (c) taking into account all
such discounts settlements and
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
forgiveness, the total outstanding Loans will not exceed the Credit Limit. Coast
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 Coast considers advisable in its reasonable credit judgment and, in all
cases, Coast shall credit Borrower's Loan account with only the net amounts
received by Coast in payment of any Receivables.
4.7 RETURNS. Provided no Event of Default has occurred and is continuing,
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 in the appropriate
amount. In the event any attempted return occurs after the occurrence of any
Event of Default, Borrower shall (a) hold the returned Inventory in trust for
Coast, (b) segregate all returned Inventory from all of Borrower's other
property, (c) conspicuously label the returned Inventory as subject to Coast's
security interest, and (d) except with respect to returns for warranty service
in the ordinary course of business, immediately notify Coast of the return of
any Inventory, specifying the reason for such return, the location and condition
of the returned Inventory, and on Coast's request deliver such returned
Inventory to Coast.
4.8 VERIFICATION. Coast may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose.
4.9 NO LIABILITY. Coast shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Coast be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Coast from liability for its
own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 FINANCIAL AND OTHER COVENANTS. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
5.2 INSURANCE. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, with
insurers reasonably acceptable to Coast, in such form and amounts as Coast may
reasonably require, and Borrower shall provide evidence of such insurance to
Coast, so that Coast is satisfied that such insurance is, at all times, in full
force and effect. All liability insurance policies of Borrower shall name Coast
as an additional insured, and all property casualty and related insurance
policies of Borrower shall name Coast as a loss payee thereon and Borrower shall
cause a lenders loss payee endorsement in form reasonably acceptable to Coast.
Upon receipt of the proceeds of any such insurance, Coast shall apply such
proceeds of property casualty insurance in reduction of the Obligations as Coast
shall determine in its sole discretion, except that, provided no Default or
Event of Default has occurred and is continuing, Coast shall release to Borrower
insurance proceeds with respect to Equipment totaling less than Two Hundred
Fifty Thousand Dollars ($250,000), which shall be utilized by Borrower for the
replacement of the Equipment with respect to which the insurance proceeds were
paid. Coast may require reasonable assurance that the insurance proceeds so
released will be so used. If Borrower fails to provide or pay for any insurance,
Coast may, but is not obligated to, obtain the same at Borrower's expense.
Borrower shall promptly deliver to Coast copies of all claims in excess of Two
Hundred Fifty Thousand Dollars ($250,000) made to insurance companies.
5.3 REPORTS. Borrower, at its expense, shall provide Coast with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Coast shall from time to time reasonably
specify upon reasonable advance notice to Borrower. Coast acknowledges that such
information may be confidential in nature and cannot be disclosed or used for
any purpose other than the administration of this Agreement.
5.4 ACCESS TO COLLATERAL, BOOKS AND RECORDS. At reasonable times not
interfering with regularly scheduled audits of Borrower being performed by
certified public accountants, and on one (1) Business Day's notice, Coast, or
its agents, shall have the right to inspect, audit and copy Borrower's books and
records and the Collateral (the "Audits"). Coast shall take reasonable steps to
keep confidential all confidential information obtained in any Audit, but Coast
shall have the right to disclose any such information to its auditors,
regulatory agencies, and attorneys, and pursuant to any subpoena or other legal
process. The Audits shall be at Borrower's expense and the charge for the Audits
shall be Five Hundred Fifty Dollars
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
($550) per person per day (or such higher amount as shall represent Coast's then
current standard charge for the same), plus reasonable out of pocket expenses.
Borrower will not enter into any agreement with any accounting firm, service
bureau or third party to store Borrower's books or records at any location other
than Borrower's Address, without first notifying Coast of the same and obtaining
the written agreement from such accounting firm, service bureau or other third
party to give Coast the same rights with respect to access to books and records
and related rights as Coast has under this Loan Agreement.
5.5 NEGATIVE COVENANTS. Borrower shall not, without Coast's prior written
consent, which consent shall not be unreasonably withheld, do any of the
following:
(a) merge or consolidate with another corporation or entity, except
in a transaction in which (i) the shareholders of the Borrower hold at least 50%
of the common stock and all other capital stock of the surviving corporation
immediately after such merger or consolidation, and (ii) the Borrower is the
surviving corporation;
(b) acquire any assets, except (i) in the ordinary course of
business, or (ii) in a transaction or a series of transactions not involving the
payment of an aggregate amount in excess of Five Hundred Thousand Dollars
($500,000);
(c) enter into any other transaction outside the ordinary course of
business as set forth in Borrower's report on form 10-K;
(d) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the sale
of obsolete or unneeded Equipment in the ordinary course of business;
(e) except as described in Section 6 of the Schedule hereto, store
any Inventory or other Collateral with any warehouseman or other third party;
(f) sell any Inventory on a sale-or-return, guaranteed sale,
consignment, or other contingent basis, except as described on Schedule 5.5(f)
hereto, setting forth Borrower's dealer and return practices;
(g) make any loans of any money or other assets, except (i) advances
to customers or suppliers in the ordinary course of business, (ii) travel
advances, employee relocation loans and other employee loans and advances in the
ordinary course of business, and (iii) loans to employees, officers and
directors for the purpose of purchasing equity securities of the Borrower;
(h) except with respect to Borrower's second off-shore placement of
payment-in-kind convertible debentures substantially in accordance with the
terms set forth on the term sheet dated June 27, 1996 delivered to Coast, and
except for debts incurred in the ordinary course of business consistent with
past practices, incur any debts, which would have a Material Adverse Effect;
(i) except as set forth on Schedule 5.5(i) hereto, guarantee or
otherwise become liable with respect to the obligations of another party or
entity;
(j) pay or declare any dividends on Borrower's stock (except for
dividends payable solely in stock of Borrower);
(k) redeem, retire, purchase or otherwise acquire, directly or
indirectly, any of Borrower's stock, except that Borrower may repurchase stock
owned by employees, directors and consultants of Borrower pursuant to terms of
employment, consulting or other stock restriction agreements at such time as any
such employee, director or consultant terminates his or her affiliation with the
Borrower, for an aggregate purchase price not to exceed $100,000 in any fiscal
year; provided, however, that such aggregate purchase price may not exceed One
Million Dollars ($1,000,000) during fiscal year 1997 so long as such purchase
does not result in a violation of any of the financial covenants set forth
herein;
(l) except as disclosed on Schedule 5.5(i) hereto, make any change
in Borrower's capital structure which would have a Material Adverse Effect; or
(m) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are only
permitted if no Default or Event of Default would occur as a result of such
transaction.
5.6 LITIGATION COOPERATION. Should any third-party suit or proceeding be
instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
5.7 INDEMNITY. Borrower hereby agrees to indemnify Coast and hold Coast
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, reasonable costs and
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
expenses (including reasonable attorneys' fees), of every nature, character and
description, which Coast may sustain or incur based upon or arising out of any
of the Obligations, any actual or alleged failure to collect and pay over any
withholding or other tax relating to Borrower or its employees, any actual or
alleged failure of Coast to comply with any writ of attachment or other legal
process relating to Borrower or any of its property, or any other matter, cause
or thing whatsoever occurred, done, omitted or suffered to be done by Coast
relating to Borrower or the Obligations (except any such amounts sustained or
incurred as the result of the gross negligence or willful misconduct of Coast).
Notwithstanding any provision in this Agreement to the contrary, the indemnity
agreement set forth in this Section shall survive any termination of this
Agreement and shall for all purposes continue in full force and effect.
5.8 FURTHER ASSURANCES. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 MATURITY DATE. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity Date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
sixty days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date. If this Agreement is renewed
under this Section 6.1, Borrower shall pay to Coast a renewal fee (the "Renewal
Fee") in the amount shown on the Schedule. The Renewal Fee shall be due and
payable on the effective date of renewal and thereafter shall bear interest at a
rate equal to the rate applicable to the Receivable Loans.
6.2 EARLY TERMINATION. This Agreement may be terminated prior to the
Maturity Date as follows: (a) by Borrower, effective three (3) Business Days
after written notice of termination is given to Coast; or (b) by Coast at any
time after the occurrence of an Event of Default, without notice, effective
immediately. If this Agreement is terminated by Borrower or by Coast under this
Section 6.2, Borrower shall pay to Coast a termination fee (the "Early
Termination Fee") in the amount shown on the Schedule; provided, however, that
such Early Termination Fee shall be limited by the provisions contained in the
Schedule. The Early Termination Fee shall be due and payable on the effective
date of termination and thereafter shall bear interest at a rate equal to the
rate applicable to the Receivable Loans.
6.3 PAYMENT OF OBLIGATIONS. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding Letters of
Credit issued by Coast or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Coast,
then on such date Borrower shall provide to Coast cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Coast's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Coast's security interests in all of the Collateral and all of
the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Coast, Coast may, in its sole discretion, refuse to make any further Loans after
termination. No termination shall in any way affect or impair any right or
remedy of Coast, nor shall any such termination relieve Borrower of any
Obligation to Coast, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Coast shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Coast's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 EVENTS OF DEFAULT. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Coast immediate written notice thereof:
(a) Any material warranty, representation, statement, report or
certificate made or delivered to Coast by Borrower or any of Borrower's
officers, employees or agents, now or in the future, shall be untrue or
misleading in a material respect; or
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
(b) Borrower shall fail to pay when due any Loan or any interest
thereon or any other monetary Obligation; or
(c) the total Loans and other Obligations outstanding at any time
shall exceed the Credit Limit and Borrower has not immediately repaid such
excess upon demand or such excess is not being otherwise repaid pursuant to a
mutually acceptable amortization schedule; or
(d) Borrower shall fail to deliver the proceeds of Collateral to
Coast as provided in Section 4.5 above, or shall fail to give Coast access to
its books and records or Collateral as provided in Section 5.4 above, or shall
breach any negative covenant set forth in Section 5.5 above; or
(e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or
(f) Borrower shall fail to perform any other non-monetary
Obligation, which failure is not cured within five (5) Business Days after the
date Borrower knew or should have known of such failure; or
(g) Any levy, assessment, attachment, seizure, lien or encumbrance
(other than a Permitted Lien) is made on all or any part of the Collateral which
is not cured within thirty (30) days after the occurrence of the same; or
(h) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or
(i) Borrower breaches any material contract or obligation, which has
or may reasonably be expected to have a Material Adverse Effect; or
(j) Dissolution, termination of existence, insolvency or business
failure of Borrower; or appointment of a receiver, trustee or custodian, for all
or any part of the property of, assignment for the benefit of creditors by, or
the commencement of any proceeding by Borrower under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in effect;
or
(k) the commencement of any proceeding against Borrower or any
guarantor of any of the Obligations under any reorganization, bankruptcy,
insolvency, arrangement, readjustment of debt, dissolution or liquidation law or
statute of any jurisdiction, now or in the future in effect, which is not cured
by the dismissal thereof within forty-five (45) days after the date commenced;
or
(l) Borrower makes any payment on account of any indebtedness or
obligation which has been subordinated to the Obligations, other than as
permitted in the applicable subordination agreement, or if any Person who has
subordinated such indebtedness or obligations terminates or in any way limits
his subordination agreement in such a manner as to result in a Material Adverse
Effect as determined by Coast; or
(m) Borrower shall suffer or experience any Change of Control
without Coast's prior written consent, not to be unreasonably withheld. As used
herein, "Change of Control" shall be deemed to have occurred at such time as a
"person" or "group" (within the meaning of Sections 13(d) and 14(d)(2) of the
Securities Exchange Act of 1934) (other than the current shareholders of
Borrower) becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of more than twenty
(20%) of the total voting power of all classes of stock then outstanding of any
Borrower normally entitled to vote in the election of directors; or
(n) Borrower shall generally not pay its debts as they become due,
or Borrower shall conceal, remove or transfer any part of its property, with
intent to hinder, delay or defraud its creditors, or make or suffer any transfer
of any of its property which may be fraudulent under any bankruptcy, fraudulent
conveyance or similar law; or
(o) there shall be any Material Adverse Effect; or
(p) Coast, acting in good faith and in a commercially reasonable
manner, deems itself insecure because of the occurrence of an event which
results or could result in a Material Adverse Effect prior to the effective date
hereof of which Coast had no knowledge on the effective date or because of the
occurrence of an event on or subsequent to the effective date.
Coast may cease making any Loans hereunder during any of the above cure periods,
and thereafter if an Event of Default has occurred.
7.2 REMEDIES. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following, to the extent permitted by law:
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
(a) Cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other document or agreement;
(b) Accelerate and declare all or any part of the Obligations to be
immediately due, payable, and performable, notwithstanding any deferred or
installment payments allowed by any instrument evidencing or relating to any
Obligation;
(c) Take possession of any or all of the Collateral wherever it may
be found, and for that purpose Borrower hereby authorizes Coast without judicial
process to enter onto any of Borrower's premises without interference to search
for, take possession of, keep, store, or remove any of the Collateral, and
remain on the premises or cause a custodian to remain on the premises in
exclusive control thereof, without charge for so long as Coast deems it
reasonably necessary in order to complete the enforcement of its rights under
this Agreement or any other agreement; provided, however, that should Coast seek
to take possession of any of the Collateral by Court process, Borrower hereby
irrevocably waives:
(i) any bond and any surety or security relating thereto
required by any statute, court rule or otherwise as an incident to such
possession;
(ii) any demand for possession prior to the commencement of
any suit or action to recover possession thereof; and
(iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment;
(d) Require Borrower to assemble any or all of the Collateral and
make it available to Coast at places designated by Coast which are reasonably
convenient to Coast and Borrower, and to remove the Collateral to such locations
as Coast may deem advisable;
(e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Coast shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge;
(f) Sell, lease or otherwise dispose of any of the Collateral, in
its condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Coast may directly
or through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale;
(g) Demand payment of, and collect any Receivables and General
Intangibles comprising Collateral and, in connection therewith, Borrower
irrevocably authorizes Coast to endorse or sign Borrower's name on all
collections, receipts, instruments and other documents, to take possession of
and open mail addressed to Borrower and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Coast's sole
discretion, to grant extensions of time to pay, compromise claims and settle
Receivables and the like for less than face value;
(h) Offset against any sums in any of Borrower's general, special or
other Deposit Accounts with Coast; and
(i) Demand and receive possession of copies of any of Borrower's
federal and state income tax returns and the books and records utilized in the
preparation thereof or referring thereto.
All reasonable attorneys' fees, expenses, costs, liabilities and obligations
incurred by Coast with respect to the foregoing shall be due from the Borrower
to Coast on demand. Coast may charge the same to Borrower's loan account, and
the same shall thereafter bear interest at the same rate as is applicable to the
Receivable Loans. Without limiting any of Coast's rights and remedies, from and
after the occurrence of any Event of Default, the interest rate then applicable
to the Obligations shall be increased by an additional two (2) percent per
annum.
7.3 STANDARDS FOR DETERMINING COMMERCIAL REASONABLENESS. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable:
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
(a) Notice of the sale is given to Borrower at least seven (7) days
prior to the sale, and, in the case of a public sale, notice of the sale is
published at least seven (7) days before the sale in a newspaper or trade
publication of national circulation such as Computer Reseller News, VAR Business
or a similar publication in the county where the sale is to be conducted
acceptable to Coast;
(b) Notice of the sale describes the collateral in general,
non-specific terms;
(c) The sale is conducted at a place designated by Coast, with or
without the Collateral being present;
(d) The sale commences at any time between 8:00 a.m. and 6:00 p.m.;
(e) Payment of the purchase price in cash or by cashier's check or
wire transfer is required;
(f) With respect to any sale of any of the Collateral, Coast may
(but is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same. Coast shall be free
to employ other methods of noticing and selling the Collateral, in its
discretion, if they are commercially reasonable.
7.4 POWER OF ATTORNEY. Upon the occurrence, and during the continuance, of
any Event of Default, without limiting Coast's other rights and remedies,
Borrower grants to Coast an irrevocable power of attorney coupled with an
interest, authorizing and permitting Coast (acting through any of its employees,
attorneys or agents) at any time, at its option, but without obligation, with or
without notice to Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise, but Coast agrees to exercise the
following powers in a commercially reasonable manner:
(a) Execute on behalf of Borrower any documents that Coast may, in
its sole discretion, deem advisable in order to perfect and maintain Coast's
security interest in the Collateral, or in order to exercise a right of Borrower
or Coast, or in order to fully consummate all the transactions contemplated
under this Agreement, and all other present and future agreements;
(b) Execute on behalf of Borrower any document exercising,
transferring or assigning any option to purchase, sell or otherwise dispose of
or to lease (as lessor or lessee) any real or personal property which is part of
Coast's Collateral or in which Coast has an interest;
(c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any Account
Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other lien, or assignment or satisfaction of
mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of
payment or proceeds of Collateral; endorse the name of Borrower upon any
instruments, or documents, evidence of payment or Collateral that may come into
Coast's possession;
(e) Endorse all checks and other forms of remittances received by
Coast;
(f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same;
(g) Grant extensions of time to pay, compromise claims and settle
Receivables and General Intangibles for less than face value and execute all
releases and other documents in connection therewith;
(h) Pay any sums required on account of Borrower's taxes or to
secure the release of any liens therefor, or both;
(i) Settle and adjust, and give releases of, any insurance claim
that relates to any of the Collateral and obtain payment therefor;
(j) Instruct any third party having custody or control of any books
or records belonging to, or relating to, Borrower to give Coast the same rights
of access and other rights with respect thereto as Coast has under this
Agreement; and
(k) Take any action or pay any sum required of Borrower pursuant to
this Agreement and any other present or future agreements. Any and all
reasonable sums paid and any and all reasonable costs, expenses, liabilities,
obligations and attorneys' fees incurred by Coast with respect to the foregoing
shall be added to and become part of the Obligations, and shall be payable on
demand. Coast may charge the foregoing to Borrower's loan account and the
foregoing shall thereafter bear interest at the same rate applicable to the
Receivable Loans. In no event shall Coast's rights under the foregoing power of
attorney or any of Coast's other rights under this Agreement be deemed to
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
indicate that Coast is in control of the business, management or properties of
Borrower.
7.5 APPLICATION OF PROCEEDS. All proceeds realized as the result of any
sale of the Collateral shall be applied by Coast first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Coast in the
exercise of its rights under this Agreement, second to the interest due upon any
of the Obligations, and third to the principal of the Obligations, in such order
as Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Coast of the cash therefor.
7.6 REMEDIES CUMULATIVE. In addition to the rights and remedies set forth
in this Agreement, Coast shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Coast and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Coast of one or more of its rights or remedies shall not be deemed an election,
nor bar Coast from subsequent exercise or partial exercise of any other rights
or remedies. The failure or delay of Coast to exercise any rights or remedies
shall not operate as a waiver thereof, but all rights and remedies shall
continue in full force and effect until all of the Obligations have been fully
paid and performed.
8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Account Debtor" means the obligor on a Receivable.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Coast is open for business.
"Closing Date" date of the initial funding under this Agreement.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Eligible Foreign Receivables" means Receivables arising from Borrower's
customers located outside the United States, provided that (i) the Borrower's
goods are shipped backed by a letter of credit, or (ii) the Borrower's goods are
shipped to a large or rated company having a verifiable credit history, or (iii)
Borrower's goods are shipped to a foreign subsidiary of a customer of Borrower
that is a company that was formed and has its primary place of business within
the United States, or (iv) Borrower's goods are shipped to a large foreign
corporation acceptable to Coast in its sole and absolute discretion, or (v)
Borrower's goods are shipped to a foreign company with a Dun & Bradstreet rating
acceptable to Coast in its sole and absolute discretion, or (vi) Borrower's
goods are shipped to a company that has credit insurance acceptable to Coast in
its sole and absolute discretion. [NOTWITHSTANDING THE FOREGOING, ANY
RECEIVABLES DERIVED FROM COMPANIES LOCATED IN THE NETHERLANDS SHALL BE ELIGIBLE
ONLY IF A SECURITY INTEREST IN SUCH RECEIVABLES CAN BE OBTAINED BY COAST IN FORM
AND SUBSTANCE SATISFACTORY TO COAST IN ITS SOLE AND ABSOLUTE DISCRETION.]
"Eligible Inventory" means Inventory which Coast, in its sole judgment,
deems eligible for borrowing, based on such considerations as Coast may from
time to time deem appropriate. Without limiting the fact that the determination
of which Inventory is eligible for borrowing is a matter of Coast's discretion,
Inventory which does not meet the following requirements will not be deemed to
be Eligible Inventory: Inventory which (i) consists of (a) domestic raw
materials, (b) media and multi-purpose commodity components, or (c) domestic
finished goods (including finished goods in package), in good, new and salable
condition which is not perishable, not obsolete or unmerchantable, and is not
comprised of work in process, packaging materials or supplies; (ii) meets all
applicable governmental standards; (iii) has been manufactured in compliance
with the Fair Labor Standards Act; (iv) conforms in all respects to the
warranties and
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
representations set forth in this Agreement; (v) is at all times subject to
Coast's duly perfected, first priority security interest; and (vi) is situated
at a one of the locations set forth on the Schedule.
"Eligible Receivables" means Receivables (including government Receivables
if all documents filed with respect thereto pursuant to the Federal Claims Act
is provided to Coast) and Eligible Foreign Receivables (i) arising in the
ordinary course of Borrower's business from the sale of goods or rendition of
services, which Coast, in its good faith business judgment, shall deem eligible
for borrowing, based on such considerations as Coast may from time to time deem
appropriate, (ii) not consisting of more than 40% of Receivables derived from
Ingram Micro, (iii) not consisting of Receivables derived from Merisel, unless
Coast shall have performed a credit review in form and substance satisfactory to
Coast in its sole and absolute discretion.
"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.
"Event of Default" means any of the events set forth in Section 7.1 of
this Agreement.
"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, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade 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 Coast, rights to purchase or sell real
or personal property, rights as a licensor or licensee of any kind, royalties,
telephone numbers, proprietary information, purchase orders, and all insurance
policies and claims (including without limitation credit insurance, liability
insurance, property insurance 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, all rights
to indemnification and all other intangible property of every kind and nature
(other than Receivables).
"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 (including without
limitation all raw materials, work in process, finished goods and goods in
transit, and including without limitation all farm products), and all materials
and supplies of every kind, nature and 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 warehouse receipts, documents of title and
other documents representing any of the foregoing.
"Material Adverse Effect" means a material adverse effect on (i) the
business, assets, condition (financial or otherwise) or results of operations of
Borrower or any subsidiary of Borrower, (ii) the ability of Borrower to perform
its obligations under this Agreement (including, without limitation, repayment
of the Obligations as they come due) or (iii) the validity or enforceability of
this Agreement or any other agreement or document entered into by any party in
connection herewith, or the rights or remedies of Coast hereunder or thereunder.
"Maximum Dollar Amount" has the meaning set forth in Section 1 of the
Schedule.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast 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, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and Coast.
"Permitted Liens" means the following:
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COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
(a) purchase money security interests in specific items of
Equipment;
(b) leases of specific items of Equipment;
(c) liens for taxes not yet payable;
(d) additional security interests and liens consented to in writing
by Coast, which consent shall not be unreasonably withheld;
(e) security interests being terminated substantially concurrently
with this Agreement;
(f) liens of materialmen, mechanics, warehousemen, carriers, or
other similar liens arising in the ordinary course of business and securing
obligations which are not delinquent;
(g) liens incurred in connection with the extension, renewal or
refinancing of the indebtedness secured by liens of the type described above in
clauses (a) or (b) above, provided that any extension, renewal or replacement
lien is limited to the property encumbered by the existing lien and the
principal amount of the indebtedness being extended, renewed or refinanced does
not increase; or
(h) liens in favor of customs and revenue authorities which secure
payment of customs duties in connection with the importation of goods.
Coast will have the right to require, as a condition to its consent under
subparagraph (d) above, that the holder of the additional security interest or
lien sign an intercreditor agreement reasonably acceptable to Coast, acknowledge
that the security interest is subordinate to the security interest in favor of
Coast, and agree not to take any action to enforce its subordinate security
interest so long as any Obligations remain outstanding, and that Borrower agree
that any uncured default in any obligation secured by the subordinate security
interest shall also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, 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.
"Solvent" means, with respect to any Person on a particular date, that on
such date (a) at fair valuations, all of the properties and assets of such
Person are greater than the sum of the debts, including contingent liabilities,
of such Person, (b) the present fair salable value of the properties and assets
of such Person is not less than the amount that will be required to pay the
probable liability of such Person on its debts as they become absolute and
matured, (c) such Person is able to realize upon its properties and assets and
pay its debts and other liabilities, contingent obligations and other
commitments as they mature in the normal course of business, (d) such Person
does not intend to, and does not believe that it will, incur debts beyond such
Person's ability to pay as such debts mature, and (e) such Person is not engaged
in business or a transaction, and is not about to engage in business or a
transaction, for which such Person's properties and assets would constitute
unreasonably small capital after giving due consideration to the prevailing
practices in the industry in which such Person is engaged. In computing the
amount of contingent liabilities at any time, it is intended that such
liabilities will be computed at the amount that, in light of all the facts and
circumstances existing at such time, represents the amount that reasonably can
be expected to become an actual or matured liability.
Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. 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.
14
<PAGE> 15
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
9. GENERAL PROVISIONS.
9.1 INTEREST COMPUTATION. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Coast (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Coast on account of the Obligations three (3) Business Days after
receipt by Coast of immediately available funds, and, for purposes of the
foregoing, any such funds received after 10:30 AM on any day shall be deemed
received on the next Business Day. Coast shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Coast in its sole discretion, and Coast may charge Borrower's
loan account for the amount of any item of payment which is returned to Coast
unpaid.
9.2 APPLICATION OF PAYMENTS. All payments with respect to the Obligations
may be applied, and in Coast's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Coast shall determine in its sole
discretion.
9.3 CHARGES TO ACCOUNTS. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's
Loan account, in which event they will bear interest at the same rate applicable
to the Loans. Coast may also, in its discretion, charge any monetary Obligations
to Borrower's Deposit Accounts maintained with Coast.
9.4 MONTHLY ACCOUNTINGS. Coast 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 Coast), unless Borrower
notifies Coast in writing to the contrary within forty-five (45) days after each
account is rendered, describing the nature of any alleged errors or omissions.
9.5 NOTICES. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, facsimile, or certified mail return
receipt requested, addressed to Coast or Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Coast shall be directed to the Commercial
Finance Division, to the attention of the Division Manager or the Division
Credit Manager. All notices shall be deemed to have been given upon delivery in
the case of notices personally delivered or via facsimile (with confirmation of
receipt), or at the expiration of one (1) Business Day following delivery to the
private delivery service, or two (2) Business Days following the deposit thereof
in the United States mail, with postage prepaid.
9.6 SEVERABILITY. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 INTEGRATION. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral understandings, representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
9.8 WAIVERS. To the extent permitted by law, the failure of Coast at any
time or times to require Borrower to strictly comply with any of the provisions
of this Agreement or any other present or future agreement between Borrower and
Coast shall not waive or diminish any right of Coast later to demand and receive
strict compliance therewith. Any waiver of any default shall not waive or affect
any other default, whether prior or subsequent, and whether or not similar. None
of the provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expressly required by this Agreement.
9.9 NO LIABILITY FOR ORDINARY NEGLIGENCE. Neither Coast, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Coast, or any of its
directors, officers, employees, agents, attorneys or any other Person
15
<PAGE> 16
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
affiliated with or representing Coast, but nothing herein shall relieve Coast
from liability for its own gross negligence or willful misconduct, or for
Coast's conduct on Borrower's premises or in manufacturing any products of
Borrower in either case after the occurrence and during the continuation of an
Event of Default, except to the extent such occupancy is pursuant to an
agreement between Coast and the owner or landlord of such premises.
9.10 AMENDMENT. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
9.11 TIME OF ESSENCE. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
9.12 ATTORNEYS FEES, COSTS AND CHARGES. Borrower shall reimburse Coast for
all reasonable attorneys' fees and all filing, recording, search, title
insurance, appraisal, audit, and other reasonable costs incurred by Coast,
pursuant to, or in connection with, or relating to this Agreement (whether or
not a lawsuit is filed), including, but not limited to, any reasonable
attorneys' fees and costs Coast incurs in order to do the following: prepare and
negotiate this Agreement and the documents relating to this Agreement; obtain
legal advice in connection with this Agreement or Borrower; enforce, or seek to
enforce, any of its rights; prosecute actions against, or defend actions by,
Account Debtors; commence, intervene in, or defend any action or proceeding;
initiate any complaint to be relieved of the automatic stay in bankruptcy; file
or prosecute any probate claim, bankruptcy claim, third-party claim, or other
claim; examine, audit, copy, and inspect any of the Collateral or any of
Borrower's books and records; protect, obtain possession of, lease, dispose of,
or otherwise enforce Coast's security interest in, the Collateral; and otherwise
represent Coast in any litigation relating to Borrower. If either Coast or
Borrower files any lawsuit against the other predicated on a breach of this
Agreement, the prevailing party in such action shall be entitled to recover its
reasonable costs and attorneys' fees, including (but not limited to) reasonable
attorneys' fees and costs incurred in the enforcement of, execution upon or
defense of any order, decree, award or judgment. Borrower shall also pay Coast's
standard charges for returned checks and for wire transfers, in effect from time
to time. All attorneys' fees, costs and charges to which Coast may be entitled
pursuant to this Paragraph may be charged by Coast to Borrower's loan account
and shall thereafter bear interest at the same rate as the Receivable Loans.
9.13 BENEFIT OF AGREEMENT. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations.
9.14 PUBLICITY. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof, subject
to Borrower's prior approval (which approval shall not be unreasonably
withheld).
9.15 JOINT AND SEVERAL LIABILITY. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.16 PARAGRAPH HEADINGS; CONSTRUCTION. Paragraph headings are only used in
this Agreement for convenience. Borrower and Coast acknowledge that the headings
may not describe completely the subject matter of the applicable paragraph, and
the headings shall not be used in any manner to construe, limit, define or
interpret any term or provision of this Agreement. The term "including",
whenever used in this Agreement, shall mean "including (but not limited to)".
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against Coast or Borrower under any rule of construction or
otherwise.
9.17 GOVERNING LAW; JURISDICTION; VENUE. This Agreement and all acts and
transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Coast to enter into this Agreement, Borrower (a) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Coast's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Los Angeles County;
(b) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by personal delivery or any
other method permitted by law; and (c) waives any and all rights Borrower may
have to object to the jurisdiction of any such court, or to transfer or change
the venue of any such action or proceeding.
16
<PAGE> 17
COAST BUSINESS CREDIT LOAN AND SECURITY AGREEMENT
9.18 ACKNOWLEDGMENT BY COAST. Coast hereby acknowledges that Borrower is a
public company subject to certain federal and state obligations to its
shareholders and investors.
9.19 MUTUAL WAIVER OF JURY TRIAL. BORROWER AND COAST EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
BORROWER:
PINNACLE MICRO, INC.,
a Delaware corporation
By
--------------------------------------
Executive Vice President
By
--------------------------------------
Secretary
COAST:
COAST BUSINESS CREDIT,
a division of Southern Pacific
Thrift & Loan Association
By
--------------------------------------
Title:
----------------------------------
17
<PAGE> 18
COAST
SCHEDULE TO
LOAN AND SECURITY AGREEMENT
BORROWER: PINNACLE MICRO, INC.,
A DELAWARE CORPORATION
ADDRESS: 19 TECHNOLOGY DRIVE
IRVINE, CALIFORNIA 92618
DATE: SEPTEMBER 18, 1996
This Schedule forms an integral part of the Loan and Security Agreement between
Coast Business Credit, a division of Southern Pacific Thrift & Loan Association,
and the above-borrower of even date.
1. CREDIT LIMIT.
(Section 1.1): Loans in a total amount at any time outstanding
not to exceed the lesser of a total of Ten Million
Dollars ($10,000,000) at any one time outstanding
(the "Maximum Dollar Amount"), or the sum of (a),
(b), (c), (d) and (e) below:
(a) Loans (the "Domestic Receivable Loans") in an
amount not to exceed eighty percent (80%) of
the amount of Borrower's Eligible Receivables
(as defined in Section 8 above) not
consisting of Eligible Foreign Receivables
(as defined in Section 8 above), with
eligibility up to sixty (60) days past due
date and one hundred twenty (120) days past
invoice date, plus
(b) Loans (the "Foreign Receivable Loans") in an
amount not to exceed the lesser of:
(1) Eighty percent (80%) of the amount of
Borrower's Eligible Receivables (as
defined in Section 8 above) consisting
of Eligible Foreign Receivables, with
eligibility up to sixty (60) days past
due date and one hundred twenty (120)
days past invoice date; or
(2) One Million Two Hundred Fifty Thousand
Dollars ($1,250,000), plus
18
<PAGE> 19
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
(c) Loans (the "Inventory Loans") in an amount
not to exceed the lesser of:
(1) Fifty percent (50%) of the value of
Borrower's Eligible Inventory (as
defined in Section 8 above), calculated
at the lower of cost or market value and
determined on a first-in, first-out
basis; or
(2) Two Million Dollars ($2,000,000), plus
(d) Term Loan (the "Term Loan"), repayable in
thirty-six (36) equal monthly installments in
the original principal amount not to exceed
the lesser of:
(1) Eighty percent (80%) of the appraised
liquidation value of Borrower's existing
Equipment; or
(2) Seven Hundred Fifty Thousand Dollars
($750,000).
(e) Loans (the "Equipment Acquisition Loans"), in
minimum advances of One Hundred Thousand
Dollars ($100,000), in a total amount at
Coast's sole discretion, not the exceed the
lesser of:
(1) Eighty percent (80%) of the invoice cost
of new Equipment less taxes and
installation charges, plus, eighty
percent (80%) of the appraised
liquidation value of used Equipment
acquired by Borrower less taxes and
installation charges; or
(2) Seven Hundred Fifty Thousand Dollars
($750,000).
Letter of Credit Sublimit
(Section 1.5): Three Million Five Hundred Thousand Dollars
($3,500,000). The face amount of all letters of
credit outstanding from time to time shall be
reserved out of loan availability hereunder.
19
<PAGE> 20
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
2. INTEREST.
INTEREST RATE
(Section 1.2): A rate equal to the "Prime Rate" plus one and
three quarters percent (1.75%) per annum,
calculated on the basis of a 360-day year for the
actual number of days elapsed; provided, however,
if Borrower achieves two (2) consecutive fiscal
quarters of profitability during fiscal years 1997
or 1998, then, and in that event, the rate shall
be reduced to the "Prime Rate" plus one and one
half percent (1.50%), so long as Borrower does not
experience two (2) consecutive fiscal quarters of
losses thereafter in fiscal years 1997 or 1998,
which, and in that event, would cause the rate to
return to the "Prime Rate" plus one and three
quarters percent (1.75%). The interest rate
applicable to all Loans shall be adjusted monthly
as of the first day of each month, and the
interest to be charged for each month shall be
based on the highest "Prime Rate" in effect during
said month, but in no event shall the rate of
interest charged on any Loans in any month be less
than eight percent (8%) per annum. "Prime Rate"
means the actual "Reference Rate" or the
substitute therefor of the Bank of America NT & SA
whether or not that rate is the lowest interest
rate charged by said bank. If the Prime Rate, as
defined, is unavailable, "Prime Rate" shall mean
the highest of the prime rates published in the
Wall Street Journal on the first business day of
the month, as the base rate on corporate loans at
large U.S. money center commercial banks.
MINIMUM QUARTERLY
INTEREST (Section 1.2): Seventy-Five Thousand Dollars ($75,000) per
quarter.
3. FEES.
(Section 1.3):
Origination Fee: Seventy-Five Thousand Dollars ($75,000), payable
on the Closing Date.
Facility Fee: Five Thousand Dollars ($5,000), per calendar
quarter, payable in advance (prorated for any
partial quarter at the beginning of the term of
this Agreement).
Letter of Credit Fees: One quarter percent (1/4%) per month, plus bank
charges and fees.
20
<PAGE> 21
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
4. MATURITY DATE.
(Section 6.1): September 30, 1998, subject to automatic renewal
as provided in Section 6.1 above, and early
termination as provided in Section 6.2 above.
RENEWAL FEE
(Section 6.1): One quarter percent (1/4%) of the Maximum Dollar
Amount per year.
EARLY TERMINATION FEE
(Section 6.2): An amount equal to three percent (3%) of the
Maximum Dollar Amount (as defined in the
Schedule); provided, however, if termination
occurs on or before the first anniversary of the
date of this Agreement such amount shall be
limited to One Hundred Fifty Thousand Dollars
($150,000) if Borrower pays off the Loan and
termination occurs through the use of proceeds
from a line of credit from Imperial Bank); and,
one percent (1%) of the Maximum Dollar Amount, if
termination occurs after the first anniversary and
on or before the second anniversary of the date of
this Agreement (there will be no Early Termination
Fee after the first anniversary of the date of
this Agreement if Borrower pays off the Loan and
termination occurs through the use of proceeds
from a line of credit from Imperial Bank).
5. REPORTING.
(Section 5.3): Borrower shall provide Coast with the following:
(1) Monthly Receivable agings, aged by invoice
date, within fifteen (15) days after the end
of each month.
(2) Monthly accounts payable agings, aged by
invoice date, and outstanding or held check
registers within fifteen (15) days after the
end of each month.
(3) 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 generally accepted accounting
principles) or such other inventory reports
as are reasonably requested by Coast, all
within ten (10) days after the end of each
month.
(4) Monthly internally prepared financial
statements, as soon as available, and in any
event within thirty (30) days after the end
of each month.
(5) Quarterly internally prepared financial
statements, as soon as available, and in any
event within fifty-five (55) days after the
end of each fiscal quarter of Borrower.
21
<PAGE> 22
COAST BUSINESS CREDIT SCHEDULE TO LOAN AND SECURITY AGREEMENT
(6) Quarterly customer lists, including customer
name, address, and phone number.
(7) Annual financial statements, as soon as
available, and in any event within one
hundred (100) days following the end of
Borrower's fiscal year, certified by
independent certified public accountants
acceptable to Coast.
6. BORROWER INFORMATION.
PRIOR NAMES OF BORROWER
(Section 3.2): None.
PRIOR TRADE NAMES OF
BORROWER
(Section 3.2): None.
EXISTING TRADE NAMES OF
BORROWER
(Section 3.2): None.
OTHER LOCATIONS AND
ADDRESSES (Section 3.3): Bonded warehouse in Amsterdam, Inventory
consisting of parts supplied to SCI for assembly
of printed circuit boards used in Borrower's
business.
MATERIAL ADVERSE
LITIGATION (Section 3.10): To be provided by Borrower.
7. OTHER PROVISIONS.
(Section 5.1): None.
22
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
UNAUDITED CONDENSED BALANCE SHEET AS OF SEPTEMBER 28, 1996 AND THE UNAUDITED
CONDENSED STATEMENT OF OPERATIONS FOR THE THIRTY-NINE WEEKS ENDED SEPTEMBER 28,
1996 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-28-1996
<PERIOD-START> DEC-31-1995
<PERIOD-END> SEP-28-1996
<CASH> 2,971
<SECURITIES> 0
<RECEIVABLES> 11,235
<ALLOWANCES> 985
<INVENTORY> 12,317
<CURRENT-ASSETS> 28,286
<PP&E> 4,997
<DEPRECIATION> 3,210
<TOTAL-ASSETS> 31,194
<CURRENT-LIABILITIES> 17,960
<BONDS> 10,000
0
0
<COMMON> 8
<OTHER-SE> 2,397
<TOTAL-LIABILITY-AND-EQUITY> 31,194
<SALES> 44,026
<TOTAL-REVENUES> 44,026
<CGS> 36,132
<TOTAL-COSTS> 36,132
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 288
<INCOME-PRETAX> (15,632)
<INCOME-TAX> 3
<INCOME-CONTINUING> (15,635)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (15,635)
<EPS-PRIMARY> (1.98)
<EPS-DILUTED> (1.98)
</TABLE>
