<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the Quarter Ended June 30, 1997
Commission file number: 0-23156
CONSEP, INC.
(Exact name of registrant as specified in its charter)
Oregon 93-0874480
- ------------------------------- ----------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
213 S.W. Columbia Street, Bend, OR 97702
-----------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (541) 388-3688
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.
[X] Yes [ ] No
Number of shares of common stock outstanding as of
August 1, 1997:
9,460,151 shares, $.01 par value per share
------------------------------------------
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CONSEP, INC.
INDEX
<TABLE>
<CAPTION>
PAGE NO.
<S> <C> <C>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of
June 30, 1997 and December 31, 1996 3
Consolidated Statements of Operations for the
three months ended June 30, 1997 and 1996 4
Consolidated Statements of Operations for the
six months ended June 30, 1997 and 1996 5
Consolidated Statements of Cash Flows for the
six months ended June 30, 1997 and 1996 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders 16
Item 6. Exhibits and Reports on Form 8-K 16
Signatures 18
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents $ 2,832,338 $ 2,443,508
Short-term investments 102,667 103,167
Accounts receivable, net 9,873,530 3,601,912
Other receivables 685,022 296,358
Inventories, net (note 2) 10,110,892 7,993,706
Prepaid expenses 409,182 966,102
------------ ------------
Total current assets 24,013,631 15,404,753
Property, plant and equipment, net 5,628,921 4,020,456
Intangible assets, net 1,439,276 1,545,246
Goodwill, net 2,112,861 2,181,901
Notes receivable and other assets 236,901 258,865
------------ ------------
Total assets $ 33,431,590 $ 23,411,221
============ ============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Bank lines 5,584,000 1,170,000
Accounts payable 5,646,543 2,526,325
Current portion of notes and leases payable 503,039 347,190
Accrued liabilities 1,064,726 646,135
Customer deposits 97,229 282,581
------------ ------------
Total current liabilities 12,895,537 4,972,231
Notes and leases payable, excluding current maturities 2,375,657 1,171,069
Mandatory stock warrant obligation 19,500 19,500
Deferred gain on sale of property 0 238,075
------------ ------------
Total liabilities 15,290,694 6,400,875
Shareholders' equity:
Common stock 94,475 94,312
Additional paid-in capital 44,288,023 44,256,367
Foreign currency translation adjustment 4,995 15,267
Accumulated deficit (26,246,597) (27,355,600)
------------ ------------
Total shareholders' equity 18,140,896 17,010,346
------------ ------------
Total liabilities and shareholders' equity $ 33,431,590 $ 23,411,221
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
3
<PAGE> 4
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
THREE MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 4,599,952 $ 3,722,565
Distribution products 9,180,282 7,961,130
------------ ------------
Total revenues 13,780,234 11,683,695
------------ ------------
COST OF REVENUES
Proprietary products 2,486,255 2,216,924
Distribution products 7,559,161 6,527,117
------------ ------------
Total cost of revenues 10,045,416 8,744,041
------------ ------------
Gross margin 3,734,818 2,939,654
------------ ------------
OPERATING EXPENSES (note 3)
Research and development 304,559 359,880
Selling, general and administrative 2,254,007 1,528,808
Distribution 915,435 860,783
------------ ------------
Total operating expenses 3,474,001 2,749,471
------------ ------------
Operating income 260,817 190,183
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 27,403 32,891
Interest expense (127,032) (96,549)
Other, net 345,024 (20,534)
------------ ------------
Net other income (expense) 245,395 (84,192)
------------ ------------
Net income $ 506,212 $ 105,991
============ ============
Net income per common and common
equivalent share (note 4) $ 0.05 $ 0.01
============ ============
Weighted average number of common
and common equivalent shares
outstanding (note 4) 9,537,979 7,832,489
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
4
<PAGE> 5
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
---------------------------------
JUNE 30, JUNE 30,
1997 1996
------------ ------------
(UNAUDITED)
<S> <C> <C>
REVENUES
Proprietary products $ 9,387,789 $ 7,297,790
Distribution products 15,218,086 13,595,520
------------ ------------
Total revenues 24,605,875 20,893,310
------------ ------------
COST OF REVENUES
Proprietary products 5,387,687 4,287,939
Distribution products 12,352,250 10,907,948
------------ ------------
Total cost of revenues 17,739,937 15,195,887
------------ ------------
Gross margin 6,865,938 5,697,423
------------ ------------
OPERATING EXPENSES (note 3)
Research and development 614,116 638,383
Selling, general and administrative 3,595,270 2,843,372
Distribution 1,832,027 1,658,550
------------ ------------
Total operating expenses 6,041,413 5,140,305
------------ ------------
Operating income 824,525 557,118
------------ ------------
OTHER INCOME (EXPENSE)
Interest income 51,997 75,890
Interest expense (170,703) (154,869)
Other, net 403,184 (17,650)
------------ ------------
Net other income (expense) 284,478 (96,629)
------------ ------------
Net income $ 1,109,003 $ 460,489
============ ============
Net income per common and common
equivalent share (note 4) $ 0.12 $ 0.06
============ ============
Weighted average number of common
and common equivalent shares
outstanding (note 4) 9,543,889 7,824,322
============ ============
</TABLE>
See accompanying notes to consolidated financial statements
5
<PAGE> 6
CONSEP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
-------------------------------
JUNE 30, JUNE 30,
1997 1996
----------- -----------
(UNAUDITED)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 1,109,003 $ 460,489
Adjustments to reconcile net income to
net cash used in operating activities:
Depreciation and amortization 574,015 512,971
Provision for bad debts 72,038 (41,039)
Inventory reserve 61,077 44,115
Loss (gain) on disposal of equipment (362) 8,667
Other non-cash items (10,898) (5,098)
Changes in assets and liabilities, net of amounts acquired:
Short-term investments 500 33,183
Accounts receivable (6,379,108) (4,819,569)
Other receivables (388,664) (214,743)
Inventories (2,186,403) (428,765)
Prepaid expenses 555,944 (9,035)
Accounts payable 3,125,248 2,444,478
Accrued liabilities 458,091 439,947
Other assets 6,461 (5,000)
Customer deposits (185,346) (402,985)
----------- -----------
Net cash used in operating activities (3,188,404) (1,982,384)
----------- -----------
INVESTING ACTIVITIES
Acquisition of intangible assets (39,920) (226,200)
Acquisition of property, plant and equipment (934,047) (468,560)
Proceeds from sale of property, plant and equipment 0 1,000
Issuance of notes receivable, net of payments received 51,216 198,414
----------- -----------
Net cash used in investing activities (922,751) (495,346)
----------- -----------
FINANCING ACTIVITIES
Increase in bank lines 4,414,340 1,007,589
Proceeds from issuance of notes payable 250,000 0
Principal payments on notes payable (196,228) (192,887)
Net proceeds from issuance of common stock 31,819 167,728
----------- -----------
Net cash provided by financing activities 4,499,931 982,430
----------- -----------
Effect of exchange rate changes on cash
and cash equivalents 54 211
----------- -----------
Net increase (decrease) in cash and cash equivalents 388,830 (1,495,089)
Cash and cash equivalents at beginning of period 2,443,508 2,069,595
----------- -----------
Cash and cash equivalents at end of period $ 2,832,338 $ 574,506
=========== ===========
</TABLE>
See accompanying notes to consolidated financial statements
6
<PAGE> 7
CONSEP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 - BASIS OF PRESENTATION
The accompanying consolidated financial statements have been prepared in
conformity with generally accepted accounting principles. However, certain
information or footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, the statements include all
adjustments necessary (which are of a normal and recurring nature) for the fair
presentation of the results of the interim periods presented. These financial
statements should be read in conjunction with the Company's audited consolidated
financial statements for the year ended December 31, 1996, as included in the
Company's 1996 Annual Report to Shareholders.
NOTE 2 - INVENTORIES
Inventories, stated at the lower of cost or market, consist of:
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
----------- -----------
<S> <C> <C>
Raw materials $ 2,049,534 $ 2,196,006
Work in process 52,333 44,963
Finished goods - proprietary 4,758,560 3,528,880
Finished goods - distribution 3,739,926 2,717,836
----------- -----------
10,600,353 8,487,685
Less reserve for obsolescence 489,461 493,979
----------- -----------
$10,110,892 $ 7,993,706
=========== ===========
</TABLE>
NOTE 3 - OPERATING EXPENSES
Research and development and selling, general and administrative expenses are
allocated to the Company's proprietary product operations. Distribution expenses
consist entirely of selling, general and administrative costs of the Company's
distribution operations.
NOTE 4 - NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE
For the three and six months ended June 30, 1997 and 1996, net income per common
and common equivalent share is based upon the weighted average number of common
shares outstanding during each period plus, to the extent dilutive, the effect
of common shares contingently issuable from the exercise of stock options.
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<PAGE> 8
NOTE 5 - SUPPLEMENTAL STATEMENTS OF CASH FLOW DISCLOSURES
Cash paid for interest and income taxes was as follows:
<TABLE>
<CAPTION>
Six Months Ended Income
June 30, Interest Taxes
-------- -------- -----
<S> <C> <C>
1997 $172,392 $ 11,844
1996 $139,359 $ 5,399
</TABLE>
Following is a summary of non-cash investing and financing activities of the
Company for the six months ended June 30, 1997 and 1996:
During the six months ended June 30, 1997, the Company acquired
equipment and vehicles for $178,393 through the issuance of notes
and leases payable. In June 1997, the Company completed the
purchase of its headquarters and manufacturing facility which was
partially financed by a $1,125,000 note payable to a bank.
In addition, as a result of the Company's intention to sell its
unfinished specialty chemicals manufacturing plant in Alachua,
Florida, the Company recorded a $175,000 write down to adjust the
facility's carrying value to the estimated fair market value.
During the six months ended June 30, 1996, the Company purchased a
building for $396,055 and acquired vehicles for $77,858 through
the issuance of notes payable. Also during the first six months of
1996, the Company converted $467,959 of trade accounts receivable
to notes receivable.
NOTE 6 - NEW ACCOUNTING PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings Per
Share". SFAS No. 128 supersedes APB Opinion No. 15, "Earnings Per Share" and
specifies the computation, presentation and disclosure requirements for earnings
per share (EPS) for entities with publicly held common stock or potential common
stock. It replaces the presentation of primary EPS with a presentation of basic
EPS and fully diluted EPS with diluted EPS. Basic EPS, unlike primary EPS,
excludes dilution and is computed by dividing income available to common
stockholders by the weighted-average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock or resulted in the issuance of common stock that then share in
the earnings of the entity. Diluted EPS is computed similarly to fully diluted
EPS under APB No. 15. SFAS No. 128 is effective for financial statements for
both interim and annual periods ending after December 31, 1997. The Company will
adopt SFAS No. 128 at December 31, 1997 for the year then ended. All prior
period EPS data presented at year end will be restated to conform with SFAS No.
128. The Company does not expect this statement to have a significant impact on
its calculations.
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<PAGE> 9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
OVERVIEW
Consep derives its revenues from the sale of its proprietary products to the
commercial agriculture and consumer home, lawn and garden markets and from sales
by its distribution subsidiaries of products produced by other manufacturers,
including both biorational insect control products and conventional toxic
pesticides as well as fertilizers and farm supplies. The Company's primary focus
is the development of proprietary products and expansion of the markets for
those products. A significant element of the Company's strategy for the
commercialization of its proprietary commercial agriculture products has been to
acquire distribution operations in key agricultural regions and to introduce its
proprietary products through those operations. In addition, the Company has
begun distributing for the 1997 season a line of consumer products, based on
natural oils, to repel biting insects. These insect repellent products, which
are manufactured by, and are the proprietary products of, a third party, are
being marketed on an exclusive basis in the United States under the Company's
Bite Blocker label as part of its consumer proprietary product line.
Proprietary product revenues increased 28.6% for the six months ended June 30,
1997 as compared to the corresponding period of 1996. This increase in
proprietary product revenues for the six months ended June 30, 1997, combined
with a 1.4% increase in proprietary product margin percentage, a 17.5% increase
in operating expenses and a 11.9% increase in distribution revenues for the same
period, contributed to a 140.8% increase in net income for the six months ended
June 30, 1997 as compared to the corresponding period of 1996.
Since its inception, Consep has funded its growth primarily through equity
financings. Funds from these financings have allowed the Company to build its
organization, develop and register proprietary products for both the commercial
agriculture and consumer home, lawn and garden markets, acquire distribution
operations for the introduction of its commercial agriculture products and
expand its sales efforts through both domestic and international channels of
distribution.
The Company has incurred annual operating losses since its inception in 1984.
The Company believes annual profitability will be dependent on continued growth
of revenues, maintaining or strengthening gross margins and controlling the
growth of operating expenses. There can be no assurance that the Company will
become profitable on an annual basis.
The Company's business is seasonal with its highest revenues historically being
recognized in the first and second quarters of each year and its lowest revenues
being recognized in the third and fourth quarters of each year. This seasonality
coincides with the commercial growing season in the Northern Hemisphere and, to
a lesser extent, the consumer home, lawn and garden buying season. The Company
anticipates this seasonal profile will continue with a slight shift to third and
fourth quarter revenues as sales to international markets and sales of new
non-seasonal products increase. In contrast to revenues, many of the Company's
operating expenses are largely independent of the quarterly selling cycles. As a
result, operating expenses will generally represent a higher percentage of
revenues in the third and fourth quarters as compared to the first two quarters
and the Company may experience a loss in the third and fourth quarters of an
otherwise profitable year.
9
<PAGE> 10
RESULTS OF OPERATIONS
REVENUES. Total revenues for the three months ended June 30, 1997 increased
17.9% to approximately $13.8 million from approximately $11.7 million in the
corresponding period of 1996. For the six months ended June 30, 1997, total
revenues increased 17.8% to approximately $24.6 million from approximately $20.9
million in the corresponding period of 1996. Revenues from the sale of
proprietary products increased 23.6% during the three months ended June 30, 1997
to approximately $4.6 million from approximately $3.7 million in the
corresponding period of 1996. For the six months ended June 30, 1997, revenues
from the sale of proprietary products were approximately $9.4 million, an
increase of 28.6% over proprietary product revenues of approximately $7.3
million recorded in the comparable period of 1996. Revenues from the Company's
distribution operations increased 15.3% during the three months ended June 30,
1997 to approximately $9.2 million from approximately $8.0 million in the
corresponding period of 1996. For the six months ended June 30, 1997, revenues
from the Company's distribution operations increased to approximately $15.2
million from approximately $13.6 million in the corresponding period of 1996.
The growth in proprietary product revenues for the three months ended June 30,
1997 was attributable to growth in sales of the Company's commercial agriculture
products and the introduction of Bite Blocker, the Company's new insect
repellent product line. These increases were partially offset by decreases in
revenues from the Company's SureFire consumer product line as well as decreased
sales of specialty chemicals to third parties by the Company's Farchan
subsidiary.
Revenues from the sale of commercial agriculture products increased
approximately $543,000 and $1.1 million, or 57.2% and 51.1%, respectively, for
the three months and six months ended June 30, 1997 as compared to the
corresponding periods of 1996. The increase in revenues for the three months
ended June 30, 1997 from sales of commercial agriculture products was primarily
attributable to sales of the new CheckMate flowable product to control pink
bollworm ("CheckMate PBW-F"). No sales of CheckMate PBW-F were recorded in the
three months ended June 30, 1996 as the Company did not receive EPA registration
until the third quarter of 1996. Revenues for the three months ended June 30,
1997 from the remaining commercial agriculture products increased a combined
29.0% over the corresponding period of 1996.
The increase in revenues for the six months ended June 30, 1997 from sales of
commercial agriculture products was primarily attributable to (i) the
introduction of a new combination CheckMate product to control both peach twig
borer and oriental fruit moth ("CheckMate SF"), (ii) a 72.9% increase in
revenues from sales of the CheckMate product to control tomato pinworm
("CheckMate TPW") and (iii) the introduction of the new CheckMate PBW-F product
discussed above. The increase in CheckMate TPW revenues was primarily the result
of the Company's strengthening its sales organization in Mexico in the first six
months of 1996.
Revenues from the sale of consumer products from the Company's SureFire and Bite
Blocker line of products in the United States and Chemfree products in Canada
increased by approximately $538,000 and $1.3 million, or 21.9% and 30.0%,
respectively, for the three months and six months ended June 30, 1997 as
compared to the corresponding periods of 1996. This growth in consumer product
revenues was primarily attributable to the introduction of the Company's new
Bite Blocker line of insect repellent products. These Bite Blocker product
revenues were partially offset by a 34.9% and 34.5% decrease, respectively, in
revenues from sales of the Company's SureFire line of products in the United
States as
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compared to the three months and six months ended June 30, 1996. The Company
believes the decrease in SureFire revenues was the result of excess inventory at
the retail level carried over from 1996 which reduced the amount of new orders
placed in the six months ended June 30, 1997. The Company believes that this
trend of reduced orders will continue in the short term until the excess
inventory at the retail level is depleted. In addition, significantly cooler
than normal weather in the late spring, which reduced insect populations, was a
major contributor to the reduction in consumer product sales for three months
and six months ended June 30, 1997 as compared to the corresponding periods of
1996.
Specialty chemical sales by Farchan decreased 62.3% and 42.5%, respectively, in
the three months and six months ended June 30, 1997 as compared to the
corresponding periods of 1996. The decrease in sales by Farchan was primarily
the result of the fire in October of 1996 that destroyed its primary
manufacturing facility in Gainesville, Florida.
The revenue increase of 15.3% and 11.9%, respectively, from the Company's
distribution operations during the three months and six months ended June 30,
1997 as compared to the corresponding period of 1996 was primarily the result of
favorable weather conditions and a slightly increased and more experienced sales
force at the Company's distribution operations.
GROSS MARGIN. The consolidated gross margin for the Company increased to 27.1%
in the three months ended June 30, 1997 from 25.2% in the corresponding period
of 1996. For the six months ended June 30, 1997, the consolidated gross margin
was 27.9% compared to 27.3% in the corresponding period of 1996. The margin
improvement for the three months and six months ended June 30, 1997, as compared
to the corresponding period of 1996, is attributable to both an increase in the
gross margins on proprietary product revenues and a proportional increase in the
higher margin proprietary product revenues. The gross margin on the sale of
proprietary products during the three months ended June 30, 1997 increased to
46.0% from the 40.4% gross margin achieved on proprietary product revenues in
the corresponding period of 1996. Gross margin on proprietary products increased
to 42.6% in the six month period ended June 30, 1997 from 41.2% in the
corresponding period of 1996. Distribution gross margins decreased in the three
month and six month periods ended June 30, 1997 to 17.7% and 18.8%, from 18.0%
and 19.8%, respectively, in the corresponding periods of 1996.
The gross margin on commercial agricultural proprietary product sales for the
three months ended June 30, 1997 increased to 38.4% from 35.9% in the
corresponding period of 1996. The increase was primarily attributable to (i)
changes in the product mix, including the new, higher margin CheckMate PBW-F
discussed earlier and (ii) increases in the overall sales and production volumes
allowing manufacturing costs to be allocated over a larger base of products. The
gross margin on commercial agricultural product sales for the six months ended
June 30, 1997 decreased to 35.4% from 41.8% in the corresponding period of 1996.
The decrease was primarily attributable to (i) lower margins on the Company's
CheckMate product to control codling moth ("CheckMate CM") due to flexible
pricing to introduce the product into Europe and to recover lost markets in the
United States as a result of the previously reported performance problems
encountered in 1996, along with higher costs of manufacturing the new improved
CheckMate CM product and (ii) additional manufacturing costs in the first
quarter primarily associated with the late arrival of production equipment,
overtime incurred to meet unexpected demand and the re-work of inventory carried
over from prior years. Somewhat offsetting these decreases to the gross margin
were the increases in the three months ended June 30, 1997 discussed above. The
gross margins on agricultural proprietary products includes accruals of
approximately $90,000 and $320,000, respectively, for the estimated
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<PAGE> 12
insurance recoveries for the additional pheromone expenses incurred in the three
months and six months ended June 30, 1997 due to the October 1996 fire that
destroyed the Company's specialty chemicals manufacturing facility. This accrual
reduced cost of revenues by approximately $90,000 and $320,000, respectively,
and positively impacted the gross margin percentage on agriculture proprietary
product sales by 6.0% and 10.2%, respectively, for the three month and six month
periods ended June 30, 1997. To date the Company has not reached a settlement
with its insurance carrier for the claim. The investigation by the insurance
carrier has been completed, but settlement discussions have reached an impasse.
Although the Company is continuing to pursue recovery of its claims through
settlement discussions, the Company intends to initiate legal proceedings, if
necessary, to recover its claim in full. However, there can be no assurance that
the Company's claim will be paid in full.
The gross margins on proprietary consumer product sales for the three months and
six months ended June 30, 1997 increased to 52.1% and 49.0%, respectively, from
39.6% and 38.6% in the corresponding periods of 1996. The increase is primarily
attributable to the 62.6% and 58.7% gross margins, respectively, realized on
sales of the new Bite Blocker product line in the three months and six months
ended June 30, 1997. Sales of specialty chemicals produced gross margins of
- -12.7% and 8.6%, respectively, in the three months and six months ended June 30,
1997, down from the 60.1% and 55.9% gross margins, respectively, reported in the
corresponding periods of 1996. The variance in gross margin for specialty
chemical sales was the direct result of the October 1996 fire that destroyed
Farchan's primary manufacturing facility in Gainesville, Florida, which
prevented Farchan from manufacturing higher margin specialty chemical products
during the six months ended June 30, 1997.
The gross margins from distribution revenues decreased to 17.7% and 18.8%,
respectively, from 18.0% and 19.8% for the three months and six months ended
June 30, 1997 as compared to the corresponding periods of 1996. The decreases
were primarily attributable to the differences in the product sales mix for the
distribution operations. Included in the results for the six months was
approximately $200,000 of unanticipated 1996 manufacturers' rebates which had
not been accrued for in 1996. These rebates improved the distribution gross
margin percentage by approximately 1.3% and accordingly, the Company does not
expect the distribution gross margin to continue at the same level for the
remainder of 1997.
OPERATING EXPENSES. Operating expenses during the three months ended June 30,
1997 increased 26.4% to approximately $3.5 million from approximately $2.7
million in the corresponding period of 1996. During the six months ended June
30, 1997, operating expenses increased 17.5% to approximately $6.0 million from
approximately $5.1 million in the corresponding period of 1996. The increased
operating expenses during the three months ended June 30, 1997, as compared to
the corresponding period of 1996, were primarily attributable to (i) selling and
marketing expenses related to the introduction of the Company's new Bite Blocker
line of insect repellent products and (ii) a write down of $175,000 to adjust
the carrying value of the unfinished specialty chemicals facility in Alachua,
Florida to its estimated fair market value. As a result of the decision to
rebuild, in Bend, Oregon, the specialty chemicals facility destroyed by fire in
October 1996, the Company intends to sell the facility in Alachua and estimates
its fair market value to be less than its carrying value. --See "Liquidity and
Capital Resources."
The increased operating expenses during the six months ended June 30, 1997, as
compared to the corresponding period of 1996, were primarily attributable to (i)
selling and marketing expenses related to the introduction of the Company's new
Bite Blocker line of insect repellent products, (ii) the $175,000 facility
carrying value write down discussed above and (iii) a
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<PAGE> 13
$52,000 reduction in bad debt reserves that positively impacted the six months
ended June 30, 1996 for the distribution operations which did not occur in the
six months ended June 30, 1997.
OTHER INCOME AND EXPENSE. During the three months and six months ended June 30,
1997, the Company recorded net other income of approximately $245,000 and
$284,000, respectively, compared to net other expense of approximately $84,000
and $97,000 during the corresponding periods of 1996. The increase in net other
income for the three months ended June 30, 1997 was primarily attributable to
(i) the recognition of a deferred gain of approximately $195,000 relating to the
1994 sale and leaseback of the Company's headquarters and manufacturing facility
and (ii) a $125,000 estimated reimbursement from the insurance company for the
business interruption coverage relating to the Farchan fire. During the six
months ended June 30, 1997, the increase in net other income was primarily
attributable to (i) the $195,000 deferred gain discussed above and (ii) a
$195,000 estimated reimbursement from the insurance company for the business
interruption coverage relating to the Farchan fire, of which $105,000 has been
reimbursed by the insurance company.
LIQUIDITY AND CAPITAL RESOURCES
Since its inception, the Company has used funds generated from operations,
equity financings and bank borrowings to fund its research and development,
marketing, acquisition of capital equipment, acquisitions of other business
operations and working capital requirements. In October 1996, the Company
completed a follow-on public offering of its common stock which raised
approximately $4.6 million net of related offering costs. Since its inception,
the Company has raised approximately $44.4 million of equity. In addition to
equity financing, the Company operates under a bank line of credit with a
maximum borrowing capacity of $7.5 million to support the working capital
requirements of both its principal proprietary product and distribution
operations. This line of credit matures in September 1997 and is secured by
substantially all of the Company's current assets. At June 30, 1997, the Company
was in compliance with all covenants related to the line of credit.
At June 30, 1997, the Company had cash, cash equivalents and short-term
investments of approximately $2.9 million and working capital of approximately
$11.1 million. Borrowings under revolving lines of credit were approximately
$5.6 million. The Company believes that cash and cash equivalents at June 30,
1997, funds generated from operations and funds available from existing bank
lines of credit will be sufficient to fund the Company's operations through at
least 1997. The Company's capital needs may increase depending upon several
factors, including future acquisitions, changes to planned research and
development activities, expanded manufacturing and commercialization programs,
additional technological, regulatory and competitive developments and the timing
of regulatory approvals for new products. As a result, the Company may need to
raise additional funds. There can be no assurance that additional financing
would be available and, if available, that the terms would be acceptable to the
Company.
On October 16, 1996, one of two buildings, in Gainesville, Florida, owned by
Consep's Farchan subsidiary, was destroyed by fire. The building served as a
manufacturing facility for certain pheromones used in certain of the Company's
commercial agriculture products, as well as specialty chemicals sold to research
organizations, pharmaceutical companies and the agricultural industry. At the
direction of the U.S. Environmental Protection Agency (the "EPA"), the Company
conducted chemical analysis tests of the fire debris. Although the chemical
analysis of the fire debris resulted in findings that substantially all of the
debris contained contaminants below EPA-allowed limits, a limited amount of ash
was declared hazardous due
13
<PAGE> 14
to elevated levels of cyanide and was disposed of accordingly. As a result of
the chemical analysis of the fire debris, and at the EPA's direction, Farchan
has tested for potential soil and groundwater contamination resulting from the
fire. Initial results of the soil and groundwater testing indicate contaminate
levels below EPA-allowed limits. Based on the results of the initial testing,
the Company believes that the EPA will lift all restrictions on the Farchan site
in the near term. All expenses related to the cleanup, sampling and laboratory
analysis have been covered by the Company's insurance and the Company believes
that the total cleanup costs will not exceed the insurance coverage limits of
$250,000.
Although the Company believes it has adequate insurance to cover all losses
related to the Farchan fire, it has not reached a final settlement with its
insurance carrier for claims associated with its additional expenses for outside
pheromone purchases or business interruption losses. The Company has recorded an
estimated $90,000 receivable due from the insurance company relating to the
business interruption coverage for losses from the date of the fire through June
30, 1997. The largest portion of the Company's claim relates to additional
expenses incurred by the Company in 1996 and 1997 for the purchase of pheromones
from third party manufacturers at substantially higher costs than would have
been incurred if the pheromones had been manufactured by Farchan. The Company
has revised its claim for such additional expenses to $530,000 and the
investigation by the insurance carrier has been completed, but settlement
discussions have reached an impasse. In addition to the business interruption
insurance coverage discussed above, the Company has recorded an estimated
$320,000 receivable due from the insurance company relating to the additional
expenses incurred for pheromones purchased from third party manufacturers
through June 30, 1997. Although the Company is continuing to pursue recovery of
its claims through settlement discussions, the Company intends to initiate legal
proceedings, if necessary, to recover its claim in full. However, there can be
no assurance that the Company's claim will be paid in full.
As an indirect result of the fire at the Farchan facility, the Company believes
it is not feasible to proceed with plans to finish and occupy its proposed plant
in nearby Alachua, Florida. The Company plans to remove all of its equipment
from the Alachua facility and sell the land and building. The Company has also
decided not to rebuild the manufacturing facility at its Gainesville site. At
the present time, the Company plans to build a specialty chemical facility to
produce pheromones and other specialty chemicals adjacent to its headquarters
and manufacturing facility in Bend, Oregon. The Company has received site permit
approval from the City of Bend and is in the process of finishing design work
for submission to the City of Bend. The Company believes the cost of the new
facility will range from $1.0 to $1.1 million. In June 1997, the Company
completed the purchase of its headquarters and manufacturing facility in Bend,
Oregon for a purchase price of approximately $1.5 million. The Company has also
received a loan commitment with a bank to provide approximately $1.7 million in
debt financing to help fund the purchase of the Company's headquarters and
manufacturing facility and the construction of the new specialty chemicals
manufacturing facility, of which approximately $1.1 million has been advanced
for the purchase of the existing facility. In addition to the advance against
the purchase of the existing facility, the Company has received a term loan of
$250,000 from its primary bank to help fund the purchase of the existing
facility and the construction of the new facility. The Company is exploring
various alternatives for funding the balance of the expected costs of
construction of the new facility. The cost of the additional equipment needed to
complete the new facility is estimated to range from $300,000 to $500,000. The
Company expects to finance at least fifty percent of the additional equipment
through bank loans and/or equipment leasing arrangements. There can be no
assurance that additional financing will be available and, if available, that
the terms will be acceptable to the Company. Assuming the availability of
adequate financing arrangements, the Company believes the new facility can be
operational by the end of the first quarter of 1998 and should be able to
produce some pheromones for the 1998 season.
14
<PAGE> 15
The Company does not expect the Farchan fire and the resulting loss of the
manufacturing facility to have a material adverse effect on the Company's
business, financial condition or results of operations, since the Company (i)
has property damage, environmental remediation, business interruption and
additional expense insurance which covers the destroyed facility, its contents,
the underlying property and the associated manufacturing operations, (ii) the
Company is proceeding with its plans to build a specialty chemical manufacturing
facility in Bend, Oregon, which it believes can be operational in sufficient
time to produce some pheromones for the 1998 season and (iii) the Company
believes it has alternative sources of supply of pheromones for the 1998 season
which it would otherwise have purchased from Farchan.
The statements set forth above regarding expected insurance recoveries and
anticipated results of environmental cleanup efforts related to the fire at the
Company's Farchan subsidiary, as well as the statements regarding the Company's
plans for replacing the destroyed specialty chemicals manufacturing facility,
are forward-looking statements which involve risks and uncertainties that could
cause actual results to differ materially from the forward-looking statements,
including, without limitation, further delays or difficulties in receiving
insurance recoveries for business interruption losses or additional pheromone
expenses, environmental remediation expenses in excess of the Company's
insurance coverage limits and unanticipated delays or difficulties in (i)
securing the necessary financing to fund the construction of the new specialty
chemical manufacturing facility and the purchase of additional manufacturing
equipment or (ii) obtaining regulatory approvals needed to construct the new
manufacturing facility. The forward-looking statements should be considered in
light of these risks and uncertainties.
15
<PAGE> 16
PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1997 Annual Meeting of Shareholders was held on Thursday, May 22,
1997, at which the following actions were taken by a vote of the shareholders:
1. Election of Directors
The following directors were elected, two to serve a three-year term
expiring in 2000 and two to serve a one-year term expiring in 1998, by the votes
indicated below:
<TABLE>
<CAPTION>
Term Votes Votes
Director Expiring For Withheld
-------- -------- --- --------
<S> <C> <C> <C>
Walter C. Babcock 2000 7,664,789 41,907
John A. Beaulieu 2000 7,664,789 41,907
Philip E. Barak 1998 7,665,374 41,322
Kenneth D. MacKay 1998 7,665,374 41,322
</TABLE>
2. Approval of the 1997 Stock Incentive Plan
By a vote of 7,079,241 to 382,416 (with 36,925 abstentions and 208,114
broker non-votes), the adoption, by the Board of Directors, of the Consep, Inc.
1997 Stock Incentive Plan (the "Plan"), was ratified by the Company's
shareholders, including the reservation of 300,000 shares of the Company's
common stock for issuance to employees and consultants pursuant to the Plan.
3. Ratification of Appointment of Auditors
By a vote of 7,682,579 to 5,367 (with 18,750 abstentions), the
appointment, by the Board of Directors, of KPMG Peat Marwick LLP to act as
independent auditors for the Company for the year ending December 31, 1997, was
ratified by the Company's shareholders.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
Exhibit
Number Description
10.26 Loan Modification Agreement with Silicon
Valley Bank
10.27 Amended and Restated Schedule to Loan
and Security Agreement with Silicon
Valley Bank
10.28 Sale and Purchase Agreement for Real
Estate
10.29 Construction Loan Agreement with Western
Bank
27.0 Financial Data Schedule
16
<PAGE> 17
(b) No reports were filed on Form 8-K during the quarter for
which this report is filed.
(THE REMAINDER OF THIS PAGE INTENTIONALLY LEFT BLANK)
17
<PAGE> 18
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
CONSEP, INC.
(REGISTRANT)
DATE: August 13, 1997 By: /s/ VOLKER G. OAKEY
--------------- --------------------
VOLKER G. OAKEY
Chairman of the Board,
President and Chief
Executive Officer
DATE: August 13, 1997 By: /s/ LARRY KATZ
--------------- ---------------
LARRY KATZ
Vice President, Finance and
Chief Financial Officer
18
<PAGE> 1
EXHIBIT 10.26
LOAN MODIFICATION AGREEMENT
BETWEEN: Consep, Inc. ("Consep"), whose address is 213 S.W. Columbia St.,
Bend, OR 97702-1013; Pacoast Inc. ("Pacoast"), whose address is
213 S.W. Columbia St., Bend, OR. 97702-1013; and Richard Hunt
Inc. ("Hunt"), whose address is 2749 East Malaga Avenue, Fresno,
CA. 93725.
AND: Silicon Valley Bank ("Silicon") whose address is 3003 Tasman
Drive, Santa Clara, California 95054;
DATE: June 23, 1997.
This Loan Modification Agreement is entered into on the above date by
Consep, Pacoast and Hunt (collectively, "Borrower") and Silicon.
I. Background. Consep entered into a loan and security agreement with
Silicon dated as of May 25, 1993, which has been modified since that date (as
amended from time to time, the "Loan Agreement"). Capitalized terms used in this
Loan Modification Agreement shall, unless otherwise defined in this Agreement,
have the meaning given to such terms in the Loan Agreement.
Silicon, Consep, Pacoast and Hunt are entering into this Agreement to
state the terms and conditions of certain modifications to the Loan Agreement
and the Schedule, as modified prior to the date of this Agreement.
2. Modifications to Loan Agreement and Schedule.
2.1 The Schedule to the Loan Agreement is hereby deleted and
replaced by the Amended and Restated Schedule to Loan and Security Agreement
attached to this Agreement.
2.2 Borrower acknowledges and agrees that all Obligations,
including without limitation Borrower's obligation to repay amounts advanced by
Silicon to Borrower on the terms of the Loan Agreement and Schedule as modified
by this Loan Modification Agreement, are secured by all liens and security
interests granted by any Borrower to Silicon in the Loan Agreement or by any
other document or agreement.
3. Conditions Precedent. This Loan Modification Agreement shall
not take effect until Borrower delivers to Silicon a Certified Resolution of
Borrower and such other documents as Silicon shall reasonably require to give
effect to the terms of this Loan Modification Agreement.
4. No Other Modifications. Except as expressly modified by this
Loan Modification Agreement, the terms of the Loan Agreement, as amended prior
to this date, shall remain unchanged and in full force and effect. Silicon's
agreement to modify the Loan Agreement pursuant to this Loan Modification
Agreement shall not obligate Silicon to make any future modifications to the
Loan Agreement or any other loan document. Nothing in this Loan Modification
Agreement shall constitute a satisfaction of any indebtedness of any Borrower to
Silicon. It is the intention of Silicon and Borrower to retain as liable parties
all makers and endorsers of the Loan Agreement or any other loan document. No
maker, endorser, or guarantor shall be released by virtue of this Loan
Modification Agreement. The terms of this paragraph shall apply not only to this
Loan Modification Agreement, but also to all subsequent loan modification
agreements.
5. Representations and Warranties.
5.1 The Borrower represents and warrants to Silicon that the
execution, delivery and performance of this Agreement are within the Borrower's
corporate powers, and have been duly authorized and are not in contravention of
law or the terms of the Borrower's articles of incorporation, bylaws or of
Page 1 - LOAN MODIFICATION AGREEMENT
<PAGE> 2
any undertaking to which the Borrower is a party or by which it is bound.
5.2 The Borrower understands and agrees that in entering into
this Agreement, Silicon is relying upon the Borrower's representations,
warranties and agreements as set forth in the Loan Agreement and other loan
documents. Borrower hereby reaffirms all representations and warranties in the
Loan Agreement, all of which are true as of the date of this Agreement.
BORROWER: CONSEP, INC.
By: /s/ Volker Oakey
------------------------
Title: President
PACOAST INC.
By: /s/ Volker Oakey
------------------------
Title: Vice President
RICHARD HUNT INC.
By: /s/ Volker Oakey
-----------------------
Title: President
SILICON:SILICON VALLEY BANK
By: /s/ Ron Sherman
------------------------
Title: Vice President
Page 2 - LOAN MODIFICATION AGREEMENT
<PAGE> 1
EXHIBIT 10.27
AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
CO-BORROWERS: CONSEP, INC., PACOAST INC. AND RICHARD HUNT INC.
ADDRESS: Consep, Inc.
Pacoast, Inc.
213 SW Columbia Street
Bend, OR 97702
Richard Hunt, Inc.,
dba Sierra Ag Chemical
2749 East Malaga Avenue
Fresno, CA 93725
DATE: June 23, 1997
LINE OF CREDIT
CREDIT LIMIT
(Section 1.1): Subject to the reserves stated below, the Credit Limit
shall be an amount not to exceed the lesser of: (i) $5,000,000
at any one time outstanding; or (ii) the sum of (a) 70% of the
Net Amount of Borrower's accounts, which Silicon in its
discretion deems eligible for borrowing, plus (b) 40% of book
value of Borrower's eligible inventory, as defined below, as
reported to Silicon on a monthly basis, up to a maximum
advance of $1,250,000 outstanding at any one time, plus (c)
100% of the amount of any certificate of deposit owned by
Borrower that is in Silicon's possession and in which Silicon
has a first priority security interest. Notwithstanding the
foregoing, however, the maximum amount of this line of credit
as stated in clause (i) above shall automatically be increased
to $7,500,000 at such time as Borrower closes an equity
financing raising proceeds of $2,000,000 or more. The amount
otherwise available for borrowing under this line of credit
shall be reduced, dollar for dollar, by the face amount of all
letters of credit issued by Silicon and by an additional
amount of $350,000 with respect to Silicon's day-light
overdraft risk associated with Borrower's controlled
disbursement accounts. In addition, the outstanding balances
of the Secured Term Loan and Secured Term Loan No. 2 described
below shall reduce, dollar for dollar, the amount otherwise
available for borrowing under the formula stated above at any
time during the term hereof during which Borrower fails to
comply with the Debt Service Coverage Ratio stated below.
There shall be no outstanding advances against inventory
during a period of thirty consecutive days each year. "Net
Amount" of an account means the gross amount of the account,
minus all applicable sales, use, excise and other similar
taxes and minus all discounts, credits and allowances of any
nature granted or claimed.
Page 1 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 2
Without limiting the fact that the determination of which
accounts are eligible for borrowing is a matter of Silicon's
discretion, the following will not be deemed eligible for
borrowing: accounts that are not subject to a first priority
perfected security interest in favor of Silicon, accounts
outstanding for more than 90 days from the invoice date,
(provided, however, that accounts relating to the following as
account debtors are eligible for up to 30 days past their
respective due dates provided that such accounts are not
outstanding for more than 150 days from the invoice date:
Cotter & Co., Ace Hardware, Frank's Nursery, Servistar Corp.,
Commerce/Darbco, US Garden Sales, Agway, Inc., Hardware
Wholesalers, Inc., LG Cook Distributors, Central Garden,
Caldwell Supply, Arett Sales Corp., J. Mollema & Son, Wetzel
Seed Co., and Payless Drug Northwest), accounts subject to any
contingencies, accounts owing from an account debtor outside
the United States (unless pre-approved by Silicon in its
discretion, or backed by a letter of credit satisfactory to
Silicon, or FCIA insured satisfactory to Silicon), accounts
owing from one account debtor to the extent they exceed 25% of
the total eligible accounts outstanding, accounts owing from
an affiliate of Borrower, and accounts owing from an account
debtor to whom Borrower is or may be liable for goods
purchased from such account debtor or otherwise. In addition,
if more than 50% of the accounts owing from an account debtor
are outstanding more than 90 days from the invoice date or are
otherwise not eligible accounts, then all accounts owing from
that account debtor will be deemed ineligible for borrowing.
Without limiting the fact that the determination of which
inventory is eligible for borrowing is a matter of Silicon's
discretion, the following shall not be deemed eligible for
borrowing: any inventory other than packaged chemicals (in
boxes, bags, cans or barrels, on which the seal has not been
broken) that are owned by Pacoast or Hunt and located in Bend,
Oregon or another location identified to Silicon in writing,
inventory that is not subject to a first priority perfected
security interest in favor of Silicon, inventory that is used,
obsolete or returned goods, inventory that is stored at a
location other than the Borrower's Address or any location
owned, leased or rented by Borrower and previously identified
to Silicon, inventory that is subject to a landlord's lien,
and inventory that is not in the possession of Borrower.
INTEREST RATE
(Section 1.2): A rate equal to the "Prime Rate" in effect from time to time,
plus 1.50% per annum. Interest shall be calculated on the
basis of a 360-day year for the actual number of days elapsed.
"Prime Rate" means the rate announced from time to time by
Silicon as its "prime rate;" it is a base rate upon which
other rates charged by Silicon are based, and it is not
necessarily the best rate available at Silicon. The interest
rate applicable to the Obligations shall change on each date
there is a change in the Prime Rate.
LOAN COMMITMENT FEE
(Section1.3): One quarter of one percent per annum of the maximum credit
limit of $7,500,000, which was paid at closing.
MATURITY DATE
(Section 5.1): September 23, 1997.
LETTERS OF CREDIT:Subject to the other terms of the Loan Agreement and the
Schedule, Silicon is willing to issue letters of credit on the
following terms:
Page 2 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 3
LETTER OF CREDIT
SUBLIMIT: The amount of all letters of credit, whether commercial or
standby letters of credit, outstanding at any one time
(including amounts drawn on letters of credit and not yet
reimbursed by the Borrower) shall not exceed $1,500,000.00 at
any one time. The amount of all letters of credit issued by
Silicon at the request of the Borrower shall reduce, dollar
for dollar, the amount otherwise available to be borrowed
under the borrowing base formula described in the first
paragraph of this Schedule.
MATURITIES OF
LETTERS OF CREDIT:Letters of credit issued by Silicon shall have an expiry date
of not later than the Maturity Date for the line of credit as
stated above. Not later than that date, all letters of credit
issued by Silicon shall be satisfied or terminated, with the
result that Silicon shall have no continuing obligations under
such letters of credit, unless Borrower's obligations to
Silicon with respect to such letters of credit is secured by
cash pledged to Silicon and in Silicon's possession on terms
satisfactory to Silicon, in which case such letters of credit
shall have an expiry date of not later than 90 days after the
Maturity Date for the line of credit as stated above.
REPAYMENT: The Borrower shall repay on demand any amount drawn on a
letter of credit issued by Silicon. Silicon may, but is not
obligated to, add to the principal amount outstanding under
the line of credit described above in this Schedule any amount
drawn on a letter of credit issued by Silicon. Any such amount
shall be subject to the terms applicable to the line of credit
described above. For calculating the interest due from the
Borrower, no interest shall accrue on the amount of any
letters of credit issued by Silicon at the Borrower's request
unless Silicon shall actually makes a payment as a result of a
draw on any such letter of credit, at which time the amount of
the draw shall be deemed an advance on the line of credit
described above and shall bear interest accordingly.
ISSUANCE: The issuance of any letter of credit under this Schedule must
be in form and content satisfactory to Silicon and in favor of
a beneficiary acceptable to Silicon. The Borrower shall
execute Silicon's then-current application forms,
reimbursement agreement and related documents as a condition
to Silicon's issuance of any letter of credit.
FEES: The Borrower shall pay Silicon the fees and costs customarily
charged by Silicon (at the time of issuance of the letter of
credit) with respect to the issuance of letters of credit.
SECURED TERM LOAN
CREDIT LIMIT: An amount not to exceed $215,000 at any one time outstanding.
The Borrower shall not be entitled to more than one advance
with respect to this Secured Term Loan. The Borrower's
indebtedness to Silicon with respect to this Secured Term Loan
shall be evidenced by this Schedule and the Loan Agreement,
not by a separate promissory note unless required by Silicon.
The unpaid principal balance owing on this Secured Term Loan
at any time may be evidenced by Silicon's internal records,
including daily computer print-outs (which Silicon shall
provide to Borrower periodically).
INTEREST RATE: The interest rate applicable to the Secured Term Loan shall be
a rate equal to the "Prime Rate" (as defined above) in effect
from time to time, plus 1.5% per annum.
Page 3 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 4
Interest calculations shall be made on the basis of a 360-day
year and the actual number of days elapsed. The interest rate
applicable to the Obligations shall change on each date there
is a change in the Prime Rate.
AMORTIZATION: Borrower shall pay Silicon monthly payments of interest on the
last day each month commencing with August 1996. In addition,
Borrower shall pay Silicon on the last day of each month,
commencing with August 1996, the amount necessary to repay
fully the amount of the Secured Term Loan in 72 equal monthly
payments.
MATURITY DATE: July 31, 2000, at which time all unpaid principal and accrued
but unpaid interest, fees and other charges shall be due and
payable.
COMMITMENT
FEE: $1,000, which was paid at closing. This fee is fully earned at
closing and is non-refundable. (Any Commitment Fee previously
paid by the Borrower in connection with this loan shall be
credited against this Fee.)
SECURED TERM LOAN NO. 2
CREDIT LIMIT: An amount not to exceed $250,000 at any one time outstanding.
The Borrower shall not be entitled to more than one advance
with respect to this Secured Term Loan No. 2. The Borrower's
indebtedness to Silicon with respect to this Secured Term Loan
No. 2 shall be evidenced by this Schedule and the Loan
Agreement, not by a separate promissory note unless required
by Silicon. The unpaid principal balance owing on this Secured
Term Loan No. 2 at any time may be evidenced by Silicon's
internal records, including daily computer print-outs (which
Silicon shall provide to Borrower periodically).
INTEREST RATE: At Borrower's option at the time of disbursement under this
Secured Term Loan No. 2, the interest rate applicable to the
Secured Term Loan No. 2 shall be a rate equal to the "Prime
Rate" (as defined above) in effect from time to time, plus
1.5% per annum, or a two-year fixed rate quoted by Silicon.
Interest calculations shall be made on the basis of a 360-day
year and the actual number of days elapsed. The interest rate
applicable to the Obligations shall change on each date there
is a change in the Prime Rate if the variable rate option is
chosen by Borrower.
AMORTIZATION: Borrower shall pay Silicon monthly payments of interest on the
last day each month commencing with July 31, 1997. In
addition, Borrower shall pay Silicon on the last day of each
month, commencing with July 31, 1997, the amount necessary to
repay fully the amount of the Secured Term Loan in 24 equal
monthly payments.
MATURITY DATE:July 31, 1999, at which time all unpaid principal and accrued
but unpaid interest, fees and other charges shall be due and
payable.
COMMITMENT
FEE: $2,500, payable at closing. This fee is fully earned at
closing and is non-refundable. (Any Commitment Fee previously
paid by the Borrower in connection with this loan shall be
credited against this Fee.)
Page 4 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 5
PRIOR NAMES OF
BORROWER
(Section 3.2): Consep Membranes, Inc.
TRADE NAMES OF
BORROWER
(Section 3.2): CheckMate; Biolure; SureFire; Sierra Ag Chemical
OTHER LOCATIONS
AND ADDRESSES
(Section 3.3): Escalon Patterson
P.O. Box 335 P.O. Box 186
20001 McHenry Avenue 105 N. 1st Street
Escalon, CA 95320 Patterson, CA 95363
209-838-2809 209-892-2601
Livingston Sacramento
P.O. Box 165 P.O. Box 292337
11019 Eucalyptus 8120 37th Avenue
Livingston, CA 95334 Sacramento, CA 95824
209-394-7981 916-383-3610
MATERIAL ADVERSE
LITIGATION
(Section 3.10): None
NEGATIVE COVENANTS-
EXCEPTIONS
(Section 4.6): Without Silicon's prior written consent, Borrower may do the
following, provided that, after giving effect thereto, no
Event of Default has occurred and no event has occurred which,
with notice or passage of time or both, would constitute an
Event of Default, and provided that the following are done in
compliance with all applicable laws, rules and regulations:
(i) repurchase shares of Borrower's stock pursuant to any
employee stock purchase or benefit plan, provided that the
total amount paid by Borrower for such stock does not exceed
$200,000 in any fiscal year, (ii) incur debt, make loans and
incur liability as a guarantor in the ordinary course of
business, (iii) pledge up to $350,000 in cash or cash
equivalents as collateral for the indebtedness of Chemfree
Environment, Inc. (a subsidiary of Borrower) to Royal Bank of
Canada; and (iv) make additional advances to Borrower's
subsidiaries provided that the total amount of such additional
advances shall not exceed $250,000 during the term hereof.
FINANCIAL
COVENANTS
(Section 4.1): Borrower shall comply with all of the following covenants on a
consolidated basis, except as set forth below. Compliance
shall be determined as of the end of each quarter, except as
otherwise specifically provided below:
QUICK ASSET RATIO:Borrower shall maintain a ratio of "Quick Assets" to current
liabilities of not less than 0.9 to 1.0.
Page 5 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 6
TANGIBLE NET WORTH:Borrower shall maintain a tangible net worth of not less than
$12,300,000, plus 50% of the net proceeds of any equity
financing of Borrower that closes after the date hereof.
DEBT TO TANGIBLE
NET WORTH RATIO: Borrower shall maintain a ratio of total liabilities to
tangible net worth of not more than 1.25 to 1.0.
PROFITABILITY: Borrower shall not incur a loss (after taxes) for any fiscal
quarter in excess of $1,250,000, or in excess of $1,500,000 in
the aggregate for two consecutive quarters, or a quarterly
loss of any amount in three consecutive quarters.
DEBT SERVICE
COVERAGE RATIO: Borrower shall maintain a Debt Service Coverage Ratio of not
less than 1.50:1.00 as of the end of each fiscal quarter of
Borrower.
DEFINITIONS: "Current assets," and "current liabilities" shall have the
meanings ascribed to them in accordance with generally
accepted accounting principles.
"Debt Service Coverage Ratio" means Earnings Before Interest,
Taxes, Depreciation and Amortization (EBITDA), divided by the
Current Maturities of Long-Term Debt (CMLTD) plus interest.
For quarterly calculations, quarterly EBITDA is matched
against 25% of CMLTD plus interest.
"Tangible net worth" means total shareholders' net worth,
determined in accordance with generally accepted accounting
principles, plus Subordinated Debt (as referred to below),
excluding however restricted cash, receivables owing from
subsidiaries of Borrower, and all assets which would be
classified as intangible assets under generally accepted
accounting principles, including without limitation goodwill,
licenses, patents, trademarks, trade names, copyrights,
capitalized software costs, deferred organizational costs and
franchises.
"Quick Assets" means cash on hand or on deposit in banks,
readily marketable securities issued by the United States,
readily marketable commercial paper rated "A-1" by Standard &
Poor's Corporation (or a similar rating by a similar rating
organization), certificates of deposit and banker's
acceptances, and accounts receivable (net of allowance for
doubtful accounts).
SUBORDINATED DEBT:"Liabilities" for purposes of the foregoing covenants do not
include indebtedness which is subordinated to the indebtedness
to Silicon under a subordination agreement in form specified
by Silicon or by language in the instrument evidencing the
indebtedness which is acceptable to Silicon.
OTHER COVENANTS
(Section 4.1): Borrower shall at all times comply with all of the following
additional covenants:
1. BANKING RELATIONSHIP. Borrower shall at all times maintain
its primary banking relationship with Silicon. Borrower shall
establish a daily deposit sweep arrangement with either US
Bank or First Interstate Bank.
2. FINANCIAL STATEMENTS AND REPORTS. The Borrower shall
provide Silicon: (a) within 30 days after the end of each
month, a monthly financial statement (consisting of a income
statement and a balance sheet) prepared by the Borrower
Page 6 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 7
in accordance with generally accepted accounting principles;
(b) within 20 days after the end of each month, an accounts
receivable aging report, an inventory report and an accounts
payable aging report, in such form as Silicon shall reasonably
specify; (c) within 20 days after the end of each month, a
Borrowing Base Certificate in the form attached to this
Agreement as Exhibit A, as Silicon may reasonably modify such
Certificate from time to time, signed by the Chief Financial
Officer of the Borrower; (d) within 30 days after the end of
each quarter, a Compliance Certificate in such form as Silicon
shall reasonably specify, signed by the Chief Financial
Officer of the Borrower, setting forth calculations showing
compliance (at the end of each such calendar quarter) with the
financial covenants set forth on the Schedule, and certifying
that throughout such quarter the Borrower was in full
compliance with all other terms and conditions of this
Agreement and the Schedule, and providing such other
information as Silicon shall reasonably request; (e) within
five days after filing, all 10Q and 10K reports and other
reports filed with the Securities Exchange Commission; and (f)
within 90 days following the end of the Borrower's fiscal
year, complete annual CPA-audited financial statements, such
audit being conducted by independent certified public
accountants reasonably acceptable to Silicon, together with an
unqualified opinion of such accountants.
3. INDEBTEDNESS. Without limiting any of the foregoing terms
or provisions of this Agreement, Borrower shall not in the
future incur indebtedness for borrowed money, except for (i)
indebtedness to Silicon, and (ii) indebtedness incurred in the
future for the purchase price of or lease of equipment in an
aggregate amount not exceeding normal course of business at
any time outstanding.
BORROWER:
CONSEP, INC.
BY: /s/ Volker Oakey
-------------------------------
ITS: President
-------------------------------
PACOAST INC.
BY: /s/ Volker Oakey
-------------------------------
ITS: Vice President
-------------------------------
RICHARD HUNT INC.
BY: /s/ Volker Oakey
-------------------------------
ITS: President
-------------------------------
SILICON:
SILICON VALLEY BANK
Page 7 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 8
BY: /s/ Ron Sherman
------------------------------
ITS: Vice President
------------------------------
Page 8 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 9
EXHIBIT A
[INSERT BORROWING BASE CERTIFICATE]
Page 9 - AMENDED AND RESTATED SCHEDULE TO LOAN AND SECURITY AGREEMENT
<PAGE> 1
EXHIBIT 10.28
SALE AND PURCHASE AGREEMENT FOR REAL ESTATE
THIS AGREEMENT is initiated on March 24, 1997 by:
CONSEP, INC., an Oregon Corporation (Purchaser), and
MALLARD INVESTMENTS, INC., and Oregon Corporation (Seller);
For and in consideration of the sum of $5,000.00 as earnest money in the form of
a promissory note, to be later deposited with Cascade Title Company, Seller
agrees to sell to the Purchaser that certain parcel of real estate, together
with improvements and personal property, known as:
213 SOUTHWEST COLUMBIA STREET IN BEND, DESCHUTES COUNTY, OREGON.
1. PRICE AND TERMS OF PURCHASE: The purchase price for this property in One
Million Four Hundred Ninety-Five Thousand and no/100 ($1,495,000).
Purchaser to apply for and receive a conventional loan with terms satisfactory
to the purchaser. Purchaser agrees to pay all costs associated with the receipt
of this loan.
2. FINANCING CONDITION: This Agreement to Purchase is subject only to
Purchasers receipt of said conventional loan. If Purchaser does not
receipt said loan, this Agreement shall be terminated and earnest money is
to be refunded to Purchaser. Purchaser to receive acceptable loan approval
by April 18, 1997.
3. PREPAYMENT OF EXISTING LOAN: In the event the existing loan with Standard
Insurance Company is paid off at closing, or any time thereafter, the
Purchaser shall be responsible for, and hold Seller harmless from, payment
of any prepayment penalty charged for prepayment of the Standard Insurance
loan.
4. TITLE INSURANCE: Prior to closing, Seller shall provide Purchaser, at
Sellers expense, a preliminary title report showing the condition of
property title, together with copies of all documents referred to therein.
Purchaser shall review and approve such exceptions within ten days of
delivery of said title report.
At closing, Seller shall at his expense, provide a standard form title
insurance policy in the amount of the purchase price showing marketable
title in Purchasers name, subject only to such exceptions acceptable to
Purchaser. Title insurance policy shall be provided by Bend, Title
Company.
5. TITLE: Fee simple title to the subject property shall be conveyed by
standard form warranty deed, free and clear of all liens, and encumbrances
except recorded covenants, conditions and restrictions, zoning ordinances,
building and use restrictions, reservations in federal patents, utility
easements, easements not materially affecting the value or intended use of
the property, and any other exceptions approved by the Purchaser.
6. PRORATION OF EXPENSES AND INCOME: All expenses, rent income, prepaid rents
and the like shall be prorated as of the date of closing, or any other
date mutually agreed upon by both parties. Seller shall be responsible for
all amounts deemed to be for activities or services prior to the proration
date and the Purchaser responsible for all on and after said date. All
deposits and fees, both refundable and non-refundable, collected from the
tenants, shall be delivered to Purchaser at closing.
7. IRS CODE SECTION 1031 EXCHANGE: Seller reserves the right and intends to
qualify this transaction as an IRS Code Section 1031 tax deferred
exchange. Seller will be substituting Cascade
<PAGE> 2
Exchange prior to closing in order to complete an existing like-kind
exchange transaction pursuant to I.R.C. Section 1031. Purchaser agrees to
reasonably cooperate with Cascade Exchange and Seller in the exchange
process at no additional expense to the Purchaser.
8. CLOSING: Closing shall occur at Cascade Title Company on or before April
30, 1997, or as soon thereafter as financing documents are available.
Normal closing costs shall be shared equally between the parties (ie:
escrow closing fee).
9. MISCELLANEOUS PROVISIONS:
a) In the event either party to this Agreement is required to
initiate litigation to enforce terms herein, the prevailing
party shall be entitled to reasonable attorney fees in
addition to any awards or relief which may be granted.
b) It is understood that this Agreement is the only agreement
between the parties relating to the subject property.
c) This Agreement shall be binding upon the heirs,
administrators, executors, and successors of the respective
parties.
d) Time is of the essence with respect to all acts to be
performed under this Agreement.
10. EARNEST MONEY NOTE: The earnest money in this transaction is in the form
of a promissory note payable on Purchasers receipt of acceptable
financing.
11. REPRESENTATIONS: The Purchaser has been a tenant in the property for the
previous three (3) years and is very familiar with the condition of the
property and the building. Purchaser is acquiring this property with no
warrants or representations from the Seller other than what is provided in
this agreement. Purchaser agrees to close this transaction based on their
own investigation of the property.
a) Seller has no knowledge of any liens to be assessed against
the property nor has Seller received any notice from any
governmental agency of any violation of law relating to the
property;
b) Seller assumes all debts, charges, claims, damages, and
liabilities attributable to the operation and ownership of
subject property prior to closing and shall hold Purchaser
harmless and indemnify and defend against same.
c) Seller is the owner of the property and has full right, power,
and authority to sell, convey and transfer the Property to
Purchaser as provided herein, and to perform Seller's
obligations herein.
12. APPROVED USES: THE PROPERTY DESCRIBED IN THIS AGREEMENT MAY NOT BE WITHIN
A FIRE PROTECTION DISTRICT PROTECTING STRUCTURES. THE PROPERTY IS SUBJECT
TO AND USE LAWS AND REGULATIONS, WHICH, IN FARM AND FOREST ZONES, MAY NOT
AUTHORIZE CONSTRUCTION OR SITING OF A RESIDENCE AND WHICH LIMIT LAWSUITS
AGAINST FARMING OR FOREST PRACTICES AS DEFINED IN ORS 30.930 IN ALL ZONES.
BEFORE SIGNING OR ACCEPTING THIS AGREEMENT, THE PERSON ACQUIRING FEE TITLE
TO THE PROPERTY SHOULD CHECK WITH THE APPROPRIATE CITY OR COUNTY PLANNING
DEPARTMENT TO VERIFY APPROVED USES AND THE EXISTENCE OF FIRE PROTECTION
FOR STRUCTURES.
13. TERMINATION: In the event this transaction is terminated, neither party
shall have any further liability under this Agreement, except to the
extent of the breach of any affirmative covenant of warranty in this
Agreement that may have been involved. In the event of such termination,
Purchasers earnest money shall be promptly refunded.
14. REMEDIES: The earnest money and additional earnest money shall be refunded
to Purchaser, and Seller shall pay all cost of title insurance and escrow
and Seller's legal fees, if title to the property is
<PAGE> 3
not marketable, or cannot be made marketable within thirty (30) days after
notice containing a written statement of defects is delivered to Seller;
or if Seller fails to consummate the sale. Acceptance by Purchaser of the
refund does not constitute a waiver of any remedies available to the
Purchaser.
If the sale is approved by Seller, title to the premise is marketable, and
Purchaser neglects or refuses to: (a) comply with any conditions of sale
including but not limited to closing the sale as specified; or (b) make
payments promptly as set forth in this Agreement, then Seller shall have
the following options: (1) Seller may seek damages; and (2) Seller may
seek specific performance of the Sale Agreement; and (3) Seller shall be
entitled to retain Purchaser's earnest money deposit or deposits which
shall be disbursed as follows: (a) to the escrow agent for the cost of
title insurance and escrow and Seller's legal fees, if any; and then (b)
to Seller to be credited against any claims Seller may choose to pursue
against the Purchaser. Seller's remedies are cumulative, not alternative.
15. ATTORNEY FEES: If civil action is filed on this contract or the subject
matter of it, the prevailing party shall be awarded reasonable attorney
fees, which shall be fixed by the courts in which the action, including
any appeal thereof, is tried, heard or decided. "Party" includes seller,
purchaser, and broker(s).
16. ACKNOWLEDGEMENT: Purchaser and Seller acknowledge that they have read and
understand this Agreement. Seller also, herein, acknowledges receipt of a
copy of this fully executed Agreement.
SELLER: PURCHASER:
Mallard Investments, Inc. Consep, Inc.
an Oregon corporation an Oregon corporation
By /s/ Arthur Steele By /s/ Larry Katz
------------------------ ------------------------------------
Arthur Steele Larry Katz, Chief Financial Officer
By /s/ John Flaxel
------------------------
John Flaxel
<PAGE> 1
EXHIBIT 10.29
CONSTRUCTION LOAN AGREEMENT
<TABLE>
<S> <C> <C> <C>
BORROWER: Consep, Inc. LENDER: WESTERN BANK, a division of Washington Mutual Bank
213 S.W. Columbia Street Pilot Butte Branch
Bend, OR 97702 600 N.E. Greenwood Avenue
P.O. Box 670
Bend, OR 97709-0670
</TABLE>
THIS CONSTRUCTION LOAN AGREEMENT BETWEEN CONSEP, INC. ("BORROWER") AND WESTERN
BANK, A DIVISION OF WASHINGTON MUTUAL BANK ("LENDER") IS MADE AND EXECUTED ON
THE FOLLOWING TERMS AND CONDITIONS. BORROWER HAS APPLIED TO LENDER FOR LOANS IN
THE TOTAL PRINCIPAL AMOUNT OF U.S. $1,695,000.00 IN ORDER TO CONSTRUCT THE
IMPROVEMENTS ON THE REAL PROPERTY DESCRIBED BELOW. LENDER IS WILLING TO LEND THE
LOAN AMOUNT TO BORROWER SOLELY UNDER THE TERMS AND CONDITIONS SPECIFIED IN THIS
AGREEMENT AND IN THE RELATED DOCUMENTS, TO EACH OF WHICH BORROWER AGREES.
BORROWER UNDERSTANDS AND AGREES THAT: (A) IN GRANTING, RENEWING, OR EXTENDING
ANY LOAN, LENDER IS RELYING UPON BORROWER'S REPRESENTATIONS, WARRANTIES, AND
AGREEMENTS AS SET FORTH IN THIS AGREEMENT, AND (B) ALL SUCH LOANS SHALL BE AND
REMAIN SUBJECT TO THE TERMS AND CONDITIONS OF THIS AGREEMENT.
TERM. This Agreement shall be effective as of June 11, 1997 and shall continue
thereafter until all Indebtedness has been paid in full and all other
obligations of Borrower hereunder have been performed in full and the parties
terminate this Agreement in writing.
DEFINITIONS. The following words shall have the following meanings when used in
this Agreement. Terms not otherwise defined in this Agreement shall have the
meanings attributed to such terms in the Uniform Commercial Code. All references
to dollar amounts shall mean amounts in lawful money of the United States of
America.
AGREEMENT. The word "Agreement" means this Construction Loan Agreement, as
this Construction Loan Agreement may be amended or modified from time to
time, together with all exhibits and schedules attached to this
Construction Loan Agreement from time to time.
ARCHITECTURE CONTRACT. The words "Architecture Contract" mean the
architect's contract relating to the Project, if any.
BORROWER. The word "Borrower" means each and every person or entity
signing the Note, including without limitation Consep, Inc.
COLLATERAL. The word "Collateral" means and includes without limitation
all property and assets granted as collateral security for a Loan, whether
real or personal property, whether granted directly or indirectly, whether
granted now or in the future, and whether granted in the form of a
security interest, mortgage, deed of trust, assignment, pledge, chattel
mortgage, chattel trust, factor's lien, equipment trust, conditional sale,
trust receipt, lien, charge, lien or title retention contract, lease or
consignment intended as a security device, or any other security or lien
interest whatsoever, whether created by law, contract, or otherwise.
COMMENCEMENT DATE. The words "Commencement Date" mean the date Borrower
begins work on the Project.
COMPLETION DATE. The words "Completion Date" mean such date as Lender
shall have established as the date by which Borrower is to have completed
the Project as required in this Agreement.
CONSTRUCTION CONTRACT. The words "Construction Contract" mean and include
the contract between Borrower and the general contractor for the Project,
if any, (General Contractor), and any subcontracts with subcontractors,
materialmen, laborers, or any other person or entity for performance of
work on the Project or the delivery of materials to the Project.
EVENT OF DEFAULT. The words "Event of Default" mean and include without
limitation any of the Events of Default set forth below in the section
titled "Events of Default."
GRANTOR. The word "Grantor" means and includes without limitation each and
all of the persons or entities granting a Security Interest in any
Collateral for the Indebtedness, including without limitation all
Borrowers granting such a Security Interest.
GUARANTOR. The word "Guarantor" means and includes without limitation all
guarantors, sureties, and accommodation parties.
IMPROVEMENTS. The word "Improvements" means and includes without
limitation all existing and future buildings, structures, facilities,
fixtures, additions, and similar construction on the Property.
INDEBTEDNESS. The word "Indebtedness" means and includes without
limitation all Loans, together with all other obligations, debts and
liabilities of Borrower to Lender, or any one or more of them, as well as
all claims by Lender against Borrower, or any one or more of them; whether
now or hereafter existing, voluntary or involuntary, due or not due,
absolute or contingent, liquidated or unliquidated; whether Borrower may
be liable individually or jointly with others; whether Borrower may be
obligated as a guarantor, surety, or otherwise; whether recovery upon such
Indebtedness may be or hereafter may become barred by any statute of
limitations; and whether such Indebtedness may be or hereafter may become
otherwise unenforceable.
LENDER. The word "Lender" means WESTERN BANK, a division of Washington
Mutual Bank, its successors and assigns.
<PAGE> 2
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 2
LOAN. The word "Loan" means the loan made to Borrower under this Agreement
and the Related Documents as described below.
LOAN FUND. The words "Loan Fund" mean the undisbursed proceeds of the Loan
under this Agreement together with any equity funds or other deposits
required from Borrower under this Agreement.
NOTE. The word "Note" means the promissory note or credit agreement dated
June 11, 1997, IN THE ORIGINAL PRINCIPAL AMOUNT OF $1,695,000.00 from
Borrower to Lender, together with all renewals of, extensions of,
modifications of, refinancings of, consolidations of, and substitutions
for the promissory note or agreement.
PLANS AND SPECIFICATIONS. The words "Plans and Specifications" mean the
plans and specifications for the Project which have been submitted to and
initialed by Lender, together with such changes and additions as may be
approved by Lender in writing.
PROJECT. The word "Project" means the construction and completion of all
Improvements contemplated by this Agreement, including without limitation
the erection of the building or structure, installation of equipment and
fixtures, landscaping, and all other work necessary to make the Property
usable and complete for the intended purposes.
PROJECT DOCUMENTS. The words "Project Documents" mean the Plans and
Specifications, all studies, data and drawings relating to the Project,
whether prepared by or for Borrower, the Construction Contract, the
Architecture Contract, and all other contracts and agreements relating to
the Project or the construction of the Improvements.
PROPERTY. The word "Property" means the Real Property together with all
Improvements, all equipment, fixtures, and other articles of personal
property now or subsequently attached or affixed to the real property,
together with all accessions, parts, and additions to, all replacements
of, and all substitutions for any of such property, and all proceeds
(including insurance proceeds and refunds of premiums) from any sale or
other disposition of such property.
REAL PROPERTY. The words "Real Property" mean the real property located in
DESCHUTES COUNTY, STATE OF OREGON, and legally described as:
LOT TWO (2), BLOCK FIVE (5) OF SHEVLIN CENTER, CITY OF BEND, DESCHUTES
COUNTY, OREGON
The Real Property or its address is commonly known as 213 S. W. Columbia
Street, Bend, OR 97702.
RELATED DOCUMENTS. The words "Related Documents" mean and include without
limitation all promissory notes, credit agreements, loan agreements,
environmental agreements, guaranties, security agreements, mortgages,
deeds of trust, and all other instruments, agreements and documents,
whether now or hereafter existing, executed in connection with the
Indebtedness.
SECURITY AGREEMENT. The words "Security Agreement" mean and include
without limitation any agreements, promises, covenants, arrangements,
understandings or other agreements, whether created by law, contract, or
otherwise, evidencing, governing, representing, or creating a Security
Interest.
SECURITY INTEREST. The words "Security Interest" mean and include without
limitation any type of collateral security, whether in the form of a lien,
charge, mortgage, deed of trust, assignment, pledge, chattel mortgage,
chattel trust, factor's lien, equipment trust, conditional sale, trust
receipt, lien or title retention contract, lease or consignment intended
as a security device, or any other security or lien interest whatsoever,
whether created by law, contract, or otherwise.
VALUE. The word "Value" means such amount or worth as defined and
determined by Lender in its sole discretion unless agreed to the contrary
by Lender in writing.
LOAN. The Loan shall be in an amount not to exceed the principal sum of U.S.
$1,695,000.00 and shall bear interest on so much of the principal sum as shall
be advanced pursuant to the terms of this Agreement and the Related Documents.
The Loan shall bear interest on each Advance from the date of the Advance in
accordance with the terms of the Note. Borrower shall use the Loan Funds solely
for the payment of (a) the costs of constructing the Improvements and equipping
the Project in accordance with the Construction Contract; (b) other costs and
expenses incurred or to be incurred in connection with the construction of the
Improvements as Lender in its sole discretion shall approve; and (c) if
permitted by Lender, interest due under the Note, including all expenses and all
loan and commitment fees described in this Agreement. The Loan amount shall be
subject at all times to all maximum limits and conditions set forth in this
Agreement or in any of the Related Documents, including without limitation, any
limits relating to loan to value ratios and acquisition and Project costs.
FEES AND EXPENSES. Whether or not the Project shall be consummated, Borrower
shall assume and pay upon demand all out-of-pocket expenses incurred by Lender
in connection with the preparation of loan documents and the making of the Loan,
including without limitation the following: (a) all closing costs, fees, and
disbursements; (b) all expenses of Lender's legal counsel; and (c) all title
examination fees, title insurance premiums, appraisal fees, survey costs,
required fees, and filing and recording fees.
NO CONSTRUCTION PRIOR TO RECORDING OF SECURITY DOCUMENT. Borrower will not
permit any work or materials to be furnished in connection with the Project
until (a) Borrower has signed the Related Documents; (b) Lender's mortgage or
deed of trust and other Security Interests in the Property have been duly
recorded and perfected; and (c) Lender has been provided evidence, satisfactory
to Lender, that Borrower has obtained all insurance required under this
Agreement or any Related Agreement and that Lender's liens on the Property and
Improvements are valid perfected first liens, subject only to such exceptions,
if any, acceptable to Lender.
<PAGE> 3
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 3
REPRESENTATIONS AND WARRANTIES. Borrower represents and warrants to Lender, as
of the date of this Agreement, as of the date of each disbursement of Loan
proceeds, as of the date of any renewal, extension or modification of any Loan,
and at all times any Indebtedness exists:
ORGANIZATION. Borrower is a corporation which is duly organized, validly
existing, and in good standing under the laws of the State of Oregon and
is validly existing and in good standing in all states in which Borrower
is doing business. Borrower has the full power and authority to own its
properties and to transact the businesses in which it is presently engaged
or presently proposes to engage. Borrower also is duly qualified as a
foreign corporation and is in good standing in all states in which the
failure to so qualify would have a material adverse effect on its
businesses or financial condition.
AUTHORIZATION. The execution, delivery, and performance of this Agreement
by Borrower, to the extent to be executed, delivered or performed by
Borrower, have been duly authorized by all necessary action by Borrower;
do not require the consent or approval of any other person, regulatory
authority or governmental body; and do not conflict with, result in a
violation of, or constitute a default under (a) any provision of its
articles of incorporation or organization, or bylaws, or any agreement or
other instrument binding upon Borrower or (b) any law, governmental
regulation, court decree, or order applicable to Borrower.
FINANCIAL INFORMATION. Each financial statement of Borrower supplied to
Lender truly and completely disclosed Borrower's financial condition as of
the date of the statement, and there has been no material adverse change
in Borrower's financial condition subsequent to the date of the most
recent financial statement supplied to Lender. Borrower has no material
contingent obligations except as disclosed in such financial statements.
LITIGATION AND CLAIMS. No litigation, claim, investigation, administrative
proceeding or similar action (including those for unpaid taxes) against
Borrower is pending or threatened, and no other event has occurred which
may materially adversely affect Borrower's financial condition or
properties, other than litigation, claims, or other events, if any, that
have been disclosed to and acknowledged by Lender in writing.
TITLE TO PROPERTY. Borrower has, or on the date of first disbursement of
Loan proceeds will have, good and marketable title to the Property free
and clear of all defects, liens, and encumbrances, excepting only liens
for taxes, assessments, or governmental charges or levies not yet
delinquent or payable without penalty or interest, and such liens and
encumbrances as may be approved in writing by the Lender.
HAZARDOUS SUBSTANCES. The terms "hazardous waste," "hazardous substance,"
"disposal" "release," and "threatened release," as used in this Agreement,
shall have the same meanings as set forth in the Comprehensive
Environmental Response, Compensation, and Liability Act of 1980, as
amended, 42 U.S.C. Section 9601, et seq. ("CERCLA"), the Superfund
Amendments and Reauthorization Act of 1986, Pub. L. No. 99-499 ("SARA"),
the Hazardous Materials Transportation Act, 49 U.S.C. Section 1801, et
seq., the Resource Conservation and Recovery Act, 42 U.S.C. Section 6901,
et seq., or other applicable state or Federal laws, rules, or regulations
adopted pursuant to any of the foregoing or intended to protect human
health or the environment ("Environmental Laws"). Except as disclosed to
and acknowledged by Lender in writing, Borrower represents and warrants
that: (a) During the period of Borrower's ownership of the properties,
there has been no use, generation, manufacture, storage, treatment,
disposal, release or threatened release of any hazardous waste or
substance by any person on, under, about or from any of the properties.
(b) Borrower has no knowledge of, or reason to believe that there has been
(i) any use, generation, manufacture, storage, treatment, disposal,
release, or threatened release of any hazardous waste or substance on,
under, about or from the properties by any prior owners or occupants of
any of the properties, or (ii) any actual or threatened litigation or
claims of any kind by any person relating to such matters. (c) Neither
Borrower nor any tenant, contractor, agent or other authorized user of any
of the properties shall use, generate, manufacture, store, treat, dispose
of, or release any hazardous waste or substance on, under, about or from
any of the properties; and any such activity shall be conducted in
compliance with all applicable federal, state, and local laws,
regulations, and ordinances, including without limitation Environmental
Laws. Borrower authorizes Lender and its agents to enter upon the
properties to make such inspections and tests as Lender may deem
appropriate to determine compliance of the properties with this section of
the Agreement. Any inspections or tests made by Lender shall be at
Borrower's expense and for Lender's purposes only and shall not be
construed to create any responsibility or liability on the part of Lender
to Borrower or to any other person. The representations and warranties
contained herein are based on Borrower's due diligence in investigating
the properties for hazardous waste and hazardous substances. Borrower
hereby (a) releases and waives any future claims against Lender for
indemnity or contribution in the event Borrower becomes liable for cleanup
or other costs under any such laws, and (b) agrees to indemnify and hold
harmless Lender against any and all claims, losses, liabilities, damages,
penalties, and expenses which Lender may directly or indirectly sustain or
suffer resulting from a breach of this section of the Agreement or as a
consequence of any use, generation, manufacture, storage, disposal,
release or threatened release occurring prior to Borrower's ownership or
interest in the properties, whether or not the same was or should have
been known to Borrower, or as a result of a violation of any Environmental
Laws. The provisions of this section of the Agreement, including the
obligation to indemnify, shall survive the payment of the Indebtedness and
the satisfaction of this Agreement and shall not be affected by Lender's
acquisition of any interest in any of the properties, whether by
foreclosure or otherwise.
PROJECT COSTS. The Project costs are true and accurate estimates of the
costs necessary to complete the Improvements in a good and workmanlike
manner according to the Plans and Specifications presented by Borrower to
Lender, and Borrower shall take all steps necessary to prevent the actual
cost of the Improvements from exceeding the Project costs.
UTILITY SERVICES. AII utility services appropriate to the use of the
Project after completion of construction are available at the boundaries
of the Property.
<PAGE> 4
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 4
ACCESS. The Property is contiguous to publicly dedicated streets, roads,
or highways providing access to the Property.
ASSESSMENT OF PROPERTY. The Property is and will continue to be assessed
and taxed as an independent parcel by all governmental authorities.
COMPLIANCE WITH GOVERNING AUTHORITIES. Borrower has examined and is
familiar with all the easements, covenants, conditions, restrictions,
reservations, building laws, regulations, zoning ordinances, and federal,
state, and local requirements affecting the Project. The Project will at
all times and in all respects conform to and comply with the requirements
of such easements, covenants, conditions, restrictions, reservations,
building laws, regulations, zoning ordinances, and federal, state, and
local requirements.
LEGAL EFFECT. This Agreement constitutes, and any instrument or agreement
required hereunder to be given by Borrower when delivered will constitute,
legal, valid and binding obligations of Borrower enforceable against
Borrower in accordance with their respective terms.
BINDING EFFECT. This Agreement, the Note and all Security Agreements
directly or indirectly securing repayment of Borrower's Loan and Note are
binding upon Borrower as well as upon Borrower's successors,
representatives and assigns, and are legally enforceable in accordance
with their respective terms.
SURVIVAL OF REPRESENTATION AND WARRANTIES. Borrower understands and agrees
that Lender is relying upon the above representations and warranties in
extending Loan Advances to Borrower. Borrower further agrees that the
foregoing representations and warranties shall be continuing in nature and
shall remain in full force and effect until such time as Borrower's Loan
and Note shall be paid in full, or until this Agreement shall be
terminated in the manner provided above, whichever is the last to occur.
CONDITIONS PRECEDENT TO EACH ADVANCE. Lender's obligation to make the initial
Advance and each subsequent Advance under this Agreement shall be subject to the
fulfillment to Lender's satisfaction of all of the conditions set forth in this
Agreement.
APPROVAL OF CONTRACTORS, SUBCONTRACTORS, AND MATERIALMEN. Lender shall
have approved a list of all contractors employed in connection with the
construction of the Improvements, showing the name, address, and telephone
number of each contractor, a general description of the nature of the work
to be done, the labor and materials to be supplied, the names of
materialmen, if known, and the approximate dollar value of the labor,
work, or materials with respect to each contractor or materialman. Lender
shall have the right to communicate with any person to verify the facts
disclosed by the list or by any application for any Advance, or for any
other purpose.
PLANS, SPECIFICATIONS, AND PERMITS. Lender shall have received and accepted a
complete set of Plans and Specifications setting forth all Improvements for the
Project, and Borrower shall have furnished to Lender copies of all permits and
requisite approvals of any governmental body necessary for the construction and
use of the Project.
ARCHITECTURE AND CONSTRUCTION CONTRACTS. Borrower shall have furnished in
form and substance satisfactory to Lender an executed copy of the
Architecture Contract and an executed copy of the Construction Contract.
BUDGET AND SCHEDULE OF ESTIMATED ADVANCES. Lender shall have approved
detailed budget and cash flow projections of total Project costs and a
schedule of the estimated amount and time of disbursements of each
Advance.
BORROWER'S AUTHORIZATION. Borrower shall have provided in form and
substance satisfactory to Lender properly certified resolutions, duly
authorizing the execution and delivery of the Loan documents, and the
consummation of the Project, and such other authorizations and other
documents as Lender in its sole discretion may require.
BOND. If requested by Lender, Borrower shall have furnished a performance
and payment bond in an amount equal to 100% of the amount of the
Construction Contract, as well as a materialmen's and mechanics' payment
bond, with such riders and supplements as Lender may require, each in form
and substance satisfactory to Lender, naming the General Contractor as
principal and Lender as an additional obligee.
APPRAISAL. If required by Lender, an appraisal shall be prepared for the
Property, at Borrower's expense, which in form and substance shall be
satisfactory to Lender, in its sole discretion, including applicable
regulatory requirements.
PLANS AND SPECIFICATIONS. If requested by Lender, Borrower shall have
assigned to Lender on Lender's forms the Plans and Specifications for the
Project.
ENVIRONMENTAL REPORT. If requested by Lender, Borrower shall have
furnished to Lender, at Borrower's expense, an environmental report and
certificate on the Property in form and substance satisfactory to Lender,
prepared by an engineer or other expert satisfactory to Lender stating
that the Property complies with all applicable provisions and requirements
of the "Hazardous Substances" paragraph set forth below.
SOIL REPORT. If requested by Lender, Borrower shall have furnished to
Lender, at Borrower's expense, a soil report for the Property in form and
substance satisfactory to Lender, prepared by a registered engineer
satisfactory to Lender stating that the Property is free from soil or
other geological conditions that would preclude its use or development as
contemplated without extra expense for precautionary, corrective or
remedial measures .
<PAGE> 5
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 5
SURVEY. If requested by Lender, Borrower shall have furnished to Lender a
survey of recent date, prepared and certified by a qualified surveyor and
providing that the Improvements, if constructed in accordance with the
Plans and Specifications, shall lie wholly within the boundaries of the
Property without encroachment or violation of any zoning ordinances,
building codes or regulations, or setback requirements, together with such
other information as Lender in its sole discretion may require.
ZONING. Borrower shall have furnished evidence satisfactory to Lender that
the Property is duly and validly zoned for the construction, maintenance,
and operation of the Project.
TITLE INSURANCE. Borrower shall have provided to Lender an ALTA Lender's
extended coverage policy of title insurance with such endorsements as
Lender may require, issued by a title insurance company acceptable to
Lender and in a form, amount, and content satisfactory to Lender, insuring
or agreeing to insure that Lender's Mortgage or Deed of Trust on the
Property is or will be upon recordation a valid first lien on the Property
free and clear of all defects, liens, encumbrances, and exceptions except
those as specifically accepted by Lender in writing. If requested by
Lender, Borrower shall provide to Lender, at Borrower's expense, a
foundation endorsement to the title policy upon the completion of each
foundation for the Improvements, showing no encroachments, and upon
completion an endorsement which insures the lien-free completion of the
Improvements.
INSURANCE. Unless waived by Lender in writing, Borrower shall have
delivered to Lender the following insurance policies or evidence thereof:
(a) an all risks course of construction insurance policy (builder's risk),
with extended coverage covering the Improvements issued in an amount and
by a company acceptable to Lender, containing a loss payable or other
endorsement satisfactory to Lender insuring Lender as mortgagee, together
with such other endorsements as may be required by Lender, including
stipulations that coverages will not be cancelled or diminished without at
least ten (l0) days' prior written notice to Lender; (b) owners and
General Contractor general liability insurance, public liability and
workmen's compensation insurance; (c) flood insurance if required by
Lender or applicable law; and (d) all other insurance required by this
Agreement or by the Related Documents.
WORKERS' COMPENSATION COVERAGE. Provide to Lender proof of the General
Contractor's compliance with all applicable workers' compensation laws and
regulations with regard to all work performed on the Project.
PAYMENT OF FEES AND EXPENSES. Borrower shall have paid to Lender all
expenses specified in this Agreement as are then due and payable.
SATISFACTORY CONSTRUCTION. All work usually done at the stage of
construction for which disbursement is requested shall have been done in a
good and workmanlike manner and all materials and fixtures usually
furnished and installed at that stage of construction shall have been
furnished and installed, all in compliance with the Plans and
Specifications. Borrower shall also have furnished to Lender such proofs
as Lender may require to establish the progress of the work, compliance
with applicable laws, freedom of the Property from liens, and the basis
for the requested disbursement.
CERTIFICATION. Borrower shall have furnished to Lender a certification by
an engineer, architect, or other qualified inspector acceptable to Lender
that the construction of the Improvements has complied and will continue
to comply with all applicable statutes, ordinances, codes, regulations,
and similar requirements.
LIEN WAIVERS. Borrower shall have obtained and attached to each
application for an Advance, including the Advance to cover final payment
to the General Contractor, executed acknowledgments of payments of all
sums due and releases of mechanic's and materialmen's liens, satisfactory
to Lender, from any party having lien rights, which acknowledgments of
payment and releases of liens shall cover all work, labor, equipment,
materials done, supplied, performed, or furnished prior to such
application for an Advance.
LACK OF DEFAULT. There shall not exist at the time of any Advance a
condition which would constitute an Event of Default under this Agreement.
DISBURSEMENT OF LOAN PROCEEDS. The following provisions relate to the
disbursement of funds from the Loan Fund.
APPLICATION FOR ADVANCES. Each application shall be stated on a standard
AIA payment request form or other form approved by Lender, executed by
Borrower, and supported by such evidence as Lender shall reasonably
require. Borrower shall apply only for disbursement with respect to work
actually done by the General Contractor and for materials and equipment
actually incorporated into the Project. Each application for an Advance
shall be deemed a certification of Borrower that as of the date of such
application, all representations and warranties contained in the Agreement
are true and correct, and that Borrower is in compliance with all of the
provisions of this Agreement.
PAYMENTS. At the sole option of Lender, Advances may be paid in the joint
names of Borrower and the General Contractor, subcontractor(s), or
supplier(s) in payment of sums due under the Construction Contract. At its
sole option, Lender may directly pay the General Contractor and any
subcontractors or other parties the sums due under the Construction
Contract. Borrower appoints Lender as its attorney-in-fact to make such
payments. This power shall be deemed to be coupled with an interest, shall
be irrevocable, and shall survive an Event of Default under this
Agreement.
PROJECTED COST OVERRUNS. If Lender at any time determines in its sole
discretion that the amount in the Loan Fund is insufficient, or will be
insufficient, to complete fully and to pay for the Project, then within
ten (10) days after receipt of a written request from Lender, Borrower
shall deposit in the Loan Fund an amount equal to the deficiency as
determined by
<PAGE> 6
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 6
Lender. The judgment and determination of Lender under this section shall
be final and conclusive. Any such amounts deposited by Borrower shall be
disbursed prior to any Loan proceeds.
FINAL PAYMENT TO GENERAL CONTRACTOR. Upon completion of the Project and
fulfillment of the Construction Contract to the satisfaction of Lender and
provided sufficient Loan Funds are available, Lender shall make an Advance
to cover the final payment due to the General Contractor upon delivery to
Lender of endorsements to the ALTA title insurance policy following the
posting of the completion notice, as provided under applicable law.
Construction shall not be deemed complete for purposes of final
disbursement unless and until Lender shall have received all of the
following:
(a) Evidence satisfactory to Lender that all work under the
Construction Contract requiring inspection by any governmental
authority with jurisdiction has been duly inspected and approved by
such authority, that a certificate of occupancy has been Issued, and
that all parties performing work have been paid, or will be paid,
for such work;
(b) A certification by an engineer, architect, or other qualified
inspector acceptable to Lender that the Improvements have been
completed substantially in accordance with the Plans and
Specifications and the Construction Contract, that direct connection
has been made to all utilities set forth in the Plans and
Specifications, and that the Project is ready for occupancy; and
(c) Acceptance of the completed Improvements by Lender and Borrower.
CONSTRUCTION DEFAULT. If Borrower fails in any respect to comply with the
provisions of this Agreement or if construction ceases before completion
regardless of the reason, Lender, at its option, may refuse to make further
Advances, may accelerate the indebtedness under the terms of the Note, and
without thereby impairing any of its rights, powers, or privileges, may enter
into possession of the construction site and perform or cause to be performed
any and all work and labor necessary to complete the improvements, substantially
in accordance with the Plans and Specifications.
DAMAGE OR DESTRUCTION. If any of the Property or Improvements is
damaged or destroyed by casualty of any nature, within sixty (60)
days thereafter Borrower shall restore the Property and Improvements
to the condition in which they were before such damage or
destruction with funds other than those in the Loan Fund. Lender
shall not be obligated to make disbursements under this Agreement
until such restoration has been accomplished.
RIGHT TO ADVANCE FUNDS. When any event occurs that Lender determines
may endanger completion of the Project or the fulfillment of any
condition or covenant in this Agreement, Lender may require Borrower
to furnish, within ten (l0) days after delivery of a written
request, adequate security to eliminate, reduce, or indemnify Lender
against, such danger. In addition, upon such occurrence, Lender in
its sole discretion may advance funds or agree to undertake to
advance funds to any party to eliminate, reduce, or indemnify Lender
against, such danger or to complete the Project. All sums paid by
Lender pursuant to such agreements or undertakings shall be for
Borrower's account and shall be without prejudice to Borrower's
rights, if any, to receive such funds from the party to whom paid.
All sums expended by Lender in the exercise of its option to
complete the Project or protect Lender's interests shall be payable
to Lender on demand together with interest from the date of the
Advance at the rate applicable to the Loan. In addition, any Advance
of funds under this Agreement, including without limitation direct
disbursements to the General Contractor or other parties in payment
of sums due under the Construction Contract, shall be deemed to have
been expended by or on behalf of Borrower and to have been secured
by Lender's Mortgage or Deed of Trust, if any, on the Property.
LIMITATION OF RESPONSIBILITY. The making of any Advance by Lender shall not
constitute or be interpreted as either (a) an approval or acceptance by Lender
of the work done through the date of the Advance, or (b) a representation or
indemnity by Lender to any party against any deficiency or defect in the work or
against any breach of any contract. Inspections and approvals of the Plans and
Specifications, the Improvements, the workmanship and materials used in the
Improvements, and the exercise of any other right of inspection, approval, or
inquiry granted to Lender in this Agreement are acknowledged to be solely for
the protection of Lender's interests, and under no circumstances shall they be
construed to impose any responsibility or liability of any nature whatsoever on
Lender to any party. Neither Borrower nor any contractor, subcontractor,
materialman, laborer, or any other person shall rely, or have any right to rely,
upon Lender's determination of the appropriateness of any Advance. No
disbursement or approval by Lender shall constitute a representation by Lender
as to the nature of the Project, its construction, or its intended use for
Borrower or for any other person, nor shall it constitute an indemnity by Lender
to Borrower or to any other person against any deficiency or defects in the
Project or against any breach of any contract.
AFFIRMATIVE COVENANTS. Borrower covenants and agrees with Lender that, while
this Agreement is in effect, Borrower will:
LITIGATION. Promptly inform Lender in writing of (a) all material adverse
changes in Borrower's financial condition, and (b) all existing and all
threatened litigation, claims, investigations, administrative proceedings or
similar actions affecting Borrower or any Guarantor which could materially
affect the financial condition of Borrower or the financial condition of any
Guarantor.
FINANCIAL RECORDS. Maintain its books and records in accordance with
generally accepted accounting principles, applied on a consistent basis, and
permit Lender to examine and audit Borrower's books and records at all
reasonable times.
ADDITIONAL INFORMATION. Furnish such additional information and statements,
lists of assets and liabilities, agings of receivables and payables,
inventory schedules, budgets, forecasts, tax returns, and other reports with
respect to Borrower's financial condition and business operations as Lender
may request from time to time.
<PAGE> 7
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 7
FINANCIAL COVENANTS AND RATIOS. Comply with the following covenants and ratios:
TANGIBLE NET WORTH. Maintain a minimum Tangible Net Worth of not
less than $12,300,000.00.
NET WORTH RATIO. Maintain a ratio of Total Liabilities to Tangible
Net Worth of less than 1.25 TO 1.00.
QUICK RATIO. Maintain a ratio of Liquid Assets to Current
Liabilities in excess of 0.90 TO 1.00.
The following provisions shall apply for purposes of determining
compliance with the foregoing financial covenants and ratios: ALL
FINANCIAL COVENANTS WILL BE TESTED ON AN ANNUAL BASIS. Except as provided
above, all computations made to determine compliance with the requirements
contained in this paragraph shall be made in accordance with generally
accepted accounting principles, applied on a consistent basis, and
certified by Borrower as being true and correct.
COMPLIANCE WITH GOVERNMENTAL REQUIREMENTS. Comply with all laws,
ordinances, and regulations, now or hereafter in effect, of all
governmental authorities applicable to the use or occupancy of the
Property, including without limitation, the Americans With Disabilities
Act. Borrower may contest in good faith any such law, ordinance, or
regulation and withhold compliance during any proceeding, including
appropriate appeals, so long as Borrower has notified Lender in writing
prior to doing so and so long as, in Lender's sole opinion, Lender's
interests in the Property are not jeopardized. Lender may require Borrower
to post adequate security or a surety bond, reasonably satisfactory to
Lender, to protect Lender's interest.
CONSTRUCTION OF THE PROJECT. Cause the Improvements to be constructed and
equipped in a diligent and orderly manner and in strict accordance with
the Plans and Specifications approved by Lender, the Construction
Contract, and all applicable laws, ordinances, codes, regulations, and
rights of adjoining or concurrent property owners.
LOAN PROCEEDS. Use the Loan Funds solely for payment of bills and expenses
directly related to the Project.
DEFECTS. Upon demand of Lender, promptly correct any defect in the
Improvements or any departure from the Plans and Specifications not
approved by Lender before further work shall be done upon the portion of
the Improvements affected.
PROJECT CLAIMS AND LITIGATION. Promptly inform Lender of (a) all material
adverse changes in the financial condition of the General Contractor; (b)
any litigation and claims, actual or threatened, affecting the Project or
the General Contractor, which could materially affect the successful
completion of the Project or the ability of the General Contractor to
complete the Project as agreed; and (c) any condition or event which
constitutes a breach or default under any of the Related Documents or any
contract related to the Project.
PAYMENT OF CLAIMS AND REMOVAL OF LIENS. (a) Cause all claims for labor
done and materials and services furnished in connection with the
Improvements to be fully paid and discharged in a timely manner, (b)
diligently file or procure the filing of a valid notice of completion of
the Improvements, or such comparable document as may be permitted under
applicable lien laws, (c) diligently file or procure the filing of a
notice of cessation, or such comparable document as may be permitted under
applicable lien laws, upon the happening of cessation of labor on the
Improvements for a continuous period of thirty (30) days or more, and (d)
take all reasonable steps necessary to remove all claims of liens against
the Property, the Improvements or any part of the Property or
Improvements, or any rights or interests appurtenant to the Property or
Improvements . Upon Lender's request, Borrower shall make such demands or
claims upon or against laborers, materialmen, subcontractors, or other
persons who have furnished or claim to have furnished labor, services, or
materials in connection with the Improvements, which demands or claims
shall under the laws of the State of Oregon require diligent assertions of
lien claims upon penalty of loss or waiver thereof. Borrower shall, within
ten (10) days after the filing of any claim of lien that is disputed or
contested by Borrower, provide Lender with a surety bond issued by a
surety acceptable to Lender sufficient to release the claim of lien or
deposit with Lender an amount satisfactory to Lender for the possibility
that the contest will be unsuccessful. If Borrower fails to remove any
lien on the Property or Improvements or provide a bond or deposit pursuant
to this provision, Lender may pay such lien, or may contest the validity
of the lien, and Borrower shall pay all costs and expenses of such
contest, including Lender's reasonable attorneys' fees.
TAXES AND CLAIMS. Pay and discharge when due all of Borrower's
indebtedness, obligations, and claims that, if unpaid, might become a lien
or charge upon the Property or Improvements; provided, however, that
Borrower shall not be required to pay and discharge any such indebtedness,
obligation, or claim so long as (a) its legality shall be contested in
good faith by appropriate proceedings, (b) the indebtedness, obligation,
or claim does not become a lien or charge upon the Property or
Improvements, and (c) Borrower shall have established on its books
adequate reserves with respect to the amount contested in accordance with
generally accepted accounting practices. If the indebtedness, obligation,
or claim does become a lien or charge upon the Property or Improvements,
Borrower shall remove the lien or charge as provided in the preceding
paragraph .
PERFORMANCE. Perform and comply with all terms, conditions, and provisions
set forth in this Agreement and in all other instruments and agreements
between Borrower and Lender, and in all other loan agreements now or
hereafter existing between Borrower and any other party. Borrower shall
notify Lender immediately in writing of any default in connection with any
agreement.
ADDITIONAL ASSURANCES. Make, execute, and deliver to Lender such Security
Agreements, instruments, documents, and other agreements reasonably
necessary to document and secure the Loan and to perfect Lender's Security
Interests in the Property and Improvements.
<PAGE> 8
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 8
NEGATIVE COVENANTS. Borrower covenants and agrees with Lender that while this
Agreement is in effect, Borrower shall not, without the prior written consent of
Lender:
INDEBTEDNESS AND LIENS. (a) Except for trade debt incurred in the normal
course of business and indebtedness to Lender contemplated by this
Agreement, create, incur or assume indebtedness for borrowed money,
including capital leases, (b) sell, transfer, mortgage, assign, pledge,
lease, grant a security interest in, or encumber any of Borrower's assets,
or (c) sell with recourse any of Borrower's accounts, except to Lender.
CAPITAL EXPENDITURES. Make or contract to make capital expenditures,
including leasehold improvements, in any fiscal year in excess of
$200,000.00 or incur liability for rentals of property (including both
real and personal property) in an amount which, together with capital
expenditures, shall in any fiscal year exceed such sum.
CONTINUITY OF OPERATIONS. (a) Engage in any business activities
substantially different than those in which Borrower is presently engaged,
(b) cease operations, liquidate, merge, transfer, acquire or consolidate
with any other entity, change ownership, change its name, dissolve or
transfer or sell Collateral out of the ordinary course of business, (c)
pay any dividends on Borrower's stock (other than dividends payable in its
stock), provided, however that notwithstanding the foregoing, but only so
long as no Event of Default has occurred and is continuing or would result
from the payment of dividends, if Borrower is a "Subchapter S Corporation"
(as defined in the Internal Revenue Code of 1986, as amended), Borrower
may pay cash dividends on its stock to its shareholders from time to time
in amounts necessary to enable the shareholders to pay income taxes and
make estimated income tax payments to satisfy their liabilities under
federal and state law which arise solely from their status as Shareholders
of a Subchapter S Corporation because of their ownership of shares of
stock of Borrower, or (d) purchase or retire any of Borrower's outstanding
shares or alter or amend Borrower's capital structure.
LOANS, ACQUISITIONS AND GUARANTIES. (a) Loan, invest in or advance money
or assets, (b) purchase, create or acquire any interest in any other
enterprise or entity, or (c) incur any obligation as surety or guarantor
other than in the ordinary course of business.
MODIFICATION OF CONTRACT. Make or permit to be made any modification of
the Construction Contract.
LIENS. Create or allow to be created any lien or charge upon the Property
or the Improvements.
GENERAL PROJECT PROVISIONS. The following provisions relate to the construction
and completion of the Project:
CHANGE ORDERS. All requests for changes in the Plans and Specifications,
other than minor changes involving no extra cost, must be in writing,
signed by Borrower and the architect, and delivered to Lender for its
approval. Borrower will not permit the performance of any work pursuant to
any change order or modification of the Construction Contract or any
subcontract without the written approval of Lender. Borrower will obtain
any required permits or authorizations from governmental authorities
having jurisdiction before approving or requesting a new change order.
PURCHASE OF MATERIALS; CONDITIONAL SALES CONTRACTS. No materials,
equipment, fixtures, or articles of personal property placed in or
incorporated into the Project shall be purchased or installed under any
Security Agreement or other agreement whereby the seller reserves or
purports to reserve title or the right of removal or repossession, or the
right to consider such items as personal property after their
incorporation into the Project, unless otherwise authorized by Lender in
writing.
LENDER'S RIGHT OF ENTRY AND INSPECTION. Lender and its agents shall have
at all times the right of entry and free access to the Property and the
right to inspect all work done, labor performed, and materials furnished
with respect to the Project. Lender shall have unrestricted access to and
the right to copy all records, accounting books, contracts, subcontracts,
bills, statements, vouchers, and supporting documents of Borrower relating
in any way to the Project.
LENDER'S RIGHT TO STOP WORK. If Lender in good faith determines that any
work or materials do not conform to the approved Plans and Specifications
or sound building practices, or otherwise depart from any of the
requirements of this Agreement, Lender may require the work to be stopped
and withhold disbursements until the matter is corrected. In such event,
Borrower will promptly correct the work to Lender's satisfaction. No such
action by Lender will affect Borrower's obligation to complete the
Improvements on or before the Completion Date. Lender is under no duty to
supervise or inspect the construction or examine any books and records.
Any inspection or examination by Lender is for the sole purpose of
protecting Lender's security and preserving Lender's rights under this
Agreement. No default of Borrower will be waived by any inspection by
Lender. In no event will any inspection by Lender be a representation that
there has been or will be compliance with the Plans and Specifications or
that the construction is free from defective materials or workmanship.
INDEMNITY. Borrower shall indemnify and hold Lender harmless from any and
all claims asserted against Lender or the Property by any person, entity,
or governmental body, or arising out of or in connection with the
Property, Improvements, or Project. Lender shall be entitled to appear in
any action or proceeding to defend itself against such claims, and all
costs incurred by Lender in connection with such defense, including
attorneys' fees, shall be paid by Borrower to Lender. Lender shall, in its
sole discretion, be entitled to settle or compromise any asserted claims
against it, and such settlement shall be binding upon Borrower for
purposes of this indemnification. All amounts paid by Lender under this
paragraph shall be secured by Lender's Mortgage or Deed of Trust, if any,
on the Property, shall be deemed an additional principal Advance under the
Loan, payable upon demand, and shall bear interest at the rate applicable
to the Loan.
<PAGE> 9
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 9
PUBLICITY. Lender may display a sign at the construction site informing the
public that Lender is the construction lender for the Project. Lender may
obtain other publicity in connection with the Project through press releases
and participation in ground-breaking and opening ceremonies and similar
events.
ACTIONS. Lender shall have the right to commence, appear in, or defend any
action or proceeding purporting to affect the rights, duties, or liabilities
of the parties to this Agreement, or the disbursement of funds from the Loan
Fund. In connection with this right, Lender may incur and pay reasonable
costs and expenses, including, but not limited to, attorneys' fees, for both
trial and appellate proceedings. Borrower covenants to pay to Lender on
demand all such expenses, together with interest from the date Lender incurs
the expense at the rate specified in the Note, and Lender is authorized to
disburse funds from the Loan Fund for such purposes.
RIGHT OF SETOFF. Borrower grants to Lender a contractual possessory security
interest in, and hereby assigns, conveys, delivers, pledges, and transfers to
Lender all Borrower's right, title and interest in and to, Borrower's accounts
with Lender (whether checking, savings, or some other account), including
without limitation all accounts held jointly with someone else and all accounts
Borrower may open in the future, excluding however all IRA and Keogh accounts,
and all trust accounts for which the grant of a security interest would be
prohibited by law. Borrower authorizes Lender, to the extent permitted by
applicable law, to charge or setoff all sums owing on the Indebtedness against
any and all such accounts.
EVENTS OF DEFAULT. Each of the following shall constitute an Event of Default
under this Agreement:
DEFAULT ON INDEBTEDNESS. Failure of Borrower to make any payment when due
on the Loans.
OTHER DEFAULTS. Failure of Borrower or any Grantor to comply with or to
perform when due any other term, obligation, covenant or condition
contained in this Agreement or in any of the Related Documents, or failure
of Borrower to comply with or to perform any other term, obligation,
covenant or condition contained in any other agreement between Lender and
Borrower.
ENVIRONMENTAL DEFAULT. Failure of any party to comply with or perform when
due any term, obligation, covenant or condition contained in any
environmental agreement executed in connection with any Loan.
FALSE STATEMENTS. Any warranty, representation or statement made or
furnished to Lender by or on behalf of Borrower or any Grantor under this
Agreement or the Related Documents is false or misleading in any material
respect at the time made or furnished, or becomes false or misleading at
any time thereafter.
DEFECTIVE COLLATERALIZATION. This Agreement or any of the Related
Documents ceases to be in full force and effect (including failure of any
collateral document to create a valid and perfected security interest or
lien) at any time and for any reason.
INSOLVENCY. The dissolution or termination of Borrower's existence as a
going business, the insolvency of Borrower, the appointment of a receiver
for any part of Borrower's property, any assignment for the benefit of
creditors, any type of creditor workout, or the commencement of any
proceeding under any bankruptcy or insolvency laws by or against Borrower.
CREDITOR OR FORFEITURE PROCEEDINGS. Commencement of foreclosure or
forfeiture proceedings, whether by judicial proceeding, self-help,
repossession or any other method, by any creditor of Borrower, any
creditor of any Grantor against any collateral securing the Indebtedness,
or by any governmental agency. This includes a garnishment, attachment, or
levy on or of any of Borrower's deposit accounts with Lender. However,
this Event of Default shall not apply if there is a good faith dispute by
Borrower or Grantor, as the case may be, as to the validity or
reasonableness of the claim which is the basis of the creditor or
forfeiture proceeding, and if Borrower or Grantor gives Lender written
notice of the creditor or forfeiture proceeding and furnishes reserves or
a surety bond for the creditor or forfeiture proceeding satisfactory to
Lender.
EVENTS AFFECTING GUARANTOR. Any of the preceding events occurs with
respect to any Guarantor of any of the Indebtedness or any Guarantor dies
or becomes incompetent, or revokes or disputes the validity of, or
liability under, any Guaranty of the Indebtedness. Lender, at its option,
may, but shall not be required to, permit the Guarantor's estate to assume
unconditionally the obligations arising under the guaranty in a manner
satisfactory to Lender, and, in doing so, cure the Event of Default.
CHANGE IN OWNERSHIP. Any change in ownership of twenty-five percent (25%)
or more of the common stock of Borrower.
ADVERSE CHANGE. A material adverse change occurs in Borrower's financial
condition, or Lender believes the prospect of payment or performance of
the Indebtedness is impaired.
INSECURITY. Lender, in good faith, deems itself insecure.
RIGHT TO CURE. If any default, other than a Default on Indebtedness, is
curable and if Borrower or Grantor, as the case may be, has not been given
a notice of a similar default within the preceding twelve (l2) months, it
may be cured (and no Event of Default will have occurred) if Borrower or
Grantor, as the case may be, after receiving written notice from Lender
demanding cure of such default: (a) cures the default within fifteen (l 5)
days; or (b) if the cure requires more than fifteen (15) days, immediately
initiates steps which Lender deems in Lender's sole discretion to be
sufficient to cure the default and thereafter continues and completes all
reasonable and necessary steps sufficient to produce compliance as soon as
reasonably practical.
BREACH OF CONSTRUCTION CONTRACT. The Improvements are not constructed in
accordance with the Plans and Specifications or in accordance with the
terms of the Construction Contract.
<PAGE> 10
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 10
CESSATION OF CONSTRUCTION. Prior to the completion of construction of the
Improvements and equipping of the Project, the construction of the
Improvements or the equipping of the Project is abandoned or work thereon
ceases for a period of more than ten (l0) days for any reason, or the
Improvements are not completed for purposes of final payment to the
General Contractor prior to the completion date represented by Borrower to
Lender, regardless of the reason for the delay.
TRANSFER OF PROPERTY. Sale, transfer, hypothecation, assignment, or
conveyance of the Property or the Improvements or any portion thereof or
interest therein by Borrower or any Grantor without Lender's prior written
consent.
CONDEMNATION. All or any material portion of the Property is condemned,
seized, or appropriated without compensation, and Borrower does not within
thirty (30) days after such condemnation, seizure, or appropriation,
initiate and diligently prosecute appropriate action to contest in good
faith the validity of such condemnation, seizure, or appropriation.
EFFECT OF AN EVENT OF DEFAULT; REMEDIES. Upon the occurrence of any Event of
Default and at any time thereafter, Lender may, at its option, but without any
obligation to do so, and in addition to any other right Lender may have, do any
one or more of the following without notice to Borrower: (a) Cancel this
Agreement; (b) Institute appropriate proceedings to enforce the performance of
this Agreement; (c) Withhold further disbursement of Loan Funds; (d) Expend
funds necessary to remedy the default; (e) Take possession of the Property and
continue construction of the Project; (f) Accelerate maturity of the Note and/or
Indebtedness and demand payment of all sums due under the Note and/or
Indebtedness; (g) Bring an action on the Note and/or Indebtedness; (h) Foreclose
Lender's Mortgage or Deed of Trust, if any, on the Property in any manner
available under law; and (i) Exercise any other right or remedy which it has
under the Note or Related Documents, or which is otherwise available at law or
in equity or by statute.
COMPLETION OF IMPROVEMENTS BY LENDER. If Lender takes possession of the
Property, it may take any and all actions necessary in its judgment to complete
construction of the Improvements, including but not limited to making changes in
the Plans and Specifications, work, or materials and entering into, modifying or
terminating any contractual arrangements, subject to Lender's right at any time
to discontinue any work without liability. If Lender elects to complete the
Improvements, it will not assume any liability to Borrower or to any other
person for completing the Improvements or for the manner or quality of
construction of the Improvements, and Borrower expressly waives any such
liability. Borrower irrevocably appoints Lender as its attorney-in-fact, with
full power of substitution, to complete the Improvements, at Lender's option,
either in Borrower's name or in its own name. In any event, all sums expended by
Lender in completing the construction of the Improvements will be considered to
have been disbursed to Borrower and will be secured by the collateral for the
Loan. Any such sums that cause the principal amount of the Loan to exceed the
face amount of the Note will be considered to be an additional Loan to Borrower,
bearing interest at the Note rate and being secured by the collateral. For these
purposes, Borrower assigns to Lender all of its right, title and interest in and
to the Project Documents; however Lender will not have any obligation under the
Project Documents unless Lender expressly hereafter agrees to assume such
obligations in writing. Lender will have the right to exercise any rights of
Borrower under the Project Documents upon the occurrence of an Event of Default.
All rights, powers, and remedies of Lender under this Agreement are cumulative
and alternative, and are in addition to all rights which Lender may have under
applicable law.
MISCELLANEOUS PROVISIONS. The following miscellaneous provisions are a part of
this Agreement:
AGENCY. Nothing in this Agreement shall be construed to constitute the
creation of a partnership or joint venture between Lender and Borrower or
any contractor. Lender is not an agent or representative of Borrower. This
Agreement does not create a contractual relationship with and shall not be
construed to benefit or bind Lender in any way with or create any
contractual duties by Lender to any contractor, subcontractor,
materialman, laborer, or any other person.
AMENDMENTS. This Agreement, together with any Related Documents,
constitutes the entire understanding and agreement of the parties as to
the matters set forth in this Agreement. No alteration of or amendment to
this Agreement shall be effective unless given in writing and signed by
the party or parties sought to be charged or bound by the alteration or
amendment.
APPLICABLE LAW. THIS AGREEMENT HAS BEEN DELIVERED TO LENDER AND ACCEPTED
BY LENDER IN THE STATE OF OREGON. IF THERE IS A LAWSUIT, BORROWER AGREES
UPON LENDER'S REQUEST TO SUBMIT TO THE JURISDICTION OF THE COURTS OF
JACKSON COUNTY, THE STATE OF OREGON. THIS AGREEMENT SHALL BE GOVERNED BY
AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF OREGON.
AUTHORITY TO FILE NOTICES. Borrower appoints and designates Lender as its
attorney-in-fact to file for record any notice that Lender deems necessary
to protect its interest under this Agreement. This power shall be deemed
coupled with an interest and shall be irrevocable while any sum or
performance remains due and owing under any of the Related Documents.
CAPTION HEADINGS. Caption headings in this Agreement are for convenience
purposes only and are not to be used to interpret or define the provisions
of this Agreement.
MULTIPLE PARTIES; CORPORATE AUTHORITY. All obligations of Borrower under
this Agreement shall be joint and several, and all references to Borrower
shall mean each and every Borrower. This means that each of the persons
signing below is responsible for ALL obligations in this Agreement.
CONSENT TO LOAN PARTICIPATION. Borrower agrees and consents to Lender's
sale or transfer, whether now or later, of one or more participation
interests in the Loans to one or more purchasers, whether related or
unrelated to Lender. Lender may provide, without any limitation
whatsoever, to any one or more purchasers, or potential purchasers, any
information or knowledge Lender may have about Borrower or about any other
matter relating to the Loan, and Borrower hereby waives any rights to
privacy it may have with respect to such matters. Borrower additionally
waives any and all notices of sale of participation interests, as well as
all notices of any repurchase of such participation interests. Borrower
also agrees that the
<PAGE> 11
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 11
purchasers of any such participation interests will be considered as the
absolute owners of such interests in the Loans and will have all the
rights granted under the participation agreement or agreements governing
the sale of such participation interests. Borrower further waives all
rights of offset or counterclaim that it may have now or later against
Lender or against any purchaser of such a participation interest and
unconditionally agrees that either Lender or such purchaser may enforce
Borrower's obligation under the Loans irrespective of the failure or
insolvency of any holder of any interest in the Loans. Borrower further
agrees that the purchaser of any such participation interests may enforce
its interests irrespective of any personal claims or defenses that
Borrower may have against Lender.
COSTS AND EXPENSES. Borrower agrees to pay upon demand all of Lender's
expenses, including without limitation attorneys' fees, incurred in
connection with the preparation, execution, enforcement, modification and
collection of this Agreement or in connection with the Loans made pursuant
to this Agreement. Lender may pay someone else to help collect the Loans
and to enforce this Agreement, and Borrower will pay that amount. This
includes, subject to any limits under applicable law, Lender's attorneys'
fees and Lender's legal expenses, whether or not there is a lawsuit,
including attorneys' fees for bankruptcy proceedings (including efforts to
modify or vacate any automatic stay or injunction), appeals, and any
anticipated post-judgment collection services. Borrower also will pay any
court costs, in addition to all other sums provided by law.
ENTIRE AGREEMENT. This Agreement and the Related Documents constitute all
of the agreements between the parties relating to the Project and
supersede all other prior or concurrent oral or written agreements or
understandings relating to the Project.
NOTICES. All notices required to be given under this Agreement shall be
given in writing, may be sent by telefacsimile, and shall be effective
when actually delivered or when deposited with a nationally recognized
overnight courier or deposited in the United States mail, first class,
postage prepaid, addressed to the party to whom the notice is to be given
at the address shown above. Any party may change its address for notices
under this Agreement by giving formal written notice to the other parties,
specifying that the purpose of the notice is to change the party's
address. To the extent permitted by applicable law, if there is more than
one Borrower, notice to any Borrower will constitute notice to all
Borrowers. For notice purposes, Borrower will keep Lender informed at all
times of Borrower's current address(es).
SUCCESSORS AND ASSIGNS. All covenants and agreements contained by or on
behalf of Borrower shall bind its successors and assigns and shall inure
to the benefit of Lender, its successors and assigns. Borrower shall not,
however, have the right to assign its rights under this Agreement or any
interest therein, without the prior written consent of Lender.
SEVERABILITY. If a court of competent jurisdiction finds any provision of
this Agreement to be invalid or unenforceable as to any person or
circumstance, such finding shall not render that provision invalid or
unenforceable as to any other persons or circumstances. If feasible, any
such offending provision shall be deemed to be modified to be within the
limits of enforceability or validity; however, if the offending provision
cannot be so modified, it shall be stricken and all other provisions of
this Agreement in all other respects shall remain valid and enforceable.
SURVIVAL. All warranties, representations, and covenants made by Borrower
in this Agreement or in any certificate or other instrument delivered by
Borrower to Lender under this Agreement shall be considered to have been
relied upon by Lender and will survive the making of the Loan and delivery
to Lender of the Related Documents, regardless of any investigation made
by Lender or on Lender's behalf.
WAIVER. Lender shall not be deemed to have waived any rights under this
Agreement unless such waiver is given in writing and signed by Lender. No
delay or omission on the part of Lender in exercising any right shall
operate as a waiver of such right or any other right. A waiver by Lender
of a provision of this Agreement shall not prejudice or constitute a
waiver of Lender's right otherwise to demand strict compliance with that
provision or any other provision of this Agreement. No prior waiver by
Lender, nor any course of dealing between Lender and Borrower, or between
Lender and any Grantor, shall constitute a waiver of any of Lender's
rights or of any obligations of Borrower or of any Grantor as to any
future transactions. Whenever the consent of Lender is required under this
Agreement, the granting of such consent by Lender in any instance shall
not constitute continuing consent in subsequent instances where such
consent is required, and in all cases such consent may be granted or
withheld in the sole discretion of Lender.
FINANCIAL STATEMENTS (INCLUDING Q10 AND K10'S). Borrower will furnish lender
with, Q10 and K10 reports within 5 days of filing and as soon as available, but
in no event later than ninety (90) days after the end of each fiscal year,
Borrower's balance sheet and income statement for the year ended, audited by a
certified public accountant satisfactory to Lender. All financial reports
required to be provided under this Agreement shall be prepared in accordance
with generally accepted accounting principles, applied on a consistent basis and
certified by Borrower as being true and correct.
DEBT SERVICE COVERAGE RATIO. Borrower agrees to maintain a Debt Service Coverage
Ratio of 1.00 to 1.00 on the subject property. Debt Service Coverage Ratio is
defined as Net Operating Income less "reoccurring" non-operating expenses such
as real estate commissions and capital improvements divided by annual debt
service requirements (principal and interest) of all debt secured by subject
property. Net Operating Income is defined as rental income remaining after the
deduction of standard operating expenses including reserves for vacancies and
capital improvement reserve.
ACQUISITIONS. Borrower agrees with Lender that while this agreement is in
effice, Borrower will not make any acquisitions without concurrence by Lender.
DRAW PERIOD. No disbursement of Loan proceeds shall be made after December 31,
1997.
<PAGE> 12
CONSTRUCTION LOAN AGREEMENT
(CONTINUED)
Page 12
UNDER OREGON LAW, MOST AGREEMENTS, PROMISES AND COMMITMENTS MADE BY US (LENDER)
AFTER OCTOBER 3, 1989 CONCERNING LOANS AND OTHER CREDIT EXTENSIONS WHICH ARE NOT
FOR PERSONAL FAMILY OR HOUSEHOLD PURPOSES OR SECURED SOLELY BY THE BORROWER'S
RESIDENCE MUST BE IN WRITING, EXPRESS CONSIDERATION AND BE SIGNED BY US TO BE
ENFORCEABLE.
BORROWER ACKNOWLEDGES HAVING READ ALL THE PROVISIONS OF THIS CONSTRUCTION LOAN
AGREEMENT, AND BORROWER AGREES TO ITS TERMS. THIS AGREEMENT IS DATED AS OF JUNE
11, 1997.
BORROWER :
CONSEP, INC.
BY:/S/ LARRY KATZ
-----------------------------------------------
LARRY KATZ, VICE PRESIDENT, FINANCE/CFO
LENDER:
WESTERN BANK, A DIVISION OF WASHINGTON MUTUAL BANK
BY:/S/ MIKE RAMSEY
-----------------------------------------------
AUTHORIZED OFFICER
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<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-31-1997
<PERIOD-END> JAN-30-1997
<CASH> 2,832,338
<SECURITIES> 102,667
<RECEIVABLES> 10,792,662
<ALLOWANCES> 919,092
<INVENTORY> 10,110,892
<CURRENT-ASSETS> 24,013,631
<PP&E> 8,967,233
<DEPRECIATION> 3,338,312
<TOTAL-ASSETS> 33,431,590
<CURRENT-LIABILITIES> 12,895,537
<BONDS> 0
0
0
<COMMON> 94,475
<OTHER-SE> 18,046,421
<TOTAL-LIABILITY-AND-EQUITY> 33,431,590
<SALES> 24,605,875
<TOTAL-REVENUES> 24,605,875
<CGS> 17,739,397
<TOTAL-COSTS> 17,739,397
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 72,038
<INTEREST-EXPENSE> 170,703
<INCOME-PRETAX> 1,109,003
<INCOME-TAX> 0
<INCOME-CONTINUING> 1,109,003
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,109,003
<EPS-PRIMARY> 0.12
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