SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 10-KSB
Mark One
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required ]
For the Fiscal Year ended December 31, 1996
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [No Fee Required]
Commission file number: 1-12840
CSL LIGHTING MANUFACTURING, INC.
(Exact name of registrant as specified in its charter)
Delaware 95-4463033
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(State of incorporation) (I.R.S. employer identification No.)
27615 Avenue Hopkins, Valencia, California 91355-3447
(Address of principal executive offices)(Zip Code)
Issuer's telephone number, including Area Code: (805) 257-4155
Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
Common, par value $.01 per share NASDAQ
- -------------------------------- ------
Securities registered under Section 12 (g) of the Exchange Act:
Common Stock, par value $.01 per share
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports) and (2)
has been subject to such filing requirements for the past 90 days. Yes [x] No
[_]
Check if there is no disclosure or delinquent filers in response to
Item 405 of Regulation S-B is not contained in this form, and no disclosure will
be contained, to the best of the Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this form 10-KSB
[___]
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For the year ended December 31, 1996, the revenues of the Registrant
were $12,316,000.
The aggregate market value of the Common Stock of the Registrant held
by non-affiliates of the Registrant, based on the average bid and ask price on
March 25, 1997, was approximately $ 8,538,357.
As of March 25, 1997, the Registrant had a total of 10,328,666 shares
of Common Stock outstanding.
INCORPORATION BY REFERENCE
PART III - Portion's of the Registrant's Proxy Statement relating to
its 1997 Annual Meeting are incorporated by reference.
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PART I
ITEM 1. BUSINESS
FORWARD-LOOKING STATEMENTS
Certain statements made in this Annual Report on Form 10-K are "forward-looking
statements" (within the meaning of the Private Securities Litigation Reform Act
of 1995) regarding the plans and objectives of management for future operations.
Such statements involve known and unknown risks, uncertainties and other factors
that may cause actual results, performance or achievements of the Company to be
materially different from any future results, performance or achievements
expressed or implied by such forward-looking statements. The forward-looking
statements included herein are based on current expectations that involve
numerous risks and uncertainties. The Company's plans and objectives are based,
in part, on assumptions involving the continued expansion of business.
Assumptions relating to the foregoing involve judgments with respect to, among
other things, future economic, competitive and market conditions and future
business decisions, all of which are difficult or impossible to predict
accurately and many of which are beyond the control of the Company. Although the
Company believes that its assumptions underlying the forward-looking statements
are reasonable, any of the assumptions could prove inaccurate and, therefore,
there can be no assurance that the forward-looking statements included in this
Report will prove to be accurate. In light of the significant uncertainties
inherent in the forward-looking statements included herein particularly in view
of the Company's early stage operations, the inclusion of such information
should not be regarded as a representation by the Company or any other person
that the objectives and plans of the Company will be achieved.
GENERAL
CSL Lighting Manufacturing, Inc., (d.b.a. Creative Systems Lighting)
(the "Company") designs, manufactures and markets mid to high-end lighting
fixtures for both commercial and residential applications on a worldwide basis.
The Company's core business consists of five specific product
categories including recessed down lighting, accent linear lighting systems,
surface system coordinates, low voltage track systems and specification grade
outdoor lighting. Approximately 70% of the Company's products are halogen light
sources, which are smaller, longer lasting and more energy efficient light
sources in comparison to traditional incandescent light sources. The balance of
the Company's core product lines primarily use compact fluorescent, and
incandescent lamp sources. Of the halogen light sources, approximately 70% use
"low voltage", which produce a concentrated, long lasting light, while 30% are
"line voltage," which produce a slightly less concentrated but significantly
less expensive light source.
The Company's core products are specified for use in new construction
and in the renovation of commercial and residential properties by architects,
engineers, interior designers and lighting designers (the "Specification
Market"). The Company's products are also sold directly to electrical
distributors, builders and to retail customers through lighting showrooms,
retail specialty stores and Home Centers (the "Consumer Retail Market"). The
Company believes that historically, approximately 70% of the Company's sales
have been made to the Specification Market and 30% to the Consumer Retail
Market.
During 1996, the Company expanded its operations to include a presence
in Asia, Europe and Africa. During 1995 and 1996, the Company successfully
installed a new management team and Board of Directors. This management team has
implemented significant new internal accounting and financial controls and has
restructured the Company's product offerings to achieve maximum penetration of
its target markets, specifically the Specification and the Consumer Retail
Markets. The Company has refocused its product offerings into five specific
product categories resulting in a reduction in SKU's and the inventory necessary
to support these discontinued
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product lines. The Company's new product offerings were introduced in January
1996 and delivery commenced during the second and third quarters of 1996. During
the year ended December 31, 1996, the Company began to realize the benefits of
its new policies and procedures through lower selling expenditures, increased
gross profit margins as a percentage of sales and the establishment of better
working relationships with its vendors, customers and joint venture partners.
Further, during 1996, the Company entered into a number of joint venture and
cooperative agreements in Europe, Asia, Africa and the United States in an
effort to further its business plan.
o In May 1996, the Company entered into a collaboration with SIMES, a large
European manufacturer of specification grade outdoor lighting products.
Under this arrangement, CSL has exclusive rights in the United States to
the SIMES product line which is being marketed and distributed under the
trade name "CSL/SIMES". The Company began shipping these products in the
third quarter of 1996. The Company is also collaborating with SIMES to
distribute certain CSL products in the European and Japanese marketplaces.
o In June and July 1996, the Company opened new offices in Singapore and in
Dong Guan City, China to support the Company's manufacturing, marketing and
sales efforts in those regions. The Dong Guan City office supports the
Company's business in the South China region. The Singapore office supports
the Company's business in Singapore, Thailand, Malaysia and Indonesia. Both
offices include architectural and design facilities.
o In August 1996, the Company opened an architectural lighting application
and design facility in Shanghai, China. The facility, which has been
approved for operations by the Chinese government, provides manufacturing,
marketing and sales functions to support the Company's business development
efforts in mainland China. The Company is presently shipping product into
mainland China. Additionally, the Company has entered into a cooperative
and agency agreement with Xin Hua Electronic Co. Ltd. ("Xin Hua") to
design, manufacture and distribute energy efficient lighting products in
North America, Europe and Asia. Pursuant to this agreement CSL is Xin Hua's
agent in North America, Europe and South East Asia and Xin Hua is CSL's
agent in mainland China. The two Company's have jointly developed new
energy efficient products which are being offered, along with existing CSL
products, in China under the trade name "CSL Asia." The Company introduced
these energy efficient products worldwide incorporating Xin Hua's
electronic ballast technology beginning in the first quarter of 1997.
o In September 1996, the Company entered a joint venture with General
Technics, S.A. to establish a manufacturing, design and showroom facility
in Casablanca, Morocco. This facility will initially support product
offerings in Africa, Europe and the Middle East. The Company will market
its products under the trade name "Creative Systems Lighting/ MOROCCO."
The Lighting Industry
The domestic lighting industry consists of five major segments:
industrial, outdoor, commercial/institutional, residential and automotive. This
market is estimated to represent approximately $7.0 billion in annual gross
sales. Within each segment of the lighting industry there are many specialized
market segments that may utilize distinct technologies and require specialized
products. Overall sales of lighting products are affected by a variety of
factors, including: (i) general economic conditions; (ii) energy costs and
availability; (iii) governmental programs and regulations; (iv) manufacturing
capacity utilization; (v) new construction and retrofit activity; and (vi)
infrastructure expenditures.
The Company participates in the industrial, commercial/institutional
and residential segments of the lighting industry. While there are a large
number of competitors within each segment, the Company believes that it has an
established reputation and market presence in the segments in which it presently
competes.
Rising energy costs, public concerns about energy conservation and
environmental issues, and pressure from the government and utility commissions
have created a large demand for lighting products that are energy
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efficient. An additional factor contributing to the demand for energy efficient
lighting products is that electricity cannot be stored in commercially usable
quantities but rather, must be generated when needed. Since the capacity of all
generating plants is finite, when the capacity of these plants are reached, no
more electricity can be provided. As a consequence, various regulatory
initiatives have been instituted to provide utilities with the incentive to
encourage the more efficient use of electrical power.
Government Directives and Initiatives
In response to the growing demand for energy efficient lighting
products, various federal and state legislation has recently been enacted, and
programs designed to encourage energy conservation have been adopted. The
following represents certain of the significant legislative measures and energy
conscious programs that have been enacted and adopted and which are impacting
the demand for energy efficient lighting products.
Environmental Protection Agency's "Green Lights Program." The "Green
Lights Program," developed by the Environmental Protection Agency (the "EPA"),
is a voluntary program whereby private sector companies commit to upgrade at
least 90% of their facilities with energy efficient lighting. The EPA provides
participants with information and literature regarding available equipment and
alternatives to existing lighting, as well as "on call" engineers who are
available to answer questions and make suggestions.
Federal Energy Management Programs. The Federal Energy Management
Program ("FEMP") encourages federal agencies to reduce energy consumption in
federal facilities and vehicles. Using 1985 as its base year, FEMP's goal is to
reduce energy consumption associated with the use, occupancy and operation of
federal buildings by 20% before the year 2000. FEMP advises federal agencies
regarding the availability of energy efficient products and strategies to meet
FEMP's goals. FEMP also works with the Government Services Administration
("GSA") and the Office of Management and Budget ("OMB") to place energy
efficient products on federal purchasing lists. FEMP is currently working on a
federal "re-lighting" initiative to provide training regarding cost-effective
means and equipment to improve lighting efficiency.
Demand Side Management. In 1981, electric utilities introduced demand
side management programs ("DSM programs") aimed primarily at reducing
electricity through the deployment of energy efficient devices, including high
efficiency lighting. To encourage the use of energy efficient products, DSM
programs provide energy-efficiency audit services, and offer rebates to
residential and commercial customers who purchase energy efficient products.
Rebate incentives are estimated to be 70% of the total program costs. In 1991,
the electric utility industry spent over $1.5 billion on DSM programs.
Management believes that annual expenditures will grow to $10 billion by 2000.
DSM programs are intended to entice consumers to use less electricity
during the peak periods and more during the off-peak, or slack periods. This
management of demand for electricity has led to the creation of a variety of
programs promoting energy saving which offer rebates for the installation of
energy-saving devices and lighting fixtures. Rebate programs offered by the
electric utilities for energy efficient equipment result in direct savings by
the user and a higher profit to the utilities on the electricity that they sell.
In addition, reduced electricity consumption postpones the need to build new
power generating plants, thereby achieving additional savings through reduced
capital expenditures.
National Energy Policy Act of 1992. The National Energy Policy Act of
1992 (the "NEPA Act") contains approximately 30 provisions designed to increase
the efficiency of utilities, buildings, equipment and factories and affects many
of the technologies that utilities promote as part of their DSM programs. The
NEPA Act directs the Federal Department of Energy to provide matching funds to
certain regions throughout the United States to demonstrate and promote energy
efficient lighting. The NEPA Act provides for the development of efficiency
ratings for both fluorescent lighting fixtures and office equipment which the
Company believes will, in turn, promote the manufacture and purchase of energy
efficient lighting such as products manufactured by the Company.
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In addition to federal programs encouraging electrical efficiency,
state programs exist that are designed to achieve similar results. For example,
California's Title 24, enacted in 1988, mandates that 50% of new bathroom and
kitchen lighting be energy efficient.
Product Categories and New Product Offerings
The Company designs, manufactures and markets recessed down lighting,
accent linear lighting systems, surface system coordinates, low voltage track
systems and specification grade outdoor lighting. Approximately 70% of the
Company's product offerings utilize halogen lamps. These light fixtures, which
are generally smaller in size, produce a superior quality and intensity of light
while not sacrificing style and detail for size. The balance of the Company's
products primarily use compact fluorescent and incandescent lamp sources. The
Company markets its lighting products under a variety of proprietary trade names
directly and indirectly to commercial and residential end users for installation
in private residences, office buildings, hotels, restaurants, stores and other
public and private facilities. The Company believes that it has established a
market niche offering performanced engineered and task oriented products. The
Company believes that historically, approximately 70% of the Company's sales
have been made to the Specification Market and 30% to the Consumer Retail
Market.
Recessed Down Lighting. The Company's most successful product offering
has been its high end low voltage halogen recessed down lighting, "Jewel Light",
featuring a complete line of die cast trims. A trim is that portion of the light
fixture that protrudes from the ceiling. As the market evolved and expanded in
this product category, a substantial market for lesser quality (stamped versus
die cast trims) with reduced price points developed. In January 1996, the
Company introduced its Echo 21 line of low voltage halogen recessed down
lighting with appropriate price points which it commenced the delivery of in
April 1996. Echo 21 specifically addresses the budget oriented market and
complements the Company's higher quality and successful "Jewel Light" line.
Accent Linear Lighting Systems. This product category is dominated by
the Company's Invizilite product. The Invizilite product is a continuous,
flexible light source hidden from view to provide an upward or downward lighting
or "wash" part of a wall with light. Invizilite can be manufactured to use low
voltage halogen, incandescent or xenon bulbs. Traditionally, Invizilite has been
exclusively marketed to the Architectural and Specification market place. In
1996, the Company introduced its third version of Invizilite, "Invizilite 3".
Invizilite 3 utilizes xenon lamps allowing for longer strip lengths between
transformers and increased lamp life. Additionally, the Company has repackaged
its Invizilite product line and introduced it into lighting showrooms and the
Home Center markets in the form of a user friendly kit.
Surface System Coordinates. In 1996, the Company introduced a systems
approach to surface lighting for suspension pendant applications, surface, wall
and ceiling mounted units. Surface system coordinates is a series of light
module holders with a variety of glass shapes, sizes, colors and lamp sources.
The Company also markets it surface system coordinates under tradename "Optica"
and "Versailles."
Low Voltage Track Systems. The Company's "Micro Track" is a low
voltage halogen track system. Micro Track's special construction allows its
companion miniaturized track heads and fixtures to be moved along the track in
both horizontal and vertical configurations.
Specification Grade Outdoor Lighting. This is a new product category
for the Company which is marketed and distributed to the Architectural,
Specification, Lighting Showroom, and Electrical Distributor market places. The
Company acquired this product line through a joint venture with a large European
manufacturer and distributor of outdoor lighting product, SIMES, and has
exclusive rights to the product in the United States. The Company is also
collaborating with SIMES to distribute certain CSL products in the European
marketplace.
Manufacturing, Assembly, Design and Tooling
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All of the Company's products are designed and tooled by the Company
and are either manufactured directly by the Company or specifically on its
behalf. Approximately 50% of the Company's products are manufactured or
assembled in the United States either at its principal facility in Valencia,
California or by local subcontractors. The balance of the Company's products are
manufactured primarily in China, Taiwan and Europe. The Company assembles
approximately 40% of its lighting products at its Valencia location and the rest
of its products are assembled in the Far East. Additionally, much of the glass
used in the Company's lighting fixtures is made in Venice, Italy, and Vianne,
France.
The Company owns all of the designs with respect to its line of
products, most of which were created by employees of the Company on a
work-for-hire basis; i.e., the design automatically becomes the property of the
Company upon creation. In addition, the Company also from time to time will
retain outside independent contractors to design lighting products. The Company
owns such designs and pays the independent designers on a consulting or royalty
basis.
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Sales and Marketing
Historically, substantially all of the Company's products were sold in
the United States and Canada. During 1996, the Company entered into a number of
joint venture and cooperative agreements in Europe, Asia and Africa to expand
its product offerings worldwide.
Domestically, the Company has over 2,000 customer accounts and is
primarily dependent on independent manufacturer's sales agencies and independent
lighting and electrical distributors in selling its products to retail and
commercial end users. Although no single manufacturer's sales agency or
distributor, or affiliated group of manufacturer's sales agencies or
distributors account for in excess of five percent of the Company's sales, the
Company is required to sustain a business relationship with approximately 75
manufacturer's representatives which are often agencies employing a number of
sales personnel. personnel). The Company also has manufacturer's sales agencies
in Mexico, England, Singapore and Hong Kong. With respect to sale of the
Company's products to the Consumer Retail Market, a distributor generally places
an order for the Company's product through a manufacturer's sales agency, who
forwards the order to the Company. Alternatively, sales of the Company's
products to the Specification Market are typically initiated by a specifier
(i.e., an architect, lighting designer, interior designer or electrical
engineer) notifying a contractor who contacts either a distributor or
manufacturer's sales agency to place the specifier's order with the Company. All
products sold to the Consumer Retail Market and the Specification Market are
typically sold on net 30 day terms.
None of the Company's present manufacturer's sales agencies are
exclusive to the Company and any of them could terminate their relationship with
the Company at any time for any reason. In addition, manufacturer's sales
agencies typically represent and distribute competing products. The Company's
ability to expand its operations will depend in significant part on its ability
to attract and retain qualified manufacturer's sales agencies experienced in the
sale of lighting products. The Company presently employs three full-time sales
personnel to supervise its manufacturer's sales agencies.
Product Warranties: Customer Service and Support
All of the Company's products are warranted by the Company from the
date of shipment. The Company's warranty provides that in the event its products
as delivered are defective, the Company has the right, in its sole discretion,
to either repair or replace the product; provided, however that in the event
that the Company's transformers or ballasts are not used in connection with the
product, the warranty is null and void.
The Company presently has five 800 telephone numbers and employs four
full-time individuals solely in connection with providing customer and technical
support for its customers, distributors and sales manufacturer's agencies. Such
personnel are available five days per week from 7:00 a.m. to 5:00 p.m. Pacific
Coast Time to respond to calls and provide assistance.
Research and Development
The Company conducts research and development in an effort to improve
its products and expand its product lines. The Company expended approximately
$231,000 and $64,000 on research and development during the years ended December
31, 1995 and 1996, respectively. The Company subcontracts its research and
development on an as needed basis.
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Product Liability
The manufacture and sale of the Company's products subjects the
Company to the risk of product liability claims. The costs of defending or
settling such claims could have a material adverse effect on the Company, even
if the Company ultimately were to prevail. Although the Company presently has an
aggregate of $12 million in product liability insurance and has never had a
product liability claim asserted against it, there can be no assurance that such
insurance can be maintained at an acceptable cost to the Company or that any
damages assessed against the Company will not exceed its coverage.
Competition
The lighting industry is intensely competitive with respect to price,
design, quality and reliability. Among its competitors are numerous
international, national and regional manufacturers some of which have equivalent
products including Cooper Industries, Inc., Genlyte Group, Juno Lighting, Inc.,
Hubbell, Inc., Thomas Industries and Lithonia. The majority of the Company's
competitors are well established, and have substantially greater financial,
managerial, technical, marketing and other resources than the Company. The
Company competes based upon price, quality and its brand-name recognition.
Underwriter's Laboratories and Other Testing Laboratories Listing
Substantially all of the Company's products are approved by
Underwriters Laboratories Inc. ("UL"), Electrical Testing Laboratories ("ETL"),
or the Canadian Standards Association ("CSA"). UL and CSA are not-for-profit
independent organizations and ETL is a for profit independent organization, all
of which test a wide variety of consumer and commercial products for compliance
with recognized U.S. and Canadian safety standards. All of the Company's
products that are UL or ETL listed in the United States are CSA approved in
Canada. Listing of a product by UL, ETL and CSA indicates that samples of that
product have been tested according to the respective country's safety standards
and found to be reasonably free from foreseeable risk of fire and electric shock
related hazards. In the United States, the laws of certain states prohibit the
sale of products that have not obtained and maintained a UL or ETL listing. Even
in those states where the Company is not required by law to obtain UL or ETL
listing, if it is unable to obtain and maintain such UL or ETL listing on an
ongoing basis, its ability to market and sell the product may be adversely
affected. The Company's products that are not approved by UL, ETL or CSA are all
products that do not fall within the classifications established by such
agencies and accordingly, are not eligible to obtain a listing from such
laboratories.
Intellectual Property Rights
Substantially all of the Company's products and their design, as well
as the design of the tooling used in the manufacturing of the Company's
products, are proprietary to the Company. Further, the Company has also sought
to establish certain proprietary rights with respect to the marks under which
its products and product lines are marketed. Consequently, the business of the
Company is dependent, to a certain extent, on the Company's ability to establish
and protect its intellectual property rights with respect to its products,
designs and trademarks and trade names under which it does business. The Company
currently has numerous patents and several patents pending. The Company
considers its patents to be a valuable asset. However, the Company believes that
its business is not dependent to any material extent upon any particular patent
or group of patents. The Company believes that its business is dependent upon
the technical and engineering skills of its employees, product differentiation,
reliability and performance, and on customer support and marketing.
Employees
As of March 31 1997, the Company had 33 full-time employees, two of
whom were employed in an executive capacity, four in sales and marketing, 13 in
design, tooling and manufacturing, and 14 in general and
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administrative capacities. The Company believes that its relations with its
employees are good. None of the Company's employees are represented by a
collective bargaining agreement.
ITEM 2. PROPERTIES
The Company occupies 52,663 square feet of space at its principal
executive offices and manufacturing facility located at 27615 Avenue Hopkins,
Valencia, California 91355, for $22,645 per month pursuant to a lease that
expires in May 2003 . The Company leases a showroom at the Dallas Trade Market,
in Dallas, Texas occupying 855 square feet for $1,592 per month. The Company
also leases a sales office in Singapore and Shanghai, China occupying
approximately 300 and 800 square feet, respectively for $2,859 and $6,327 per
month, respectively. The Singapore and Shanghai lease expire on July 31, 1998
and September 30, 1998, respectively.
ITEM 3. LITIGATION
The Company is not a party to any material legal proceedings.
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of Stockholders of the Company was held on February
25, 1997 in New York City, pursuant to notice. At that meeting the following
directors were elected to hold office until the 1997 Annual Meeting of
Stockholders: Sylvan Gerber, Bert Finmark, Mark Allen, Dhananjay Wadekar and
Michael Smith, each receiving 6,518,875 votes in favor and 42,660 votes in
opposition. In addition, the Company's 1996 Stock Option Plan was approved
(6,481,525 votes in favor, 69,110 votes in opposition and 10,900 abstentions),
and the appointment of Arthur Andersen LLP as independent auditors of the
Company was ratified (5,995,799 votes in favor, 514,986 votes against and 20,650
abstentions). In addition, the Company Certificate of Incorporation was amended
to increase the authorized common stock from 10,000,000 to 30,000,000 shares
(6,208,340 votes in favor, 304,849 votes against and 28,350 abstentions).
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The following table sets forth, for the periods indicated, the high
and low closing prices in the over-the-counter market for the common stock of
the Company, as reported by the National Association of Securities Dealers. The
Company's stock is traded on the NASDAQ Small Cap Market under the symbol
"CSLX." At March 25, 1997 the Company had approximately 2,000 holders of its
common stock. The over-the-counter market quotations reflect inter-dealer
prices, without retail mark-up, mark-down or commission and may not necessarily
represent actual transactions.
Calendar 1996 High Low
------------- ---- ---
First Quarter 2 1 1/8
Second Quarter 3 7/8 1 7/8
Third Quarter 4 2 1/2
Fourth Quarter 3 1/6 1 1/16
Calendar 1995 High Low
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First Quarter 2 1/2 3/4
Second Quarter 1 1/2 1
Third Quarter 2 1/2 1 1/8
Fourth Quarter 2 3/16 1
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Dividend Policy
The Company has not paid any cash dividends in the past and has no
present intention of doing so in the immediate future. The Company's Board of
Directors intends for the foreseeable future to retain any earnings to finance
the future growth of the Company. Additionally, certain of the Company's credit
agreements with its lending institution prohibit the payment of dividends during
their term.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND
RESULTS OF OPERATIONS
Results of Operations:
The table set forth below sets forth certain financial data expressed
as a percentage of net sales:
For the Year Ended
------------------
1995 1996
---- ----
Net Sales 100.0% 100.0%
Gross Profit 33.3% 41.4%
Selling Expense 26.2% 26.9%
General and Administrative Expense 21.0% 31.1%
Legal Expense 5.2% 1.4%
Loss from Operations (19.1)% (18.0)%
Other (Income) Expense 1.9% (8.0)%
Interest Expense 3.0% 16.0%
Provisions for Income Taxes -- % -- %
Net Loss (24.0)% (26.0)%
Overview:
The Company's strategy is to exploit new markets for its product
offerings and maximize the efficiencies of its manufacturing and distribution
network on a world-wide basis. In furtherance of this strategy, during 1996, the
Company expanded its operations to include a presence in Asia, Southeast Asia,
Europe and Africa. During 1995 and 1996, the Company successfully installed a
new management team and Board of Directors. This management team has implemented
significant new internal accounting and financial controls and has restructured
the Company's product offerings to achieve maximum penetration of its target
markets, specifically the Specification and the Consumer Retail Markets. The
Company has refoucsed its product offerings into five specific product
categories resulting in a reduction in SKU's and the inventory necessary to
support these discontinued product lines. The Company's new product offerings
were introduced in January 1996 and delivery commenced during the second and
third quarters of 1996. During the year ended December 31, 1996, the Company
began to realize the benefits of its new policies and procedures through lower
selling expenditures, increased gross profit margins as a percentage of sales
and the establishment of better working relationships with its vendors,
customers and joint venture partners. Further, during 1996, the Company has
entered into a number of joint venture and cooperative agreements in Europe,
Asia, Africa and the United States in an effort to further its business plan.
o In May 1996, the Company entered into a collaboration with SIMES, a large
European manufacturer of specification grade outdoor lighting products.
Under this arrangement, CSL has exclusive rights in the United States to
the SIMES product line which is being marketed and distributed under the
trade name "CSL/SIMES". The Company began shipping these products in the
third quarter of 1996. The Company is also collaborating with SIMES to
distribute certain CSL products in the European and Japanese marketplaces.
o In June and July 1996, the Company opened new offices in Singapore and in
Dong Guan City, China to support the Company's manufacturing, marketing and
sales efforts in those regions. The Dong Guan City office
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supports the Company's business in the South China region. The Singapore
office supports the Company's business in Singapore, Thailand, Malaysia and
Indonesia. Both offices include architectural and design facilities.
o In August 1996, the Company opened an architectural lighting application
and design facility in Shanghai, China. The facility, which has been
approved by the Chinese government, provides manufacturing, marketing and
sales functions to support the Company's business development efforts in
mainland China. The Company is presently shipping product into mainland
China. Additionally, the Company has entered into a cooperative and agency
agreement with Xin Hua Electronic Co. Ltd. ("Xin Hua") to design,
manufacture and distribute energy efficient lighting products in North
America, Europe and Asia. Pursuant to this agreement CSL is Xin Hua's agent
in North America, Europe and South East Asia and Xin Hua is CSL's agent in
mainland China. The two Company's have jointly developed new energy
efficient products which are being offered, along with existing CSL
products, in China under the trade name "CSL Asia". The Company introduced
energy efficient products worldwide incorporating Xin Hua's electronic
ballast technology beginning in the first quarter of 1997.
o In September 1996, the Company entered a joint venture with General
Technics, S.A. to establish a manufacturing, design and showroom facility
in Casablanca, Morocco. This facility will initially support product
offerings in Africa, Europe and the Middle East. The Company will market
its products under the trade name "Creative Systems Lighting/ MOROCCO."
Sales
Sales decreased by $2,715,000 or 18.1% from $15,031,000 for the year
ended December 31, 1995, to $12,316,000 for the year ended December 31, 1996.
The decrease in the overall domestic sales is attributable to the Company
focusing on the penetration of new markets overseas, the reduction of its
product pricing and the discontinuation of unprofitable product offerings.
Gross Profit
Gross profit as a percentage of net sales increased 8.1% from 33.3%
for the year ended December 31, 1995, to 41.4% for the year ended December 31,
1996. Gross profit increased by $92,000 or 1.8% from $5,009,000 for the year
ended December 31, 1995, to $5,101,000 for the year ended December 31, 1996.
Gross profit as a percentage of sales has improved over the prior period due to
internal cost controls, lower material costs, and a reduction in inventory
reserves from the prior period. Further, the increase in gross profit as a
percentage of sales in 1996 is attributable to the discontinuance of
unprofitable product offerings.
Selling Expense
Selling expenses as a percentage of net sales for the year ended
December 31, 1995 and 1996 were 26.2% and 26.9%, respectively. For the year
ended December 31, 1995 and 1996, selling expense were $3,945,000 and
$3,318,000, respectively. The decrease in selling expense from the comparable
prior year period is primarily attributable to lower commission expense caused
by lower sales volume and a reduction in salaries for the sales department
offset by increases in expenditures relating to the Company's overseas offices.
General and Administrative Expenses
General and administrative expenses as a percentage of net sales for
the year ended December 31, 1995 and 1996 were 21.0% and 31.1%, respectively.
For the year ended December 31, 1995 and 1996, general and administrative
expenses were $3,153,000 and $3,832,000, respectively. The increase in general
and administrative expenses during the current period was attributable to
increases in travel and other related expenses to establish the Company's
overseas offices, staffing and expenditures related to the Company's overseas
offices, bad debt expense,
12
<PAGE>
bank and consulting fees associated with the refinancing of the Company's line
of credit, and amortization of subordinated debt issuance costs. Further, in
1996, the Company was required under FASB 123 to record $177,000 in compensation
expense in connection with warrants issued to non-employees.
Legal
Legal expenses as a percentage of net sales for the year ended
December 31, 1995 and 1996 were 5.2% and 1.4%, respectively. For the year ended
December 31, 1995 and 1996, legal expenses were $784,000 and $167,000,
respectively. The significantly higher legal expenditures for the year ended
December 31, 1995 was due to the legal expenses incurred in connection with the
Zukerman litigation (see Note 4 - Notes to Financial Statements).
Other (Income) and Expense
Other income and expense as a percentage of net sales for the year
ended December 31, 1995 and 1996, were 1.9% and (8.0)%, respectively. For the
year ended December 31, 1995 and 1996, other income and expense were $290,000
and $(987,000), respectively. The increase in other income during the comparable
period is attributable to the recognition of the Zukerman legal settlement (see
Note 4 - Notes to Financial Statements), offset in part by the write-off of a
specific licensing agreement.
Interest Expense
Interest expense as a percentage of net sales for the year ended
December 31, 1995 and 1996, were 3.0% and 16.0%, respectively. For the year
ended December 31, 1995 and 1996, interest expense was $440,000 and $1,978,000,
respectively. The increase in interest expense during the 1996 period is due to
the issuance of subordinated convertible debt at various common stock conversion
discounts. In accordance with SEC accounting guidelines, the Company is required
to account for the discount conversion features of its subordinated convertible
debt as interest expense. Accordingly, the Company recognized $1,423,000 in
interest expense relating to subordinated convertible debt issued during 1996
(See Note 9-Notes to Financial Statements).
Provision for Income Taxes
The current provision for income taxes for the year ended December 31,
1995 and 1996, consists of minimum state tax.
Net Loss
Net loss for the year ended December 31, 1995 and 1996 were
$(3,604,000) and $(3,208,000), respectively. Net loss per share for the year
ended December 31, 1995 and 1996 were $(0.89) and $(0.60), respectively.
Liquidity and Capital Resources
For the year ended December 31, 1996, the Company relied upon private
placements of convertible debt and equity and trade credit to support its
operations and growth. During the year ended December 31, 1996, the Company
raised approximately $5,443,000, net of expenses and debt issuance costs,
through debt and equity placements. These funds were used to finance the
Company's operations, to provide for inventory purchases for the Company's new
product lines, to support the establishment of its overseas operations, and to
repay outstanding debt.
Subsequent to December 31, 1996, the Company raised $1,000,000 through
the placement of six percent convertible notes due October 24, 1999. The notes
are convertible into common stock commencing 60 days after issuance at a
conversion price equal to the lesser of 75% of the average bid price for the
five trading days preceding conversion or $1.008 per share plus 1,000 shares of
common stock for each $10,000 principal amount converted.
13
<PAGE>
On October 15, 1996, the Company successfully negotiated a new two
year line of credit agreement and a three year equipment term loan with a new
bank. This line of credit and term loan replaced the Company's debt facility
with Bank of America. The terms of the Company's new line of credit provides for
a maximum dollar borrowing of $4,000,000 based on 80% of the Company's eligible
accounts receivable and 40% of the Company's eligible inventory (capped at
$1,000,000). The term loan is capped at $100,000 or 80% of the forced
liquidation value of the Company's eligible equipment. The interest rates for
the line of credit and term loan are prime plus 2.75% and prime plus 3%,
respectively. The current maximum borrowing capacity under the Company's credit
facility is approximately $2 million. A portion of the proceeds from the
convertible debt financings together with the Company's new credit facility were
used to repay the Company's debt obligation to Bank of America.
The Company believes that it will be able to generate sufficient cash
flows to support its operations through fiscal 1997. However, there can be no
assurance that the Company will generate sufficient cash flows, the failure of
which would have a material adverse effect on the Company's operations and
financial position. If future losses are incurred the Company will be required
to raise additional funding to support the Company's operations. The failure to
consummate such financing will have a material effect on the Company's business.
The Company believes that inflation has not had a material impact on
it operations.
New Authoritative Pronouncements
The FASB has issued SFAS No. 123 "Accounting for Stock Based
Compensation." The Company has adopted this standard and has taken a $182,000
charge to earnings for options and warrants effecting compensation and interest
expense (See Note 13 - Notes to the Financial Statements).
In 1997, the FASB has issued SFAS No. 128 "Earnings per Share" and
SFAS No. 129 "Disclosure of Information about Capital Structure." The Company
will adopt this standard for fiscal year 1997. Managment does not expect the
adoption of these standards to have a material effect on the Company's financial
position or results of operations.
14
<PAGE>
ITEM 7. SELECTED FINANCIAL DATA
The following table sets forth certain selected financial data for the
years ended December 31, 1995 and 1996 which has been derived from the Company's
Financial Statements included elsewhere in this report. The financial data for
the years ended December 31, 1995 and 1996 has been audited by Arthur Andersen
LLP. The following financial information is qualified by reference to, and
should be read in conjunction with, the Company's Financial Statements and the
related Notes thereto appearing elsewhere in this report. See "Financial
Statements" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
SELECTED BALANCE SHEET DATA:
December 31,
1995 1996
---- ----
Total Assets $ 7,383,000 $ 8,600,000
Total Liabilities 6,144,000 7,532,000
Long - Term Liabilities, Net of Current Portion 545,000 5,487,000
Working Capital (113,000) 4,758,000
Stockholders' Equity 1,239,000 1,068,000
SELECTED STATEMENT OF OPERATION DATA:
Year Ending Year Ending
December 31, December 31,
1995 1996
------------ ------------
Net Sales $ 15,031,000 $ 12,316,000
Cost of Goods Sold 10,022,000 7,215,000
Selling Expense 3,945,000 3,318,000
General and Administrative Expenses 3,153,000 3,832,000
Legal Expense 784,000 167,000
Loss from Operations (2,873,000) (2,216,000)
Other (Income) Expense 290,000 (987,000)
Interest Expense 440,000 1,978,000
Loss Before Provision for Income Taxes (3,603,000) (3,207,000)
Provision for Income Taxes 1,000 1,000
Net Loss $ (3,604,000) $ (3,208,000)
Loss per Common Share $ (0.89) $ (0.60)
Weighted Average Number of Shares of Common Stock
Outstanding 4,067,000 5,381,000
15
<PAGE>
ITEM 8. DISAGREEMENTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Directors and Executive Officers
Name Age Position
- ---- --- --------
Sylvan Gerber 67 Chief Executive Officer, Chairman of the Board, and
Director
Mark Allen 35 Chief Operating Officer, Executive Vice President
of Finance, Secretary and Director
Bert Finmark 69 Director
Scott Searle 48 President
Michael Smith 42 Director
Dhananjay Wadekar 42 Director
All directors hold office until the next annual meeting of
stockholders and the election and qualification of their successors. Executive
officers are elected annually by the Board of Directors and, subject to existing
employment agreements, serve at the discretion of the Board.
Background of Executive Officers and Directors
Sylvan Gerber has been the President from inception to August 1, 1995
and a Director of the Company since inception. Mr. Gerber was elected Chairman
of the Board and Chief Executive Officer concurrent with the termination of
Zukerman. From 1986 to May 1991, Mr. Gerber was a private investor. From 1974 to
1986, Mr. Gerber was the President and Chief Executive Officer of Capri Lighting
Manufacturing Company ("Capri Lighting") which Mr. Gerber co-founded in 1974.
Capri Lighting was sold in 1984 to Thomas Industries, Inc., although Mr. Gerber
continued to manage the day-to-day operations of Capri Lighting until 1986.
Mark Allen has been Vice President / Finance since October 1994. In
March 1995, Mr. Allen was appointed Chief Operating Officer, Executive V. P /
Finance and was elected to the Board of Directors. From 1991 to 1994, Mr. Allen
was employed by Thomas James, Inc. (now known as H. J. Meyers & Co., Inc.) as
Vice President, Corporate Finance and Director of Private Placements.
Bert Finmark was elected to the Board of Directors in 1995 and is a
member of the Audit and Compensation committees. From 1974 to 1986, Mr. Finmark
was a co-founder and Chairman of Capri Lighting. From 1956 to 1974, Mr. Finmark
was founder and President of Superior Wholesale Electric.
Scott Searle has been President since August 2, 1995. From 1990 to
1995, Mr. Searle served as President of Minka Lighting, Inc.
16
<PAGE>
Michael Smith was elected to the Board of Directors in 1995 and is a
member of the Audit and Compensation committees. Mr. Smith is a principal of
International Capital & Management Inc., a merchant banking and venture capital
firm. From October 1992 through January 1997, Mr. Smith was the Managing
Director of Corporate Finance of H.J. Meyers & Co. (formerly known as Thomas
James Associates, Inc.) an investment banking firm and was General Counsel of
such firm from May 1991 through May 1995. Mr. Smith serves on the Board of
Directors of The Village Green Bookstore, Inc., and Infinite Machines Corp. Mr.
Smith was associated with the law firm of Harter, Secrest & Emery from 1987
until 1991. Mr. Smith received a B.A. from Cornell University and a J.D. from
Cornell University School of Law.
Dhananjay Wadekar was elected to the Company's Board of Directors in
April 1996 and is a member of the Audit and Compensation committees. Mr. Wadekar
is a co-founder of DynaGen, Inc., a publicly traded bio-technology company, and
has served as Chairman of the Board, Executive Vice President and a Director
since November 1991. Mr. Wadekar was, from 1985 to January 1989, the Chairman
and Chief Executive Officer of Holometrix, Inc., a publicly traded, thermal
instrumentation company which he founded. Mr. Wadekar was a director of
Holometrix, Inc. from 1985 until November 1994.
ITEM 10. EXECUTIVE COMPENSATION
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Pursuant to general instruction G the information required by Part III
shall be incorporated by reference from the Registrant's definitive proxy
statement for the fiscal year ended December 31, 1996 which is to be filed by
with the Commission on or before April 30, 1997.
17
<PAGE>
ITEM 13 EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Certificate of Incorporation of the Company.*
3.2 Certificate of Amendment of Certificate of Incorporation of the
Company.***
3.3 By-Laws of the Company.*
4.1 Form of Securities Purchase Agreement, Convertible Note and
Registration Rights Agreement entered into in February 1997***
9.1 Voting Trust Agreement by and among the Company, Sylvan Gerber and
each of his children.*
10.2 Employment Agreement by and between the Company and Sylvan Gerber.**
10.3 Employment Agreement by and between the Company and Mark Allen.**
10.4 Employment Agreement by and between the Company and Scott Searle.**
10.5 1994 Stock Option Plan.*
10.6 1995 Stock Option Plan.**
10.7 1994 Non-Employee Director Stock Option Plan.*
10.8 Lease for Company's principal offices located at 27615 Avenue
Hopkins, Valencia, California 91355.*
10.9 Stock Escrow Agreement by and among the Company, H. J. Meyers & Co.,
Inc. (formerly Thomas James Associates, Inc.) and certain principal
stockholders of the Company.*
10.10 Loan and Security Agreement between Coast Business Credit and the
Company dated October 9, 1996.***
10.11 Indemnification Agreement between the Company and its officers and
directors.*
10.12 Form of Restricted Stock Grant Agreements between the Company and
Sylvan Gerber, Scott Searle and Mark Allen.**
10.13 Form of Promissory Note and Warrant Agreement issued to Bert
Finmark.**
10.14 Form of Promissory Note and Warrant Agreement issues to Sylvan
Gerber.**
27.1 Financial Data Schedule***
- ----------
* Filed as an Exhibit to the Company's Registration Statement on Form
SB-2 (Registration No 33-72678) and incorporated herein by
reference.
** Filed as an Exhibit to the Company's Annual Report on Form 10-KSB
for the fiscal year ended December 31, 1995
18
<PAGE>
*** Filed herewith
(b) Reports on Form 8-K
None
Financial Statements
- --------------------
The financial statements listed in the accompanying index to financial
statements on page F-1 are filed as part of this report.
19
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
----
Report of Independent Public Accountants F-2
Balance Sheets as of December 31, 1995 and 1996 F-3
Statements of Operations for the years ended
December 31, 1995 and 1996 F-5
Statements of Stockholders' Equity for the
years ended December 31, 1995 and 1996 F-6
Statements of Cash Flows for the years ended
December 31, 1995 and 1996 F-7
Notes to Financial Statements F-9
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To CSL Lighting Manufacturing, Inc.:
We have audited the accompanying balance sheets of CSL LIGHTING MANUFACTURING,
INC. (a Delaware Corporation, d.b.a. Creative Systems Lighting) as of December
31, 1995 and 1996, and the related statements of operations, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of CSL Lighting Manufacturing,
Inc. as of December 31, 1995 and 1996, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a retained deficit that raise substantial doubt about its ability to
continue as a going concern. Management's plans in regard to these matters are
also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
ARTHUR ANDERSEN LLP
Los Angeles, California
March 19, 1997
F-2
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
BALANCE SHEETS
ASSETS
Pro Forma
December 31, December 31, December 31,
1995 1996 1996
---------- ---------- ----------
(Unaudited)
CURRENT ASSETS:
Cash $ 120,000 $ 7,000 $1,007,000
Accounts receivable, net of
allowance for doubtful accounts
of $145,000 in 1995 and
$381,000 in 1996 1,961,000 1,611,000 1,611,000
Inventories 3,135,000 4,172,000 4,172,000
Due from affiliates 6,000 - -
Receivable from employees 76,000 7,000 7,000
Notes receivable from officers 85,000 105,000 105,000
Other current assets 103,000 901,000 901,000
---------- ---------- ----------
Total current assets 5,486,000 6,803,000 7,803,000
---------- ---------- ----------
PROPERTY AND EQUIPMENT, at cost,
net of accumulated depreciation
and amortization 1,640,000 1,517,000 1,517,000
---------- ---------- ----------
OTHER ASSETS, net of accumulated
amortization of $70,000 in
1995 and $73,000 in 1996 257,000 280,000 280,000
---------- ---------- ----------
$7,383,000 $8,600,000 $9,600,000
========== ========== ==========
The accompanying notes are an integral part of these balance sheets.
F-3
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
BALANCE SHEETS
LIABILITIES AND STOCKHOLDERS' EQUITY
Pro Forma
December 31, December 31, December 31,
1995 1996 1996
----------- ----------- -----------
(Unaudited)
CURRENT LIABILITIES:
Current portion of long-term debt $ 412,000 $ 19,000 $ 19,000
Current portion of notes payable
to stockholders 239,000 100,000 100,000
Short-term borrowings 3,409,000 - -
Accounts payable 1,077,000 1,347,000 1,347,000
Accrued expenses
Commissions 229,000 222,000 222,000
Warranty and other 230,000 339,000 339,000
Customer deposits 3,000 18,000 18,000
----------- ----------- -----------
Total current liabilities 5,599,000 2,045,000 2,045,000
----------- ----------- -----------
LONG-TERM LIABILITIES:
Long-term debt, net of current
portion 123,000 1,936,000 1,936,000
Notes payable to stockholders,
net of current portion 200,000 78,000 78,000
Subordinated convertible debt - 3,253,000 2,588,000
Deferred rent 222,000 220,000 220,000
----------- ----------- -----------
545,000 5,487,000 4,822,000
----------- ----------- -----------
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value:
Authorized -- 1,000,000 shares
Issued and outstanding -- none - - -
Common stock, $.01 par value:
Authorized -- 10,000,000 shares
Issued -- 4,400,000 shares at
December 31, 1995, 6,784,000
shares at December 31, 1996 and
9,042,000 shares at Pro Forma
December 31, 1996
Outstanding -- 4,400,000 shares
at December 31, 1995, 6,269,000
shares at December 31, 1996
and 8,527,000 shares at Pro
Forma December 31, 1996 44,000 63,000 85,000
Additional paid-in capital 7,551,000 11,722,000 13,698,000
Less - 515,000 shares held
in treasury - (1,218,000) (1,218,000)
Deferred compensation (640,000) (575,000) (575,000)
Retained deficit (5,716,000) (8,924,000) (9,257,000)
----------- ----------- -----------
1,239,000 1,068,000 2,733,000
----------- ----------- -----------
$ 7,383,000 $ 8,600,000 $ 9,600,000
=========== =========== ===========
The accompanying notes are an integral part of these balance sheets.
F-4
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
----------- -----------
NET SALES $15,031,000 $12,316,000
COST OF GOODS SOLD 10,022,000 7,215,000
----------- -----------
5,009,000 5,101,000
----------- -----------
OPERATING EXPENSES:
Selling 3,945,000 3,318,000
General and administrative 3,153,000 3,832,000
Legal 784,000 167,000
----------- -----------
7,882,000 7,317,000
----------- -----------
Loss from operations (2,873,000) (2,216,000)
----------- -----------
OTHER (INCOME) EXPENSE:
Interest income (43,000) -
Gain from legal settlement - (1,137,000)
Loss on licensing agreement - 157,000
Loss on disposition of property
and equipment 337,000 7,000
Other, net (4,000) (14,000)
----------- -----------
290,000 (987,000)
----------- -----------
INTEREST EXPENSE:
Financing obligations 440,000 555,000
Fixed conversion discounts and additional
stock conversion bonus for convertible notes - 1,423,000
---------- ---------
440,000 1,978,000
---------- ---------
Loss before provision
for income taxes (3,603,000) (3,207,000)
PROVISION FOR INCOME TAXES 1,000 1,000
----------- -----------
NET LOSS $(3,604,000) $(3,208,000)
=========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES OF
COMMON STOCK OUTSTANDING 4,067,000 5,381,000
=========== ===========
LOSS PER COMMON SHARE $ (0.89) $ (0.60)
=========== ===========
The accompanying notes are an integral part of these statements.
F-5
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
<TABLE>
<CAPTION>
Common Stock Additional Treasury Stock
----------------- Paid-In ---------------- Deferred
Shares Amount Capital Shares Amount Compensation
------ ------ ------- ------ ------ ------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1994 4,000,000 $ 40,000 $ 6,924,000 -- $ -- $ --
Stock issuance to officers as compensation 400,000 4,000 646,000 -- -- (640,000)
Costs related to 1994 public offering -- -- (19,000) -- -- --
Net loss -- -- -- -- -- --
---------- -------- ------------ ------- ----------- ---------
BALANCE, December 31, 1995 4,400,000 44,000 7,551,000 -- -- (640,000)
---------- -------- ------------ ------- ----------- ---------
Sale of common stock under Regulation S 989,000 10,000 852,000 -- -- --
Sale/issuance of common stock and warrants
under Private Placement 775,000 8,000 767,000 -- -- --
Issuance of common stock in connection
with conversion of note payable to
shareholder 107,000 1,000 146,000 -- -- --
Issuance of common stock in connection
with conversion of subordinated
convertible notes 476,000 5,000 692,000 -- -- --
Interest expense associated with fixed
conversion discounts and additional
stock conversion bonus -- -- 1,423,000 -- -- --
Issuance of common stock to non-employees
as payment for services rendered 37,000 -- 75,000 -- -- --
Issuance of warrants as compensation to
non-employees under FASB No. 123 -- -- 177,000 -- -- --
Issuance of warrants as interest under
FASB No.123 -- -- 39,000 -- -- --
Amortization of deferred compensation -- -- -- -- -- 65,000
Recovery of common stock from former
chief executive officer and chairman
of the board (see Note 4) (515,000) (5,000) -- 515,000 (1,218,000) --
Net loss -- -- -- -- -- --
---------- -------- ------------ ------- ----------- ---------
BALANCE, December 31, 1996 6,269,000 $ 63,000 $ 11,722,000 515,000 $(1,218,000) $(575,000)
========== ======== ============ ======= =========== =========
</TABLE>
Retained
Deficit Total
------- -----
BALANCE, December 31, 1994 $(2,112,000) $ 4,852,000
Stock issuance to officers as compensation -- 10,000
Costs related to 1994 public offering -- (19,000)
Net loss (3,604,000) (3,604,000)
----------- -----------
BALANCE, December 31, 1995 (5,716,000) 1,239,000
----------- -----------
Sale of common stock under Regulation S -- 862,000
Sale/issuance of common stock and warrants
under Private Placement -- 775,000
Issuance of common stock in connection
with conversion of note payable to
shareholder -- 147,000
Issuance of common stock in connection
with conversion of subordinated
convertible notes -- 697,000
Interest expense associated with fixed
conversion discounts and additional
stock conversion bonus -- 1,423,000
Issuance of common stock to non-employees
as payment for services rendered -- 75,000
Issuance of warrants as compensation to
non-employees under FASB No. 123 -- 177,000
Issuance of warrants as interest under
FASB No.123 -- 39,000
Amortization of deferred compensation 65,000
Recovery of common stock from former
chief executive officer and chairman
of the board (see Note 4) -- (1,223,000)
Net loss (3,208,000) (3,208,000)
----------- -----------
BALANCE, December 31, 1996 $(8,924,000) $ 1,068,000
=========== ===========
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995 AND 1996
1995 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $(3,604,000) $(3,208,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 504,000 616,000
Provision for doubtful accounts 319,000 334,000
Loss on disposition of property and equipment 337,000 7,000
Write off of note receivable from employee 49,000 --
Deferred compensation 10,000 65,000
Interest expense associated with fixed
conversion discounts and additional
stock bonus -- 1,423,000
Issuance of warrants as interest under
FASB No. 123 -- 5,000
Issuance of common stock to non-employees as
payment for services -- 75,000
Issuance of warrants as compensation to
non-employees under FASB No. 123 -- 177,000
Gain from legal settlement -- (1,137,000)
(Increase) decrease in assets:
Accounts receivable (76,000) 16,000
Inventories 1,804,000 (1,037,000)
Due from affiliates 6,000 6,000
Receivables from employees (63,000) 69,000
Other (15,000) (982,000)
Increase (decrease) in liabilities:
Accounts payable (129,000) 270,000
Accrued expenses (544,000) 102,000
Customer deposits (3,000) 15,000
Deferred rent 12,000 (2,000)
----------- -----------
Net cash used in operating activities (1,393,000) (3,186,000)
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment (558,000) (305,000)
Notes receivable from officers (85,000) (20,000)
----------- -----------
Net cash used in investing activities (643,000) (325,000)
----------- -----------
F-7
<PAGE>
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to short-term borrowings 2,050,000 --
Repayments of short-term borrowings (1,640,000) (3,409,000)
Additions to long-term debt -- 1,833,000
Repayments of long-term debt (301,000) (413,000)
Additions to notes payable to stockholders 200,000 --
Net proceeds from issuance of subordinated
convertible debt -- 3,950,000
Net proceeds from sales of common stock and
warrants (19,000) 1,437,000
----------- -----------
Net cash provided by financing activities 290,000 3,398,000
----------- -----------
NET DECREASE IN CASH (1,746,000) (113,000)
CASH, beginning of year 1,866,000 120,000
----------- -----------
CASH, end of year $ 120,000 $ 7,000
=========== ===========
The accompanying notes are an integral part of these statements.
F-8
<PAGE>
CSL LIGHTING MANUFACTURING, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996
1. Line of Business
CSL Lighting Manufacturing, Inc. (the Company) designs, manufactures and markets
a line of lighting fixtures utilizing both "low voltage" and standard "line
voltage" halogen light sources for sale directly and indirectly to commercial
and residential end users.
The Company has suffered recurring losses from operations and has a retained
deficit of $8,924,000 that raise substantial doubt about the Company's ability
to continue as a going concern. Management has evaluated its current operations
and has refocused the Company's efforts and developed plans to raise additional
capital, generate operating income and sustain the Company's operations through
fiscal 1997. Management's plans include the following:
o The Company plans to establish new markets for its products in Asia,
Europe and the Middle East. The Company currently has sales offices
in Singapore and Shanghai, China and has engaged a sales
representative in Morocco.
o The Company has forged various strategic alliances with Simes, a
large European manufacturer of specification grade outdoor lighting
products, and Xinhua Electronic Equipment Company, a Chinese
producer of transformers for both commercial and residential
lighting applications.
o The Company has successfully raised an additional $1,000,000 through
the placement of subordinated convertible debt subsequent to year
end (see Note 15).
o The Company plans to raise additional capital as necessary through
further private placements of equity and/or issuance of debt.
There can be no assurance that the Company will be able to successfully raise
additional capital to meet its current operating needs. In addition, there can
be no assurance that the Company's products will be successful in the new
markets or that the Company will be able to produce and distribute products in
sufficient quantities or at sufficient price levels to make the expansion effort
profitable.
2. Summary of Significant Accounting Policies
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those
estimates.
F-9
<PAGE>
Credit Risk
The Company's accounts receivable are unsecured and the Company is at risk
to the extent such amounts become uncollectible. Customers include
electrical distributors, lighting showrooms and retailers and are located
primarily throughout the United States and Canada. The Company also has
sales to customers in Mexico, England, Singapore and Hong Kong.
Inventories
Inventories include costs of materials, labor and manufacturing overhead
and are stated at the lower of cost (weighted average) or market and
consist of the following at December 31, 1995 and 1996:
1995 1996
---------- ----------
Raw materials $ 781,000 $ 749,000
Finished goods 2,354,000 3,423,000
---------- ----------
$3,135,000 $4,172,000
========== ==========
Property and Equipment
Property and equipment are stated at cost and consist of the following at
December 31, 1995 and 1996:
1995 1996
----------- -----------
Computer equipment $ 626,000 $ 406,000
Displays and showrooms 618,000 650,000
Factory machinery and equipment 1,009,000 1,156,000
Furniture and fixtures 184,000 187,000
Leasehold improvements 281,000 336,000
Office machinery and equipment 83,000 28,000
Vehicles 41,000 16,000
----------- -----------
2,842,000 2,779,000
Less--Accumulated depreciation
and amortization (1,202,000) (1,262,000)
----------- -----------
$ 1,640,000 $ 1,517,000
=========== ===========
Depreciation and amortization are computed based upon the estimated useful
lives of the related assets using the straight-line method.
Useful lives range from three to ten years.
The Company capitalizes expenditures that materially increase asset lives
and charges ordinary repairs and maintenance to operations as incurred.
When assets are sold or otherwise disposed of, the cost and related
depreciation or amortization are removed from the accounts and any
resulting gain or loss is included in other income (expense) in the
accompanying statements of operations.
F-10
<PAGE>
Notes Receivable From Officers
At December 31, 1996, the Company has $105,000 of notes receivable from
two officers ($60,000 and $45,000, respectively). The notes are interest
free and are currently due and payable.
Trademarks and Patents
Costs associated with the establishment and defense of trademarks and
patents have been capitalized and are being amortized over ten years using
the straight-line method.
Deferred Rent
The lease for the Company's facility includes certain rent relief in its
early months and scheduled increasing monthly payments thereafter. In
accordance with generally accepted accounting principles, the Company has
accounted for the lease to provide for even charges to operations over the
life of the lease.
Revenue Recognition
Revenue on product sales is recognized at the time of shipment.
Stock Based Compensation
The Company adopted Statement of Financial Accounting Standards (SFAS) No.
123, "Accounting for Stock Based Compensation" (SFAS 123) in fiscal 1996.
As allowed by SFAS 123, the Company has elected to continue to measure
compensation cost under Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) and comply with the
pro forma disclosure requirements of the new standard (see Note 13).
Loss Per Common Share
Loss per common share is based on the weighted average number of common
shares outstanding during the period. Due to the net losses for the years
ended December 31, 1995 and 1996, common stock equivalents were not
included as the effect would be antidilutive.
Statements of Cash Flows
The Company prepares its statements of cash flows using the indirect
method as prescribed by the Statement of Financial Accounting Standards
No. 95. Supplemental cash flows disclosures are as follows at December 31,
1995 and 1996:
1995 1996
-------- --------
Interest paid $426,000 $383,000
Taxes paid 1,000 1,000
Conversion of debt to equity - 1,044,000
Prepaid interest recorded in connection
with warrants issued with debt - 34,000
In addition, during 1996, in connection with the settlement of a lawsuit
(see Note 4), the Company recorded a gain of $1,137,000, reduced common
stock (treasury stock) by $1,223,000, eliminated a note payable to a
shareholder of $92,000 and recorded a note payable to a shareholder of
$178,000.
F-11
<PAGE>
New Authoritative Pronouncements
In March 1995, the Financial Accounting Standards Board (FASB) issued SFAS
No. 121, "Accounting for the Impairment of Long-Lived Assets and
Long-Lived Assets to be Disposed Of" (SFAS 121), which requires impairment
losses to be recorded on long-lived assets used in operations when
indications of impairment are present and the undiscounted cash flows
estimated to be generated by those assets are less than the assets'
carrying amount. The Company adopted SFAS 121 in the fourth quarter of
1995 and the impact on the Company's financial position and results of
operations was insignificant.
In March 1997, the FASB issued SFAS No. 128, "Earnings per Share" (SFAS
128) and SFAS No. 129, "Disclosure of Information about Capital Structure"
(SFAS 129). SFAS 128 revises and simplifies the computation for earnings
per share and requires certain additional disclosures. SFAS 129 requires
additional disclosures regarding the Company's capital structure. Both
standards will be adopted in the fourth quarter of 1997. Management does
not expect the adoption of these standards to have a material effect on
the Company's financial position or results of operations.
Pro Forma Balance Sheet Presentation
Subsequent to December 31, 1996, various Subordinated Convertible Debt
holders converted $1,665,000 of debt for 2,258,000 shares of common stock
(see Note 15). The Company also issued an additional $1,000,000 of 6
percent Subordinated Convertible Debt (see Note 15) and in connection with
the related fixed discount on the conversion feature, reflected an
additional charge to interest expense of $333,000. The accompanying pro
forma balance sheet gives effect to these transactions as if they had
occurred on December 31, 1996.
3. Management Change - Fiscal 1995
In August 1995, the Company hired a new President whose mission is to refocus
and revitalize the Company's operations. The new President immediately began a
review of the Company's product lines and markets and began the process of
determining which products to discontinue. This resulted in the decision to
delete several product lines (for example, Intimacee, Bain De Sorbe, Multiples
and Samovar). In connection with the discontinuance of these product lines, the
Company wrote off approximately $1,020,000 of inventory during the third and
fourth quarters of 1995. The Company is now focusing its efforts on the
Invizilite, Jewel Light and Suretask (Mitelite) product lines. Also during the
fourth quarter of 1995, the Company wrote off approximately $300,000 of accounts
receivable.
4. Lawsuit Against Former Chief Executive Officer and Chairman of the Board
In December 1995, the Company signed a Settlement Memorandum in connection with
a lawsuit with its former Chief Executive Officer and Chairman of the Board
(Zukerman). Among other reasons, the Company sued Zukerman for alleged financial
improprieties. In connection with the Settlement Memorandum, Zukerman, among
other things, surrendered and transferred 515,000 shares of common stock back to
the Company. Furthermore, a $92,000 note payable to Zukerman was also eliminated
(see Note 8). The Company did not record any recovery of losses from Zukerman or
other damages from Zukerman in connection with this lawsuit until the second
quarter of 1996 when the 515,000 shares were received by the Company.
F-12
<PAGE>
5. Income Taxes
The Company accounts for income taxes SFAS No. 109 (SFAS 109), "Accounting for
Income Taxes." As the Company incurred losses in both fiscal 1995 and 1996, the
provision for income taxes in each year represents the minimum state tax due.
Under SFAS 109, deferred income tax assets or liabilities are computed based on
the temporary difference between the financial statement and income tax bases of
assets and liabilities using the enacted marginal income tax rate in effect for
the year in which the differences are expected to reverse. Deferred income tax
expenses or credits are based on the changes in the deferred income tax assets
or liabilities from period to period.
Under SFAS 109, deferred tax assets may be recognized for temporary differences
that will result in deductible amounts in future periods and for loss
carryforwards. A valuation allowance is recognized if, based on the weight of
available evidence, it is more likely than not that some portion or all of the
deferred tax asset will not be realized.
A detail of the Company's deferred tax asset as of December 31, 1995 and 1996
follows:
Years Ended
---------------------------
December 31, December 31,
1995 1996
------------ ------------
Allowance for doubtful accounts $ 58,000 $ 152,000
Inventory valuation 400,000 400,000
Uniform inventory capitalization 80,000 80,000
Accrued warranty expense 39,000 39,000
Deferred rent 89,000 89,000
Federal net operating loss
carryforwards 1,479,000 2,040,000
Other, net 46,000 450,000
---------- ----------
2,191,000 3,250,000
Valuation allowance (2,191,000) (3,250,000)
---------- ----------
$ - $ -
========== ==========
As of December 31, 1996, the Company had a net operating loss carryforward for
federal tax purposes of approximately $6,000,000.
6. Credit Facility
In October 1996, the Company established a credit facility with a finance
company consisting of a two year line of credit and a two year equipment term
loan. The facility provides for a maximum borrowing of $4,000,000 based on 80
percent of the Company's eligible accounts receivable and 40 percent of the
Company's eligible inventory (capped at $1,000,000). The term loan is capped at
$200,000 or 80 percent of the liquidation value of the Company's eligible
equipment. The interest rates for the line of credit and term loan are prime
plus 2.75 percent and prime plus 3 percent, respectively (11 percent and 11.25
percent at December 31, 1996, respectively). As of December 31, 1996, there was
$1,736,000 and $97,000 outstanding under the line of credit and the term loan,
respectively (see Note 7).
F-13
<PAGE>
7. Long-Term Debt
Long-term debt consists of the following at December 31, 1995 and 1996:
1995 1996
----------- -----------
Notes payable to a bank, secured by the
Company's assets, bearing interest at
a rate of prime plus 1 percent (9.5 percent at
December 31, 1995), paid in full in 1996 $ 394,000 $ --
Long-term line of credit with a finance company,
secured by eligible accounts receivable and
inventory, bearing interest at a rate of
11 percent, due in October 1998 (see Note 6) -- 1,736,000
Equipment term-loan with a finance company, secured
by eligible equipment, bearing interest at a rate
of 11.25 percent, due in October 1998 (see Note 6) -- 97,000
Loan payable to facility landlord, secured by
certain leasehold improvements, bearing interest
at a rate of 9.97 percent, principal and interest
payable in monthly installments of approximately
$2,000 through May 2003 129,000 117,000
Capital lease (see Note 11) 12,000 5,000
----------- -----------
535,000 1,955,000
Less--Current portion (412,000) (19,000)
----------- -----------
$ 123,000 $ 1,936,000
=========== ===========
The following summarizes, by year, the required principal debt payments as of
December 31, 1996:
Year ending December 31,
1997 $ 19,000
1998 1,848,000
1999 17,000
2000 18,000
2001 20,000
Thereafter 33,000
----------
$1,955,000
==========
F-14
<PAGE>
8. Notes Payable to Stockholders
Notes payable to stockholders consists of the following at December 31, 1995 and
1996:
1995 1996
--------- ---------
Unsecured note payable to current chairman
of the board, converted to 107,000 shares
of common stock in 1996 (see Notes 12 and 13) $ 147,000 $ --
Unsecured note payable to current chairman
of the board, subordinate to the long-term
bank credit facility, bearing interest at a
rate of 9 percent (see Note 12) -- 78,000
Unsecured note payable to former chief
executive officer and chairman of the
board, eliminated in 1996 pursuant to a
Settlement Memorandum signed in connection
a lawsuit (see Note 4) 92,000 --
Unsecured note payable to a director of the
Company, bearing interest at a rate of
9 percent, principal due August 1997,
(see Note 12) 200,000 100,000
--------- ---------
439,000 178,000
Less--Current portion (239,000) (100,000)
--------- ---------
$ 200,000 $ 78,000
========= =========
9. Subordinated Convertible Notes
During 1996, the Company raised capital through the placement of three different
series of Subordinated Convertible Notes bearing interest at rates of 7, 8 and
12 percent, respectively. Each series is convertible into common stock
commencing 90 days after issuance at discounted conversion prices based on 80,
75 and 75 percent of the average bid price for the five trading days preceding
conversion, for the 7, 8 and 12 percent notes, respectively. For the 7 and 8
percent notes, the conversion price per share is limited to a maximum of $2.875
and $2.00 per share, respectively. In addition to the 25 percent discount on
conversion for the 12 percent notes, for such notes, there is an additional 10
percent stock issuance, at no cost, for each conversion.
F-15
<PAGE>
The terms associated with each series and the related amounts raised and
converted are as follows:
Outstanding Converted
Raised Converted As Of Subsequent To
During During December 31, December 31,
1996 1996 1996 1996
---------- -------- ---------- ----------
Seven percent notes,
due March 31, 2001:
Amount $1,250,000 $ 67,000 $1,183,000 $ 250,000
Shares 32,000 308,000
Eight percent notes,
due October 31, 1998:
Amount $ 600,000 $110,000 $ 490,000 $ 490,000
Shares 127,000 640,000
Twelve percent notes,
due November 27, 1997:
Amount $2,100,000 $520,000 $1,580,000 $ 925,000
Shares 317,000 1,310,000
Total:
Amount $3,950,000 $697,000 $3,253,000 $1,665,000
========== ======== ========== ==========
Shares 476,000 2,258,000
======== ==========
In accordance with generally accepted accounting principles, the fixed discount
on the conversion feature of the above notes is considered to be interest
expense and is recognized in the statement of operations during the period from
the issuance of the debt to the time at which the debt becomes convertible (90
days). In addition, the 10 percent stock bonus upon conversion of the 12 percent
debt is also deemed to be interest. In connection with the issuance of the above
notes, in the fourth quarter of 1996, the Company recorded interest expense in
the accompanying statements of operations for the year ended December 31, 1996
as follows:
7 percent notes $ 313,000
8 percent notes 200,000
12 percent notes 910,000
----------
$1,423,000
==========
F-16
<PAGE>
10. Sales of Common Stock
During 1996, the Company raised $1,637,000 through the issuance, sale and
conversion of 1,764,000 shares of common stock and warrants as follows:
Net
Shares Proceeds
--------- ----------
Regulation S (February 1996) 660,000 $ 373,000
Regulation S (October 1996) 329,000 489,000
--------- ----------
989,000 862,000
--------- ----------
Private Placement - Sold (April 1996) 575,000 575,000
Private Placement - Conversion of
Notes Payable to Shareholders
(April 1996)(see Note 12) 200,000 200,000
--------- ----------
775,000 775,000
--------- ----------
1,764,000 $1,637,000
========= ==========
In connection with the private placement, each investor received one common
stock warrant for each common share purchased (see Note 13).
11. Commitments and Contingencies
The Company leases its office space, manufacturing facility, showroom and
certain property and equipment under long-term operating leases expiring at
various dates through 2003. Total rent expense under these operating leases was
approximately $355,000 in 1995 and $372,000 in 1996.
Included in property and equipment is approximately $20,000 of equipment which
is leased under a noncancellable lease accounted for as a capital lease which
expires October 1997 (see Note 7).
F-17
<PAGE>
Total minimum lease payments under the above leases are as follows:
Capital Operating
Lease Leases Total
------- ---------- ----------
Year ending December 31,
1997 $ 6,000 $ 439,000 $ 445,000
1998 - 396,000 396,000
1999 - 312,000 312,000
2000 - 294,000 294,000
2001 - 288,000 288,000
Thereafter - 491,000 491,000
------- ---------- ----------
6,000 $2,220,000 $2,226,000
========== ==========
Less--Amount representing
interest (12.5 percent) (1,000)
-------
Present value of minimum
lease payments 5,000
Less--Current portion (5,000)
-------
$ -
=======
The Company has commitments under two royalty agreements. The first agreement
requires the Company to pay an individual five percent of net sales generated by
a product line designed by that individual. The second agreement requires the
Company to pay an individual $5,000 per month for the use of technology designed
by such individual. This agreement is scheduled to cease at the close of March
1997. Total royalty expense was approximately $131,000 in 1995 and $108,000 in
1996.
The Company is a defendant in various lawsuits arising out of the normal course
of business. In the opinion of management, the outcome of these lawsuits will
not have a material effect on the Company's financial position or results of
operations.
The Company has employment agreements with certain executive officers that, in
addition to customary benefit and severance provisions, guarantee lump sum
payments after a change in control of the Company, if certain events occur.
Compensation which might be payable under these agreements has not been accrued
as no such change in control has occurred.
12. Related-Party Transactions
The Company sells lighting products to a company owned in part by a stockholder.
The Company had sales to this affiliated company of approximately $97,000 in
1995 and $16,000 in 1996. At December 31, 1995 there was $6,000 due from this
affiliate.
The Company has notes receivable from two of its officers (see Note 2).
The Company has notes payable with stockholders and a director (see Note 8).
The Company granted stock warrants to stockholders (see Note 13).
F-18
<PAGE>
In 1996, the Company converted a $147,000 note payable to stockholder into
107,000 shares of common stock (see Note 8).
In 1996, in connection with a private placement of common stock, the Company
converted $200,000 of notes payable to stockholders into 200,000 shares of
common stock (see Notes 8 and 10).
13. Stock Option Plan and Warrants
The Company has four Stock Option Plans under which the Company is authorized to
issue incentive and non-qualified stock options to its directors, officers, key
employees and consultants totaling up to 760,000 shares of common stock. At
December 31, 1996, 740,000 shares are available for future grant under these
plans. Options are generally granted at exercise prices not less than the fair
market value on the date of grant and expire ten years after the date of grant.
Options granted under these plans are fully vested immediately upon issuance.
The Company has also granted to non-employees options under no specific plan.
All such options were granted prior to 1995 and were canceled in 1996.
The Company has granted warrants to stockholders, directors, officers,
consultants, underwriters and a finance company in connection with various
transaction including issuance of debt, extension of debt, private placement of
common shares, consulting services and the initial public offering of common
shares. All warrants are granted at exercise prices not less than the fair
market value on the date of grant and expire from two to five years after the
date of grant. Warrants are fully exerciseable immediately upon grant.
In 1996 , the Company adopted SFAS 123. Therefore, the following information is
presented in accordance with the provisions of SFAS 123.
A summary of the Company's Stock Option Plans and changes in outstanding options
for the years ended December 31, 1995 and 1996 follows:
1995 1996
------------------------ -----------------------
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
---------- ---------- --------- ----------
OPTIONS OUTSTANDING,
beginning of year 108,000 $4.75 20,000 $4.75
Canceled (88,000) 4.75 - -
------- ------
OPTIONS OUTSTANDING,
end of year 20,000 $4.75 20,000 $4.75
======= ======
As of December 31, 1996, all outstanding options have a remaining life of
approximately 7 years and 20,000 are currently exerciseable.
F-19
<PAGE>
A summary of the Company's outstanding warrants and activity for the years ended
December 31, 1995 and 1996 follows:
1995 1996
------------------------ -----------------------
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Warrant Price Warrant Price
---------- ---------- --------- ----------
WARRANTS OUTSTANDING,
beginning of year 160,000 $7.25 345,000 $4.30
Granted 185,000 1.75 1,125,000 1.97
Canceled - - (160,000) 7.25
------- ---------
WARRANTS OUTSTANDING,
end of year 345,000 $4.30 1,310,000 $1.94
======= =========
Warrants exerciseable
at end of year 345,000 $4.30 1,310,000 $1.94
======= =========
Weighted average fair
value of warrants
granted during the $1.34 $1.32
year ======= =======
The following table summarizes information about the warrants outstanding at
December 31, 1996:
Number Weighted Average Number
Range of Outstanding at Remaining Exercisable at
Exercise Prices December 31, 1996 Contractual Life December 31, 1996
--------------- ----------------- ---------------- -----------------
$1.50 60,000 4.1 years 60,000
$1.75 395,000 4.0 years 395,000
$2.00 805,000 4.3 years 805,000
$3.00 50,000 4.7 years 50,000
--------- ---------
1,310,000 1,310,000
========= =========
As permitted by SFAS 123, the Company continues to apply the accounting rules of
APB 25 governing the recognition of compensation expense from its Stock Option
Plans. Such accounting rules measure compensation expense on the first date at
which both the number of shares and the exercise price are known. Under the
Company's plans, this would typically be the grant date. To the extent that the
exercise price equals or exceeds the market value of the stock on the grant
date, no expense is recognized. As options are generally granted at exercise
prices not less than the fair market value on the date of grant, no compensation
expense is recognized under this accounting treatment in the accompanying
statements of operations. However, under the provisions of SFAS 123, options
(and other equity instruments) granted to non-employees are excluded from the
pro forma disclosure requirements and must be recorded as compensation expense
at fair value in the accompanying statements of operations.
F-20
<PAGE>
During the year ended December 31, 1996, the fair value of warrants granted to
consultants, which was charged to compensation expense in the accompanying
statements of operations, was $177,000.
During the year ended December 31, 1996, the fair value of warrants granted in
connection with the issuance of debt was $39,000, $34,000 of which is recorded
as prepaid interest in the accompanying balance sheets and $5,000 of which is
recorded as interest expense - bank financing in the accompanying statements of
operations.
Had the Company applied the fair value based method of accounting, which is not
required, to all grants of options and warrants, under SFAS 123, the Company
would have recorded additional expense of $248,000 in 1995. This would have
increased the net loss to the pro forma amount of $3,852,000 and loss per common
share to the pro forma amount of $(.95) in 1995. In 1996, no pro forma
disclosures for fair values are required because all computed amounts have been
recorded directly to the accompanying balance sheets and statements of
operations. These recorded and pro forma amounts were determined by estimating
the fair value of each option and warrant on its grant date using the
Black-Scholes option-pricing model. Assumptions of 5.28 to 6.38 percent for risk
free interest rate, 2 to 5 years for expected life, 78.53 to 92.16 percent for
expected volatility and no expected dividends were applied to all grants for
each year presented.
14. Stock Issued to Officers as Compensation
On November 1, 1995, 400,000 shares of stock were granted to certain officers
for services performed and to be performed over a ten-year period. These shares
will vest ratably over the same ten year period. The market price of the
Company's common stock was $1.625 on the date of grant, giving rise to $650,000
of deferred compensation. For the years ended December 31, 1995 and 1996, the
Company has recognized $10,000 and $65,000 of compensation expense,
respectively. The remaining unamortized balance is recorded as deferred
compensation to be recognized as the stock vests over the next ten years.
15. Subsequent Events
In January, February and March 1997, various Subordinated Convertible
Debtholders of 7, 8 and 12 percent notes converted an additional $1,665,000 of
debt into 2,258,000 shares of common stock (see Note 9).
In February 1997, the Company raised $1,000,000 through the placement of 6
percent convertible notes due December 31, 1998. The notes are convertible into
common stock commencing 90 days after issuance at a conversion price equal to 75
percent of the average bid price for the five trading days preceding conversion.
Interest expense associated with the fixed discount on the conversion feature
totaled $333,000.
F-21
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Registrant has duly caused this Report to be signed on its
behalf by the undersigned hereunto duly authorized on the 31st day of March,
1997.
CSL LIGHTING MANUFACTURING, INC.
By: /s/ Sylvan Gerber
- ---------------------
Sylvan Gerber
Chairman of the Board, and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this Report
has been signed below by the following persons on behalf of the registrant in
the capacities indicated on the 31st day of March, 1997.
Signatures
/s/ Sylvan Gerber Chairman of the Board, Chief
- ----------------------- Executive Officer
Sylvan Gerber
/s/ Mark Allen Acting Principal Accounting
- ----------------------- Officer, Chief Operating Officer, Vice
Mark Allen President of Finance Director
/s/ Bert Finmark Director
- -----------------------
Bert Finmark
/s/ Michael Smith Director
- -----------------------
Michael Smith
/s/ Dhananjay Wadekar Director
- -----------------------
Dhananjay Wadekar
20
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
CSL LIGHTING MANUFACTURING, INC.
[Filed March 6, 1997]
The undersigned, being the Chief Operating Officer and Assistant Secretary
of CSL Lighting Manufacturing, Inc.. (the "Corporation") hereby certify that:
FIRST: The name of the Corporation is CSL LIGHTING MANUFACTURING, INC.
SECOND: The Certificate of Incorporation was filed with the Secretary of
State on November 16, 1993.
THIRD: The Certificate of Incorporation is hereby amended to increase the
Corporation's authorized capitalization.
FOURTH: To accomplish the foregoing amendment, Article FOURTH is hereby
amended and restated as follows:
"FOURTH: The total number of shares of stock which the corporation
shall have authority to issue is thirty-one million (31,000,000) shares of which
thirty million (30,000,000) shares shall be Common Stock with a par value of
$.01 per share and one million (1,000,000) shares shall be Preferred Stock with
a par value of $.01 per share.
Additional designations of powers, the rights and preferences and
the qualifications, limitations or restrictions with respect to each class of
stock of the corporation shall be as determined by the Board of Directors from
time to time."
<PAGE>
FIFTH: The foregoing amendment was adopted by the directors and
stockholders of the Corporation at duly called meetings of the board and
stockholders, respectively, in accordance with the provisions of Section 242 of
the General Corporation Law.
IN WITNESS WHEREOF, this Certificate is subscribed as of this 25th day of
February, 1997 by the undersigned who affirm under penalties of perjury that the
statements contained herein are true and correct.
________________________________________
Mark Allen, Chief Operating Officer
________________________________________
Kenneth S. Rose, Assistant Secretary
2
SECURITIES PURCHASE AGREEMENT
This Securities Purchase Agreement (the "Agreement"), dated as of February 24,
1997, is entered into by and between Ihag Handelsbank Zurich, acting in its
capacity as agent for certain non-U.S. Persons ("Purchaser") and CSL Lighting
Manufacturing, Inc., (the "Company"). This is the Agreement referred to as the
"Purchase Agreement" in the Registration Rights Agreement (as defined in Section
6(b) hereof).
The parties hereto agree as follows:
1. Purchase and Sale of Convertible Debentures. Upon the basis of
the representations and warranties, and subject to the terms and conditions, set
forth in this Agreement, the Company covenants and agrees to sell to the
Purchaser on the Closing Date, at a purchase price of $500,000 (the "Purchase
Price"), a convertible note in registered form in a principal amount of $500,000
and substantially in the form of Exhibit A hereto (the "Note"), such Note
convertible at the option of the holder thereof into a number of Note Shares
determined pursuant to Article 3 of the Note, according to the terms and
conditions set forth in the Note and upon the basis of the representations and
warranties, and subject to the terms and conditions set forth in this Agreement,
the Purchaser covenants and agrees to purchase from the Company on the Closing
Date the Note at the Purchase Price. All capitalized terms not otherwise defined
herein shall have the meanings attributed to them in the Note.
2. Closing. The closing of the purchase and sale of the Note
pursuant to Section 1 hereof shall take place on February 28, 1997 at the
offices of Morse, Zelnick, Rose & Lander LLP, located at 450 Park Avenue, Suite
902, New York, New York 10022 or at such other date, time and place as the
Purchaser and the Company may agree upon in writing, or at such other time at
which the Escrow Agent shall have received all documents and instructions as it
shall it its sole judgment deem necessary and appropriate to consummate the
transactions contemplated hereby (such time and date for the closing, the
"Closing Date"). The duly executed Note to be purchased by the Purchaser shall
be delivered by, or on behalf of, the Company at the closing against payment of
the Purchase Price therefor in immediately available funds by, or on behalf of,
the Purchaser to the attorney trust account of Morse, Zelnick, Rose & Lander,
LLP, (the "Escrow Agent") (Chase Manhattan Bank, Account No. 967086639, ABA
Routing Number 021000021). The Escrow Agent shall receive from the Purchaser and
the Company written instructions of the Purchaser and the Company in
substantially the form of Exhibit B hereto (the "Closing Instructions"),
instructing the Escrow Agent with respect the closing and settlement procedures.
Commencing on the second business day after delivery to the Escrow Agent of the
Purchase Price, the
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<PAGE>
Purchaser, if the Company is not ready, willing and able to consummate the
transaction in accordance with the terms of the Closing Instructions, may
terminate the proposed transaction by notice to the Company and the Escrow
Agent, whereupon the Escrow Agent shall redeliver the Purchase Price to the
Purchaser as soon as practicable in accordance with the written instructions of
the Purchaser.
3. Representations. Warranties and Covenants of the Purchaser. The
Purchaser understands, and represents and warrants to, and agrees with, the
Company, that:
(a) The Note and the Note Shares have not been and, unless
registered under the Securities Act of 1933, as amended (the "Securities Act"),
in accordance with the Registration Rights Agreement (as defined in Section
6(b)), will not be registered under the Securities Act, or any other applicable
securities law, and, accordingly, may not be offered, sold, transferred,
pledged, hypothecated or otherwise disposed of ("Transferred") unless registered
under the Securities Act or Transferred in a transaction exempt from
registration under the Securities Act and any other applicable securities law;
(b) The Purchaser is an "accredited investor" within the
meaning of Rule 501(a) under the Securities Act (an "Accredited Investor"), and
is acquiring or will acquire the Note and the Note Shares for its own account.
The Purchaser has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of an investment
in the Note and the Note Shares. The Purchaser is aware that it may be required
to bear the economic risk of an investment in the Note for an indefinite period,
and it is able to bear such risk for an indefinite period;
(c) The Purchaser is acquiring or will acquire the Note and
the Note Shares for its own account for investment purposes and not with a view
to, or for offer or sale in connection with, any distribution thereof. The
Purchaser agrees to offer, sell or otherwise transfer the Note and the Note
Shares only (I) in accordance with the terms of this Agreement and the Note, as
applicable, and (ii) pursuant to registration under the Securities Act or an
exemption from registration under the Securities Act and any other applicable
securities law; and
(d) The Purchaser acknowledges that the Company and others
will rely upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and further agrees that if any of the
acknowledgments, representations and agreements deemed to have been made by the
Purchaser by its acquisition of the Note and the Note Shares are no longer
accurate, it shall promptly notify the Company.
(e) The Company has furnished or made available to the
Purchaser a full and complete set of its most recent definitive proxy statement
in connection with its annual meeting of stockholders, its Annual Report on Form
10-KSB
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<PAGE>
for its most recently completed fiscal year, its Form 10-QSB's for each of its
fiscal quarters since the end of its most recently completed fiscal year and any
Form 8-K's filed during its current fiscal year (collectively, the "SEC
Documents"), which the Company has filed pursuant to the Securities Exchange Act
of 1934, as amended.
4. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the Purchaser that:
(a) The Company has been duly incorporated and is validly
existing as a corporation under the laws of Delaware.
(b) This Agreement and the Registration Rights Agreement (as
defined in Section 6(b)) have been duly authorized, executed and delivered by
the Company and constitute valid and binding agreements, enforceable in
accordance with their respective terms, and the Company has full corporate power
and authority necessary to enter into such agreements and to perform its
obligations thereunder.
(c) No consent, approval, authorization or order of any
court, governmental agency or body or arbitrator having jurisdiction over the
Company or any of its affiliates is required for execution of this Agreement or
the Registration Rights Agreement (as defined in Section 6(b)) and the
performance of its obligations under such agreements, including, without
limitation, the issuance and sale of the Note and the Note Shares (except for
the registration of the Note Shares under the Securities Act pursuant to the
Registration Rights Agreement as defined in Section 6(b)).
(d) Neither the sale of the Note pursuant to this Agreement,
nor the performance of its obligations under this Agreement, the Note or the
Registration Rights Agreement by the Company will:
(i) violate, conflict with, result in a breach of, or
constitute a default (or an event which with the giving of notice or the lapse
of time or both would be reasonably likely to constitute a default) under (A)
the articles of incorporation or by-laws of the Company, (B) any decree,
judgment, order, law, treaty, rule, regulation or determination applicable to
the Company of any court, governmental agency or body, or arbitrator having
jurisdiction over the Company or over the properties or assets of the Company,
(C) the terms of any bond, debenture, note or any other evidence of
indebtedness, or any agreement, stock option or other similar plan, indenture,
lease, mortgage, deed of trust or other instrument to which the Company is a
party, by which the Company is bound, or to which any of the properties of the
Company is subject, or (D) the terms of any "lockup" or similar provision of any
underwriting or similar agreement to which the Company is a party; or
(ii) result in the creation or imposition of any lien,
claim or other encumbrance upon any of the assets of the Company.
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<PAGE>
(e) The Note, when issued and delivered pursuant to this
Agreement, will have been duly authorized, executed, issued and delivered and
will constitute a legal, valid, binding and enforceable obligation of the
Company.
(f) The Note Shares, when issued, (i) will be free and clear
of any security interests, liens, claims or other encumbrances, (ii) will be
duly and validly authorized and issued, (iii) will be fully paid and
nonassessable, (iv) will not have been issued or sold in violation of any
preemptive or other similar rights of the holders of any securities of the
Company, and (v) will not subject the holders thereof to personal liability by
reason of being such holders.
(g) Except as set forth in the SEC Documents, there is no
pending or, to the best knowledge of the Company, threatened action, suit,
proceeding or investigation before any court, governmental agency or body, or
arbitrator having jurisdiction over the Company or any of its affiliates that
would materially affect the results of operations of the Company or the
execution by the Company of, or the performance by the Company of its
obligations under, this Agreement, the Note or the Registration Rights
Agreement.
(h) The Company, any person representing the Company, and, to
the best knowledge of the Company, any other person selling or offering to sell
the Note or the Note Shares in connection with the transaction contemplated by
this Agreement, have not made, at any time, any oral communication in connection
with the offer or sale of the Note or the Note Shares which contained any untrue
statement of a material fact or omitted to state any material fact necessary in
order to make the statements, in the light of the circumstances under which they
were made, not misleading.
(i) Except as disclosed to the Purchaser or any of its
affiliates in writing, the Company is not in possession of any material
non-public information that, if publicly disclosed, would, or could reasonably
be expected to, have an effect on the price of the Company's common stock, par
value $.01 per share (the "Common Stock"), which is listed for trading on the
National Association of Securities Dealers Automated Quotations Small
Capitalization system ("NASDAQ").
(j) Assuming the accuracy of, and compliance with, the
representations, warranties and covenants of the Purchaser in this Agreement,
the sale of the Note and the Note Shares pursuant to this Agreement and the Note
has been made in accordance with the provisions and requirements of Section 4(2)
under the Securities Act ("Section 4(2) and any applicable state law.
(k) None of the Company, any affiliate of the Company, or any
person acting on behalf of the Company or any such affiliate has engaged, or
will engage, in any general solicitation or general advertising with respect to
the Note.
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<PAGE>
(l) The Company is a corporation duly organized, validly
existing and in good standing under the laws of the state of Delaware and is
duly qualified as a foreign corporation in all jurisdictions in which the
failure to so qualify would have a material adverse effect on the Company and
its subsidiaries taken as a whole. The Company has registered its Common Stock
pursuant to Section 12 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the Common Stock is listed and trades on the Nasdaq Small
Cap Market. The Company has filed all materials required to be filed pursuant to
all reporting obligations under either Section 13(a) or 15(d) of the Exchange
Act for at least twelve (12) months immediately preceding the offer or sale of
the Notes, and has received no notice, either oral or written, with respect to
the continued eligibility for such listing. The Company has timely made all
filings required under the Exchange Act during the twelve month period preceding
the date hereof and is eligible to use Form S-3 to register the Note Shares.
(m) The Company undertakes and agrees to make all necessary
filings in connection with the sale of the Notes as required by the United
States laws and the regulations or any domestic securities exchange or trading
market.
(n) Except as set forth in the SEC Documents, since January 1,
there has been no material adverse development in the assets, liabilities,
business properties, operations, financial condition or results of operations of
the Company and its subsidiaries taken as a whole, except as disclosed in the
filings of the Company with the SEC.
(o) None of the filings of the Company with the SEC since
January 1, 1996 contained, at the time they were filed, any untrue statement of
a material fact or omitted to state any material fact required to be stated
therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading. The Company has since
January 1, 1996 timely filed all requisite forms, reports and exhibits thereto
with the SEC.
(p) Except as set forth in the SEC Documents, there is no
known fact to the Company or any subsidiary (other than general economic
conditions generally known to the public) that has not been disclosed in writing
to the Purchaser that (i) could reasonably be expected to have a material
adverse effect on the condition (financial or otherwise) or in the earnings,
business affairs, business prospects, properties or assets of the Company or any
subsidiary, or (ii) could reasonably be expected to materially and adversely
affect the ability of the Company or any subsidiary to perform its obligations
pursuant to this Agreement.
5. Covenants of the Company. The Company covenants and agrees with
the Purchaser:
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<PAGE>
(a) to comply with all requirements of Section 4(2) with
respect to the sale of the Note and the Note Shares including but not limited to
the filing of a Form D with the Securities and Exchange Commission;
(b) to notify the Purchaser promptly if at any time during the
period beginning on the date of this Agreement and ending on the Closing Date
(i) any event shall have occurred as a result of which any oral communication
made by the Company, any person representing the Company, or, to the best
knowledge of the Company, by any other person in connection with the
transactions contemplated by this Agreement would include an untrue statement of
a material fact or omit to state any material fact necessary in order to make
the statements therein, in the light of the circumstances under which they were
made, not misleading, or (ii) there is any public disclosure of material
information regarding the Company or its financial condition or results of
operation;
(c) to cause the Note Shares to be, upon delivery, fully paid,
nonassessable, free of preemptive rights and free from all taxes, liens,
charges, security interests or other encumbrances;
(d) have at all times authorized and reserved for issuance,
free from preemptive rights, a sufficient number of shares of Common Stock to
yield a number of Note Shares sufficient to satisfy the conversion rights of the
Purchaser pursuant to the terms and conditions of the Note.
6. Conditions Precedent to the Purchaser's Obligations. The
obligations of the Purchaser hereunder are subject to the performance by the
Company of its obligations hereunder and to the satisfaction of the following
additional conditions precedent:
(a) The representations and warranties made by the Company in
this Agreement shall, unless waived by the Purchaser, be true and correct in all
material respects as of the date hereof and at the Closing Date, with the same
force and effect as if they had been made on and as of the Closing Date.
(b) The Company and the Purchaser shall have entered into a
Registration Rights Agreement (the "Registration Rights Agreement") in a form
satisfactory to the Purchaser.
(c) The Company will provide an opinion or opinions of counsel
confirming in substance the representations and warranties set out in paragraphs
(a), (b), (c), (d), (e), (f), (j) and (l) of Section 4.
(d) None of the following shall have occurred: (i) any general
suspension of trading in, or limitation on prices listed for, the Common Stock
on the NASDAQ, (ii) a declaration of a banking moratorium or any suspension of
payments in
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<PAGE>
respect to banks in the United States, (iii) a commencement of a war, armed
hostilities or other international or national calamity directly or indirectly
involving the United States, (iv) in the case of the foregoing existing at the
date of this Agreement, a material acceleration or worsening thereof, (v) at any
time up to and including the day before the Closing Date, the Note Shares shall
trade on the NASDAQ at a price below , or (vi) any limitation by the federal or
state authorities on the extension of credit by lending institutions that
materially and adversely affects the Purchaser.
7. Conditions Precedent to the Company's Obligations. The
obligations of the Company hereunder are subject to the performance by the
Purchaser of its obligations hereunder and to the satisfaction of the condition
precedent that the representations and warranties made by the Purchaser in this
Agreement shall, unless waived by the Company, be true and correct in all
material respects as of the date hereof and at the Closing Date, with the same
force and effect as if they had been made on and as of the Closing Date.
8. Transfer of Note Shares.
(a) Securities Act Legend. Each certificate evidencing the
Note, the Note Shares, and any certificates issued upon transfer or exchange of
the Note or the Note Shares shall be stamped or imprinted with a legend
substantially as follows:
THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY
STATE; AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE
DISPOSED OF EXCEPT IN COMPLIANCE WITH, OR PURSUANT TO AN EXEMPTION FROM, THE
REQUIREMENTS OF SUCH ACT OR SUCH LAWS.
(b) Securities Act Compliance. Each holder (a "Holder") of a
certificate evidencing the Note or the Note Shares which bears the restrictive
legend set forth in Section 8(a) above (the "Restricted Securities"), and who
proposes to Transfer (as defined in Section 3(a) of this Agreement) any
Restricted Securities, shall give written notice to the Company of such Holder's
intention to effect such Transfer. Each such notice shall describe the manner
and circumstances of the proposed sale or other disposition in sufficient detail
and may be accompanied by an opinion of legal counsel to the Holder. Promptly
upon receipt of such notice, the Company shall present a copy thereof (together
with any accompanying opinion of legal counsel to the Holder) to its legal
counsel, and the following provisions shall apply:
(i) If, in the opinion of legal counsel to such Holder,
satisfactory in form and substance to the Company and its legal counsel, or if
such
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<PAGE>
notice was not accompanied by an opinion of legal counsel to the Holder, then,
if, in the opinion of legal counsel to the Company, the proposed sale or other
disposition may be effected without registering the Restricted Securities
involved under the Securities Act or under state securities laws, such Holder
shall be entitled to Transfer such Restricted Securities in accordance with the
terms of the notice delivered to the Company. The Company will advise the
Holder, within five (5) business days after submission of such notice, whether
such Holder is entitled to so Transfer the Restricted Securities. If the Holder
is entitled to so Transfer, he shall submit the stock certificate or
certificates evidencing the Restricted Securities to be Transferred to the
Company in proper form for Transfer and accompanied by appropriate instruments
of Transfer. Restricted Securities thus Transferred (and each of the
certificates evidencing any untransferred balance of the Note Shares not so
transferred) shall bear the restrictive legend set forth in Section 8(a),
unless, in the opinion of both such legal counsel (or legal counsel to the
Company if the Holder did not present an opinion of its legal counsel), such
legend is not required by the applicable provisions of the Securities Act or
state securities laws; and
(ii) If in the reasonable opinion of either of such
legal counsel (or legal counsel to the Company if the Holder did not present an
opinion of its legal counsel), the proposed Transfer cannot be effected without
registering the Note Shares involved under the Securities Act or state
securities laws, such Holder shall not offer to Transfer or Transfer such
Restricted Securities unless and until such Restricted Securities have been
registered under the Securities Act or state securities laws for such purpose or
an exemption from such registration becomes available pursuant to Section
8(b)(i) above. The Company has obligated itself to register the Note Shares
pursuant to the terms of the Registration Rights Agreement, a copy of which is
attached hereto and made a part hereof.
9. Fees and Expenses. Each of the Purchaser and the Company agrees
to pay its own expenses incident to the performance of its obligations
hereunder, including, but not limited to, the fees, expenses and disbursements
of such party's counsel.
10. Survival of the Representations. Warranties. etc. The respective
agreements, representations, warranties, indemnities and other statements made
by or on behalf of the Company and the Purchaser, respectively, pursuant to this
Agreement, shall remain in full force and effect, regardless of any
investigation made by or on behalf of the other party to this Agreement or any
officer, director or employee of, or person controlling or under common control
with, such party and will survive delivery of any payment for the Note and the
Note Shares.
11. Notices. All notices, requests and other communications
hereunder must be in writing and delivered to the parties at the following
addresses or facsimile numbers:
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<PAGE>
If to the Purchaser, to: Ihag Handelsbank Zurich
Bleicherweg 18
Postfach
CH-8022 Zurich
Attention: Dr. Stoffel
Telecopy: 411/2051285
If to the Company, to: CSL Lighting Manufacturing, Inc.
27615 Avenue Hopkins
Valencia, California 91355-3493
Attention: President
Telecopy: (805) 294-9078
with a copy to: Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue
New York, N.Y. 10021
Telecopy: (212) 838-9190
All such notices, requests and other communications will (i) if delivered
personally to the address as provided in this Section, be deemed given upon
delivery, (ii) if delivered by facsimile transmission to the facsimile number as
provided in this Section, be deemed given upon receipt, and (iii) if delivered
by mail in the manner described above to the address as provided in this
Section, be deemed given upon receipt (in each case regardless of whether such
notice, request or other communication is received by any other Person to whom a
copy of such notice is to be delivered pursuant to this Section). Any party from
time to time may change its address, facsimile number or other information for
the purpose of notices to that party by giving notice specifying such change to
the other parties hereto.
12. Third Party Beneficiary. Any permitted transferee of any part
of the principal amount of the Note or the Note Shares shall be a third party
beneficiary of the Company's obligations under this Agreement, the Note and the
Registration Rights Agreement. Such person shall have all the rights of a third
party beneficiary with respect to the enforcement against the Company of any
provision of this Agreement, the Note and the Registration Rights Agreement.
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<PAGE>
13. Miscellaneous.
(a) This Agreement may be executed in one or more
counterparts and it is not necessary that signatures of all parties appear on
the same counterpart, but such counterparts together shall constitute but one
and the same agreement.
(b) This Agreement shall inure to the benefit of and be
binding upon the parties hereto, their respective successors and permitted
assigns.
(c) This agreement shall be governed by, and construed in
accordance with, the laws of the State of New York (without giving effect to
conflicts of laws principles). With respect to any suit, action or proceedings
relating to this Agreement, each of the Company and the Purchaser irrevocably
submits to the exclusive jurisdiction of the courts of the State of New York and
the United States District Court located in the Borough of Manhattan in the City
of New York and hereby waives to the fullest extent permitted by applicable law
any claim that any such suit, action or proceeding has been brought in an
inconvenient forum. Subject to applicable law, the Company agrees that final
judgment against it in any legal action or proceeding arising out of or relating
to this Agreement or the Note shall be conclusive and may be enforced in any
other jurisdiction within or outside the United States by suit on the judgment,
a certified copy of which judgment shall be conclusive evidence thereof and the
amount of its indebtedness, or by such other means provided by law.
(d) The headings of the sections of this document have been
inserted for convenience of reference only and shall not be deemed to be a part
of this Agreement.
(e) The provisions of this Agreement are severable, and if
any clause or provision shall be held invalid, illegal or unenforceable in whole
or in part in any jurisdiction, then such invalidity or unenforceability shall
affect in that jurisdiction only such clause or provision, or part thereof, and
shall not in any manner affect such clause or provision in any other
jurisdiction or any other clause or provision of this Agreement in any
jurisdiction.
(f) This Agreement, including the schedules and exhibits
hereto, constitutes the sole and entire agreement of the parties with respect to
the subject matter hereof.
14. Time of Essence. Time shall be of the essence in this Agreement.
15. Escrow Agent. The Escrow Agent shall not be liable for any
action taken or omitted by it in good faith and its liability hereunder shall
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<PAGE>
be limited to liability for gross negligence or willful misconduct on its part.
The Issuer and the Purchaser agree to save harmless, indemnify and defend the
Escrow Agent for, from and against any loss, damage, liability, judgment, cost
and expense whatsoever, by reason of, or on account of, any misrepresentation
made to it or its status or activities as Escrow Agent under this Agreement
except for any loss, damage, liability, judgment, cost or expense resulting from
gross negligence or willful misconduct on the part of the Escrow Agent.
The Escrow Agent shall not be responsible for any failure or inability of
any of the parties to perform or comply with the provisions of this Agreement,
or the agreements delivered in connection herewith.
In the performance of its duties hereunder, the Escrow Agent shall be
entitled to rely in good faith upon any document (including facsimile
transmitted copies of documents), instrument or signature believed by it in good
faith to be genuine and to be signed by any party hereto or an authorized
officer or agent thereof, and shall not be required to investigate the truth or
accuracy of any statement contained in any such document or instrument. The
Escrow Agent may assume in good faith that any person purporting to give any
notice in accordance with the provisions hereof has been duly authorized to do
so.
Each party hereto acknowledges that (a) the Escrow Agent is not acting as
legal counsel to such party in any manner or respect in connection with the
transactions contemplated by this Agreement, and (b) the Escrow Agent is serving
as an accommodation to the parties hereto. Each party further acknowledges that
the Escrow Agent has acted, and acts, as legal counsel in certain matter to the
Company and H.J. Meyers & Co., Inc. ("Meyers") Each party hereto waives all
claims in the nature of conflict of interest against the Escrow Agent and
further agrees that in the event of any dispute which arises hereunder, or
otherwise between a party and the Company, the Escrow Agent shall be free to
represent the Company.
It is understood and further agreed that the Escrow Agent shall:
(a) be under no duty to enforce payment of any subscription that is to be
paid to and held by it hereunder;
(b) promptly notify the Purchaser and the Issuer of any discrepancy
between the amounts set forth on any statement delivered by the Purchaser and/or
the Issuer and the sum or sums delivered to it therewith;
(c) be under no duty to accept funds, checks, drafts or instruments for
the payment of money from anyone other than the Issuer or the Purchaser, or to
give any receipt therefor except to the Issuer or the Purchaser, with a copy in
each case to the Issuer;
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<PAGE>
(d) be protected in acting upon any notice, request, certificate,
approval, consent or other paper reasonably believed by it to be genuine and to
be signed by the proper party or parties (including, but not limited to, copies
of documents transmitted by facsimile);
(e) be permitted to consult with counsel of its choice, and shall not be
liable for any action taken, suffered, or omitted by it in accordance with the
advice of such counsel; provided, however, that nothing in this subsection (e),
nor any action taken by the Escrow Agent, or suffered or omitted by it in
accordance with the advice of any counsel, shall relieve the Escrow Agent from
liability for any claims that are occasioned by its gross negligence or willful
misconduct;
(f) not be bound by any modification, amendment, termination,
cancellation, or recission of this Agreement, unless the same shall be in
writing and signed by it;
(g) be entitled to refrain from taking any action other than to keep all
property held in escrow if it (i) shall be uncertain concerning its duties or
rights hereunder, or (ii) shall have received claims or demands from any party,
or (iii) shall have received instructions from the Purchaser and/or the Issuer
which, in the Escrow Agent's opinion, are in conflict with any of the provisions
of this Agreement, until it shall have received a final judgment by a court of
competent jurisdiction;
(h) have no liability for following the instructions herein or expressly
provided for herein, or the written instructions given by the Purchaser and/or
the Issuer; and
(i) have the right, at any time, to resign hereunder by giving written
notice of its resignation to all other parties hereto at least three (3)
business days prior to the date specified for such resignation to take effect,
and upon the effective date of such resignation all cash and other payments and
all other property then held by the Escrow Agent hereunder shall be delivered by
it to such person as may be designated in writing by the other parties executing
this Agreement, whereupon the Escrow Agent's obligations hereunder shall cease
and terminate. If no such person has been designated by such date, all
obligations of the Escrow Agent hereunder shall, nevertheless, cease and
terminate. The Escrow Agent's sole responsibility thereafter shall be to keep
safely all property then held by it and to deliver the same to a person
designated by the other parties executing this Agreement or in accordance with
the directions of a final order or judgment of a court of competent
jurisdiction.
16. Right of First Refusal. For a period of twelve (12) months following
the Closing, the Purchaser shall have a five (5) day right of first refusal
(together with any other purchasers in this offering) to purchase any debt or
equity
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securities (excluding sales to employees) of the Company which the Company
intends to offer in a private placement transaction.
17. Shorting Position. The Purchaser has no existing short position with
respect to the Common Stock and agrees not to enter into any short sales or
other hedging transactions with respect to the Common Stock at any time during
the first sixty (60) days after the closing of this Agreement. Purchaser further
agrees that, at all times after the execution of this Agreement by the Purchaser
and prior to conversion of all principal amount of the Debentures acquired by
Purchaser, it will keep its purchase of the Debentures confidential, except as
required by law and except as necessary in the ordinary course of Purchaser's
business.
18. Delivery of Stock. The Company will permit the Purchaser to exercise
its right to convert the Note by telecopying an executed and completed Notice of
Conversion to the Company and delivering within three business days thereafter,
the original Notice of Conversion and Note by express courier. Each date on
which a Notice of Conversion is telecopied to and received by the Company in
accordance with the provisions hereof shall be deemed a Conversion Date. The
Company will transmit the certificates representing the Note Shares and the
newly issued Note representing the amount of the Note which remains unconverted
to the Purchaser via express courier within three business days after receipt by
the Company of the original Notice of Conversion and the Note.
19. Liquidated Damages for Failure to Deliver. The Company understands
that a delay beyond the deadline for delivery, specified in paragraph 18, could
result in economic loss to the Purchaser. As compensation to the Purchaser for
such loss, the Company agrees to pay late payments to the Purchaser for the late
issuance of shares issuable at conversion in accordance with the following
schedule (where No. Business Days Late is defined as the number of business days
beyond three business days after receipt by the Company of the original Notice
of Conversion and the Note:
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No. Business Days Late Late Payment for Each $50,000 of
Equity Debenture Principal Amount
Being Converted
---------------------- ---------------------------------
1 $50.00
2 $100.00
3 $150.00
4 $200.00
5 $250.00
6 $300.00
7 $350.00
8 $400.00
9 $450.00
10 $500.00
>10 $500.00 + $100.00 for each Business
Day Late Beyond 10 Days
The Company shall make any payments incurred under this Section in
immediately available funds upon demand. Nothing herein shall limit a
Purchaser's right to pursue actual damages for the Company's failure to issue
and deliver Note Shares to the Purchaser. Furthermore, in addition to any other
remedy which may be available to the Purchaser, in the event that the Company
fails for any reason to effect delivery of Note Shares within five business days
after the Delivery Date, the Purchaser will be entitled to revoke the relevant
Notice of Conversion by delivering a notice to such effect to the Company
whereupon the Company and the Purchaser shall each be restored to their
respective positions immediately prior to such Notice of Conversion.
20. Non-delivery of the Note Shares. If, within ten (10) business days of
the date after receipt by the Company of the original Conversion Notice and the
original Note the Company shall fail to (i) issue the Note Shares, and (ii)
deliver to the Purchaser the Note Shares, for any reason other than failure by
the Purchaser to comply with its obligations hereunder, then the Company shall:
(a) hold the Purchaser harmless against any loss, claim or damage
arising from or as a result of such failure by the Company (including, without
limitation, any such loss, claim or damage resulting from an obligation to
resell the Note Shares); and
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(b) reimburse the Purchaser for all of its out-of-pocket expenses
reasonably incurred, including fees and disbursements of its counsel, incurred
by the Purchaser in connection with this Agreement and the transactions
contemplated herein; provided however, that the Company shall then be have
further liability to the Purchaser except as provided for in this Section 20.
IN WITNESS WHEREOF, this Agreement has been duly executed and
delivered by the duly authorized officer(s) of each party hereto as of the date
first above written.
CSL Lighting Manufacturing, Inc.
_______________________________
Name: Mark Allen
Title: Chief Operating Officer
Ihag Handelsbank Zurich, as agent for
non-U.S. persons
_______________________________
Name:
Title:
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EXHIBIT A
CONVERTIBLE NOTE
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THE NOTE REPRESENTED BY THIS CERTIFICATE HAS NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNDER THE SECURITIES LAWS OF ANY STATE;
AND MAY NOT BE SOLD, ASSIGNED, TRANSFERRED, PLEDGED OR OTHERWISE DISPOSED OF
EXCEPT IN COMPLIANCE WITH, OR PURSUANT TO AN EXEMPTION FROM, THE REQUIREMENTS OF
SUCH ACT OR SUCH LAWS.
--------------------
CONVERTIBLE NOTE
Due December 31, 1998
February 28, 1997 $500,000
No. F-1
CSL Lighting Manufacturing, Inc., a Delaware corporation (hereinafter
called the "Issuer"), for value received, hereby promises to pay to the Holder
(as defined below) on December 31, 1998 the principal amount of $500,000 in such
coin or currency of the United States of America as at the time of payment shall
be legal tender for public and private debts, at the principal office of the
Issuer and to pay interest on the principal sum outstanding semi-annually, in
arrears, on the last business day of each such semi-annual period after the date
hereof, commencing August 31, 1997 or, if earlier, on each Conversion Date (as
hereinafter defined), until the principal hereof is paid in full or has been
converted, at the rate of 6% per annum (the "Note Interest Rate"), subject to
Section 6.3 hereto, computed on the basis of the actual number of days elapsed
in a 365-day year. Accrual of interest shall commence on the date hereof until
payment in full of the principal sum has been made or duly provided for. All
accrued and unpaid interest shall bear interest at the same rate from and after
the due date of the interest payment until so paid. The interest so payable,
less any amounts required by law to be deducted or withheld, will be paid
semi-annually in arrears in cash or, if earlier, on each Conversion Date in
shares of Common Stock in accordance with conversion procedures described
hereinafter, to the person in whose name this Note (or one or more predecessor
Notes) is registered on the records of the Company regarding registration and
transfers of the Notes on the Conversion Date.
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ARTICLE 1
DEFINITIONS
SECTION 1.1 Definitions. The terms defined in this Article whenever used
in this Note shall have the respective meanings hereinafter specified.
(a) "Additional Capital Shares" shall have the meaning set forth in
Section 3. l(c).
(b) "Business Day" shall mean a day other than Saturday, Sunday or
any day on which banks located in the state of New York are authorized or
obligated to close.
(c) "Capital Shares" shall mean the Common Shares and any other
shares of any other class of common stock, whether now or hereafter authorized,
which have the right to participate in the distribution of earnings and assets
of the Issuer.
(d) "Closing Date" shall mean February 28, 1997.
(e) "Common Shares" shall mean shares of the common stock, par value
$.01, of the Issuer.
(f) "Conversion Date" shall mean any day on which all or some part
of the principal amount of this Note is converted into Note Shares in accordance
with the terms of this Note, provided that a Conversion Date must be a Business
Day.
(g) "Conversion Notice" shall have the meaning set forth in Section
3.2.
(h) "Conversion Price" shall have the meaning set forth in Section
3. 1.
(i) "Conversion Ratio" shall have the meaning set forth in Section
3.1.
(j) "Current Market Price" per Common Share on any date herein
specified shall be deemed to be the last trade price on such day on the National
Association of Securities Dealers Automated Quotations Small Capitalization
system ("NASDAQ").
(k) "Default Interest Rate" shall be equal to the Note Interest Rate
plus 6% per annum.
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(1) "Event of Default" shall have the meaning set forth in Section
6.1.
(m) "Holder" shall mean Ihag Handelbank Zurich, acting in its
capacity as agent for certain non-U.S. persons or any person to which this Note
is subsequently transferred in accordance with the terms provided herein.
(n) "Issuer" shall mean CSL Lighting Manufacturing, Inc., a Delaware
corporation, and any successor corporation by merger, consolidation, sale or
exchange of all or substantially all of the Issuer's assets, or otherwise.
(o) "Market Disruption Event" shall mean any event that results in a
material suspension or limitation of trading of Common Shares on the NASDAQ (or,
if the Common Shares are not listed for trading on the NASDAQ, the principal
trading market for the Common Shares as determined by the Holder in its
reasonable discretion).
(p) "Maximum Rate" shall have the meaning set forth in Section 6.3.
(q) "Note" shall mean this Convertible Note or such other
Convertible Note or Notes exchanged therefor as provided in Section 2.1.
(r) "Notes" shall mean the Convertible Note issued pursuant to the
Purchase Agreement and such other Convertible Note or Notes exchanged therefor
as provided in Section 2.1.
(s) "Note Shares" when used with reference to the securities
issuable upon conversion of this Note, shall mean all Common Shares now or
hereafter Outstanding and securities of any other class into which the Note
Shares shall hereafter have been changed, whether now or hereafter created.
(t) "Outstanding" when used with reference to Common Shares or
Capital Shares (collectively, "Shares"), shall mean, at any date as of which the
number of such Shares is to be determined, all issued and outstanding Shares,
and shall include all such Shares issuable in respect of outstanding scrip or
any certificates representing fractional interests in such Shares; provided,
however, that "Outstanding" shall not mean any such Shares then directly or
indirectly owned or held by or for the account of the Issuer or any Subsidiary.
(u) "Person" shall mean an individual, a corporation, a partnership,
an association, a trust or other entity or organization, including a government
or political subdivision or an agency or instrumentality thereof.
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(v) "Purchase Agreement" means the Securities Purchase Agreement,
dated February 24, 1997, between the Issuer and Ihag Handelbank Zurich, acting
in its capacity as agent for certain non-U.S. persons.
(w) "Redemption Price" shall have the meaning set forth in Section
2.4.
(x) "Registration Rights Agreement" shall have the meaning set forth
in Section 6(b) of the Purchase Agreement. This is the Note referred to as the
Note in the Registration Rights Agreement.
(y) "SEC" shall mean the United States Securities and Exchange
Commission.
(z) "Securities Act" shall mean the Securities Act of 1933, as
amended, and the rules and regulations of the SEC thereunder, all as in effect
at the time.
(aa) "Senior Debt" shall have the meaning set forth in Section 4.2.
(bb) "Senior Lender" shall have the meaning set forth in Section
4.2.
(cc) "Subsidiary" shall mean any entity of which securities or other
ownership interests having ordinary voting power to elect a majority of the
board of directors or other persons performing similar functions are owned
directly or indirectly by the Issuer.
(dd) "Subordinated Debt" shall have the meaning set forth in Section
4.2.
(ee) "Trading Day" shall mean any day on which trades of securities
listed thereon are reported by the NASDAQ (or, if the Common Shares are not
listed for trading on the NASDAQ, the principal trading market for the Common
Shares) and on which no Market Disruption Event has occurred.
(ff) "Valuation Event" shall have the meaning set forth in Section
3.1.
(gg) "Valuation Period" shall have the meaning set forth in Section
3.1. All references to "cash" or "$" herein shall mean currency of the United
States of America.
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ARTICLE 2
EXCHANGES AND TRANSFER; REDEMPTION
SECTION 2.1 Exchange and Registration of Transfer of Notes. The Holder
may, at its option, surrender this Note at the office of the Issuer and receive
in exchange therefor a Note or Notes, each in the denomination of $10,000.00 or
an integral multiple of $10,000.00 in excess thereof, dated as of the date of
this Note, and, subject to Section 4.1, payable to such Person, or order, as may
be designated by such Holder. The aggregate principal amount of such Note or
Notes exchanged in accordance with this Section 2.1 shall equal the aggregate
unpaid principal amount of this Note as of the date of such surrender; provided,
however, that upon such exchange there shall be filed with the Issuer the name
and address for all purposes hereof of the Holder or Holders of the Note or
Notes delivered in such exchange. This Note, when presented for registration of
transfer or for exchange, conversion or payment, shall (if so required by the
Issuer) be duly endorsed by, or be accompanied by a written instrument of
transfer in form reasonably satisfactory to the Issuer duly executed by, the
Holder or its attorney duly authorized in writing.
SECTION 2.2 Loss. Theft. Destruction of Note. Upon receipt of evidence
satisfactory to the Issuer of the loss, theft, destruction or mutilation of this
Note and, in the case of any such loss, theft or destruction, upon receipt of
indemnity or security reasonably satisfactory to the Issuer, or, in the case of
any such mutilation, upon surrender and cancellation of this Note, the Issuer
will make and deliver, in lieu of such lost, stolen, destroyed or mutilated
Note, a new Note of like tenor and unpaid principal amount dated as of the date
hereof. This Note shall be held and owned upon the express condition that the
provisions of this Section 2.2 are exclusive with respect to the replacement of
a mutilated, destroyed, lost or stolen Note and shall preclude any and all other
rights and remedies notwithstanding any law or statute existing or hereafter
enacted to the contrary with respect to the replacement of negotiable
instruments or other securities without their surrender.
SECTION 2.3 Who Deemed Absolute Owner. The Issuer may deem the person in
whose name this Note shall be registered upon the registry books of the Issuer
to be, and may treat it as, the absolute owner of this Note (whether or not this
Note shall be overdue) for the purpose of receiving payment of or on account of
the principal of this Note, for the conversion of this Note and for all other
purposes, and the Issuer shall not be affected by any notice to the contrary.
All such payments and such conversion shall be valid and effectual to satisfy
and discharge the liability upon this Note to the extent of the sum or sums so
paid or the conversion so made.
SECTION 2.4 Optional Redemption by the Issuer. The Issuer at its election,
upon notice given as provided in Section 2.5, may redeem this Note in whole or
in part at any time and from time to time, but only with respect to that portion
of this Note for which the Company has not been provided with a Conversion
Notice. The
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price to redeem the Note (the "Redemption Price") shall be equal to 110% of the
total sum that the Holder would have received had the amount of the Note being
redeemed been converted into Note Shares on the date of redemption and sold on
such date.
SECTION 2.5 Notice of Redemptions: Right to Convert in Lieu of Accepting
Redemptions. In the case of redemption of this Note, notice thereof shall be
given in writing to the Holder not fewer than 5 nor more than 15 days prior to
the date fixed for such redemption, which notice shall specify the date fixed
for such redemption and make reference to this Section 2.5 pursuant to which
such redemption is to be made. Such notice of redemption and all other notices
to be given to the Holder shall be given by registered mail at its designated
address.
Upon notice of any redemption being given as provided in this Section 2.5,
the Holder shall have the right to exercise, either in whole or in part, the
conversion privilege pursuant to Article 3 hereof until 5:00 P.M. on the date
fixed for redemption.
SECTION 2.6 Surrender of Notes: Notation Thereon. Upon any redemption of a
portion of the principal amount of this Note pursuant to this Article 2, the
Holder at its option may require the Issuer to make and deliver, at the expense
of the Issuer (other than for transfer taxes, if any), upon surrender of this
Note, a new Note payable to such person or persons, or order, as may be
designated by the Holder for the principal amount of this Note then remaining
unredeemed, dated as of the date to which interest has been paid on the
unredeemed principal amount of this Note (or, if no interest has been paid
hereon, then dated as of the date of this Note), or may present this Note to the
Issuer for notation hereon of the payment of the portion of the principal amount
so redeemed. The Issuer may, as a condition of payment of all or any of the
principal of or interest on this Note, require the Holder to present this Note
for notation of such payment and, if this Note be paid in full, require the
surrender hereof.
ARTICLE 3
CONVERSION OF NOTE
SECTION 3.1 Conversion: Conversion Price. At the option of the Holder, at
any time from the ninetieth (90) day following the date of issuance of this Note
until this Note is paid in full, this Note may be converted, either in whole or
in part up to the principal amount hereof (or in case some portion of this Note
shall have been called for redemption prior to such date, then at the portion
that is not so called), together with accrued and unpaid interest thereon to the
relevant Conversion Date, into Note Share (calculated as to each conversion to
the nearest 1/lOOth of a Note Share), at the conversion price the ("Conversion
Price") equal to seventy-five percent (75%) (the "Conversion Ratio") of the
average closing bid price of the Common Stock on the five Trading Days
immediately preceding the relevant Conversion Date (the "Valuation
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Period"), (but in no event shall such amount be in excess of 100% of the average
closing bid price of the Common Stock on the five Trading Days immediately
preceding the issuance date of this Note) plus 1,000 shares of Common Stock for
each $10,000 principal amount of this Note converted; provided, however, that if
a Valuation Event occurs during any Valuation Period, a new Valuation Period
shall begin on the Trading Day immediately after the occurrence of such
Valuation Event and end on the Conversion Date; provided, further, however, that
if a Valuation Event occurs on the fifth day of a Valuation Period then the
Conversion Price shall be the closing price on such day; provided, further,
however, that the Holder may, in its sole discretion, postpone such Conversion
Date to a Trading Day which is no more than five Trading Days after the
occurrence of the latest Valuation Event.
For the purposes of this Section 3.1, a "Valuation Event" shall mean an event in
which the Issuer at any time during a Valuation Period takes any of the
following actions:
(a) subdivides or combines its Common Shares;
(b) pays a dividend in its Capital Shares or makes any other
distribution of its Capital Shares;
(c) issues any additional Capital Shares (the "Additional Capital
Shares"), otherwise than as provided in the foregoing Sections 3. l(a) and 3.
l(b) above, at a price per share less, or for other consideration lower, than
the Current Market Price in effect immediately prior to such issuance, or
without consideration;
(d) issues any warrants, options or other rights to subscribe for or
purchase any Additional Capital Shares and the price per share for which
Additional Capital Shares may at any time thereafter be issuable pursuant to
such warrants, options or other rights shall be less than the Current Market
Price in effect at the hereunder immediately prior to such issuance;
(e) issues any securities convertible into or exchangeable for
Capital Shares and the consideration per share for which Additional Capital
Shares may at any time thereafter be issuable pursuant to the terms of such
convertible or exchangeable securities shall be less than the Current Market
Price in effect immediately prior to such issuance;
(f) make a distribution of its assets or evidences of indebtedness
to the holders of its Capital Shares as a dividend in liquidation or by way of
return of capital or other than as a dividend payable out of earnings or surplus
legally available for dividends under applicable law or any distribution to such
holders made in respect of the sale of all or substantially all of the Issuer's
assets (other than under the circumstances provided for in the foregoing
Sections 3.l(a) through 3.l(e)), provided, in
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each case, that such distribution described in this Section 3.l(f) does not
constitute an Event of Default hereunder; or
(g) take any action affecting the number of Outstanding Capital
Shares, other than an action described in any of the foregoing Sections 3.l(a)
through 3.l(f) hereof, inclusive, which in the opinion of the Issuer's Board of
Directors, determined in good faith, would have a materially adverse effect upon
the rights of the Holder at the time of a conversion of this Note.
Notwithstanding anything to the contrary contained herein, in no event
shall the Holder be entitled to convert this Note into any Note Shares when the
result of such conversion would entitle the Holder to receive that number of
shares of the Issuer's Common Stock of which the sum of (xx) the number of
shares of Common Stock beneficially owned by the Holder and its affiliates
(other than shares of Common Stock which may be deemed beneficially owned
through the ownership of the unconverted portion of this Note) and (yy) the
number of shares of Common Stock issuable upon conversion of this Note, would
result in beneficial ownership by the Holder and its affiliates of more than
4.9% of the outstanding shares of Common Stock. For the purposes of this
provision, beneficial ownership shall be determined in accordance with Section
13(d) of the Securities Exchange Act of 1934, as amended, and Regulation 13 D
and G thereunder, except as otherwise provided in clause (xx) of this provision.
SECTION 3.2 Exercise of Conversion Privilege. In order to exercise the
conversion privilege, either in whole or in part, the Holder shall surrender
this Note to the Issuer during usual business hours at its principal office and
shall give written notice to the Issuer in the form attached hereto in Annex I
(the "Conversion Notice") at said office that the Holder elects to convert this
Note. The Issuer shall convert the Note and issue the Note Shares effective as
of the time requested by the Holder in the Conversion Notice so long as such
time is after the date on which the Conversion Notice is given. The Conversion
Notice shall also state the name or names (with address) of the persons who are
to become the holders of the Note Shares in connection with such conversion.
Upon surrender for conversion, this Note shall be accompanied by a proper
assignment hereof to the Issuer or in blank. As promptly as practicable after
the receipt of such Conversion Notice and the surrender of this Note as
aforesaid, but in any event no more than three (3) Business Days after the
Issuer's receipt of such Conversion Notice and surrender of this Note, the
Issuer shall (i) issue the Note Shares issuable upon such conversion in
accordance with the provisions of this Article 3, and (ii) deliver to the Holder
(X) a certificate or certificate(s) representing the number of Note Shares to
which the Holder is entitled by virtue of such conversion, and (Y) cash, as
provided in Section 3.3, in respect of any fraction of a Share issuable upon
such conversion. Such conversion shall be deemed to have been effected at the
time at which the Conversion Notice indicates so long as this Note shall have
been surrendered as aforesaid at such time, and at such time the rights of the
Holder as holder of this Note shall cease and the person and persons in whose
name or names the Note Shares shall be issuable upon such conversion shall be
deemed to have become the holder or holders
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of record of the Note Shares represented thereby. The Conversion Notice shall
constitute a contract between the Holder and the Issuer, whereby the Holder
shall be deemed to subscribe for the number of Note Shares which it will be
entitled to receive upon such conversion and, in payment and satisfaction of
such subscription (and for any cash adjustment to which it is entitled pursuant
to Section 3.4), to surrender this Note and to release the Issuer from all
liability thereon.
SECTION 3.3 Fractional Shares. No fractional Note Shares or scrip
representing fractional Note Shares shall be issued upon conversion of this
Note. Instead of any fractional Note Shares which would otherwise be issuable
upon conversion of this Note, the Issuer shall pay a cash adjustment in respect
of such fraction in an amount equal to the same fraction of the greater of the
Current Market Price per Common Share at the close of business on the Business
Day which next precedes the day of conversion or the Conversion Price in effect
at the time of conversion. No payment or adjustment shall be made upon any
conversion on account of any distribution on the Note Shares issued upon such
conversion but the Holder surrendering this Note for conversion shall be
entitled to receive in cash, upon any conversion, the amount of any interest
accrued and unpaid to the date of such conversion on the then outstanding
principal amount thereof.
SECTION 3.4 Reclassification. Consolidation. Merger or Mandatory Share
Exchange. At any time while this Note remains outstanding and unexpired, in case
of any reclassification or change of Outstanding Common Shares issuable upon
conversion of this Note (other than a change in par value, or from par value to
no par value per share, or from no par value per share to par value or as a
result of a subdivision or combination of outstanding securities issuable upon
conversion of this Note) or in case of any consolidation, merger or mandatory
share exchange of the Issuer with or into another corporation (other than a
merger or mandatory share exchange with another corporation in which the Issuer
is a continuing corporation and which does not result in any reclassification or
change, other than a change in par value, or from par value to no par value per
share, or from no par value per share to par value, or as a result of a
subdivision or combination of Outstanding Common Shares upon conversion of this
Note), or in the case of any sale or transfer to another corporation of the
property of the Issuer as an entirety or substantially as an entirety, the
Issuer, or such successor or purchasing corporation, as the case may be, shall,
without payment of any additional consideration therefore, execute a new Note
providing that the Holder shall have the right to convert such new Note (upon
terms and conditions not less favorable to the Holder than those then applicable
to this Note) and to receive upon such exercise, in lieu of each Common Share
theretofore issuable upon conversion of this Note, the kind and amount of shares
of stock, other securities, money or property receivable upon such
reclassification, change, consolidation, merger, mandatory share exchange, sale
or transfer by the holder of one Common Share issuable upon conversion of this
Note had this Note been converted immediately
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prior to such reclassification, change, consolidation, merger, mandatory share
exchange or sale or transfer. The provisions of this Section 3.4 shall similarly
apply to successive reclassifications, changes, consolidations, mergers,
mandatory share exchanges and sales and transfers.
SECTION 3.5 Adjustments to Conversion Ratio. For so long as this Note is
outstanding, if the Issuer (i) issues and sells pursuant to an exemption from
registration under the Securities Act (A) Common Shares at a purchase price
representing a percentage of the Current Market Price of the Common Shares on
the date of issuance thereof that is lower than 75%, (B) warrants or options
with a strike price representing a percentage of the Current Market Price of the
Common Shares on the date of issuance of the warrants or options that is lower
than 75%, or (C) convertible or exchangeable securities with a right to exchange
at lower than 75% of the Current Market Price of the Common Shares on the date
of issuance or conversion, as applicable, of such convertible or exchangeable
securities; and (ii) grants the right to the purchaser(s) thereof to demand that
the Issuer register under the Securities Act such Common Shares issued or the
Common Shares for which such warrants or options may be exercised or such
convertible or exchangeable securities may be converted or exchanged, then the
Conversion Ratio shall be reduced to equal the lowest of any such lower
percentages.
ARTICLE 4
STATUS; RESTRICTIONS ON TRANSFER
SECTION 4.1 Status of Note. Subject to Section 4.2 below, this Note is a
direct, general and unconditional obligation of the Issuer ranking pari passu
with all other unsecured senior indebtedness of the Issuer, and constitutes a
valid and legally binding obligation of the Issuer, enforceable in accordance
with its terms subject, as to enforcement, to bankruptcy, insolvency,
reorganization and other similar laws of general applicability relating to or
affecting creditors' rights and to general principals of equity.
SECTION 4.2 Subordination of Note. The payment of principal, interest,
fees and other sums arising pursuant this Note (the "Subordinated Debt") is
expressly subordinated, in the manner hereinafter set forth, in right of payment
to the prior payment and satisfaction in full of the Senior Debt. As used
herein, "Senior Debt" means the principal, interest, fees and other sums
currently payable to Coast Business Credit (the "Senior Lender") and any future
restructuring of such indebtedness (including any restructurings where a new
lender is substituted for the Senior Lender), but not including any additional
borrowings from the Senior Lender (or any substitute Senior Lender) made after
the date of this Agreement. So long as any part of the Senior Debt shall be due
to the Senior Lender (or any substitute Senior Lender) and unpaid, no payment of
any Subordinated Debt (whether in respect of principal, interest, fees, charges
or otherwise) shall be made at any time by the Company or received by the
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Holder, without the prior written consent of the Senior Lender (or any
substitute Senior Lender). Notwithstanding the foregoing, however, the Company
may convert this Note pursuant to Article 3 hereof or redeem this Note pursuant
to Article 2 hereof.
SECTION 4.3 Restrictions on Transfer. This Note, and any Note Shares
issued according to the terms hereof, have not been and will not be registered
under the United States Securities Act. This Note and any Note Shares may not be
offered or sold, directly or indirectly, except pursuant to registration under
the Act, an available exemption therefrom, or pursuant to Regulation S.
ARTICLE 5
COVENANTS
The Issuer covenants and agrees that so long as this Note shall be
outstanding:
SECTION 5.1 Payment of Note. The Issuer will punctually, according to the
terms hereof,(a) pay or cause to be paid the principal of, or interest on, this
Note and (B) issue Note Shares upon conversion. .
SECTION 5.2 Notice of Default. If any one or more events occur which
constitute or which, with the giving of notice or the lapse of time or both,
would constitute an Event of Default or if the Holder shall demand payment or
take any other action permitted upon the occurrence of any such Event of
Default, the Issuer will forthwith give notice to the Holder, specifying the
nature and status of the Event of Default or other event or of such demand or
action, as the case may be.
SECTION 5.3 Sufficient of Authorized Common Shares. (i) So long as the
Current Market Price of the Common Shares is greater than or equal to 90% of the
Current Market Price on the date hereof, the Issuer shall at all times have
authorized and reserved for issuance, free from preemptive rights, a sufficient
number of Common Shares to yield a number of Note Shares sufficient to satisfy
the conversion rights of the Purchaser pursuant to the terms and conditions
hereof; and
(ii) at any time when the Current Market Price of the Common Shares
is less than 90% of such Current Market Price on the date hereof, the Issuer
shall continue to reserve the number of shares of Common Stock required by
clause (i) above and in addition to use its best efforts (including, without
limitation, by authorizing increases in its capital) to have at all times
authorized and reserved for issuance, free from preemptive rights, a sufficient
number of Common Shares which will yield a number of Note Shares sufficient to
satisfy the conversion rights of the Purchaser pursuant to the terms and
conditions hereof and required by the drop in the market price of the Common
Stock below 90% of such market price on the date hereof.
SECTION 5.4 Insurance. The Issuer will carry and maintain in full force
and effect at all times with insurers the Issuer reasonably believes to be
financially
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sound and reputable such insurance in such amounts as is customary in the
respective industries of the Issuer and such subsidiaries.
SECTION 5.5 Payment of Obligations. The Issuer will pay and discharge at
or before maturity, all its respective material obligations and liabilities,
including, without limitation, tax liabilities, except where the same may be
contested in good faith by appropriate proceedings, and will maintain in
accordance with generally accepted accounting principles, appropriate reserves
for the accrual of any of the same;
SECTION 5.6 Compliance with Laws. The Issuer will comply in all material
respects with all applicable laws, ordinances, rules, regulations, and
requirements of governmental authorities except where the necessity of
compliance therewith is contested in good faith by appropriate proceedings.
SECTION 5.7 Inspection of Property. Books and Records. The Issuer will
keep proper books of record and account in which full, true and correct entries
shall be made of all dealings and transactions in relation to its business and
activities and will permit representatives of the Holder at the Holder's expense
to visit and inspect any of its respective properties, to examine and make
abstracts from any of its respective books and records and to discuss its
respective affairs, finances and accounts with its respective officers,
employees and independent public accountants, all at such reasonable times and
as often as may reasonably be desired.
ARTICLE 6
REMEDIES
SECTION 6.1 Events of Default. "Event of Default" wherever used herein
means any one of the following events:
(a) default in the issuance of Note Shares due upon conversion;
(b) default in the due and punctual payment of the principal of,
interest on, or any other amount owing in respect of, this Note when and as the
same shall become due and payable, and continuance of such default for a period
of thirty (30) calendar days; or
(c) substantial failure in the performance or observance of Section
5.5 of this Note and the continuance of such default for a period of thirty (30)
calendar days; or
(d) default in the performance or observance of any covenant or
agreement of the Issuer in this Note (other than a covenant or agreement a
default in the performance of which is specifically provided for elsewhere in
this Section), and the continuance of such default for a period of thirty (30)
calendar days after there has
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been given to the Issuer by a Holder a written notice specifying such default
and requiring it to be remedied; or
(d) the entry of a decree or order by a court having jurisdiction in
the premises adjudging the Issuer or any Subsidiary a bankrupt or insolvent, or
approving as properly filed a petition seeking reorganization, arrangement,
adjustment or composition of or in respect of the Issuer under the Bankruptcy
Code or any other applicable Federal or state law, or appointing a receiver,
liquidator, assignee, trustee or sequestrator (or other similar official) of the
Issuer or of any substantial part of its property, or ordering the winding-up or
liquidation of its affairs, and the continuance of any such decree or order
unstayed and in effect for a period of 30 calendar days; or
(e) the institution by the Issuer or any Subsidiary of proceedings
to be adjudicated a bankrupt or insolvent, or the consent by it to the
institution of bankruptcy or insolvency proceedings against it, or the filing by
it of a petition or answer or consent seeking reorganization or relief under the
Federal Bankruptcy Code or any other applicable Federal or state law, or the
consent by it to the filing of any such petition or to the appointment of a
receiver, liquidator, assignee, trustee or sequestrator (or other similar
official) of the Issuer or of any substantial part of its property, or the
making by it of an assignment for the benefit of creditors, or the admission by
it in writing of its inability to pay its debts generally as they become due, or
the taking of corporate action by the Issuer in furtherance of any such action;
or
(f) the Issuer shall fail to register the Note Shares as provided
for in the Registration Rights Agreement; or
(g) any principal or other indebtedness of the Issuer or any
Subsidiary, over than-the Senior Debt, exceeding $500,000 is not repaid on its
original maturity date or becomes due and payable by reason of default before
its original maturity date; or
(h) (i) the Issuer or any Subsidiary is unable to pay its debts as
they fall due, stops, suspends, or threatens in writing to stop or suspend
payment of all or any material part of its debts (other than debts contested in
good faith by appropriate proceedings), begins negotiations or takes any
proceeding or other step with a view to readjustment, rescheduling or deferral
of all of its indebtedness (or any material part thereof) that it will or might
otherwise be unable to pay when due or seeks the appointment of a statutory
manager or proposes in writing or makes a general assignment or an arrangement
or composition with or for the benefit of its creditors or any group or class
thereof or files a petition for suspension of payments or other relief of
debtors of for bankruptcy or is declared bankrupt or a moratorium or statutory
management is agreed or declared in respect of or affecting all or any material
part of the indebtedness of the Issuer or any of its wholly owned subsidiaries,
or (ii) the Issuer ceases or threatens in writing to cease to carry on all or
any material part of the business carried on by the Issuer and its Subsidiaries
taken as a whole and as a result of
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such cessation or threat of cessation, the Issuer will not be able to perform or
comply with its payment obligations under this Note; or
(i) on or after the date hereof, a final judgment or final judgments
for the payment of money shall have been entered by any court or courts of
competent jurisdiction against the Issuer and remains undischarged for a period
(during which execution shall be effectively stayed) of 30 days, provided that
the aggregate amount of all such judgments at any time outstanding (to the
extent not paid or to be paid, as evidenced by a written communication to that
effect from the applicable insurer, by insurance) exceeds $500,000; or
(j) it becomes unlawful for the Issuer to perform or comply with its
obligations under this Note or the Registration Rights Agreement.
SECTION 6.2 Remedy Upon Non-Registration. In the event that an Event of
Default occurs pursuant to Section 6.1(f) hereof, then, provided the Holder is
not a U.S. Person as that term is defined under Regulation S of the Act, the
Holder may, at its option, convert the principal amount and accrued interest
under this Note into shares of Common Stock in accordance with the terms of this
Note. In such event, the shares of Common Stock shall be issued pursuant to
Regulation S and shall be transferable in accordance with the provisions of
Regulation S as set forth below. Upon the conversion of any Note pursuant to
this provision, the Company shall instruct its transfer agent to issue in the
name of the holder, or such non-U.S. Person as the Holder designates, a
certificate or certificates representing the shares issuable upon such
conversion. The certificates issued shall either be without legend, or may
contain a self-liquidating legend at the end of the restricted period under
Regulation S (the "Restricted Period"). The Company warrants that the only
restriction it will impose in the certificate(s) with its transfer agent will be
to monitor the Restricted Period and that the shares will otherwise be freely
transferable on the books and records of the Company. Nothing in this Section
6.2 shall affect in any way the Holder's, or the Holder's nominee's, obligation
and agreements to comply with all applicable securities laws upon resale of the
Common Stock.
SECTION 6.3 Acceleration of Maturity: Rescission and Annulment. If an
Event of Default occurs and is continuing, then and in every such case any
Holder may declare the principal of this Note to be due and payable immediately,
by a notice in writing to the Issuer, and upon any such declaration the
principal of this Note shall become immediately due and payable.
SECTION 6.4 Default Interest Rate. (a) If any portion of the principal of
or interest on the Note shall not be paid when due (whether at the stated
maturity, by acceleration or otherwise) such principal of and interest on the
Note which is due and owing but not paid shall, without limiting the Holder's
rights under this Note or under the Purchase Agreement, bear interest at the
Default Interest Rate until paid in full.
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(b) Notwithstanding anything herein or in the Purchase Agreement to
the contrary, if at any time the applicable interest rate as provided for herein
shall exceed the maximum lawful rate which may be contracted for, charged, taken
or received by the Lender in accordance with applicable laws of the State of New
York (the "Maximum Rate"), the rate of interest applicable to the Note shall be
limited to the Maximum Rate.
SECTION 6.5 Remedies Not Waived. No course of dealing between the Issuer
and the Holder or any delay in exercising any rights hereunder shall operate as
a waiver by the Holder.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1 Register. (a) The Issuer shall keep at its principal office a
register in which the Issuer shall provide for the registration of this Note.
Upon any transfer of this Note in accordance with Article 2 and 4 hereof, the
Issuer shall register such transfer on the Note register.
(b) The Issuer may deem the person in whose name this Note shall be
registered upon the registry books of the Issuer to be, and may treat it as, the
absolute owner of this Note (whether or not this Note shall be overdue) for the
purpose of receiving payment of interest on or principal of this Note, for the
conversion of this Note and for all other purposes, and the Issuer shall not be
affected by any notice to the contrary. All such payments and such conversions
shall be valid and effective to satisfy and discharge the liability upon this
Note to the extent of the sum or sums so paid or the conversion or conversions
so made.
SECTION 7.2 Withholding. To the extent required by applicable law, the
Issuer may withhold amounts for or on account of any taxes imposed or levied by
or on behalf of any taxing authority in the United States having jurisdiction
over the Issuer from any payments made pursuant to this Note.
SECTION 7.3 Governing Law. THIS NOTE SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK (WITHOUT GIVING EFFECT TO
CONFLICTS OF LAWS PRINCIPLES). WITH RESPECT TO ANY SUIT, ACTION OR PROCEEDINGS
RELATING TO THIS NOTE, THE ISSUER IRREVOCABLY SUBMITS TO THE EXCLUSIVE
JURISDICTION OF THE COURTS OF THE STATE OF NEW YORK AND THE UNITED STATES
DISTRICT COURT LOCATED IN THE BOROUGH OF MANHATTAN IN THE CITY OF NEW YORK AND
HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY CLAIM THAT
ANY SUCH SUIT, ACTION OR PROCEEDING HAS BEEN BROUGHT IN AN INCONVENIENT FORUM.
SUBJECT TO APPLICABLE LAW, THE ISSUER AGREES THAT FINAL JUDGMENT AGAINST IT IN
ANY LEGAL ACTION OR
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PROCEEDING ARISING OUT OF OR RELATING TO THIS NOTE SHALL BE CONCLUSIVE AND MAY
BE ENFORCED IN ANY OTHER JURISDICTION WITHIN OR OUTSIDE THE UNITED STATES BY
SUIT ON THE JUDGMENT, A CERTIFIED COPY OF WHICH JUDGMENT SHALL BE CONCLUSIVE
EVIDENCE THEREOF AND THE AMOUNT OF ITS INDEBTEDNESS, OR BY SUCH OTHER MEANS
PROVIDED BY LAW.
SECTION 7.4 Headings. The headings of the Articles and Sections of this
Note are inserted for convenience only and do not constitute a part of this
Note.
IN WITNESS WHEREOF, the Issuer has caused this Note to be signed by its
duly authorized officer under its corporate seal, attested by its duly
authorized officer, on the date of this Note.
CSL Lighting Manufacturing, Inc.
By:_________________________________
Name: Mark Allen
Title: Chief Operating Officer
Attest
By:____________________________
Name: Kenneth S. Rose
Title: Assistant Secretary
[Corporate Seal]
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ANNEX I TO THE NOTE
[FORM OF CONVERSION NOTICE]
TO _____________________:
The undersigned owner of the Convertible Note, dated February 28, 1997,
issued by CSL Lighting Manufacturing, Inc. (the "Note") hereby irrevocably
exercises the option to convert $______________ of the principal amount of the
Note and accrued and unpaid interest thereon into Common Shares, par value $.01,
of CSL Lighting Manufacturing, Inc. (the "Note Shares"), in accordance with the
terms of the Note. The undersigned directs that the Note Shares issuable and
certificates therefor (to the extent that certificates evidencing Common Shares
are then being issued by CSL Lighting Manufacturing, Inc. deliverable upon the
conversion, together with any check in payment for fractional Note Shares, be
issued in the name of and delivered, if appropriate, to the undersigned unless a
different name has been indicated below
Dated:
Signature
Fill in for registration of Note Shares:
Please print name and address
(including zip code number)
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<PAGE>
REGISTRATION RIGHTS AGREEMENT
REGISTRATION RIGHTS AGREEMENT (this "Agreement"), dated as of February 28,
1997 by and among CSL Lighting Manufacturing, Inc. a Delaware corporation, with
headquarters located at 27615 Avenue Hopkins, Valencia, CA 91355-3493 (the
"Company"), and the undersigned parties (together with affiliates, the "Initial
Investors").
WHEREAS:
A. In connection with the Securities Purchase Agreement of even date
herewith by and between the Company and the Initial Investors (the "Securities
Purchase Agreement"), the Company has agreed, upon the terms and subject to the
conditions contained therein, to issue and sell to the Initial Investors
Convertible Notes (the "Notes") that are convertible into shares (the
"Conversion Shares") of the Company's common stock (the "Common Stock"), upon
the terms and subject to the limitations and conditions set forth in the Notes;
and
B. To induce the Initial Investors to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"1933 Act"), and applicable state securities laws;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
contained herein and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the Company and the Initial
Investors hereby agree as follows:
1. DEFINITIONS.
(a) As used in this Agreement, the following terms shall have the
following meanings:
(i) "Investors" means the Initial Investors and any transferees or
assignees who agrees to become bound by the provisions of this Agreement in
accordance with Section 9 hereof.
(ii) "register," "registered," and "registration" refer to a
registration effected by preparing and filing a Registration Statement or
Statements in compliance
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with the 1933 Act and pursuant to Rule 415 under the 1933 Act or any successor
rule providing for offering securities on a continuous basis ("Rule 415"), and
the declaration or ordering of effectiveness of such Registration Statement by
the United States Securities and Exchange Commission (the "SEC").
(iii) "Registrable Securities" means the Conversion Shares issued or
issuable and any shares of capital stock issued or issuable as a dividend on or
in exchange for or otherwise with respect to any of the foregoing.
(iv) "Registration Statement" means a registration statement of the
Company under the 1933 Act.
(b) Capitalized terms used herein and not otherwise defined herein
shall have the respective meanings set forth in the Securities Purchase
Agreement.
2. REGISTRATION.
(a) Mandatory Registration. The Company shall on or before April 29,
1997 file with the SEC a Registration Statement on Form S-3 (or, if Form S-3 is
not then available, on such form of Registration Statement as is then available
to effect a registration of the Registrable Securities, subject to the consent
of the Initial Investors (as determined pursuant to Section l 0) hereof), which
consent will not be unreasonably withheld) covering the resale of the
Registrable Securities, which Registration Statement, to the extent allowable
under the 1933 Act and the Rules promulgated thereunder (including Rule 416),
shall state that such Registration Statement also covers such indeterminate
number of additional shares of Common Stock as may become issuable upon
conversion of the Note (i) to prevent dilution resulting from stock splits,
stock dividends or similar transactions or (ii) by reason of changes in the
Conversion Rate in accordance with the terms thereof. The Company shall use its
best efforts to cause such registration to become and remain effective
(including the taking of such steps as are necessary to obtain the removal of
any stop orders); provided, that the Investors shall furnish the Company with
such appropriate information in connection therewith as the Company shall
reasonably request in writing. The Registration Statement (and each amendment or
supplement thereto, and each request for acceleration of effectiveness thereof)
shall be provided to (and subject to the approval of) the Initial Investors and
its counsel prior to its filing or other submission.
(b) Liquidated Damages. The Company shall use its best efforts to
obtain effectiveness of the Registration Statement as soon as practicable. If
(i) the Registration Statement(s) covering the Registrable Securities required
to be filed by the Company pursuant to Section 2(a) hereof is not declared
effective by the SEC on or before May 29, 1997 (other than by reason of any act
or failure to act in a timely manner by the Investors or Investors' counsel), or
if, after the Registration Statement has been declared effective by the SEC,
sales cannot be made pursuant to the Registration Statement (by reason of stop
order, or the Company's failure to update the
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Registration Statement), or (ii) the Common Stock is not listed or included for
quotation on the NASDAQ National Market System (the "NASDAQ-NMS"), NASDAQ Small
Cap, the New York Stock Exchange (the "NYSE") or the American Stock Exchange
(the "AMEX"), then the Company will make payments to the Investors in such
amounts and at such times as shall be determined pursuant to this Section 2(b)
as partial relief for the damages to the Investors by reason of any such delay
in or reduction of their ability to sell the Registrable Securities (which
remedy shall not be exclusive of any other remedies available at law or in
equity). The Company shall pay to each holder of Registrable Securities an
amount equal to the aggregate "Purchase Price" (as defined below) of the Notes
held by such Investors (including, without limitation, Notes that have been
converted into Conversion Shares then held by such Investors) (the "Aggregate
Share Price") multiplied by two and one-half hundredths (.025) times the sum of:
(i) the number of months (prorated for partial months) after the end of such
90-day period and prior to the date the Registration Statement is declared
effective by the SEC, provided, however, that there shall be excluded from such
period any delays which are solely attributable to changes required by the
Investors in the Registration Statement with respect to information relating to
the Investors, including, without limitation, changes to the plan of
distribution, or to the failure of the Investors to conduct their review of the
registration statement pursuant to Section 2(a) above in a reasonably prompt
manner; (ii) the number of months (prorated for partial months) that sales
cannot be made pursuant to the Registration Statement after the Registration
Statement has been declared effective; and (iii) the number of months (prorated
for partial months) that the Common Stock is not listed or included for
quotation on the NASDAQ-NMS, NASDAQ Small Cap, NYSE or AMEX after the
Registration Statement has been declared effective. (For example, if the
Registration Statement becomes effective one (1) month after the end of such
60-day period, the Company would pay $25,000 for each $1,000,000 of Aggregate
Share Price and would continue to pay $25,000 for each $1,000,000 of Aggregate
Share Price until the Registration Statement becomes effective.) Such amounts
shall be paid in cash or, at each Investor's option (but subject to the
limitations contained in Section 3.1 of the Note), may be convertible into
Common Stock at the "Conversion Price" (as defined in the Note). Any shares of
Common Stock issued upon conversion of such amounts shall be Registrable
Securities. If the Investor desires to convert the amounts due hereunder into
Registrable Securities it shall so notify the Company in writing within two (2)
business days of the date on which such amounts are first payable in cash and
such amounts shall be so convertible (pursuant to the mechanics set forth in the
Note), beginning on the last day upon which the cash amount would otherwise be
due in accordance with the following sentence. Payments of cash pursuant hereto
shall be made within ten (10) days after the end of each period that gives rise
to such obligation, provided that, if any such period extends for more than
thirty (30) days, interim payments shall be-made for each such thirty (30) day
period. The term "Purchase Price" means the purchase price paid by the Investors
for the Note. Upon agreement of both the Purchaser and the Company, any
liquidated damages due under the provisions of this subparagraph may be paid in
shares of Common Stock, registered
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as if such stock were Note Shares, and valued at the Conversion Price, as such
term is defined in Section 3.1 of the Note.
(c) Piggy-Back Registrations. If at any time prior to the expiration
of the Registration Period (as hereinafter defined) the Company shall file with
the SEC a Registration Statement relating to (i) a firm underwritten offering
for its own account or the account of others under the 1933 Act of any of its
equity securities or (ii) any other offering for its own account or the account
of others under the 1933 Act of any of its equity securities (other than on Form
S-4 or Form S-8 or their then equivalents relating to equity securities to be
issued solely in connection with any acquisition of any entity or business or
equity securities issuable in connection with stock option or other employee
benefit plans) at a time when the Registration Statement contemplated by Section
l(a) hereof is not effective, the Company shall send to each Investor who is
entitled to registration rights under this Section 2(c) written notice of such
determination and, if within fifteen (15) days after the effective date of such
notice, such Investor shall so request in writing, the Company shall include in
such Registration Statement all or any part of the Registrable Securities such
Investor requests to be registered, except that if, in connection with any
underwritten public offering for the account of the Company the managing
underwriter(s) thereof shall impose a limitation on the number of shares of
Common Stock which may be included in the Registration Statement because, in
such underwriter(s)' judgment, marketing or other factors dictate such
limitation is necessary to facilitate public distribution, then the Company
shall be obligated to include in such Registration Statement only such limited
portion of the Registrable Securities with respect to which such Investor has
requested inclusion hereunder as the underwriter shall permit. Any exclusion of
Registrable Securities shall be made pro rata among the Investors seeking to
include Registrable Securities, in proportion to the number of Registrable
Securities sought to be included by such Investors; provided, however, that the
Company shall not exclude any Registrable Securities unless the Company has
first excluded all outstanding securities, the holders of which are not entitled
to inclusion of such securities in such Registration Statement or are not
entitled to pro rata inclusion with the Registrable Securities; and provided,
further, however, that, after giving effect to the immediately preceding
proviso, any exclusion of Registrable Securities shall be made pro rata with
holders of other securities having the right to include such securities in the
Registration Statement other than holders of securities entitled to inclusion of
their securities in such Registration Statement by reason of demand registration
rights. No right to registration of Registrable Securities under this Section
2(c) shall be construed to limit any registration required under Section 2(a)
hereof. If an offering in connection with which an Investor is entitled to
registration under this Section 2(c) is an underwritten offering, then each
Investor whose Registrable Securities are included in such Registration
Statement shall, unless otherwise agreed by the Company, offer and sell such
Registrable Securities in an underwritten offering using the same underwriter or
underwriters and, subject to the provisions of this Agreement, on the same terms
and conditions as other shares of Common Stock included in such underwritten
offering.
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(d) Eligibility for Form S-3. The Company represents and warrants
that it meets the requirements for the use of Form S-3 for registration of the
sale by the Initial Investors and any other Investor of the Registrable
Securities and the Company shall file all reports required to be filed by the
Company with the SEC in a timely manner so as to maintain such eligibility for
the use of Form S-3.
3. OBLIGATIONS OF THE COMPANY.
In connection with the registration of the Registrable Securities, the
Company shall have the following obligations:
(a) The Company shall on or before April 29, 1997 prepare and file
promptly with SEC, a Registration Statement with respect to the number of
Registrable Securities provided in Section 2(a), and thereafter use its best
efforts to cause such Registration Statement relating to Registrable Securities
to become effective as soon as possible after such filing, and keep the
Registration Statement effective pursuant to Rule 415 at all times until such
date as is the earlier of (i) the date on which all of the Registrable
Securities have been sold and (ii) the date on which the Registrable Securities
(in the opinion of counsel to the Initial Investors) may be immediately sold
without registration (the "Registration Period"), which Registration Statement
(including any amendments or supplements thereto and prospectuses contained
therein and all documents incorporated by reference therein) shall not contain
any untrue statement of a material fact or omit to state a material fact
required to be stated therein, or necessary to make the statements therein not
misleading. The Company shall furnish to the Investor copies of reasonably
complete drafts of all such documents proposed to be filed (including exhibits,
if any), and any such Investor shall have the opportunity to object, within two
(2) business days, to any information pertaining solely to such Investor that is
contained therein and the company will make the corrections reasonably requested
by such Investor with respect to such information prior to filing any such
Registration Statement or amendment.
(b) The Company shall prepare and file with the SEC such amendments
(including post-effective amendments) and supplements to the Registration
Statement and the prospectus used in connection with the Registration Statement
as may be necessary to keep the Registration Statement effective at all times
during the Registration Period, and, during such period, comply with the
provisions of the 1933 Act with respect to the disposition of all Registrable
Securities of the Company covered by the Registration Statement until such time
as all of such Registrable Securities have been disposed of in accordance with
the intended methods of disposition by the seller or sellers thereof as set
forth in the Registration Statement. In the event the number of shares available
under a Registration Statement filed pursuant to this Agreement is insufficient
to cover all of the Registrable Securities issued or issuable upon - conversion
of the Preferred Stock, the Company shall amend the Registration Statement, or
file a new Registration Statement (on the short form available therefore, if
applicable), or both, so as to cover all of the Registrable Securities, in each
case, as
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soon as practicable, but in any event within thirty (30) days after the
necessity therefor arises (based on the market price of the Common Stock and
other relevant factors on which the Company reasonably elects to rely). The
Company shall use its best efforts to cause such amendment and/or new
Registration Statement to become effective as soon as practicable following the
filing thereof.
(c) The Company shall furnish to each Investor whose Registrable
Securities are included in the Registration Statement and its legal counsel (i)
promptly after the same is prepared and publicly distributed, filed with the
SEC, or received by the Company, one copy of the Registration Statement and any
amendment thereto, each preliminary prospectus and prospectus and each amendment
or supplement thereto, and, in the case of the Registration Statement referred
to in Section 2(a), each letter written by or on behalf of the Company to the
SEC or the staff of the SEC, and each material item of correspondence from the
SEC or the staff of the SEC, in each case relating to such Registration
Statement (other than any portion thereof which contains information for which
the Company has sought confidential treatment), and (ii) such number of copies
of a prospectus, including a preliminary prospectus, and all amendments and
supplements thereto and such other documents as such Investor may reasonably
request in order to facilitate the disposition of the Registrable Securities
owned by such Investor.
(d) The Company shall use its best efforts to (i) register and
qualify the Registrable Securities covered by the Registration Statement under
such other securities or "blue sky" laws of such jurisdictions in the United
States as the Investors who hold a majority in interest of the Registrable
Securities being offered reasonably request, (ii) prepare and file in those
jurisdictions such amendments (including post-effective amendments) and
supplements to such registrations and qualifications as may be necessary to
maintain the effectiveness thereof during the Registration Period, (iii) take
such other actions as may be necessary to maintain such registrations and
qualifications in effect at all times during the Registration Period, and (iv)
take all other actions reasonably necessary or advisable to qualify the
Registrable Securities for sale in such jurisdictions; provided, however, that
the Company shall not be required in connection therewith or as a condition
thereto to (a) qualify to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 3(d), (b) subject itself
to general taxation in any such jurisdiction, (c) file a general consent to
service of process in any such jurisdiction, (d) provide any undertakings that
cause the Company undue expense or burden, or (e) make any change in its charter
or bylaws, which in each case the Board of Directors of the Company determines
to be contrary to the best interests of the Company and its stockholders.
(e) As promptly as practicable after becoming aware of such event,
the Company shall notify each Investor of the happening of any event, of which
the Company has knowledge, as a result of which the prospectus included in the
Registration Statement, as then in effect, includes an untrue statement of a
material fact or omission to state a material fact required to be stated therein
or necessary to make
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the statements therein not misleading, and use its best efforts promptly to
prepare a supplement or amendment to the Registration Statement to correct such
untrue statement or omission, and deliver such number of copies of such
supplement or amendment to each Investor as such Investor may reasonably
request.
(f) The Company shall use its best efforts to prevent the issuance
of any stop order or other suspension of effectiveness of a Registration
Statement, and, if such an order is issued, to obtain the withdrawal of such
order at the earliest possible moment and to notify each Investor who holds
Registrable Securities being sold (or, in the event of an underwritten offering,
the managing underwriters) of the issuance of such order and the resolution
thereof.
(g) The Company shall permit a single firm of counsel designated by
the Initial Investors to review the Registration Statement and all amendments
and supplements thereto a reasonable period of time prior to their filing with
the SEC, and not file any document in a form to which such counsel reasonably
objects. Any period of review shall be added to the time in which registration
is required to be filed and effective, as appropriate.
(h) The Company shall make generally available to its security
holders as soon as practical, but not later than ninety (90) days after the
close of the period covered thereby, an earnings statement (in form complying
with the provisions of Rule 158 under the 1933 Act) covering a twelve-month
period beginning not later than the first day of the Company's fiscal quarter
next following the effective date of the Registration Statement.
(i) The Company shall make available for inspection by (i) any
Investor, (ii) any underwriter participating in any disposition pursuant to the
Registration Statement, (iii) one firm of attorneys and one firm of accountants
or other agents retained by the Initial Investors, and (iv) one firm of
attorneys retained by all such underwriters (collectively, the "Inspectors") all
pertinent financial and other records, and pertinent corporate documents and
properties of the Company (collectively, the "Records"), as shall be reasonably
deemed necessary by each Inspector to enable each Inspector to exercise its due
diligence responsibility, and cause the Company's officers, directors and
employees to supply all information which any Inspector may reasonably request
for purposes of such due diligence; provided, however, that each Inspector shall
hold in confidence and shall not make any disclosure (except to an Investor) of
any Record or other information which the Company determines in good faith to be
confidential, and of which determination the Inspectors are so notified, unless
(a) the disclosure of such Records is necessary to avoid or correct a
misstatement or omission in any Registration Statement, (b) the release of such
Records is ordered pursuant to a subpoena or other order from a court or
government body of competent jurisdiction, or (c) the information in such
Records has been made generally available to the public other than by disclosure
in violation of this or any other agreement. The Company shall not be required
to disclose any confidential
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information in such Records to any Inspector until and unless such Inspector
shall have entered into confidentiality agreements (in form and substance
satisfactory to the Company) with the Company with respect thereto,
substantially in the form of this Section 3(i). Each Investor agrees that it
shall, upon learning that disclosure of such Records is sought in or by a court
or governmental body of competent jurisdiction or through other means, give
prompt notice to the Company and allow the Company, at its expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, the Records deemed confidential. Nothing herein shall be deemed to limit
the Investor's ability to sell Registrable Securities in a manner which is
otherwise consistent with applicable laws and regulations.
(j) The Company shall hold in confidence and not make any disclosure
of information concerning an Investor provided to the Company unless (i)
disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other order
from a court or governmental body of competent jurisdiction, or (iv) such
information has been made generally available to the public other than by
disclosure in violation of this or any other agreement. The Company agrees that
it shall, upon learning that disclosure of such information concerning an
Investor is sought in or by a court or governmental body of competent
jurisdiction or through other means, give prompt notice to such Investor prior
to making such disclosure, and allow the Investor, at its expense, to undertake
appropriate action to- prevent disclosure of, or to obtain a protective order
for, such information.
(k) The Company shall use its best efforts either to (i) cause all
the Registrable Securities covered by the Registration Statement to be listed on
the NYSE or the AMEX or another national securities exchange and on each
additional national securities exchange on which securities of the same class or
series issued by the Company are then listed, if any, if the listing of such
Registrable Securities is then permitted under the rules of such exchange, or
(ii) secure the designation and quotation, of all the Registrable Securities
covered by the Registration Statement on the NASDAQ-NMS or, if not eligible for
the NASDAQ-NMS on the NASDAQ Small Cap and, without limiting the generality of
the foregoing, to arrange for or maintain at least two market makers to register
with the National Association of Securities Dealers, Inc. ("NASD") as such with
respect to such Registrable Securities.
(1) The Company shall provide a transfer agent and registrar, which
may be a single entity, for the Registrable Securities not later than the
effective date of the Registration Statement.
(m) The Company shall cooperate with the Investors who hold
Registrable Securities being offered and the managing underwriter or
underwriters, if any, to facilitate the timely preparation and delivery of
certificates (not bearing any
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<PAGE>
restrictive legends) representing Registrable Securities to be offered pursuant
to the Registration Statement and enable such certificates to be in such
denominations or amounts, as the case may be, as the managing underwriter or
underwriters, if any, or the Investors may reasonably request and-registered in
such names as the managing underwriter or underwriters, if any, or the Investors
may request.
(n) The Company shall use its best efforts to cause all Registrable
Securities covered by such registration statement to be registered with or
approved by such other governmental agencies or authorities as may be necessary
to enable each holder thereof to consummate disposition of Registrable
Securities.
4. OBLIGATIONS OF THE INVESTORS.
In connection with the registration of the Registrable Securities, the
Investors shall have the following obligations:
(a) It shall be a condition precedent to the obligations of the
Company to complete the registration pursuant to this Agreement with respect to
the Registrable Securities of a particular Investor that such Investor shall
furnish to the Company such information regarding itself, the Registrable
Securities held by it and the intended method of disposition of the Registrable
Securities held by it as shall be reasonably required to effect the registration
of such Registrable Securities and shall execute such documents in connection
with such registration as the Company may reasonably request.
(b) Each Investor, by such Investor's acceptance of the Registrable
Securities, agrees to cooperate with the Company as reasonably requested by the
Company in connection with the preparation and filing of the Registration
Statement hereunder, unless such Investor has notified the Company in writing of
such Investor's election to exclude all of such Investor's Registrable
Securities from the Registration Statement.
(c) Each Investor agrees that, upon receipt of any notice from the
Company of the happening of any event of the kind described in Section 3(e) or
3(f), such Investor will immediately discontinue disposition of Registrable
Securities pursuant to the Registration Statement covering such Registrable
Securities until such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Section 3(e) or 3(f) and, if so directed by
the Company, such Investor shall deliver to the Company (at the expense of the
Company) or destroy (and deliver to the Company a certificate of destruction)
all copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.
(d) No Investor may participate in any underwritten registration
hereunder unless such Investor (i) agrees to sell such Investor's Registrable
Securities
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<PAGE>
on the basis provided in any underwriting arrangements in usual and customary
form entered into by the Company, (ii) completes and executes all
questionnaires, powers of attorney, indemnities, underwriting agreements and
other documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all underwriting
discounts and commissions and any expenses in excess of those payable by the
Company pursuant to Section 5 below.
5. EXPENSES OF REGISTRATION.
All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees, the
fees and disbursements of counsel for the Company.
6. INDEMNIFICATION.
In the event any Registrable Securities are included in a Registration
Statement under this Agreement:
(a) To the extent permitted by law, the Company will indemnify, hold
harmless and defend (i) each Investor who holds such Registrable Securities, and
(ii) the directors, officers, partners, employees, agents and each person who
control any Investor within the meaning of the 1933 Act or the Securities
Exchange Act of 1934, as amended (the "1934 Act"), if any, (each, an
"Indemnified Person"), against any joint or several losses, claims, damages,
liabilities or expenses (collectively, together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether commenced
or threatened, in respect thereof, "Claims") to which any of them may become
subject insofar as such Claims arise out of or are based upon: (i) any untrue
statement or alleged untrue statement of a material fact in a Registration
Statement or the omission or alleged omission to state therein a material fact
required to be stated or necessary to make the statements therein not
misleading, (ii) any untrue statement or alleged untrue statement of a material
fact contained in any preliminary prospectus if used prior to the effective date
of such Registration Statement, or contained in the final prospectus (as amended
or supplemented, if the Company files any amendment thereof or supplement
thereto with the SEC) or the omission or alleged omission to state therein any
material fact necessary to make the statements made therein, in light of the
circumstances under which the statements therein were made, not misleading, or
(iii) any violation or alleged violation by the Company of the 1933 Act, the
1934 Act, any other law, including, without limitation, any state securities
law, or any rule or regulation thereunder relating to the offer or sale of the
Registrable Securities (the matters in the foregoing clauses (i) through (iii)
being, collectively, "Violations"). Subject to the restrictions set forth in
Section 6(c) with respect to the number of legal counsel, the Company shall
reimburse the Investors and each such underwriter or controlling person,
promptly as such expenses are incurred and are due and payable, for any
reasonable legal fees or other reasonable expenses incurred by
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<PAGE>
them in connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the indemnification
agreement contained in this Section 6(a): (i) shall not apply to a Claim arising
out of or based upon a Violation which occurs in reliance upon and in conformity
with information furnished in writing to the Company by any Indemnified Person
expressly for use in connection with the preparation of the Registration
Statement or any such amendment thereof or supplement thereto; (ii) shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of the Company, which consent shall not be
unreasonably withheld; and (iii) with respect to any preliminary prospectus,
shall not inure to the benefit of any Indemnified Person if the untrue statement
or omission of material fact contained in the preliminary prospectus was
corrected on a timely basis in the prospectus, as then amended or supplemented,
if such corrected prospectus was timely made available by the Company pursuant
to Section 3(c) hereof, and the Indemnified Person was promptly advised in
writing not to use the incorrect prospectus prior to the use giving rise to a
Violation and such Indemnified Person, notwithstanding such advice, used it.
Such indemnity shall remain in full force and effect regardless of any
investigation made by or on behalf of the Indemnified Person and shall survive
the transfer of the Registrable Securities by the Investors pursuant to Section
9.
(b) In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees severally and not jointly
to indemnify, hold harmless and defend, to the same extent and in the same
manner set forth in Section 6(a), the Company, each of its directors, each of
its officers who signs the Registration Statement, each person, if any, who
controls the Company within the meaning of the 1933 Act or the 1934 Act, and any
other stockholder selling securities pursuant to the Registration Statement or
any of its directors or officers or any person who controls such stockholder or
underwriter within the meaning of the 1933 Act or the 1934 Act (collectively and
together with an Indemnified Person, an "Indemnified Party"), against any Claim
to which any of them may become subject, under the 1933 Act, the 1934 Act or
otherwise, insofar as such Claim arises out of or is based upon any Violation,
in each case to the extent (and only to the extent) that such Violation occurs
in reliance upon and in conformity with written information furnished to the
Company by such Investor expressly for use in connection with such Registration
Statement; and subject to Section 6(c) such Investor will-reimburse any legal or
other expenses (promptly as such expenses are incurred and are due and payable)
reasonably incurred by them in connection with investigating or defending any
such Claim; provided, however, that the indemnity agreement contained in this
Section 6(b) shall not apply to amounts paid in settlement of any Claim if such
settlement is effected without the prior written consent of such Investor, which
consent shall not be unreasonably withheld; provided, further, however, that the
Investor shall be liable under this Agreement (including this Section 6(b) and
Section 7) for only that amount as does not exceed the net proceeds to such
Investor as a result of the sale of Registrable Securities pursuant to such
Registration Statement. Such indemnity shall remain in full force and effect
regardless of any investigation made by or on behalf of
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<PAGE>
such Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9. Notwithstanding anything to
the contrary contained herein, the indemnification agreement contained in this
Section 6(b) with respect to any preliminary prospectus shall not inure to the
benefit of any Indemnified Party if the untrue statement or omission of material
fact contained in the preliminary prospectus was corrected on a timely basis in
the prospectus, as then amended or supplemented.
(c) Promptly after receipt by an Indemnified Person or Indemnified
Party under this Section 6 of notice of the commencement of any action
(including any governmental action), such Indemnified Person or Indemnified
Party shall, if a Claim in respect thereof is to made against any indemnifying
party under this Section 6, deliver to the indemnifying party a written notice
of the commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party and
the Indemnified Person or the Indemnified Party, as the case may be; provided,
however, that an Indemnified Person or Indemnified Party shall have the right to
retain its own counsel with the fees and expenses to be paid by the indemnifying
party, if, in the reasonable opinion of counsel retained by the indemnifying
party, the representation by such counsel of the Indemnified Person or
Indemnified Party and the indemnifying party would be inappropriate due to
actual or potential differing interests between such Indemnified Person or
Indemnified Party and any other party represented by such counsel in such
proceeding. The indemnifying party shall pay for only one separate legal counsel
for the Indemnified Persons or the Indemnified Parties, as applicable, and such
legal counsel shall be selected by Investors holding a majority-in-interest of
the Registrable Securities included in the Registration Statement to which the
Claim relates (with the approval of the Initial Investor if it holds Registrable
Securities included in such Registration Statement), if the Investors are
entitled to indemnification hereunder, or the Company, if the Company is
entitled to indemnification hereunder, as applicable. The failure to deliver
written notice to the indemnifying party within a reasonable time of the
commencement of any such action shall not relieve such indemnifying party of any
liability to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is actually prejudiced in its
ability to defend such action. The indemnification required by this Section 6
shall be made by periodic payments of the amount thereof during the course of
the investigation or defense, as such expense, loss, damage or liability is
incurred and is due and payable.
7. CONTRIBUTION.
To the extent any indemnification by an indemnifying party is prohibited
or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however, that
(i) no contribution shall be made under circumstances where the maker would not
have been liable for
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<PAGE>
indemnification under the fault standards set forth in Section 6, (ii) no seller
of Registrable Securities guilty of fraudulent misrepresentation (within the
meaning of Section 1 l(f) of the 1933 Act) shall be entitled to contribution
from any seller of Registrable Securities who was not guilty of such fraudulent
misrepresentation, and (iii) contribution (together with any indemnification or
other obligations under this Agreement) by any seller of Registrable Securities
shall be limited in amount to the net amount of proceeds received by such seller
from the sale of such Registrable Securities.
8. REPORTS UNDER THE 1934 ACT.
With a view to making available to the Investors the benefits of Rule 144
promulgated under the 1933 Act or any other similar rule or regulation of the
SEC that may at any time permit the Investors to sell securities of the Company
to the public without registration ("Rule 144"), the Company agrees to:
(a) make and keep public information available, as those terms are
understood and defined in Rule 144;
(b) file with the SEC in a timely manner all reports and other
documents required of the Company under the 1933 Act and the 1934 Act so long as
the Company remains subject to such requirements and the filing of such reports
and other documents is required for the applicable provisions of Rule 144; and
(c) furnish to each Investor so long as such Investor owns
Registrable Securities, promptly upon request, (i) a written statement by the
Company that it has complied with the reporting requirements of Rule 144, the
1933 Act and the 1934 Act, (ii) a copy of the most recent annual or quarterly
report of the Company and such other reports and documents so filed by the
Company, and (iii) such other information as may be reasonably requested to
permit the Investors to sell such securities pursuant to Rule 144 without
registration.
9. ASSIGNMENT OF REGISTRATION RIGHTS.
The rights to have the Company register Registrable Securities pursuant to
this Agreement shall be automatically assignable by the Investors to any
transferee of all or any portion of Registrable Securities if (i) the Investor
agrees in writing with the transferee or assignee to assign such rights, and a
copy of such agreement is furnished to the Company within a reasonable time
after such assignment, (ii) the Company is, within a reasonable time after such
transfer or assignment, furnished with written notice of (a) the name and
address of such transferee or assignee, and (b) the securities with respect to
which such registration rights are being transferred or assigned, (iii)
following such transfer or assignment, the further disposition of such
securities by the transferee or assignee is restricted under the 1933 Act and
applicable state securities laws, (iv) at or before the time the Company
receives the written notice contemplated by clause (ii) of this sentence, the
transferee or assignee agrees in writing with the
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<PAGE>
Company to be bound by all of the provisions contained herein, (v) such transfer
shall have been made in accordance with the applicable requirements of the
Securities Purchase Agreement, and (vi) such transferee shall be an "accredited
investor" as that term defined in Rule 501 of Regulation D promulgated under the
1933 Act.
10. AMENDMENT OF REGISTRATION RIGHTS.
Provisions of this Agreement may be amended and the observance thereof may
be waived (either generally or in a particular instance and either retroactively
or prospectively), only with written consent of the Company, and Investors who
hold at least seventy-five (75%) percent of the Registrable Securities. Any
amendment or waiver effected in accordance with this Section 10 shall be binding
upon each Investor and the Company.
11. MISCELLANEOUS.
(a) A person or entity is deemed to be a holder of Registrable
Securities whenever such person or entity owns of record such Registrable
Securities. If the Company receives conflicting instructions, notices or
elections from two or more persons or entities with respect to the same
Registrable Securities, the Company shall act upon the basis of instructions,
notice or election received from the registered owner of such Registrable
Securities.
(b) Notices required or permitted to be given hereunder shall be in
writing and shall be deemed to be sufficiently given when personally delivered
(by hand, by courier, by telephone line facsimile transmission or other means)
or sent by certified mail, return receipt requested, properly addressed and with
proper postage pre-paid,
(i) if to the Company:
CSL Lighting Manufacturing, Inc.
27615 Avenue Hopkins,
Valencia, CA 91355-3493
Attention: President
with copy to:
Morse, Zelnick, Rose & Lander, LLP
450 Park Avenue, Suite 902
New York, N.Y. 10022
Attn.: Kenneth S. Rose, Esq.
if to the Initial Investors as set forth below their signatures appended hereto,
or at such other address as each such party furnishes by notice given in
accordance with this
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<PAGE>
Section 11(b), and shall be effective, when personally delivered, upon receipt
and, when so sent by certified mail, four days after deposit with the United
States Postal Service.
(c) Failure of any party to exercise any right or remedy under this
Agreement or otherwise, or delay by a party in exercising such right or remedy,
shall not operate as a waiver thereof
(d) This Agreement shall be enforced, governed by and construed in
accordance with the laws of the State of Delaware applicable to agreements made
and to be performed entirely within such State. In the event that any provision
of this Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the extent that
it may conflict therewith and shall be deemed modified to conform with such
statute or rule of law. Any provision hereof which may prove invalid or
unenforceable under any law shall not affect the validity or enforceability of
any other provision hereof. The parties hereto hereby submit to the exclusive
jurisdiction of the United States Federal Courts located in New York County, New
York with respect to any dispute arising under this Agreement or the
transactions contemplated hereby.
(e) This Agreement and the Securities Purchase Agreement (including
all schedules and exhibits thereto) constitute the entire agreement among the
parties hereto with respect to the subject matter hereof and thereof. There are
no restrictions, promises, warranties or undertakings, other than those set
forth or referred to herein and therein. This Agreement and the Securities
Purchase Agreement supersede all prior agreements and understandings among the
parties hereto with respect to the subject matter hereof and thereof.
(f) Subject to the requirements of Section 9 hereof, this Agreement
shall inure to the benefit of and be binding upon the successors and assigns of
each of the parties hereto.
(g) The headings in this Agreement are for convenience of reference
only and shall not limit or otherwise affect the meaning hereof.
(h) This Agreement may be executed in two or more counterparts, each
of which shall be deemed an original but all of which shall constitute one and
the same agreement. This Agreement, once executed by a party, may be delivered
to the other party hereto by facsimile transmission of a copy of this Agreement
bearing the signature of the party so delivering this Agreement.
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<PAGE>
(i) Each party shall do and perform, or cause to be done and
performed, all such further acts and things, and shall execute and deliver all
such other agreements, certificates, instruments and documents, as the other
party may reasonably request in order to carry out the intent and accomplish the
purposes of this Agreement and the consummation of the transactions contemplated
hereby.
(j) All consents and other determinations to be made by the
Investors pursuant to this Agreement shall be made by the Investors holding a
majority of the Registrable Securities (determined as if all Notes then
outstanding had been converted into Registrable Securities).
IN WITNESS WHEREOF, the parties have caused this Agreement to be duly
executed as of the date first above written.
CSL Lighting Manufacturing, Inc.
By:_________________________
Name: Mark Allen
Its: Chief Operating Officer
INITIAL INVESTORS
____________________________
By:_________________________
Name:_______________________
Its:________________________
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Coast
Loan and Security Agreement
Borrower: CSL Lighting Manufacturing, Inc.
Address: 27615 Avenue Hopkins
Valencia, CA 91355
Date: October 9, 1996
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between COAST
BUSINESS CREDIT, a division of Southern Pacific Thrift & Loan Association
("Coast"), a California corporation, with offices at 12121 Wilshire Boulevard,
Suite 1111, Los Angeles, California 90025, and the borrower(s) named above
(jointly and severally, the "Borrower"), whose chief executive office is located
at the above address ("Borrower's Address"). The Schedule to this Agreement (the
"Schedule") shall for all purposes be deemed to be a part of this Agreement, and
the same is an integral part of this Agreement. (Definitions of certain terms
used in this Agreement are set forth in Section 8 below.)
1. LOANS.
1.1 Loans. Coast will make loans to Borrower (the "Loans"), in amounts
determined by Coast in its reasonable discretion, up to the amounts (the "Credit
Limit") shown on the Schedule, provided no Default or Event of Default has
occurred and is continuing.
1.2 Interest. All Loans and all other monetary Obligations shall bear
interest at the rate shown on the Schedule, except where expressly set forth to
the contrary in this Agreement. Interest shall be payable monthly, on the last
day of the month. Interest may, in Coast's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Coast minimum monthly interest during the
term of this Agreement with respect to the Receivable Loans and the Inventory
Loans in the amount set forth on the Schedule (the "Minimum Monthly Interest").
1.3 Fees. Borrower shall pay Coast the fee(s) shown on the Schedule, which
are in addition to all interest and other sums payable to Coast and are not
refundable.
1.4 Letters of Credit. At the request of Borrower, Coast may, in its
reasonable discretion, arrange for the issuance of letters of credit for the
account of Borrower (collectively, "Letters of Credit"), by issuing guarantees
to the issuer of the letter of credit or by other means. All Letters of Credit
shall be in form and substance satisfactory to Coast in its sole discretion .
The aggregate face amount of all outstanding Letters of Credit from time to time
shall not exceed the amount shown on the Schedule (the "Letter of Credit
Sublimit"), and shall be reserved against Loans which would otherwise be
available hereunder. Borrower shall pay all bank charges for the issuance of
Letters of Credit. Any payment by Coast under or in connection with a Letter of
Credit shall constitute a Loan hereunder on the date such payment is made. Each
Letter of Credit shall have an expiration date no later than thirty days prior
to the Maturity Date. Borrower hereby agrees to indemnify, save, and hold Coast
harmless from any loss, cost, expense, or liability, including payments made by
Coast, expenses, and reasonable attorneys' fees incurred by Coast arising out of
or in connection with any Letters of Credit. Borrower agrees to be bound by the
regulations and interpretations of the issuer of any Letters of Credit
guarantied by Coast and opened for Borrower's account or by Coast's
interpretations of any Letter of Credit issued by Coast for Borrower's account,
and Borrower understands and agrees that Coast shall not be liable for any
error, negligence, or mistake, whether of omission or commission, in following
Borrower's instructions or those contained in the Letters of Credit or any
modifications, amendments, or supplements thereto. Borrower understands that
Letters of Credit may require Coast to indemnify the issuing bank for certain
costs or liabilities arising out of claims by Borrower against such issuing
bank. Borrower hereby agrees to indemnify and hold Coast harmless with respect
to any loss, cost, expense, or liability incurred by Coast under any Letter of
Credit as a
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<PAGE>
Coast Business Credit Loan and Security Agreement
----------------------------------------------------------------------
result of Coast's indemnification of any such issuing bank. The provisions of
this Loan Agreement, as it pertains to Letters of Credit, and any other present
or future documents or agreements between Borrower and Coast relating to Letters
of Credit are cumulative.
2. SECURITY INTEREST.
2.1 Security Interest. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Coast a security interest in all
of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located: All Receivables, Inventory, Equipment, and
General Intangibles, including, without limitation, all of Borrower's Deposit
Accounts, and all money, and all property now or at any time in the future in
Coast's possession (including claims and credit balances), and all proceeds of
any of the foregoing (including proceeds of any insurance policies, proceeds of
proceeds, and claims against third parties), all products of any of the
foregoing, and all books and records related to any of the foregoing (all of the
foregoing, together with all other property in which Coast may now or in the
future be granted a lien or security interest, is referred to herein,
collectively, as the "Collateral").
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER.
In order to induce Coast to enter into this Agreement and to make Loans,
Borrower represents and warrants to Coast as follows, and Borrower covenants
that the following representations will continue to be true, and that Borrower
will at all times comply with all of the following covenants:
3.1 Corporate Existence and Authority. Borrower, if a corporation, is and
will continue to be, duly organized, validly existing and in good standing under
the laws of the jurisdiction of its incorporation. Borrower is and will continue
to be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 Name; Trade Names and Styles. The name of Borrower set forth in the
heading to this Agreement is its correct name. Listed on the Schedule are all
prior names of Borrower and all of Borrower's present and prior trade names.
Borrower shall give Coast 30 days' prior written notice before changing its name
or doing business under any other name. Borrower has complied, and will in the
future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 Place of Business; Location of Collateral. The address set forth in
the heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Coast at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the Schedule.
3.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all
times in the future be, the sole owner of all the Collateral, except for items
of Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. Coast now has, and will continue
to have, a first-priority perfected and enforceable security interest in all of
the Collateral, subject only to the Permitted Liens, and Borrower will at all
times defend Coast and the Collateral against all claims of others. None of the
Collateral now is or will be affixed to any real property in such a manner, or
with such intent, as to become a fixture. Borrower is not and will not become a
lessee under any real property lease pursuant to which the lessor may obtain any
rights in any of the Collateral and no such lease now prohibits, restrains,
impairs or will prohibit, restrain or impair Borrower's right to remove any
Collateral from the leased premises. Whenever any Collateral is located upon
premises in which any third party has an interest (whether as owner, mortgagee,
beneficiary under a deed of trust, lien or otherwise), Borrower shall, whenever
requested by Coast, use its best efforts to cause such third party to execute
and deliver to Coast, in form acceptable to Coast, such waivers and
subordinations as Coast shall specify, so as to ensure that Coast's rights in
the Collateral are, and will continue to be, superior to the rights of any such
third party. Borrower will keep in full force and effect, and
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will comply with all the terms of, any lease of real property where any of the
Collateral now or in the future may be located.
3.5 Maintenance of Collateral. Borrower will maintain the Collateral in
good working condition, and Borrower will not use the Collateral for any
unlawful purpose. Borrower will immediately advise Coast in writing of any
material loss or damage to the Collateral.
3.6 Books and Records. Borrower has maintained and will maintain at
Borrower's Address complete and accurate books and records, comprising an
accounting system in accordance with generally accepted accounting principles.
3.7 Financial Condition, Statements and Reports. All financial statements
now or in the future delivered to Coast have been, and will be, prepared in
conformity with generally accepted accounting principles (except, in the case of
unaudited financial statements, for the absence of footnotes and subject to
normal year-end adjustments) and now and in the future will fairly reflect the
financial condition of Borrower, at the times and for the periods therein
stated. Between the last date covered by any such statement provided to Coast
and the date hereof, there has been no material adverse change in the financial
condition or business of Borrower. Borrower is now and will continue to be
solvent.
3.8 Tax Returns and Payments; Pension Contributions. Borrower has timely
filed, and will timely file, all tax returns and reports required by foreign,
federal, state and local law, and Borrower has timely paid, and will timely pay,
all foreign, federal, state and local taxes, assessments, deposits and
contributions now or in the future owed by Borrower. Borrower may, however,
defer payment of any contested taxes, provided that Borrower (i) in good faith
contests Borrower's obligation to pay the taxes by appropriate proceedings
promptly and diligently instituted and conducted, (ii) notifies Coast in writing
of the commencement of, and any material development in, the proceedings, and
(iii) posts bonds or takes any other steps required to keep the contested taxes
from becoming a lien upon any of the Collateral. As of the date hereof, Borrower
is unaware of any claims or adjustments proposed for any of Borrower's prior tax
years which could result in additional taxes becoming due and payable by
Borrower. Borrower has paid, and shall continue to pay all amounts necessary to
fund all present and future pension, profit sharing and deferred compensation
plans in accordance with their terms, and Borrower has not and will not withdraw
from participation in, permit partial or complete termination of, or permit the
occurrence of any other event with respect to, any such plan which could result
in any liability of Borrower, including any liability to the Pension Benefit
Guaranty Corporation or its successors or any other governmental agency.
Borrower shall, at all times, utilize the services of an outside payroll service
providing for the automatic deposit of all payroll taxes payable by Borrower.
3.9 Compliance with Law. Borrower has complied, and will comply, in all
material respects, with all provisions of all material foreign, federal, state
and local laws and regulations relating to Borrower, including, but not limited
to, those relating to Borrower's ownership of real or personal property, the
conduct and licensing of Borrower's business, and environmental matters.
3.10 Litigation. Except as disclosed in the Schedule, there is no claim,
suit, litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted (collectively "Claim"). Borrower will
promptly inform Coast in writing of any Claim arising after the date hereof,
threatened or instituted by or against Borrower, involving any material Claim.
For purposes of this provision, material shall mean any single Claim of $100,000
or more or Claims of $200,000 or more in the aggregate.
3.11 Use of Proceeds. All proceeds of all Loans shall be used solely for
lawful business purposes. Borrower is not purchasing or carrying any "margin
stock" (as defined in Regulation G of the Board of Governors of the Federal
Reserve System) and no part of the proceeds of any Loan will be used to purchase
or carry any "margin stock" or to extend credit to others for the purpose of
purchasing or carrying any "margin stock."
4. RECEIVABLES.
4.1 Representations Relating to Receivables. Borrower represents and
warrants to Coast as follows: Each Receivable with respect to which Loans are
requested by Borrower shall, on the date each Loan is requested and made,
represent an undisputed bona fide existing unconditional obligation of the
Account Debtor created by the sale, delivery, and acceptance of goods or the
rendition of services in the ordinary course of Borrower's business, including
warranty obligations as
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previously disclosed to Coast and as reflected in Exhibit 4.1 attached
hereto.
4.2 Representations Relating to Documents and Legal Compliance. Borrower
represents and warrants to Coast as follows: All statements made and all unpaid
balances appearing in all invoices, instruments and other documents evidencing
the Receivables are and shall be true and correct and all such invoices,
instruments and other documents and all of Borrower's books and records are and
shall be genuine and in all respects what they purport to be. All sales and
other transactions underlying or giving rise to each Receivable shall fully
comply with all applicable laws and governmental rules and regulations. All
signatures and endorsements on all documents, instruments, and agreements
relating to all Receivables are and shall be genuine, and all such documents,
instruments and agreements are and shall be legally enforceable in accordance
with their terms.
4.3 Schedules and Documents relating to Receivables. Borrower shall
deliver to Coast transaction reports and loan requests, schedules of
Receivables, and schedules of collections, all on Coast's standard forms;
provided, however, that Borrower's failure to execute and deliver the same shall
not affect or limit Coast's security interest and other rights in all of
Borrower's Receivables, nor shall Coast's failure to advance or lend against a
specific Receivable affect or limit Coast's security interest and other rights
therein. Loan requests received after 10:30 AM will not be considered by Coast
until the next Business Day. Together with each such schedule, or later if
requested by Coast, Borrower shall furnish Coast with copies (or, at Coast's
request, originals) of all contracts, orders, invoices, and other similar
documents, and all original shipping instructions, delivery receipts, bills of
lading, and other evidence of delivery, for any goods the sale or disposition of
which gave rise to such Receivables, and Borrower warrants the genuineness of
all of the foregoing. Borrower shall also furnish to Coast an aged accounts
receivable trial balance in such form and at such intervals as Coast shall
request. In addition, Borrower shall deliver to Coast the originals of all
instruments, chattel paper, security agreements, guarantees and other documents
and property evidencing or securing any Receivables, upon receipt thereof and in
the same form as received, with all necessary endorsements, all of which shall
be with recourse. Borrower shall also provide Coast with copies of all credit
memos as and when requested by Coast.
4.4 Collection of Receivables. Borrower shall have the right to collect
all Receivables, unless and until an Event of Default has occurred. Borrower
shall hold all payments on, and proceeds of, Receivables in trust for Coast, and
Borrower shall deliver all such payments and proceeds to Coast within one
Business Day after receipt by Borrower, in their original form, duly endorsed to
Coast, to be applied to the Obligations in such order as Coast shall determine.
Coast may, in its discretion, require that all proceeds of Collateral be
deposited by Borrower into a lockbox account, or such other "blocked account" as
Coast may specify, pursuant to a blocked account agreement in such form as Coast
may specify. Coast or its designee may, at any time, notify Account Debtors that
Coast has been granted a security interest in the Receivables.
4.5. Remittance of Proceeds. All proceeds arising from the disposition of
any Collateral shall be delivered to Coast within one Business Day after receipt
by Borrower, in their original form, duly endorsed to Coast, to be applied to
the Obligations in such order as Coast shall determine. Borrower agrees that it
will not commingle proceeds of Collateral with any of Borrower's other funds or
property, but will hold such proceeds separate and apart from such other funds
and property and in an express trust for Coast. Nothing in this Section limits
the restrictions on disposition of Collateral set forth elsewhere in this
Agreement.
4.6 Disputes. Borrower shall notify Coast promptly of all disputes or
claims of a material nature relating to Receivables. Borrower shall not forgive
(completely or partially), compromise or settle any Receivable for less than
payment in full, or agree to do any of the foregoing, except that Borrower may
do so, provided that: (i) Borrower does so in good faith, in a commercially
reasonable manner, in the ordinary course of business, and in arm's length
transactions, which are reported to Coast on the regular reports provided to
Coast; (ii) no Default or Event of Default has occurred and is continuing; and
(iii) taking into account all such discounts settlements and forgiveness, the
total outstanding Loans will not exceed the Credit Limit. Coast may, at any time
after the occurrence of an Event of Default, settle or adjust disputes or claims
directly with Account Debtors for amounts and upon terms which Coast considers
advisable in its reasonable credit judgment and, in all cases, Coast shall
credit Borrower's Loan account with only the net amounts received by Coast in
payment of any Receivables.
4.7 Returns. Provided no Event of Default has occurred and is continuing,
if any Account Debtor returns any Inventory to Borrower in the ordinary course
of its business, Borrower shall promptly determine the reason for such return
and promptly issue a credit memorandum to the Account Debtor in the appropriate
amount. In the event any attempted return occurs after the occurrence of
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any Event of Default, Borrower shall, upon Coast's request, (i) hold the
returned Inventory in trust for Coast, (ii) segregate all returned Inventory
from all of Borrower's other property, (iii) conspicuously label the returned
Inventory as subject to Coast's security interest, and (iv) immediately notify
Coast of the return of any Inventory, specifying the reason for such return, the
location and condition of the returned Inventory, and on Coast's request deliver
such returned Inventory to Coast.
4.8 Verification. Coast may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Coast or such other name as Coast may choose.
4.9 No Liability. Coast shall not under any circumstances be responsible
or liable for any shortage or discrepancy in, damage to, or loss or destruction
of, any goods, the sale or other disposition of which gives rise to a
Receivable, or for any error, act, omission, or delay of any kind occurring in
the settlement, failure to settle, collection or failure to collect any
Receivable, or for settling any Receivable in good faith for less than the full
amount thereof, nor shall Coast be deemed to be responsible for any of
Borrower's obligations under any contract or agreement giving rise to a
Receivable. Nothing herein shall, however, relieve Coast from liability for its
own gross negligence or willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 Financial and Other Covenants. Borrower shall at all times comply with
the financial and other covenants set forth in the Schedule.
5.2 Insurance. Borrower shall, at all times insure all of the tangible
personal property Collateral and carry such other business insurance, such
coverage in an amount typical to Borrower's industry and with insurers
reasonably acceptable to Coast, in such form and amounts as Coast may reasonably
require, and Borrower shall provide evidence of such insurance to Coast, so that
Coast is satisfied that such insurance is, at all times, in full force and
effect. All liability insurance policies of Borrower shall name Coast as an
additional insured, and all property casualty and related insurance policies of
Borrower shall name Coast as a loss payee thereon and Borrower shall cause a
lenders loss payee endorsement in form reasonably acceptable to Coast. Upon
receipt of the proceeds of any such insurance, Coast may apply such proceeds in
reduction of the Obligations as Coast shall determine in its reasonable
discretion, except that, provided no Default or Event of Default has occurred
and is continuing, Coast shall release to Borrower insurance proceeds with
respect to any recovery for Equipment losses totaling less than $50,000, which
shall be utilized by Borrower for the replacement of the Equipment with respect
to which the insurance proceeds were paid. Coast may require reasonable
assurance that the insurance proceeds so released will be so used. If Borrower
fails to provide or pay for any insurance, Coast may, but is not obligated to,
obtain the same at Borrower's expense. Borrower shall promptly deliver to Coast
copies of all reports made to insurance companies.
5.3 Reports. Borrower, at its expense, shall provide Coast with the
written reports set forth in the Schedule, and such other written reports with
respect to Borrower (including budgets, sales projections, operating plans and
other financial documentation), as Coast shall from time to time reasonably
specify.
5.4 Access to Collateral, Books and Records. At reasonable times, and on
one Business Day's notice, Coast, or its agents, shall have the right to
inspect, audit and copy Borrower's books and records and the Collateral (the
"Audits"). Coast shall take reasonable steps to keep confidential all
confidential information obtained in any Audit, but Coast shall have the right
to disclose any such information to its auditors, regulatory agencies, and
attorneys, and pursuant to any subpoena or other legal process. The Audits shall
be at Borrower's expense and the charge for the Audits shall be $550 per person
per day (or such higher amount as shall represent Coast's then current standard
charge for the same), plus reasonable out of pocket expenses.There shall be an
annual cap of $10,000 for the audit fees (or a pro rata portion for any partial
year) as long as there are no Events of Default and there are no material
changes in the business of the Borrower. Borrower will not enter into any
agreement with any accounting firm, service bureau or third party to store
Borrower's books or records at any location other than Borrower's Address,
without first notifying Coast of the same and obtaining the written agreement
from such accounting firm, service bureau or other third party to give Coast the
same rights with respect to access to books and records and related rights as
Coast has under this Loan Agreement.
5.5 Negative Covenants. Borrower shall not, without Coast's prior written
consent, do any of the following:
(i) merge or consolidate with another corporation or entity, except in a
transaction in which (A) the shareholders of the Borrower hold at least 30% of
the common stock and all other capital stock of the surviving corporation
immediately after such merger or
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consolidation; and (B) the Borrower is the surviving corporation;
(ii) acquire any assets, except (A) in the ordinary course of business, or
(B) in a transaction or a series of transactions not involving the payment of an
aggregate amount in excess of $200,000 involving cash or cash equivalent;
(iii) enter into any other transaction outside the ordinary course of
business;
(iv) sell or transfer any Collateral, except for the sale of finished
Inventory in the ordinary course of Borrower's business, and except for the sale
of obsolete or unneeded Inventory and Equipment in the ordinary course of
business;
(v) store any Inventory or other Collateral with any warehouseman or other
third party, except upon ten (10) days prior written notice to Coast;
(vi) sell any Inventory on a sale-or-return, guaranteed sale, consignment,
or other contingent basis;
(vii) make any loans of any money or other assets, except (A) advances to
customers or suppliers in the ordinary course of business, (B) travel advances,
employee relocation loans and other employee loans and advances in the ordinary
course of business, and (C) loans to employees, officers and directors for the
purpose of purchasing equity securities of the Borrower; other than as disclosed
in Exhibit 5.5 (vii) attached hereto;
(viii) incur any debts, outside the ordinary course of business, which
would have a material, adverse effect on Borrower or on the prospect of
repayment of the Obligations;
(ix) guarantee or otherwise become liable with respect to the obligations
of another party or entity other than disclosed in Exhibit 5.5 (vii) attached
hereto;
(x) pay or declare any dividends on Borrower's stock (except for dividends
payable solely in stock of Borrower);
(xi) redeem, retire, purchase or otherwise acquire, directly or indirectly,
any of Borrower's stock, except that Borrower may repurchase stock owned by
employees, directors and consultants of Borrower pursuant to terms of
employment, consulting or other stock restriction agreements at such time as any
such employee, director or consultant terminates his or her affiliation with the
Borrower, for an aggregate purchase price not to exceed $100,000 in any fiscal
year;
(xii) make any change in Borrower's capital structure which would have a
material adverse effect on Borrower or on the prospect of repayment of the
Obligations; or
(xiii) dissolve or elect to dissolve.
Transactions permitted by the foregoing provisions of this Section are only
permitted if no Default or Event of Default would occur as a result of such
transaction.
5.6 Litigation Cooperation. Should any third-party suit or proceeding be
instituted by or against Coast with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Coast, make available Borrower and
its officers, employees and agents and Borrower's books and records, to the
extent that Coast may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
5.7 Indemnity. Borrower hereby agrees to indemnify Coast and hold Coast
harmless from and against any and all claims, debts, liabilities, demands,
obligations, actions, causes of action, penalties, reasonable costs and expenses
(including reasonable attorneys' fees), of every nature, character and
description, which Coast may sustain or incur based upon or arising out of any
of the Obligations, any actual or alleged failure to collect and pay over any
withholding or other tax relating to Borrower or its employees, any relationship
or agreement between Coast and Borrower, any actual or alleged failure of Coast
to comply with any writ of attachment or other legal process relating to
Borrower or any of its property, or any other matter, cause or thing whatsoever
occurred, done, omitted or suffered to be done by Coast relating to Borrower or
the Obligations (except any such amounts sustained or incurred as the result of
the gross negligence or willful misconduct of Coast). Notwithstanding any
provision in this Agreement to the contrary, the indemnity agreement set forth
in this Section shall survive any termination of this Agreement and shall for
all purposes continue in full force and effect.
5.8 Further Assurances. Borrower agrees, at its expense, on request by
Coast, to execute all documents and take all actions, as Coast, may deem
reasonably necessary or useful in order to perfect and maintain Coast's
perfected security interest in the Collateral, and in order to fully consummate
the transactions contemplated by this Agreement.
6. TERM.
6.1 Maturity Date. This Agreement shall continue in effect until the
maturity date set forth on the Schedule (the "Maturity Date"); provided that the
Maturity date shall automatically be extended, and this Agreement shall
automatically and continuously renew, for successive additional terms of one
year each, unless one party gives written notice to the other, not less than
ninety days prior to the next Maturity Date, that such party elects to terminate
this Agreement effective on the next Maturity Date.
6.2 Early Termination. This Agreement may be terminated prior to the
Maturity Date as follows: (i)
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by Borrower, effective three Business Days after written notice of termination
is given to Coast; or (ii) by Coast at any time after the occurrence of an Event
of Default, with notice, effective immediately. If this Agreement is terminated
by Borrower under this Section 6.2, Borrower shall pay to Coast a termination
fee (the "Early Termination Fee") in the amount shown on the Schedule. The Early
Termination Fee shall be due and payable on the effective date of termination
and thereafter shall bear interest at a rate equal to the rate applicable to the
Receivable Loans.
6.3 Payment of Obligations. On the Maturity Date or on any earlier
effective date of termination, Borrower shall pay and perform in full all
Obligations, whether evidenced by installment notes or otherwise, and whether or
not all or any part of such Obligations are otherwise then due and payable.
Without limiting the generality of the foregoing, if on the Maturity Date, or on
any earlier effective date of termination, there are any outstanding Letters of
Credit issued by Coast or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Coast,
then on such date Borrower shall provide to Coast cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Coast's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Coast's security interests in all of the Collateral and all of
the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Coast, Coast may, in its sole discretion, refuse to make any further Loans after
termination. No termination shall in any way affect or impair any right or
remedy of Coast, nor shall any such termination relieve Borrower of any
Obligation to Coast, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Coast shall promptly deliver to Borrower
termination statements, requests for reconveyances and such other documents as
may be required to fully terminate Coast's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
7.1 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Coast immediate written notice thereof: (a) Any material warranty,
representation, statement, report or certificate made or delivered to Coast by
Borrower or any of Borrower's officers, employees or agents, now or in the
future, shall be untrue or misleading in a material respect; or (b) Borrower
shall fail after five days notice, to pay when due any Loan or any interest
thereon or any other monetary Obligation; or (c) the total Loans and other
Obligations outstanding at any time shall exceed the Credit Limit and not repaid
within five days after notice; or (d) Borrower shall fail to deliver the
proceeds of Collateral to Coast as provided in Section 4.5 above, or shall fail
to give Coast access to its books and records or Collateral as provided in
Section 5.4 above, or shall breach any negative covenant set forth in Section
5.5 above after five days notice; or (e) Borrower shall fail to comply with the
financial covenants (if any) set forth in the Schedule within five days or shall
fail to perform any other non-monetary Obligation which by its nature cannot be
cured; or (f) Borrower shall fail to perform any other non-monetary Obligation,
which failure is not cured within five Business Days after the date due; or (g)
Any levy, assessment, attachment, seizure, lien or encumbrance (other than a
Permitted Lien) is made on all or any part of the Collateral which is not cured
or bonded within ten days after the occurrence of the same; or (h) any default
or event of default occurs under any obligation secured by a Permitted Lien,
which is not cured or bonded within any applicable cure period or waived in
writing by the holder of the Permitted Lien; or (i) Borrower breaches any
material contract or obligation, which has a material adverse effect on
Borrower's business or financial condition; or (j) Dissolution, termination of
existence, insolvency or business failure of Borrower; or appointment of a
receiver, trustee or custodian, for all or any part of the property of,
assignment for the benefit of creditors by, or the commencement of any
proceeding by Borrower under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or in the future in effect; or (k) the commencement of any
proceeding against Borrower or any guarantor of any of the Obligations under any
reorganization, bankruptcy, insolvency, arrangement, readjustment of debt,
dissolution or liquidation law or statute of any jurisdiction, now or in the
future in effect, which is not cured by the dismissal thereof within thirty (30)
days after the date commenced; or (l) revocation or termination of, or
limitation or denial of liability upon, any guaranty(if applicable) of the
Obligations or any attempt to do any of the foregoing, or
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commencement of proceedings by any guarantor of any of the Obligations under any
bankruptcy or insolvency law; or (m) revocation or termination of, or limitation
or denial of liability upon, any pledge of any certificate of deposit,
securities or other property or asset of any kind pledged by any third party to
secure any or all of the Obligations, or any attempt to do any of the foregoing,
or commencement of proceedings by or against any such third party under any
bankruptcy or insolvency law; or (n) Borrower makes any payment on account of
any indebtedness or obligation which has been subordinated to the Obligations,
other than as permitted in the applicable subordination agreement, or if any
Person who has subordinated such indebtedness or obligations terminates or in
any way limits his subordination agreement; or (o) there shall be a reduction in
the record or beneficial ownership of an aggregate of more than 20% of the
outstanding shares of stock held by directors and management of Borrower (other
than by inheritance), in one or more transactions, compared to the ownership of
outstanding shares of stock of Borrower in effect on the date hereof, without
the prior written consent of Coast; or (p) Borrower shall generally not pay its
debts as they become due, or Borrower shall conceal, remove or transfer any part
of its property, with intent to hinder, delay or defraud its creditors, or make
or suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or (q) there shall be a
material adverse change in Borrower's business or financial condition. Coast may
cease making any Loans hereunder during any of the above cure periods, and
thereafter if an Event of Default has occurred.
7.2 Remedies. Upon the occurrence, and during the continuance, of any
Event of Default, Coast, at its option, and without notice or demand of any kind
(all of which are hereby expressly waived by Borrower), may do any one or more
of the following: (a) Cease making Loans or otherwise extending credit to
Borrower under this Agreement or any other document or agreement; (b) Accelerate
and declare all or any part of the Obligations to be immediately due, payable,
and performable, notwithstanding any deferred or installment payments allowed by
any instrument evidencing or relating to any Obligation; (c) Take possession of
any or all of the Collateral wherever it may be found, and for that purpose
Borrower hereby authorizes Coast without judicial process to enter onto any of
Borrower's premises without interference to search for, take possession of,
keep, store, or remove any of the Collateral, and remain on the premises or
cause a custodian to remain on the premises in exclusive control thereof,
without charge for so long as Coast deems it reasonably necessary in order to
complete the enforcement of its rights under this Agreement or any other
agreement; provided, however, that should Coast seek to take possession of any
of the Collateral by Court process, Borrower hereby irrevocably waives: (i) any
bond and any surety or security relating thereto required by any statute, court
rule or otherwise as an incident to such possession; (ii) any demand for
possession prior to the commencement of any suit or action to recover possession
thereof; and (iii) any requirement that Coast retain possession of, and not
dispose of, any such Collateral until after trial or final judgment; (d) Require
Borrower to assemble any or all of the Collateral and make it available to Coast
at places designated by Coast which are reasonably convenient to Coast and
Borrower, and to remove the Collateral to such locations as Coast may deem
advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Coast shall have the right to use Borrower's premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Coast obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale (Coast shall have the right to
conduct such disposition on Borrower's premises without charge, for such time or
times as Coast deems reasonable, or on Coast's premises, or elsewhere and the
Collateral need not be located at the place of disposition; Coast may directly
or through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition; any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale); (g) Demand
payment of, and collect any Receivables and General Intangibles comprising
Collateral and, in connection therewith, Borrower irrevocably authorizes Coast
to endorse or sign Borrower's name on all collections, receipts, instruments and
other documents, to take possession of and open mail addressed to Borrower
except mail from Borrower's attorneys and remove therefrom payments made with
respect to any item of the Collateral or proceeds thereof, and, in Coast's sole
discretion, to grant extensions of time to pay, compromise claims and settle
Receivables and the like for less than face value; (h) Offset against any sums
in any of Borrower's general, special or other Deposit Accounts with Coast; and
(i) Demand and receive possession of any of Borrower's federal and state income
tax returns and the books and records utilized in the preparation thereof or
referring thereto. All reasonable attorneys' fees, expenses, costs, liabilities
and obligations incurred by Coast with respect to the foregoing shall be due
from the Borrower to Coast on demand. Coast may charge the same to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as is
applicable to the Receivable Loans. Without limiting any of Coast's
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<PAGE>
rights and remedies, from and after the occurrence of any Event of Default, the
interest rate applicable to the Obligations shall be increased by an additional
three percent per annum.
7.3 Standards for Determining Commercial Reasonableness. Borrower and
Coast agree that a sale or other disposition (collectively, "sale") of any
Collateral which complies with the following standards will conclusively be
deemed to be commercially reasonable: (i) Notice of the sale is given to
Borrower at least seven days prior to the sale, and, in the case of a public
sale, notice of the sale is published at least seven days before the sale in a
newspaper of general circulation in the county where the sale is to be
conducted; (ii) Notice of the sale describes the collateral in general,
non-specific terms; (iii) The sale is conducted at a place designated by Coast,
with or without the Collateral being present; (iv) The sale commences at any
time between 8:00 a.m. and 6:00 p.m.; (v) Payment of the purchase price in cash
or by cashier's check or wire transfer is required; (vi) With respect to any
sale of any of the Collateral, Coast may (but is not obligated to) direct any
prospective purchaser to ascertain directly from Borrower any and all
information concerning the same. Coast shall be free to employ other methods of
noticing and selling the Collateral, in its discretion, if they are commercially
reasonable.
7.4 Power of Attorney. Upon the occurrence, and during the continuance, of
any Event of Default, without limiting Coast's other rights and remedies,
Borrower grants to Coast an irrevocable power of attorney coupled with an
interest, authorizing and permitting Coast (acting through any of its employees,
attorneys or agents) at any time, at its option, but without obligation, with or
without notice to Borrower, and at Borrower's expense, to do any or all of the
following, in Borrower's name or otherwise, but Coast agrees to exercise the
following powers in a commercially reasonable manner: (a) Execute on behalf of
Borrower any documents that Coast may, in its sole discretion, deem advisable in
order to perfect and maintain Coast's security interest in the Collateral, or in
order to exercise a right of Borrower or Coast, or in order to fully consummate
all the transactions contemplated under this Agreement, and all other present
and future agreements; (b) Execute on behalf of Borrower any document
exercising, transferring or assigning any option to purchase, sell or otherwise
dispose of or to lease (as lessor or lessee) any real or personal property which
is part of Coast's Collateral or in which Coast has an interest; (c) Execute on
behalf of Borrower, any invoices relating to any Receivable, any draft against
any Account Debtor and any notice to any Account Debtor, any proof of claim in
bankruptcy, any Notice of Lien, claim of mechanic's, materialman's or other
lien, or assignment or satisfaction of mechanic's, materialman's or other lien;
(d) Take control in any manner of any cash or non-cash items of payment or
proceeds of Collateral; endorse the name of Borrower upon any instruments, or
documents, evidence of payment or Collateral that may come into Coast's
possession; (e) Endorse all checks and other forms of remittances received by
Coast; (f) Pay, contest or settle any lien, charge, encumbrance, security
interest and adverse claim in or to any of the Collateral, or any judgment based
thereon, or otherwise take any action to terminate or discharge the same; (g)
Grant extensions of time to pay, compromise claims and settle Receivables and
General Intangibles for less than face value and execute all releases and other
documents in connection therewith; (h) Pay any sums required on account of
Borrower's taxes or to secure the release of any liens therefor, or both; (i)
Settle and adjust, and give releases of, any insurance claim that relates to any
of the Collateral and obtain payment therefor; (j) Instruct any third party
having custody or control of any books or records belonging to, or relating to,
Borrower to give Coast the same rights of access and other rights with respect
thereto as Coast has under this Agreement; and (k) Take any action or pay any
sum required of Borrower pursuant to this Agreement and any other present or
future agreements. Any and all reasonable sums paid and any and all reasonable
costs, expenses, liabilities, obligations and attorneys' fees incurred by Coast
with respect to the foregoing shall be added to and become part of the
Obligations, and shall be payable on demand. Coast may charge the foregoing to
Borrower's loan account and the foregoing shall thereafter bear interest at the
same rate applicable to the Receivable Loans. In no event shall Coast's rights
under the foregoing power of attorney or any of Coast's other rights under this
Agreement be deemed to indicate that Coast is in control of the business,
management or properties of Borrower.
7.5 Application of Proceeds. All proceeds realized as the result of any
sale of the Collateral shall be applied by Coast first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Coast in the
exercise of its rights under this Agreement, second to the interest due upon any
of the Obligations, and third to the principal of the Obligations, in such order
as Coast shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Coast for any deficiency. If, Coast, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Coast shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the
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Coast Business Credit Loan and Security Agreement
----------------------------------------------------------------------
reduction of the Obligations until the actual receipt by Coast of the cash
therefor.
7.6 Remedies Cumulative. In addition to the rights and remedies set forth
in this Agreement, Coast shall have all the other rights and remedies accorded a
secured party under the California Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Coast and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Coast of one or more of its rights or remedies shall not be deemed an election,
nor bar Coast from subsequent exercise or partial exercise of any other rights
or remedies. The failure or delay of Coast to exercise any rights or remedies
shall not operate as a waiver thereof, but all rights and remedies shall
continue in full force and effect until all of the Obligations have been fully
paid and performed.
8. Definitions. AS USED IN THIS AGREEMENT, THE FOLLOWING TERMS HAVE THE
FOLLOWING MEANINGS:
"Account Debtor" means the obligor on a Receivable.
"Affiliate" means, with respect to any Person, a relative, partner,
shareholder, director, officer, or employee of such Person, or any parent or
subsidiary of such Person, or any Person controlling, controlled by or under
common control with such Person.
"Business Day" means a day on which Coast is open for business.
"Code" means the Uniform Commercial Code as adopted and in effect in the
State of California from time to time.
"Collateral" has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time or both,
would constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Eligible Inventory" means Inventory which Coast, in its good faith
business judgment, deems eligible for borrowing, based on such considerations as
Coast may from time to time deem appropriate. Without limiting the fact that the
determination of which Inventory is eligible for borrowing is a matter of
Coast's discretion, Inventory which does not meet the following requirements
will not be deemed to be Eligible Inventory: Inventory which (i) consists of
finished goods, in good, new and salable condition which is not perishable, not
obsolete or unmerchantable, and is not comprised of raw materials, work in
process, packaging materials or supplies; (ii) meets all applicable governmental
standards; (iii) has been manufactured in compliance with the Fair Labor
Standards Act; (iv) conforms in all respects to the warranties and
representations set forth in this Agreement; (v) is at all times subject to
Coast's duly perfected, first priority security interest; and (vi) is situated
at one of the locations set forth on the Schedule. In the event there are any
changes in the criteria for advances on Inventory, Coast will give Borrower five
days prior notice.
"Eligible Receivables" means Receivables arising in the ordinary course of
Borrower's business from the sale of goods or rendition of services, which
Coast, in its good faith business judgment, shall deem eligible for borrowing,
based on such considerations as Coast may from time to time deem appropriate.
"Equipment" means all of Borrower's present and hereafter acquired
machinery, molds, machine tools, motors, furniture, equipment, furnishings,
fixtures, trade fixtures, motor vehicles, tools, parts, dyes, jigs, goods and
other tangible personal property (other than Inventory) of every kind and
description used in Borrower's operations or owned by Borrower and any interest
in any of the foregoing, and all attachments, accessories, accessions,
replacements, substitutions, additions or improvements to any of the foregoing,
wherever located.
"Event of Default" means any of the events set forth in Section 7.1 of
this Agreement.
"General Intangibles" means all general intangibles of Borrower, whether
now owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Coast, rights to purchase or sell real
or personal property, rights as a licensor or licensee of any kind, royalties,
telephone numbers, proprietary information, purchase orders, and all insurance
policies and claims (including without limitation life insurance, key man
insurance, credit insurance, liability insurance, property insurance and other
insurance), tax refunds and claims, computer programs, discs, tapes and tape
files, claims under guaranties, security interests or other security held by or
granted to Borrower, all rights to indemnification and all other intangible
property of every kind and nature (other than Receivables).
"Inventory" means all of Borrower's now owned and hereafter acquired
goods, merchandise or other personal property, wherever located, to be furnished
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Coast Business Credit Loan and Security Agreement
----------------------------------------------------------------------
under any contract of service or held for sale or lease (including without
limitation all raw materials, work in process, finished goods and goods in
transit, and including without limitation all farm products), and all materials
and supplies of every kind, nature and description which are or might be used or
consumed in Borrower's business or used in connection with the manufacture,
packing, shipping, advertising, selling or finishing of such goods, merchandise
or other personal property, and all warehouse receipts, documents of title and
other documents representing any of the foregoing.
"Maximum Dollar Amount" has the meaning set forth in Section 1 of the
Schedule.
"Obligations" means all present and future Loans, advances, debts,
liabilities, obligations, guaranties, covenants, duties and indebtedness at any
time owing by Borrower to Coast, whether evidenced by this Agreement or any note
or other instrument or document, whether arising from an extension of credit,
opening of a letter of credit, banker's acceptance, loan, guaranty,
indemnification or otherwise, whether direct or indirect (including, without
limitation, those acquired by assignment and any participation by Coast in
Borrower's debts owing to others), absolute or contingent, due or to become due,
including, without limitation, all interest, charges, expenses, fees, attorney's
fees, expert witness fees, audit fees, letter of credit fees, collateral
monitoring fees, closing fees, facility fees, termination fees, minimum interest
charges and any other sums chargeable to Borrower under this Agreement or under
any other present or future instrument or agreement between Borrower and Coast.
"Permitted Liens" means the following: (i) purchase money security
interests in specific items of Equipment; (ii) leases of specific items of
Equipment; (iii) liens for taxes not yet payable; (iv) additional security
interests and liens consented to in writing by Coast, which consent shall not be
unreasonably withheld; (v) security interests being terminated substantially
concurrently with this Agreement; (vi) liens of materialmen, mechanics,
warehousemen, carriers, or other similar liens arising in the ordinary course of
business and securing obligations which are not delinquent; (vii) liens incurred
in connection with the extension, renewal or refinancing of the indebtedness
secured by liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement lien is limited to the
property encumbered by the existing lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods. Coast will have the
right to require, as a condition to its consent under subparagraph (iv) above,
that the holder of the additional security interest or lien sign an
intercreditor agreement on Coast's then standard form, or provide satisfactory
evidence of subordination acceptable to Coast, acknowledge that the security
interest is subordinate to the security interest in favor of Coast, and agree
not to take any action to enforce its subordinate security interest so long as
any Obligations remain outstanding, and that Borrower agree that any uncured
default in any obligation secured by the subordinate security interest shall
also constitute an Event of Default under this Agreement.
"Person" means any individual, sole proprietorship, partnership, joint
venture, trust, unincorporated organization, association, corporation,
government, or any agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired
accounts (whether or not earned by performance), letters of credit, contract
rights, chattel paper, instruments, securities, documents and all other forms of
obligations at any time owing to Borrower, all guaranties and other security
therefor, all merchandise returned to or repossessed by Borrower, and all rights
of stoppage in transit and all other rights or remedies of an unpaid vendor,
lienor or secured party.
Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 Interest Computation. In computing interest on the Obligations, all
checks, wire transfers and other items of payment received by Coast (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Coast on account of the Obligations three Business Days after receipt
by Coast of immediately available funds, and, for purposes of the foregoing, any
such funds received after 10:30 AM on any day shall be deemed received on the
next Business Day. Coast shall not, however, be required to credit Borrower's
account for the amount of any item of payment which is unsatisfactory to Coast
in its sole discretion, and Coast may charge Borrower's loan account for the
amount of any item of payment which is returned to Coast unpaid.
9.2 Application of Payments. All payments with respect to the Obligations
may be applied, and in Coast's sole discretion reversed and re-applied, to the
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Coast Business Credit Loan and Security Agreement
----------------------------------------------------------------------
Obligations, in such order and manner as Coast shall determine in its sole
discretion.
9.3 Charges to Accounts. Coast may, in its discretion, require that
Borrower pay monetary Obligations in cash to Coast, or charge them to Borrower's
Loan account, in which event they will bear interest at the same rate applicable
to the Loans. Coast may also, in its discretion, charge any monetary Obligations
to Borrower's Deposit Accounts maintained with Coast.
9.4 Monthly Accountings. Coast shall provide Borrower monthly with an
account of advances, charges, expenses and payments made pursuant to this
Agreement. Such account shall be deemed correct, accurate and binding on
Borrower and an account stated (except for reverses and reapplications of
payments made and corrections of errors discovered by Coast), unless Borrower
notifies Coast in writing to the contrary within thirty days after each account
is rendered, describing the nature of any alleged errors or omissions.
9.5 Notices. All notices to be given under this Agreement shall be in
writing and shall be given either personally or by reputable private delivery
service or by regular first-class mail, or certified mail return receipt
requested, addressed to Coast or Borrower at the addresses shown in the heading
to this Agreement, or at any other address designated in writing by one party to
the other party. Notices to Coast shall be directed to the Commercial Finance
Division, to the attention of the Division Manager or the Division Credit
Manager. All notices shall be deemed to have been given upon delivery in the
case of notices personally delivered, or at the expiration of one Business Day
following delivery to the private delivery service, or two Business Days
following the deposit thereof in the United States mail, with postage prepaid.
9.6 Severability. Should any provision of this Agreement be held by any
court of competent jurisdiction to be void or unenforceable, such defect shall
not affect the remainder of this Agreement, which shall continue in full force
and effect.
9.7 Integration. This Agreement and such other written agreements,
documents and instruments as may be executed in connection herewith are the
final, entire and complete agreement between Borrower and Coast and supersede
all prior and contemporaneous negotiations and oral representations and
agreements, all of which are merged and integrated in this Agreement. There are
no oral understandings, representations or agreements between the parties which
are not set forth in this Agreement or in other written agreements signed by the
parties in connection herewith.
9.8 Waivers. The failure of Coast at any time or times to require Borrower
to strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Coast shall not waive or
diminish any right of Coast later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Coast shall be deemed to have been waived
by any act or knowledge of Coast or its agents or employees, but only by a
specific written waiver signed by an authorized officer of Coast and delivered
to Borrower. Borrower waives demand, protest, notice of protest and notice of
default or dishonor, notice of payment and nonpayment, release, compromise,
settlement, extension or renewal of any commercial paper, instrument, account,
General Intangible, document or guaranty at any time held by Coast on which
Borrower is or may in any way be liable, and notice of any action taken by
Coast, unless expressly required by this Agreement.
9.9 No Liability Except for Gross Negligence. Neither Coast, nor any of
its directors, officers, employees, agents, attorneys or any other Person
affiliated with or representing Coast shall be liable for any claims, demands,
losses or damages, of any kind whatsoever, made, claimed, incurred or suffered
by Borrower or any other party through the negligence of Coast, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Coast, but nothing herein shall relieve Coast from
liability for its own gross negligence or willful misconduct.
9.10 Amendment. The terms and provisions of this Agreement may not be
waived or amended, except in a writing executed by Borrower and a duly
authorized officer of Coast.
9.11 Time of Essence. Time is of the essence in the performance by
Borrower of each and every obligation under this Agreement.
9.12 Attorneys Fees, Costs and Charges. Borrower shall reimburse Coast for
all reasonable attorneys' fees and all filing, recording, search, title
insurance, appraisal, audit, and other reasonable costs incurred by Coast,
pursuant to, or in connection with, or relating to this Agreement (whether or
not a lawsuit is
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Coast Business Credit Loan and Security Agreement
----------------------------------------------------------------------
filed), including, but not limited to, any reasonable attorneys' fees and costs
Coast incurs in order to do the following: prepare and negotiate this Agreement
and the documents relating to this Agreement; obtain legal advice in connection
with this Agreement or Borrower; enforce, or seek to enforce, any of its rights;
prosecute actions against, or defend actions by, Account Debtors; commence,
intervene in, or defend any action or proceeding; initiate any complaint to be
relieved of the automatic stay in bankruptcy; file or prosecute any probate
claim, bankruptcy claim, third-party claim, or other claim; examine, audit,
copy, and inspect any of the Collateral or any of Borrower's books and records;
protect, obtain possession of, lease, dispose of, or otherwise enforce Coast's
security interest in, the Collateral; and otherwise represent Coast in any
litigation relating to Borrower. If either Coast or Borrower files any lawsuit
against the other predicated on a breach of this Agreement, the prevailing party
in such action shall be entitled to recover its reasonable costs and attorneys'
fees, including (but not limited to) reasonable attorneys' fees and costs
incurred in the enforcement of, execution upon or defense of any order, decree,
award or judgment. Borrower shall also pay Coast's standard charges for returned
checks and for wire transfers, in effect from time to time. All attorneys' fees,
costs and charges to which Coast may be entitled pursuant to this Paragraph may
be charged by Coast to Borrower's loan account and shall thereafter bear
interest at the same rate as the Receivable Loans. Not withstanding the
foregoing and provided there is no Event of Default or material change in the
business of Borrower, Coast will use its best effort to limit such attorney fees
and cost to $15,000 per year.
9.13 Benefit of Agreement. The provisions of this Agreement shall be
binding upon and inure to the benefit of the respective successors, assigns,
heirs, beneficiaries and representatives of Borrower and Coast; provided,
however, that Borrower may not assign or transfer any of its rights under this
Agreement without the prior written consent of Coast, and any prohibited
assignment shall be void. No consent by Coast to any assignment shall release
Borrower from its liability for the Obligations.
9.14 Publicity. Coast is hereby authorized, at its expense, to issue
appropriate press releases and to cause a tombstone to be published announcing
the consummation of this transaction and the aggregate amount thereof.
9.15 Joint and Several Liability. If Borrower consists of more than one
Person, their liability shall be joint and several, and the compromise of any
claim with, or the release of, any Borrower shall not constitute a compromise
with, or a release of, any other Borrower.
9.16 Limitation of Actions. Any claim or cause of action by Borrower
against Coast, its directors, officers, employees, agents, accountants or
attorneys, based upon, arising from, or relating to this Loan Agreement, or any
other present or future document or agreement, or any other transaction
contemplated hereby or thereby or relating hereto or thereto, or any other
matter, cause or thing whatsoever, occurred, done, omitted or suffered to be
done by Coast, its directors, officers, employees, agents, accountants or
attorneys, shall be barred unless asserted by Borrower by the commencement of an
action or proceeding in a court of competent jurisdiction by the filing of a
complaint within one year after the first act, occurrence or omission upon which
such claim or cause of action, or any part thereof, is based, and the service of
a summons and complaint on an officer of Coast, or on any other person
authorized to accept service on behalf of Coast, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Coast in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.17 Paragraph Headings; Construction. Paragraph headings are only used in
this Agreement for convenience. Borrower and Coast acknowledge that the headings
may not describe completely the subject matter of the applicable paragraph, and
the headings shall not be used in any manner to construe, limit, define or
interpret any term or provision of this Agreement. The term "including",
whenever used in this Agreement, shall mean "including (but not limited to)".
This Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against Coast or Borrower under any rule of construction or
otherwise.
9.18 Governing Law; Jurisdiction; Venue. This Agreement and all acts and
transactions hereunder and all rights and obligations of Coast and Borrower
shall be governed by the laws of the State of California. As a material part of
the consideration to Coast to enter into this Agreement, Borrower (i) agrees
that all actions and proceedings relating directly or indirectly to this
Agreement shall, at Coast's option, be litigated in courts located within
California, and that the exclusive venue therefor shall be Los Angeles County;
(ii) consents to the jurisdiction and venue of any such court and consents to
service of process in any such action or proceeding by
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Coast Business Credit Loan and Security Agreement
----------------------------------------------------------------------
personal delivery or any other method permitted by law; and (iii) waives any and
all rights Borrower may have to object to the jurisdiction of any such court, or
to transfer or change the venue of any such action or proceeding.
9.19 Mutual Waiver of Jury Trial. BORROWER AND COAST EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR BORROWER, IN ALL
OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
Borrower:
CSL LIGHTING MANUFACTURING, INC.
By_______________________________
Sylvan Gerber
Title: Chief Executive Officer
Coast:
COAST BUSINESS CREDIT, a division of
Southern Pacific Thrift & Loan
Association
By_______________________________
Barbara Nitkin
Title: Vice President
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<PAGE>
Coast
----------------------------------------------------------------------
Secured Promissory Note
(Equipment Acquisition Loan)
Los Angeles, California
$200,000.00 October 9, 1996
FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to the
order of COAST BUSINESS CREDIT, a DIVISION OF SOUTHERN PACIFIC THRIFT AND LOAN
ASSOCIATION ("Coast") at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California, or at such other address as the holder of this Note shall direct,
the principal sum of TWO HUNDRED THOUSAND DOLLARS ($200,000.00), or so much
thereof as shall have been from time to time advanced, over a twelve month draw
down period, in sums not less than One Hundred Thousand Dollars ($100,000.00),
together with interest thereon from the date thereof until paid, with principal
payable over thirty-six (36) equal payments commencing after the advance. The
entire remaining unpaid principal balance of this Note, plus any and all accrued
and unpaid interest, shall be due and payable on the earlier of (i) thirty-six
(36) months after October 31, 1996 or (ii) the date that the Loan and Security
Agreement between borrower and Coast of even date terminates by its terms or is
terminated by either party in accordance with its terms..
This Note shall bear interest on the unpaid balance hereof from time to
time outstanding at a rate equal to the "Prime Rate" (as hereinafter defined)
plus 3.0% per annum, but in no event shall the interest rate in any month be
less than 9.0% per annum. Interest shall be calculated on the basis of a 360-day
year for the actual number of days elapsed. As used herein, the term "Prime
Rate" shall mean the actual "Reference Rate" or the substitute therefor of any
nationally recognized bank designated by Coast whether or not that rate is the
lowest interest rate charged by said bank. The interest rate applicable to this
Note shall be adjusted monthly, as of the first day of each month, and the
interest rate charged during each month shall be based on the highest Prime Rate
in effect during said month. If the Prime Rate is unavailable, "Prime Rate"
shall mean the highest of the prime rates published in the Wall Street Journal
on the first business day of the month, as the base rate of corporate loans at
large U.S. money center banks. Accrued interest shall be payable monthly, in
addition to principal payments provided above.
Principal of, and interest on, this Note shall be payable in lawful money
of the United States of America. If a payment hereunder becomes due and payable
on a Saturday, Sunday, or legal holiday, the due date thereof shall be extended
to the next succeeding business day, and interest shall be payable thereon
during such extension.
<PAGE>
In the event any payment of principal or interest on this Note is not paid
in full when due, or if any other default or event of default occurs under the
Loan and Security Agreement or any other present or future instrument, document,
or agreement between Borrower or Coast, Coast may, at its option, at any time
thereafter, declare the entire unpaid principal balance of this Note plus all
accrued interest to be immediately due and payable, without notice or demand.
Without limiting the foregoing, and without limiting Coast's other rights and
remedies, in the event any installment of principal or interest is not paid in
full on or before the date due, Borrower agrees that it would be impracticable
or extremely difficult to fix the actual damages resulting therefrom to Coast,
and therefore the Borrower agrees immediately to pay Coast an amount equal to 5%
of the installment (or portion thereof) not paid, as liquidated damages, to
compensate Coast for the internal administrative expenses in administering the
default. The acceptance of any installment of principal or interest by Coast
after the time when it becomes due, as herein specified, shall not be held to
establish a custom, or to waive any rights of Coast to enforce payment when due
of any further installments or any other rights, nor shall any failure or delay
to exercise any rights be held to waive the same.
All payments hereunder are to be applied first to costs and fees referred
to hereunder, second to the payment of accrued interest and the remaining
balance to the payment of principal. Any principal prepayment hereunder shall be
applied against principal payments in the inverse order of maturity. Coast shall
have the continuing and exclusive right to apply or reverse and reapply any and
all payments hereunder in its sole discretion.
Borrower agrees to pay all costs and expenses (including without
limitation attorneys' fees) incurred by Coast in connection with or related to
this Note, or its enforcement, whether or not suit be brought. Borrower hereby
further waives presentment, demand for payment, notice of dishonor, notice of
nonpayment, protest, notice of protest, and any and all other notices and
demands in connection with the delivery, acceptance, performance, default, or
enforcement of this Note, and Borrower hereby waives the benefits of any statute
of limitations with respect to any action to enforce, or otherwise related to,
this Notice.
This Note is secured by the Loan and Security Agreement and all other
present and future security agreements between Borrower and Coast. Nothing
herein shall be deemed to limit any of the terms or provisions of the Loan and
Security Agreement or any other present or future document, instrument or
agreement, between Borrower and Coast, and all of Coast's rights and remedies
hereunder and thereunder are cumulative.
In the event any one or more of the provisions of this Note shall for any
reason be held to be invalid, illegal or unenforceable, the same shall not
affect any other provision of this Note and the remaining provisions of this
Note shall remain in full force and effect.
No waiver or modification of any of the terms or provisions of this Note
shall be valid or binding unless set forth in a writing signed by a duly
authorized officer of Coast, and then only to
2
<PAGE>
the extent therein specifically set forth. If more than one person executes this
Note, their obligations hereunder shall be joint and several.
COAST AND BORROWER EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR IN ANY WAY RELATING TO: (i)
THIS NOTE; OR (ii) ANY OTHER PRESENT OR FUTURE INSTRUMENT OR AGREEMENT BETWEEN
COAST AND BORROWER; OR (iii) ANY CONDUCT, ACTS OR OMISSIONS OF COAST OR BORROWER
OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER
PERSONS AFFILIATED WITH COAST OR BORROWER.
THIS NOTE is payable in, and shall be governed by the laws of the State of
California.
CSL LIGHTING MANUFACTURING, INC.
BY:__________________________________
Sylvan Gerber
Title: Chief Executive Officer
3
<PAGE>
Coast
----------------------------------------------------------------------
Secured Promissory Note
Los Angeles, California
$100,000.00 October 9, 1996
FOR VALUE RECEIVED, the undersigned ("Borrower") promises to pay to the
order of COAST BUSINESS CREDIT, a DIVISION OF SOUTHERN PACIFIC THRIFT AND LOAN
ASSOCIATION ("Coast") at 12121 Wilshire Boulevard, Suite 1111, Los Angeles,
California, or at such other address as the holder of this Note shall direct,
the principal sum of ONE HUNDRED THOUSAND DOLLARS ($100,000.00), together with
interest thereon from the date thereof until paid, and fully amortized over a
thirty-six (36) month period thereafter beginning October 9, 1996 and continuing
on the same date of succeeding month. The entire remaining unpaid principal
balance of this Note, plus any and all accrued and unpaid interest, shall be due
and payable on the earlier of (i) thirty-six (36) months after October 31, 1996,
or (ii) the date that the Loan and Security Agreement between Borrower and Coast
of even date terminates by its terms or is terminated by either party in
accordance with its terms.
This Note shall bear interest on the unpaid balance hereof from time to
time outstanding at a rate equal to the "Prime Rate" (as hereinafter defined)
plus 3.0% per annum, but in no event shall the interest rate in any month be
less than 9.0% per annum. Interest shall be calculated on the basis of a 360-day
year for the actual number of days elapsed. As used herein, the term "Prime
Rate" shall mean the actual "Reference Rate" or the substitute therefor of any
nationally recognized bank designated by Coast whether or not that rate is the
lowest interest rate charged by said bank. The interest rate applicable to this
Note shall be adjusted monthly, as of the first day of each month, and the
interest rate charged during each month shall be based on the highest Prime Rate
in effect during said month. If the Prime Rate is unavailable, "Prime Rate"
shall mean the highest of the prime rates published in the Wall Street Journal
on the first business day of the month, as the base rate of corporate loans at
large U.S. money center banks. Accrued interest shall be payable monthly, in
addition to principal payments provided above.
Principal of, and interest on, this Note shall be payable in lawful money
of the United States of America. If a payment hereunder becomes due and payable
on a Saturday, Sunday, or legal holiday, the due date thereof shall be extended
to the next succeeding business day, and interest shall be payable thereon
during such extension.
In the event any payment of principal or interest on this Note is not paid
in full when due, or if any other default or event of default occurs under the
Loan and Security Agreement or any other present or future instrument, document,
or agreement between Borrower or Coast, Coast may, at its option, at any time
thereafter, declare the entire unpaid principal balance of this Note
<PAGE>
plus all accrued interest to be immediately due and payable, without notice or
demand. Without limiting the foregoing, and without limiting Coast's other
rights and remedies, in the event any installment of principal or interest is
not paid in full on or before the date due, Borrower agrees that it would be
impracticable or extremely difficult to fix the actual damages resulting
therefrom to Coast, and therefore the Borrower agrees immediately to pay Coast
an amount equal to 5% of the installment (or portion thereof) not paid, as
liquidated damages, to compensate Coast for the internal administrative expenses
in administering the default. The acceptance of any installment of principal or
interest by Coast after the time when it becomes due, as herein specified, shall
not be held to establish a custom, or to waive any rights of Coast to enforce
payment when due of any further installments or any other rights, nor shall any
failure or delay to exercise any rights be held to waive the same.
All payments hereunder are to be applied first to costs and fees referred
to hereunder, second to the payment of accrued interest and the remaining
balance to the payment of principal. Any principal prepayment hereunder shall be
applied against principal payments in the inverse order of maturity. Coast shall
have the continuing and exclusive right to apply or reverse and reapply any and
all payments hereunder in its sole discretion.
Borrower agrees to pay all costs and expenses (including without
limitation attorneys' fees) incurred by Coast in connection with or related to
this Note, or its enforcement, whether or not suit be brought. Borrower hereby
further waives presentment, demand for payment, notice of dishonor, notice of
nonpayment, protest, notice of protest, and any and all other notices and
demands in connection with the delivery, acceptance, performance, default, or
enforcement of this Note, and Borrower hereby waives the benefits of any statute
of limitations with respect to any action to enforce, or otherwise related to,
this Notice.
This Note is secured by the Loan and Security Agreement and all other
present and future security agreements between Borrower and Coast. Nothing
herein shall be deemed to limit any of the terms or provisions of the Loan and
Security Agreement or any other present or future document, instrument or
agreement, between Borrower and Coast, and all of Coast's rights and remedies
hereunder and thereunder are cumulative.
In the event any one or more of the provisions of this Note shall for any
reason be held to be invalid, illegal or unenforceable, the same shall not
affect any other provision of this Note and the remaining provisions of this
Note shall remain in full force and effect.
No waiver or modification of any of the terms or provisions of this Note
shall be valid or binding unless set forth in a writing signed by a duly
authorized officer of Coast, and then only to the extent therein specifically
set forth. If more than one person executes this Note, their obligations
hereunder shall be joint and several.
COAST AND BORROWER EACH HEREBY WAIVE THE RIGHT TO TRIAL BY JURY IN ANY
ACTION OR PROCEEDING BASED UPON, ARISING OUT OF, OR
2
<PAGE>
IN ANY WAY RELATING TO: (i) THIS NOTE; OR (ii) ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN COAST AND BORROWER; OR (iii) ANY CONDUCT, ACTS
OR OMISSIONS OF COAST OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS,
EMPLOYEES, AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH COAST OR
BORROWER.
THIS NOTE is payable in, and shall be governed by the laws of the State of
California.
CSL Lighting Manufacturing
BY:__________________________________
Sy Gerber
Title: Chief Executive Officer
3
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from CSL LIGHTING
MANUFACTURING INC. 12/31/96 10KSB and is qualified in its entirety by reference
to such financial statements.
</LEGEND>
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 7,000
<SECURITIES> 0
<RECEIVABLES> 1,992,000
<ALLOWANCES> 381,000
<INVENTORY> 4,172,000
<CURRENT-ASSETS> 6,803,000
<PP&E> 2,779,000
<DEPRECIATION> 1,262,000
<TOTAL-ASSETS> 8,600,000
<CURRENT-LIABILITIES> 2,045,000
<BONDS> 5,487,000
0
0
<COMMON> 63,000
<OTHER-SE> 1,005,000
<TOTAL-LIABILITY-AND-EQUITY> 8,600,000
<SALES> 12,316,000
<TOTAL-REVENUES> 12,316,000
<CGS> 7,215,000
<TOTAL-COSTS> 14,532,000
<OTHER-EXPENSES> (987,000)
<LOSS-PROVISION> 334,000
<INTEREST-EXPENSE> 1,978,000
<INCOME-PRETAX> (3,207,000)
<INCOME-TAX> 1,000
<INCOME-CONTINUING> (3,208,000)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,208,000)
<EPS-PRIMARY> (.60)
<EPS-DILUTED> (.60)
</TABLE>
