<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the quarterly period ended September 30, 1998
Commission File Number 1-13424
Data Systems Network Corporation
Michigan 38-2649874
(State or other jurisdiction of (I.R.S. Employer
Incorporation or organization) Identification No.)
34705 W. 12 Mile Rd., Suite 300 48331
Farmington Hills, Michigan
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code:
(248) 489-8700
Indicate by check mark whether the registrant (l) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
YES [ ] NO [X]
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practical date:
Common Stock, $.01 Par Value - 4,859,224 shares as of November 6, 1998
<PAGE> 2
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
UNAUDITED AUDITED
SEPTEMBER 30, DECEMBER 31,
1998 1997
--------------- ---------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents (Notes 2) $ 2,431,405 $ 5,349
Investments - 6,203,361
Accounts receivable (net of allowance of $745,435 and $800,000
at September 30, 1998 and December 31, 1997 respectively). 20,020.435 27,098,823
Notes receivable 217,901 197,133
Inventories 752,889 680,673
Other current assets 254,619 537,781
-------------- --------------
Total current assets 23,677,249 34,723,120
SERVICE PARTS 240,510 320,677
PROPERTY AND EQUIPMENT, net 2,682,607 2,583,437
GOODWILL, net 3,041,945 4,072,207
OTHER ASSETS 2,188,312 1,514,125
-------------- --------------
TOTAL ASSETS $ 31,830,623 $ 43,213,566
============== ==============
<CAPTION>
LIABILITIES AND STOCKHOLDERS EQUITY
<S> <C> <C>
CURRENT LIABILITIES:
Bank line of credit (Note 3) $ 8,621,871 $ 17,296,558
Accounts payable 14,186,332 16,220,200
Accrued liabilities 1,528,992 2,288,198
Capitalized lease obligation - current portion 87,387 79,988
Deferred maintenance revenues 2,018,995 927,154
-------------- --------------
Total current liabilities 26,443,577 36,812,098
CAPITAL LEASE OBLIGATION - NON CURRENT 89,679 157,551
STOCKHOLDERS' EQUITY
Preferred stock, authorized 1,000,000 shares, none outstanding
Common stock ($.01 par value; authorized 10,000,000
shares; issued and outstanding 4,859,224 and 4,857,974 shares
at June 30, 1998 and December 31, 1997, respectively) 48,592 48,580
Additional paid-in capital 17,936,219 17,945,606
Accumulated deficit (12,687,444) (11,750,269)
-------------- --------------
Total stockholders' equity 5,297,367 6,243,917
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 31,830,623 $ 43,213,566
============== ==============
</TABLE>
See Accompanying Notes to the Consolidated financial Statements.
<PAGE> 3
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED SEPTEMBER 30, FOR THE NINE MONTHS ENDED SEPTEMBER 30,
RESTATED & RESTATED &
UNAUDITED UNAUDITED UNAUDITED UNAUDITED
1998 1997 (Note 7) 1998 1997 (Note 7)
---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
REVENUES:
Net sales $ 18,258,545 $ 15,384,785 $ 52,846,174 $ 45,578,983
Service revenue 6,123,205 4,774,972 16,681,298 13,133,733
--------------- ------------- ------------- --------------
Total revenues 24,381,750 20,159,757 69,527,472 58,712,716
COST OF REVENUES:
Cost of sales 15,699,190 12,528,210 43,423,438 36,932,821
Cost of service revenue 4,733,627 3,658,941 14,211,756 10,859,664
--------------- ------------- ------------- --------------
Total cost of revenues 20,432,817 16,187,151 57,635,194 47,792,485
GROSS PROFIT 3,948,933 3,972,606 11,892,278 10,920,231
OPERATING EXPENSES:
Selling expenses 2,588,608 2,651,531 7,578,460 7,195,553
General and administrative expenses 1,167,788 818,152 4,908,937 3,030,659
--------------- ------------- ------------- --------------
Total operating expenses 3,756,396 3,469,683 12,487,397 10,226,212
INCOME (LOSS) FROM OPERATIONS 192,537 502,923 (595,119) 694,019
OTHER INCOME (EXPENSES)
Interest expense (197,906) (358,722) (614,504) (1,085,088)
Interest income 16,809 155,577 99,178 267,910
Other income 139,780 146,969 254,278 208,615
--------------- ------------- ------------- --------------
Net other (expenses) (41,317) (56,176) (261,048) (608,563)
INCOME (LOSS) BEFORE INCOME TAXES 151,220 446,747 (856,167) 85,456
FROM CONTINUING OPERATIONS
INCOME TAXES - - - -
NET INCOME (LOSS) --------------- ------------- ------------- --------------
FROM CONTINUING OPERATIONS $ 151,220 $ 446,747 $ (856,167) $ 85,456
DISCONTINUED OPERATIONS (NOTE 4)
LOSS FROM OPERATIONS OF UNS - (214,947) (1,686,054) (352,260)
GAIN ON DISPOSAL OF UNS (NOTE 4) - - (1,605,304) -
--------------- ------------- ------------- --------------
NET GAIN (LOSS) FROM UNS - (214,947) (80,750) (352,260)
NET INCOME (LOSS) $ 151,220 $ 231,800 $ (936,917) (266,804)
=============== ============= ============= ==============
INCOME (LOSS) PER COMMON SHARE Basic Basic Basic Basic
----- ----- ----- -----
FROM CONTINUING OPERATIONS $ 0.03 $ 0.10 $ (0.18) $ 0.02
=============== ============= ============= ==============
FROM DISCONTINUED OPERATIONS $ - $ (0.05) $ (0.01) (0.08)
=============== ============= ============= ==============
NET INCOME (LOSS) PER COMMON SHARE $ 0.03 $ 0.05 $ (0.19) $ 0.06
=============== ============= ============= ==============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 4,859,224 4,576,883 4,859,224 4,172,219
=============== ============= ============= ==============
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements.
<PAGE> 4
DATA SYSTEMS NETWORK CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED SEPTEMBER 30
RESTATED &
UNAUDITED UNAUDITED
1998 1997 (NOTE 7 )
-------------- --------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) $ (936,917) $ (266,804)
Adjustments to reconcile net (loss)
to net cash used in operating activities:
Depreciation and amortization 861,534 653,435
Gain on disposal of UNS 866,335 -
Changes in assets and liabilities that provided (used) cash,
net of effects of discontinued operations:
Investments 6,203,361 -
Accounts receivable 7,078,388 (11,617,008)
Notes receivable (20,768) (75,499)
Inventories (72,216) (162,352)
Other current assets 283,162 (81,849)
Service parts 80,167 605,000
Other assets (674,187) 73,760
Accounts payable (2,033,868) 354,782
Accrued liabilities (759,461) 153,204
Deferred maintenance revenues 1,091,842 (464,081)
------------- -------------
Net cash provided by (used in) operating activities 11,967,371 (10,827,412)
------------- -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of property and equipment, net (806,778) (795,424)
Redemption of warrants and exercise of stock options, net 625 8,821,902
------------- -------------
Net cash provided by (used in) investing activities (806,153) 8,026,478
------------- -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net current borrowings (repayment) under bank line of credit (8,674,688) 7,917,337
Net proceeds (repayment) from capital lease obligation financing (60,473) 256,075
------------- -------------
Net cash provided by (used in) financing activities (8,735,161) 8,173,412
------------- -------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 2,426,057 5,372,478
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 5,349 1,522,434
------------- -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 2,431,406 $ 6,894,912
============= =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOWS:
Cash paid during the period for:
Interest $ 707,113 $ 710,980
============= =============
Income taxes NONE NONE
============= =============
</TABLE>
See Accompanying Notes to the Consolidated Financial Statements.
<PAGE> 5
DATA SYSTEMS NETWORK CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - SEPTEMBER 30, 1998
UNAUDITED
1. BASIS OF PRESENTATION.
The consolidated financial statements included herein have been prepared by Data
Systems Network Corporation ("Company") without audit, pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
footnote disclosures normally included in the financial statements prepared in
accordance with generally accepted accounting principles have been omitted
pursuant to such rules and regulations.
The information provided in this report reflects all adjustments consisting of
normal recurring accruals which are, in the opinion of management, necessary for
the fair presentation of the Company's financial position as of September 30,
1998, the results of its operations for the three month and nine month periods
ending September 30, 1998 and 1997 and its cash flows for the nine month periods
ended September 30, 1998 and 1997. These consolidated financial statements
should be read in conjunction with the Company's financial statements for the
year ended December 31, 1997 as filed with the Securities and Exchange
Commission.
Results for the interim period are not necessarily indicative of results that
may be expected for the entire year.
2. SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION The accompanying consolidated financial statements include the
accounts of Data Systems Network Corporation, its 70% - owned subsidiary,
Unified Network Services, Inc. ("UNS") from February 1996 through May 31, 1998,
(Note 4) and the operation of the Network Systems Group ("NSG") from date of
purchase. The principal activities of Data Systems Network Corporation (the
"Company") involve the sales of microcomputer and network hardware and software
and the performance of maintenance and advance services, such as network
management, imaging and systems consulting, to major corporate and state and
local government customers in the United States. The Company's corporate
headquarters are in Michigan. Additionally, there are two technical centers, one
in Michigan and one in North Carolina, and 16 direct sales offices located
throughout the United States.
CASH AND CASH EQUIVALENTS includes liquid investments with maturities of three
months or less and cash received and deposited into an escrow account. The
escrow account was established to receive monies for payment of maintenance
services from a single customer. Funds are released to the Company on a monthly
basis based upon a predetermined schedule. As of September 30, 1998 there was
approximately $829,000 in the escrow account of which $277,600 will be released
in the next twelve months.
PRODUCT RETURNS AND SERVICE ADJUSTMENTS are estimated based upon historical
data. Actual credits are recorded against the established reserve in the month
they are authorized and accepted. The Company's customers have no contractual
rights to return products. The Company determines whether to accept product
returns on a case by case basis and will generally accept product returns only
upon payment of a restocking fee and/or if the products may be returned to the
manufacturer. The Company offers no warranty separate from the product
manufacturers' warranties. As of September 30, 1998 the Company had recorded a
reserve of $500,000 for potential product returns and service adjustments.
EARNINGS (LOSS) PER COMMON SHARE - In February 1997, the Financial Accounting
Standards Board issued Statement No. 128, "Earnings per Share" ("SFAS 128").
SFAS 128 specifies the computation; presentation and disclosure requirements for
earnings per share ("EPS") of entities with publicly held common stock or
potential common stock. SFAS 128 defines two EPS calculations, basic and
diluted. The objective of basic EPS is to measure the performance of an entity
over the reporting period by dividing income available to common stock by the
weighted average of shares outstanding. The objective of diluted EPS is
consistent with that of basic EPS while giving effect to all dilutive potential
common shares that were outstanding. All potential common shares were excluded
from the computations of diluted earnings per share for the periods ended
September 30, 1998 and 1997 because the effect would have been anti-dilutive.
<PAGE> 6
RECENT ACCOUNTING PRONOUNCEMENTS - On January 1, 1998, the Company adopted
Statement of Financial Accounting Standards ("SFAS") No. 130, Reporting
Comprehensive Income. SFAS No. 130 establishes standards for reporting and
displaying of comprehensive income and its components. For the three months
ended September 30, 1998 and 1997, the Company had no items of comprehensive
income, and as a result the Company's reported net income was the same as
comprehensive income. In June 1997, the Financial Accounting Standards Board
issued SFAS No. 131, "Disclosures about Segments of and Enterprise and Related
Information." SFAS No. 131 establishes standards for the way that public
business enterprises report information about operating segments and related
information in interim and annual financial statements. The Company intends to
provide financial and descriptive information about its reportable operating
segments to conform to the requirements in its annual financial statements for
1998 and quarterly thereafter.
3. LINES OF CREDIT
As of September 30, 1998, the Company had a credit agreement ("NBD Agreement")
with NBD Bank ("NBD"). The Agreement provided for a discretionary line of credit
not to exceed $11 million. Borrowing limits under the credit facility were
determined based on a collateral formula, which included 80% of qualified trade
receivables. Borrowings under the credit agreement bore interest at 2% over NBD
prime and had a term extending to September 30, 1998. Previously, the Company
had a credit agreement that provided for a revolving line of credit not to
exceed $12 million, a discretionary line of credit not to exceed $8 million and
a discretionary lease line not to exceed $500,000. Each was collateralized by an
interest in the Company's entire accounts receivable, inventory (other than
equipment financed through IBM Credit) and equipment.
On September 30, 1998 the Company and Foothill Capital Corporation ("Foothill")
entered into a new credit facility ("Foothill Agreement"), replacing in its
entirety, the NBD Agreement. The Foothill Agreement provides for an initial
revolving line of credit not to exceed $15 million. The Company may, at its
option and subject to certain collateral requirements, increase the line to $20
million during the term of the Foothill Agreement. Borrowing limits under the
Foothill Agreement are determined based on a collateral formula, which includes
85% of qualified trade receivables. Borrowings under the Foothill Agreement bear
interest at 1% over Norwest Bank prime and have a term extending to September
30, 2001. All monies owed by the Company to NBD were paid on October 1, 1998.
The Company has also entered into a finance agreement with IBM Credit
Corporation. As of September 30, 1998, the agreement extended a maximum of
$2,000,000 to be used exclusively for the acquisition of inventory for resale.
Use of this credit line is at the Company's option. As collateral for payment of
all debt incurred under this agreement, IBM Credit Corporation was granted a
first security interest in the Company's inventory equal to the amount of the
outstanding debt. This agreement allows for thirty (30) day interest free
financing of eligible inventory and a variable discount off of invoice for
eligible product purchases paid for within fifteen days from the date of
invoice. The Company or the lender can terminate this agreement at any time. The
terms and conditions of this financing agreement can be changed at the
discretion of IBM Credit Corporation. The line of credit was fully utilized as
of September 30, 1998 and has been included in accounts payable.
4. DISCONTINUED OPERATIONS
During fiscal 1998, the Company decided to sell its large account network
management services operation. This business has been accounted for as a
discontinued operation. The results of this segment of the business have been
excluded from continuing operations in the consolidated statement of operations
for all periods presented.
Under the terms of the original 1996 purchase agreement, the minority
shareholders of Unified Network Services Inc. ("UNS") elected to exercise a
contract option to initiate re-purchase of the UNS subsidiary. The Company's
Board of Directors accepted the proposal and adopted a plan to discontinue
operations. Effective June 1, 1998, the Company sold its 70% interest in the UNS
subsidiary for cash and notes, and discontinued operations in its large account
network management business. The net gain upon disposal of the discontinued
segment was $1,605,304. The terms of the sale included $7,000 in cash and a note
for $3,000,000 that is secured by the stock of UNS. The buyers will also assume
the existing liabilities of the subsidiary. The Company has decided to defer the
recognition of a gain on sale related to the note until payments on the note
begin in 1999.
<PAGE> 7
The Company has restated its prior financial statements to present the operating
results of the UNS segment as a discontinued operation. The net assets of UNS
amounted to $925,925 and the net liabilities totaled $4,633,049 leaving negative
shareholder equity of $3,707,124. Operating results from discontinued operations
are as follows:
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Net Sales $ 278,061 $1,155,735
Cost and Expense:
Cost of Sales 1,420,938 942,786
Selling, General &
Administrative 543,177 350,261
---------------------------
Total Cost $1,964,115 $1,293,047
Operating (Loss) ($1,686,054) (137,312)
Income Tax Credits - 0 - - 0 -
---------------------------
(Loss) from Operations ($1,686,054) $ (137,312)
===========================
</TABLE>
5. GOING CONCERN MATTERS
The accompanying financial statements have been prepared on a going concern
basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. As shown in the financial
statements for the nine months ended September 30, 1998 and 1997, the Company
incurred losses of $936,917 and $266,804, respectively. The working capital
deficiency as of September 30, 1998 was $2,766,328.
The financial statements do not include any adjustment relating to the
recoverability and classification of recorded asset amounts or the amounts and
classification of liabilities that might be necessary should the Company be
unable to continue as a going concern. Management has successfully negotiated to
replace its previously authorized line of credit with its primary lender as
discussed in Note 3. Management finalized those negotiations on September 30,
1998, which provide a long-term commitment for line of credit financing through
September 30, 2001. Additionally, management continues to consolidate its
business operations and stabilize strategic business relationships so the
Company can meet its obligations and attain a level of operations that is
profitable.
As part of management's plans, the Company discontinued operations in its large
account network management operation. The Company sold its interest in the UNS
subsidiary effective June 1, 1998. The divestiture results in substantial cost
savings without significant loss of customer relationships or the ability to
deliver specialized technical services in any related area. The Company
continues to operate the remote network management center in Raleigh, NC, and
continues to market its ENCOR (TM) software product.
6. LEGAL PROCEEDINGS
In February, March and April 1998 civil actions were filed against the Company,
certain officers, and the Board of Directors. The complaints allege violations
of the Securities Exchange Act of 1934 resulting from alleged nondisclosures and
misrepresentations of information concerning the Company's financial results and
future prospects due to accounting irregularities. Management is unable to
assess the potential amount of any liability resulting from such class action
lawsuits, however, management currently believes that the resolution of these
proceedings will not have a material adverse effect on the Company's financial
position or results of operations. Future events and circumstances could alter
management's belief.
<PAGE> 8
7. RESTATEMENT OF PRIOR FINANCIAL STATEMENTS
As announced on February 24, 1998, the Company became aware of certain
accounting errors and irregularities affecting previously issued financial
statements. Contemporaneously, the Company's independent accountants advised the
Company that their unqualified auditor's report on the Company's consolidated
financial statements as of December 31, 1996 and 1995 and for each of the years
ended in that two year period was being withdrawn and should no longer be relied
upon. On March 13, 1998, the Company's independent accountants informed the
Board of Directors that they were resigning.
In connection with their audits for the two most recent fiscal years and through
March 13 there were no disagreements between the Company and the independent
accountants on any matter of accounting principles or practices, financial
statement disclosure, or auditing scope or procedure, which disagreements if not
resolved to the satisfaction of the independent accountants would have caused
them to make reference thereto in their report on the financial statements for
such fiscal years.
A special committee of the outside members of the Company's Board of Directors
has investigated the accounting errors and irregularities. All known adjustments
to the prior year financial statements have been reflected in the restated 1997
financial statements presented.
<PAGE> 9
Item 2 - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis of financial condition and results of operations of the
Company should be read in conjunction with the Company's financial statements
and notes thereto included under Item 1. Financial Statements.
RESULTS OF OPERATIONS
REVENUES. For the three months ended September 30, 1998, total revenue increased
20.9% to $24.4 million from $20.2 million for the same period in 1997. For the
nine months ended September 30, 1998, total revenue increased 18.4% to $69.5
million from $58.7 million in 1997. These increases were primarily due to
organic growth in all regions serviced by the Company. The Company continued to
leverage off of the successful expansion into the eastern region of the United
States, as well as from increases in government work in Michigan, Florida and
Louisiana.
Product sales increased $2.9 million or 18.7% and service revenues increased
$1.4 million or 28.2% for the three months ended September 30,1998 compared to
the same period in 1997. Service revenues accounted for 25.1% of total revenues
during the three months ended September 30, 1998 compared to 23.7% in 1997. For
the nine months ending September 30, 1998, service revenue accounted for 24.0%
of total revenue, a 1.6% increase in the service to product business mix
compared to the same period in 1997. Product sales increased during the quarter
primarily due to a significant non-government integration project in the
Northeastern Region. The service revenue increases resulted primarily from an
increase in specialty services and maintenance revenues from government work.
The Company's focus on training, installation and project service revenue
continues to improve the balance in the business mix between product and service
sales.
A blanket purchase order with the State of Michigan had previously been renewed
through September 1998. The Company's sales management team has been meeting
with representatives of the State of Michigan and with another of the State's
master contract holders, to continue to provide network and maintenance services
to the State. Those negotiations have resulted in an agreement, through a
third party master-contractor blanket purchase order, to supply the State with
network services. Separately, the State of Michigan has extended the Company's
maintenance services through March 31, 1999 for company provided services and
through, September 30, 1999 for Company sub-contracted third party maintenance
service providers. As with all of the Company's service contracts and purchase
orders, there can be no assurance that any agreement will continue to be
extended or that, if re-bid, the Company would be awarded a new agreement on
terms and conditions which are at least as favorable to the Company as any
current agreement.
COST OF REVENUES. The total cost of revenues for the three months ended
September 30, 1998 increased to 83.8% (of total revenue) from 80.3% in 1997. For
the nine months ending September 30, 1998, the total cost of revenues increased
to 82.9% from 81.4% in 1997. The cost of service revenues increased to 77.3% (as
a percent of service revenue) for the three months ended September 30, 1998 as
compared to 76.6% in the same three months in 1997. The increase was due
primarily to the Company's continued investment in technical personnel, which
increased both pre-sale and post-sale field support cost. Total headcount in
technical support has leveled and is consistent with expectations for the
anticipated growth in service offerings. The increase in the cost of service
revenue for the three months ended September 30, 1998 was also due to the
utilization during the period of third party subcontractors to support
installations in areas where the Company does not have a physical presence. The
cost of product sales increased to 86.0% for the three months ended
September 30, 1998 compared to 81.4% for the same period in 1997. The increase
in cost parallels the increase in the product sales revenue, (up over 1997 by
$2.9 million), and relates to the non-government project in the Northeast
Region. For the nine months ended September 30, 1998, product sales cost
declined to 62% of total revenue compared to 63% in the same time period in the
prior year. The Company attributes the cost control primarily to the success of
its efforts to negotiate discounts from key product suppliers.
OPERATING EXPENSES. As a percent of total sales, selling, general and
administrative expense declined to 16% in the three months ended September 30,
1998 when compared to 17% in the same period in 1997. Overall cost control in
sales and administration along with decreases in accounting and legal related
expenses account for the stabilization. For the nine
<PAGE> 10
months ending September 30, 1998, total operating expenses increased slightly to
18.0% from 17.4% of total revenue in 1997. The increase is primarily due to
legal and auditing expenses that exceed just over $1.0 million year to date,
which were partially offset by cost control in all administrative areas. The
extraordinary efforts required to complete year end 1997 and 1996 reporting,
cost incurred in connection with the pending shareholder law suits, and bank
audit and examination expenses, account for 1.4% of cost as a percent of total
revenue.
OTHER (EXPENSE) INCOME. Net other expenses decreased by $14,859 for the three
months ending September 30, 1998 and by $347,515 for the nine months ending
September 30, 1998 when compared to the same time periods in the prior year.
Interest expense accounts for the majority of the decrease, declining $160,816
for the quarter and $470,584 year to date, when compared to the same time period
in the prior year. The decrease reflects lower average borrowings in 1998 due to
the Company's collection of accounts receivables and repayment of bank
indebtedness. The Company continues to manage its working capital needs from
ongoing operations.
DISCONTINUED OPERATIONS. Persuant to the terms of the original 1996 purchase
agreement, by which the Company acquired Unified Network Services Inc. ("UNS"),
the minority shareholders of UNS elected to exercise a contract option to
initiate re-purchase of the Company's UNS subsidiary. The Company's Board of
Directors accepted the proposal and adopted a plan to discontinue operations.
Effective June 1, 1998, the Company sold its 70% interest in the UNS subsidiary
for cash and notes and discontinued operations in its large account network
management business. The net gain upon disposal of the discontinued segment was
$1,605,304. The terms of the sale included $7,000 in cash and a note for
$3,000,000, secured by the stock of UNS. The buyers will also assume the
existing liabilities of UNS. The Company is deferring the recognition of a gain
on sale related to the note until payments on the note begin in 1999.
The Company has restated its prior financial statements to present the operating
results of the UNS segment as a discontinued operation. The net assets of UNS
amounted to $925,925 and the net liabilities totaled $4,633,049, leaving
negative shareholder equity of $3,707,124. The divestiture results in
substantial cost savings without significant loss of customer relationships or
the ability to deliver specialized technical services in any related area. The
Company continues to have a presence in the Raleigh, NC market, and retains
ownership of its proprietary remote network management ENCORE(TM) software
product.
FINANCIAL CONDITION
As of September 30, 1998, the Company financed its business primarily through
funds generated internally through operations trade credit and advances under an
$11 million discretionary line of credit with NBD Bank (the "Bank"). The line of
credit was secured by substantially all of the Company's assets, with the
exception of those inventory assets acquired under the Company's credit line
with IBM Credit Corporation, and was due on demand by the Bank. The term of the
agreement extended to September 30, 1998, and could be terminated at any time by
the Company or the Bank. The agreement contained certain financial ratio
covenants requiring the Company's receivables to be genuine and free of all
other encumbrances and required the Company's inventory to be kept only at
certain locations and to be free of all other encumbrances. As of September 30,
1998, the line of credit bore interest at prime rates plus 2.0%. Borrowing under
the line of credit was determined based on a collateral formula. As of September
30, 1998, the formula would have permitted borrowings of up to $11.5 million, of
which $8.6 million was outstanding.
On September 30, 1998 the Company and Foothill Capital Corporation ("Foothill")
entered into a new credit facility ("Foothill Agreement"), replacing in its
entirety, the existing credit agreement with NBD. The Foothill Agreement
provides for an initial revolving credit facility line of credit not to exceed
$15 million. The Company may, at its option and subject to certain collateral
requirements, increase the line of credit to $20 million anytime during the term
of the Foothill Agreement. Borrowing limits under the credit facility are
determined based on a collateral formula, which includes 85% of qualified trade
receivables. Borrowings under the credit agreement bear interest at 1% over the
Norwest Bank prime rate and have a term extending to September 30, 2001. All
monies owed by the Company to NBD were paid on October 1, 1998 using borrowings
under the Foothill Agreement.
<PAGE> 11
The secured financing agreement with IBM Credit Corporation continues to offer
thirty days interest free financing up to $2.0 million on certain products
purchased by the Company for resale. As of September 30, 1998, the IBM Credit
Corporation line of credit was fully utilized and is reflected in the total
accounts payable balance.
For the nine months ended September 30, 1998, the Company increased cash and
cash equivalents by approximately $2.4 million primarily due to the $7.1 million
decrease in accounts receivable and the liquidation of $6.2 million of
investments. The increase was partially offset by the $8.7 million decrease in
line of credit borrowings and the $2.7 million decrease in accounts payable and
accrued liabilities. Working capital deficiency as of September 30, 1998 was
$2.8 million compared to a working capital deficiency of $2.5 million at June
30, 1998. The slight change was due to an increase in the line of credit
outstanding, which resulted form the payoff of all NBD Bank indebtedness, and an
increase in the deferred revenue, which reflects a future benefits. The increase
in liabilities was offset by a $1.2 million increase in accounts receivable.
The Company believes that the combination of present cash balances, future
operating cash flows, and credit facilities will be adequate to fund the
Company's currently anticipated internal growth and current short and long term
cash flow requirements.
YEAR 2000 COMPLIANCE
The Year 2000 ("Y2K") issue is the result of computer programs using a two-digit
format, as opposed to four digits, to indicate the year. Such computer systems
will be unable to interpret dates beyond the year 1999, which could cause a
system failure or other computer errors, leading to disruptions in operations.
In 1997, the Company developed a three-phase program for Y2K information systems
compliance. Phase I is to identify those systems with which the Company has
exposure to Y2K issues. Phase I is expected to be completed by December 31,
1998. Phase II is the development and implementation of action plans to be Y2K
compliant in all areas by early 1999. Phase III, to be completed by mid-1999, is
the final testing of each major area of exposure to ensure compliance. The
Company has identified three major areas determined to be critical for
successful Y2K compliance: (1) financial and informational system applications,
(2) customer relationships and equipment applications and (3) third-party
consultant and vendor relationships.
The Company, in accordance with Phase I of the program, is in the process of
conducting an internal review and inventory of all systems (including
information technology and non-information technology systems), and contacting
all critical suppliers to determine major areas of exposure to Y2K issues. In
the financial and information system area, a number of applications have been
identified as Y2K compliant due to their recent implementation. The Company's
core financial and reporting systems are not Y2K compliant but were already
scheduled for replacement by early 1999. In the customer and equipment area, the
Company is in the process of identifying areas of exposure. The Company has
completed its Phase I assessment of its non-information technology systems and
does not believe it will incur significant costs remediating those systems for
Y2K compliance. In the third-party consultant and vendor area, the Company has
contacted most of its major third parties. Most of these parties state that they
intend to be Y2K compliant by 2000. Additionally, the Company has included Y2K
requirements on all purchase orders issued to vendors and further, has included
a Y2K disclaimer on all customer invoices.
The Company believes it will cost approximately $200,000 to replace the core
financial and reporting systems and has identified the potential for 1,000 man
hours of work to bring the remaining systems network, financial and
informational system applications into compliance at an estimated cost of
$100,000. Because of the Company's expertise in this area, internal personnel
will undertake the majority of the work and expects approximately one-half of
the cost to be incurred in 1998 and the remainder in 1999. The Company has yet
to determine what costs, if any, will be incurred in connection with the
customer and equipment area and the third party consultants and vendor area.
The Company believes that its most reasonably likely worst case Y2K scenario, is
that certain vendors fail to supply the Company with products that are Y2K
compliant, which are then sold to the Company's customers, or, certain vendors
are unable to provide the Company with needed products or services due to the
failure of the vendor to be Y2K compliant. In such cases, the Company plans to
use its expertise in this area to work with its customers to provide Y2K
remediation and seek out alternative Y2K compliant vendors. It is uncertain how
the Company might be effected by the occurrence of its most reasonable likely
worst case scenario. However, in the event of such an occurrence, the Company's
revenue, net income or financial condition could be materially adversely
effected. The Company is continuing to review contingency plans to evaluate Y2K
business interruption scenarios, but has not established a timetable for
completion of a formal plan.
<PAGE> 12
FORWARD-LOOKING STATEMENT
The foregoing discussion and analysis contain a number of "forward looking
statements" within the meaning of the Securities Exchange Act of 1934, and are
subject to a number of risks and uncertainties. These include general business
conditions, continuing favorable economic conditions, the failure of the
Company's customers to fulfill contractual commitments, the ability of the
Company to recruit and retain qualified personnel, the ability of the Company to
develop and sustain new customers in geographic areas in which the Company has
recently begun to operate, the ability of management to implement new systems to
manage the Company's growth effectively and efficiently, the impact of
undetected errors or defects associated with year 2000 date functions on the
Company's operations or unanticipated costs of Year 2000 remediation, the
relative uncertainties in the market direction of emerging technologies, the
ability of the Company to recruit and retain qualified personnel and the
potential loss of key personnel within the new regions, the Company's ability to
retain its commercial and governmental contracts, and a lack of market
acceptance of the Company's products and services.
PART II OTHER INFORMATION
ITEM 1 - Legal Proceedings
Class Action Litigation
As initially reported in the Company's annual report on Form 10-K, filed on
April 15, 1998, and subsequently updated by the Company's quarterly reports on
Form 10-Q, as amended, on or about February 26, 1998, Plaintiff Tony DiFatta
filed civil action, Case No. 98CV70854 DT (the "DiFatta Complaint"), in the
United States District Court for the Eastern District of Michigan, Southern
Division, against the Company and individual defendants Michael W. Grieves and
Philip M. Goy. Mr. DiFatta seeks to represent a class of all purchasers of the
Company's stock on the open market between March 5, 1997 and February 24, 1998,
excluding the individual defendants and any officer, director or control person
of the Company and members of their immediate families. The DiFatta Complaint
alleges violation of Sections 10(b) and 20(a) of the Securities Exchange Act of
1934, 15 U.S.C. Sections 78j(b) and 78t(a), and SEC Rule lOb-5, through
nondisclosure and misrepresentations of information concerning the Company's
financial results and future prospects. In particular, DiFatta claims that press
releases and SEC filings by the Company were materially false and misleading in
that they overstated revenues and earnings for the year and quarter ended
December 31, 1996, and for the quarters ended March 31, 1997, June 30, 1997 and
September 30, 1997 due to accounting irregularities.
On or about March 17, 1998, Plaintiff Jeffrey P. Emrich filed civil action, Case
No. 98CV1223 DT (the "Emrich Complaint"), in the United States District Court
for the Eastern District of Michigan, Southern Division, against the Company and
individual defendants Grieves and Goy. On or about April 17, 1998, Plaintiff
David L. Ronick filed a civil action, Case No. 98-71644 DT (the"Ronick
Complaint") in the same court against the Company and individual defendants
Grieves, Goy, Walter J. Aspatore and Jerry A. Dusa. The Emrich Complaint and the
Ronick Complaint each seek to certify an essentially identical class of
purchasers of the Company's stock as the class proposed in the DiFatta
Complaint, and present essentially identical claims.
On or about June 10, 1998, the DiFatta, Emrich and Ronick actions were
consolidated for all purposes under the caption In Re: Data Systems Network
Corporation Securities Litigation, Case No. 98-70854.
On or about July 10, 1998, Plaintiffs in the consolidated action filed a
consolidated complaint in lieu of the previously filed complaints, against the
Company and individual defendants Grieves and Goy, seeking to represent a class
of purchasers of the Company's stock between May 15, 1996 and February 24, 1998.
Since the filing of the consolidated complaint, the parties have been engaged
periodically in settlement discussions. The Company, however, can provide no
assurance and makes no representation that these discussions will ultimately
result in the settlement of this matter.
<PAGE> 13
Securities and Exchange Commission Investigation
On or about October 29, 1998, the Securities and Exchange Commission ("SEC")
informed the Company that it is conducting a formal private investigation of the
accounting irregularities experienced by the Company in fiscal years 1996
and 1997. This inquiry is ongoing, and the Company is cooperating with the SEC
and providing information as requested.
ITEM 5 - Other Information
Board of Director Change
By letter dated September 9, 1998, Jerry A. Dusa, Outside Director of the
Company, resigned from the Board of Directors. Mr. Dusa sighted personal reasons
for his decision and sighted no disagreement with the Company on any matter
relating to the Company's operating policies or practices as the basis for his
action.
ITEM 6 - Exhibits and Reports on Form 8-K
(a) EXHIBITS
10. Loan and Security Agreement between the Company and Foothill Capital
Corporation dated September 30, 1998.
27. Financial Data Schedule
(b) REPORTS ON FORM 8-K The following filings occurred during the third
quarter of 1998:
Date Information Reported
July 31, 1998 Items 5 and 7
No financial statements were filed with these Reports on Form 8-K.
<PAGE> 14
SIGNATURES
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Data Systems Network Corporation
November 9, 1998 /s/ John 0. Lychos, Jr. --------------------------
John 0. Lychos, Jr.
Vice President - Finance,
Treasurer and Chief Financial Officer
(principal financial officer)
November 9, 1998 /s/ Michael W. Grieves --------------------------
Michael W. Grieves
President and Chief Executive Officer
(duly authorized officer)
<PAGE> 15
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION
- ------- --- -----------
10. Loan and Security Agreement between the Company and
Foothill Capital Corporation dated September 30, 1998.
27. Financial Data Schedule
<PAGE> 1
================================================================================
LOAN AND SECURITY AGREEMENT
BY AND BETWEEN
DATA SYSTEMS NETWORK CORPORATION
AND
FOOTHILL CAPITAL CORPORATION
DATED AS OF SEPTEMBER 30, 1998
================================================================================
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE(S)
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<S> <C>
1. DEFINITIONS AND CONSTRUCTION......................................................................... 1
1.1 Definitions................................................................................. 1
1.2 Accounting Terms............................................................................ 14
1.3 Code........................................................................................ 14
1.4 Construction................................................................................ 14
1.5 Schedules and Exhibits...................................................................... 14
2. LOAN AND TERMS OF PAYMENT............................................................................ 14
2.1 Revolving Advances.......................................................................... 14
2.2 Letters of Credit........................................................................... 15
2.3 RESERVED.................................................................................... 17
2.4 RESERVED.................................................................................... 17
2.5 Overadvances................................................................................ 18
2.6 Interest and Letter of Credit Fees: Rates, Payments, and Calculations...................... 18
2.7 Collection of Accounts...................................................................... 19
2.8 Crediting Payments; Application of Collections.............................................. 19
2.9 Designated Account.......................................................................... 20
2.10 Maintenance of Loan Account; Statements of Obligations...................................... 20
2.11 Fees........................................................................................ 20
3. CONDITIONS; TERM OF AGREEMENT........................................................................ 21
3.1 Conditions Precedent to the Initial Advance and Initial Letter of Credit.................... 21
3.2 Conditions Precedent to all Advances and all Letters of Credit.............................. 23
3.3 Conditions Subsequent....................................................................... 24
3.4 Term; Automatic Renewal..................................................................... 24
3.5 Effect of Termination....................................................................... 25
3.6 Early Termination by Borrower............................................................... 25
3.7 Termination Upon Event of Default........................................................... 25
4. CREATION OF SECURITY INTEREST........................................................................ 25
4.1 Grant of Security Interest.................................................................. 25
4.2 Negotiable Collateral....................................................................... 26
4.3 Collection of Accounts, General Intangibles, and Negotiable Collateral...................... 26
4.4 Delivery of Additional Documentation Required............................................... 26
4.5 Power of Attorney........................................................................... 26
4.6 Right to Inspect............................................................................ 27
</TABLE>
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<TABLE>
<S> <C>
5. REPRESENTATIONS AND WARRANTIES....................................................................... 27
5.1 No Encumbrances............................................................................. 27
5.2 Eligible Accounts........................................................................... 27
5.3 Inventory................................................................................... 27
5.4 Equipment................................................................................... 27
5.5 Location of Inventory and Equipment......................................................... 27
5.6 Inventory Records........................................................................... 28
5.7 Location of Chief Executive Office; FEIN.................................................... 28
5.8 Due Organization and Qualification; Subsidiaries............................................ 28
5.9 Due Authorization; No Conflict.............................................................. 28
5.10 Litigation.................................................................................. 29
5.11 No Material Adverse Change.................................................................. 29
5.12 Solvency.................................................................................... 29
5.13 Employee Benefits........................................................................... 30
5.14 Environmental Condition..................................................................... 30
5.15 Intellectual Property....................................................................... 30
5.16 Year 2000 Compliance........................................................................ 30
6. AFFIRMATIVE COVENANTS................................................................................ 31
6.1 Accounting System........................................................................... 31
6.2 Collateral Reporting........................................................................ 31
6.3 Financial Statements, Reports, Certificates................................................. 32
6.4 Tax Returns................................................................................. 33
6.5 Guarantor Reports........................................................................... 33
6.6 Returns..................................................................................... 33
6.7 Title to Equipment.......................................................................... 33
6.8 Maintenance of Equipment.................................................................... 33
6.9 Taxes....................................................................................... 33
6.10 Insurance................................................................................... 34
6.11 No Setoffs or Counterclaims................................................................. 35
6.12 Location of Inventory and Equipment......................................................... 35
6.13 Compliance with Laws........................................................................ 35
6.14 Employee Benefits........................................................................... 35
6.15 Leases...................................................................................... 36
6.16 Preservation of Existence, Etc.............................................................. 36
6.17 Keeping of Records and Books of Account..................................................... 36
6.18 Maintenance of Properties, Etc.............................................................. 36
6.19 Copyright Registrations..................................................................... 36
6.20 Year 2000 Compatibility..................................................................... 37
6.21 Further Assurances.......................................................................... 37
7. NEGATIVE COVENANTS................................................................................... 37
7.1 Indebtedness................................................................................ 37
7.2 Liens....................................................................................... 38
7.3 Restrictions on Fundamental Changes......................................................... 38
</TABLE>
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<TABLE>
<S> <C> <C>
7.4 Disposal of Assets.......................................................................... 38
7.5 Change Name................................................................................. 38
7.6 Guarantee................................................................................... 38
7.7 Nature of Business.......................................................................... 38
7.8 Prepayments and Amendments.................................................................. 38
7.9 Change of Control........................................................................... 38
7.10 Consignments................................................................................ 38
7.11 Distributions............................................................................... 38
7.12 Accounting Methods.......................................................................... 39
7.13 Investments................................................................................. 39
7.14 Transactions with Affiliates................................................................ 39
7.15 Suspension.................................................................................. 39
7.16 Compensation................................................................................ 39
7.17 Use of Proceeds............................................................................. 39
7.18 Change in Location of Chief Executive Office; Inventory and Equipment with Bailees.......... 39
7.19 No Prohibited Transactions Under ERISA...................................................... 40
7.20 Financial Covenants......................................................................... 41
7.21 Capital Expenditures........................................................................ 41
8. EVENTS OF DEFAULT.................................................................................... 41
9. FOOTHILL'S RIGHTS AND REMEDIES....................................................................... 42
9.1 Rights and Remedies......................................................................... 42
9.2 Remedies Cumulative......................................................................... 44
10. TAXES AND EXPENSES................................................................................... 45
11. WAIVERS; INDEMNIFICATION............................................................................. 45
11.1 Demand; Protest; etc........................................................................ 45
11.2 Foothill's Liability for Collateral......................................................... 45
11.3 Indemnification............................................................................. 45
12. ISSUANCE OF EQUITY INTERESTS TO FOOTHILL............................................................. 46
12.1 Authorization and Issuance of Warrants...................................................... 46
12.2 Securities Act Matters...................................................................... 46
12.3 Certain Taxes............................................................................... 47
12.4 Cancellation and Issuance................................................................... 47
13. NOTICES.............................................................................................. 47
14. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER........................................................... 48
15. DESTRUCTION OF BORROWER'S DOCUMENTS.................................................................. 49
</TABLE>
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<PAGE> 5
<TABLE>
<S> <C>
16. GENERAL PROVISIONS................................................................................... 49
16.1 Effectiveness............................................................................... 49
16.2 Successors and Assigns...................................................................... 49
16.3 Section Headings............................................................................ 50
16.4 Interpretation.............................................................................. 50
16.5 Severability of Provisions.................................................................. 50
16.6 Amendments in Writing....................................................................... 50
16.7 Counterparts; Telefacsimile Execution....................................................... 50
16.8 Revival and Reinstatement of Obligations.................................................... 50
16.9 Integration................................................................................. 51
16.10 Brokers Fees................................................................................ 51
</TABLE>
iv
<PAGE> 6
SCHEDULES AND EXHIBITS
- ----------------------
Schedule P-1 Permitted Liens
Schedule 3.1 Financing Statements to be terminated
Schedule 5.8 Capitalization; Subsidiaries
Schedule 5.10 Litigation
Schedule 5.13 ERISA Benefit Plans
Schedule 5.15 Copyrights and Trademarks
Schedule 6.12 Location of Inventory and Equipment
Schedule 7.1 Indebtedness
Exhibit C-1 Form of Compliance Certificate
Exhibit C-2 Form of Copyright Security Agreement
Exhibit C-3 Form of Trademark Security Agreement
Exhibit M-1 Form of Notice of Increase in Maximum Revolving Amount
Exhibit P-1 Form of Pledge Agreement
Exhibit R Registration Rights Agreement
Exhibit W Common Stock Purchase Warrant
v
<PAGE> 7
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT (THIS "AGREEMENT"), is entered into as
of September 30, 1998, between FOOTHILL CAPITAL CORPORATION, a California
corporation ("Foothill"), with a place of business located at 11111 Santa Monica
Boulevard, Suite 1500, Los Angeles, California 90025-3333 and DATA SYSTEMS
NETWORK CORPORATION, a Michigan corporation ("Borrower"), with its chief
executive office located at 34705 West Twelve Mile Road, Suite 300, Farmington
Hills, Michigan 48331.
The parties agree as follows:
1. DEFINITIONS AND CONSTRUCTION.
1.1 DEFINITIONS. As used in this Agreement, the following
terms shall have the following definitions:
"Account Debtor" means any Person who is or who may
become obligated under, with respect to, or on account of, an Account.
"Accounts" means all currently existing and hereafter
arising accounts, contract rights, and all other forms of obligations owing to
Borrower arising out of the sale, lease or license of goods or intangibles or
the rendition of services by Borrower, irrespective of whether earned by
performance, and any and all credit insurance, guaranties, or security therefor.
"Advances" has the meaning set forth in Section
2.1(a).
"Affiliate" means, as applied to any Person, any
other Person who directly or indirectly controls, is controlled by, is under
common control with or is a director or officer of such Person. For purposes of
this definition, "control" means the possession, directly or indirectly, of the
power to vote 5% or more of the securities having ordinary voting power for the
election of directors or the direct or indirect power to direct the management
and policies of a Person.
"Agreement" has the meaning set forth in the preamble
hereto.
"Authorized Person" means any officer or other
employee of Borrower.
"Availability" means, as of any date of
determination, the difference (so long as such difference is a positive number)
between (a) the lesser of the Borrowing Base and the Maximum Revolving Amount
and (b) Revolving Facility Usage.
"Average Unused Portion of Maximum Revolving Amount"
means, as of any date of determination, (a) the Maximum Revolving Amount, less
(b) the sum of (i) the average Daily Balance of Advances that were outstanding
during the immediately preceding month, plus (ii) the average Daily Balance of
the undrawn Letters of Credit that were outstanding during the immediately
preceding month.
1
<PAGE> 8
"Bankruptcy Code" means the United States Bankruptcy
Code (11 U.S.C. Section 101 et seq.), as amended, and any successor statute.
"Benefit Plan" means a "defined benefit plan" (as
defined in Section 3(35) of ERISA) for which Borrower, any Subsidiary of
Borrower, or any ERISA Affiliate has been an "employer" (as defined in Section
3(5) of ERISA) within the past six years.
"Borrower" has the meaning set forth in the preamble
to this Agreement.
"Borrower's Books" means all of Borrower's books and
records including: ledgers; records indicating, summarizing, or evidencing
Borrower's properties or assets (including the Collateral) or liabilities; all
information relating to Borrower's business operations or financial condition;
and all computer programs, disk or tape files, printouts, runs, or other
computer prepared information.
"Borrowing Base" has the meaning set forth in Section
2.1(a).
"Business Day" means any day that is not a Saturday,
Sunday, or other day on which national banks are authorized or required to
close.
"Change of Control" shall be deemed to have occurred
at such time as a "person" or "group" (within the meaning of Sections 13(d) and
14(d)(2) of the Securities Exchange Act of 1934) other than Michael Grieves and
Diane Grieves becomes the "beneficial owner" (as defined in Rule 13d-3 under the
Securities Exchange Act of 1934), directly or indirectly, of more than 25% of
the total voting power of all classes of stock then outstanding of Borrower
entitled to vote in the election of directors.
"Closing Date" means the date of the first to occur
of the making of the initial Advance or the issuance of the initial Letter of
Credit.
"Code" means the New York Uniform Commercial Code.
"Collateral" means each of the following:
(a) the Accounts,
(b) Borrower's Books,
(c) the Equipment,
(d) the General Intangibles,
(e) the Inventory,
(f) the Negotiable Collateral,
(g) all Securities Accounts,
-2-
<PAGE> 9
(h) any money, or other assets of Borrower that now
or hereafter come into the possession, custody, or control of Foothill, and
(i) the proceeds and products, whether tangible or
intangible, of any of the foregoing, including proceeds of insurance covering
any or all of the Collateral, and any and all Accounts, Borrower's Books,
Equipment, General Intangibles, Inventory, Negotiable Collateral, Securities
Accounts, money, deposit accounts, or other tangible or intangible property
resulting from the sale, exchange, collection, or other disposition of any of
the foregoing, or any portion thereof or interest therein, and the proceeds
thereof.
"Collateral Access Agreement" means a landlord
waiver, mortgagee waiver, bailee letter, or acknowledgment agreement of any
warehouseman, processor, lessor, consignee, or other Person in possession of,
having a Lien upon, or having rights or interests in the Equipment or Inventory,
in each case, in form and substance satisfactory to Foothill.
"Collections" means all cash, checks, notes,
instruments, and other items of payment (including, insurance proceeds, proceeds
of cash sales, rental proceeds, and tax refunds).
"Common Stock" means shares of the common capital
stock of Borrower.
"Compliance Certificate" means a certificate
substantially in the form of Exhibit C-1 and delivered by the chief accounting
officer of Borrower to Foothill.
"copyright" shall have the meaning given to such item
in the United States Copyright Act of 1997, as amended, and includes
unregistered copyrights.
"Copyright Security Agreement" means, collectively,
one or more Copyright Security Agreements, each in the form of Exhibit C-2
hereto, between Borrower and Foothill, securing the Obligations, as the same may
be amended or otherwise modified from time to time.
"Daily Balance" means the amount of an Obligation
owed at the end of a given day.
"deems itself insecure" means that the Person deems
itself insecure in accordance with the provisions of Section 1-208 of the Code.
"Default" means an event, condition, or default that,
with the giving of notice, the passage of time, or both, would be an Event of
Default.
"Designated Account" means account number 6797064 of
Borrower maintained with Borrower's Designated Account Bank, or such other
deposit account of Borrower (located within the United States) which has been
designated, in writing and from time to time, by Borrower to Foothill.
"Designated Account Bank" means NBD Bank, whose
office is located at 701 First National Building, Detroit, MI 48226, and whose
ABA number is 072000326.
-3-
<PAGE> 10
"Dilution" means, in each case based upon the
experience of the immediately prior three (3) months, the result of dividing the
Dollar amount of (a) bad debt write-downs, discounts, advertising discounts,
returns, promotion discounts, credits, or other dilution with respect to the
Accounts, by (b) Borrower's Collections (excluding extraordinary items) plus the
Dollar amount of clause (a).
"Dilution Reserve" means, as of any date of
determination, an amount sufficient to reduce Foothill's advance rate against
Eligible Accounts by one percentage point for each percentage point by which
Dilution is in excess of 5%.
"Disbursement Letter" means an instructional letter
executed and delivered by Borrower to Foothill regarding the extensions of
credit to be made on the Closing Date, the form and substance of which shall be
satisfactory to Foothill.
"Dollars or $" means United States dollars.
"Early Termination Premium" has the meaning set forth
in Section 3.6.
"EBITDA" means, with respect to any fiscal period of
Borrower, an amount equal to the sum for such fiscal period of (i) Net Income,
plus (ii) provision for taxes based on income, plus (iii) Interest Expense, plus
(iv) depreciation, amortization and other non-cash charges.
"Eligible Accounts" means those Accounts created by
Borrower in the ordinary course of business (net of current deposits and
unapplied cash payments to Borrower), that arise out of Borrower's sale of goods
or rendition of services, that strictly comply with each and all of the
representations and warranties respecting Accounts made by Borrower to Foothill
in the Loan Documents, and that are and at all times continue to be acceptable
to Foothill in all respects; provided, however, that standards of eligibility
may be fixed and revised from time to time by Foothill in Foothill's reasonable
credit judgment. Eligible Accounts shall not include the following:
(a) Accounts that the Account Debtor has failed to
pay within 90 days of invoice date, Accounts owed by an Account Debtor that is
not a Governmental Authority with selling terms of more than 30 days, or
Accounts owed by an Account Debtor that is a Governmental Authority with selling
terms of more than 60 days;
(b) Accounts owed by an Account Debtor or its
Affiliates where 50% or more of all Accounts owed by that Account Debtor (or its
Affiliates) are deemed ineligible under clause (a) above;
(c) Accounts with respect to which the Account Debtor
is an employee, Affiliate, or agent of Borrower;
(d) Accounts with respect to which goods are placed
on consignment, guaranteed sale, sale or return, sale on approval, bill and
hold, or other terms by reason of which the payment by the Account Debtor may be
conditional;
-4-
<PAGE> 11
(e) Accounts that are not payable in Dollars or with
respect to which the Account Debtor: (i) does not maintain its chief executive
office in the United States, or (ii) is not organized under the laws of the
United States or any State thereof, or (iii) is the government of any foreign
country or foreign sovereign state, or of any state, province, municipality, or
other political subdivision thereof, or of any department, agency, public
corporation, or other instrumentality thereof, unless (y) the Account is
supported by an irrevocable letter of credit satisfactory to Foothill (as to
form, substance, and issuer or domestic confirming bank) that has been delivered
to Foothill and is directly drawable by Foothill, or (z) the Account is covered
by credit insurance in form and amount, and by an insurer, satisfactory to
Foothill;
(f) Accounts with respect to which the Account Debtor
is either (i) the United States or any department, agency, or instrumentality of
the United States (exclusive, however, of Accounts with respect to which
Borrower has complied, to the satisfaction of Foothill, with the Assignment of
Claims Act, 31 U.S.C. Section 3727), or (ii) any state or city Governmental
Authority (exclusive, however, of (A) Accounts owed by any such Governmental
Authority that does not have a statutory counterpart to the Assignment of Claims
Act and (B) Accounts owed by a Governmental Authority that does have a statutory
counterpart to the Assignment of Claims Act and with respect to which Borrower
has complied with such applicable statutory counterpart to the satisfaction of
Foothill);
(g) Accounts with respect to which the Account Debtor
is a creditor of Borrower, has or has asserted a right of setoff, has disputed
its liability, or has made any claim with respect to the Account;
(h) Accounts with respect to an Account Debtor whose
total obligations owing to Borrower exceed 10% of all Eligible Accounts, to the
extent of the obligations owing by such Account Debtor in excess of such
percentage; provided, however, that for (i) Accounts with respect to which the
Account Debtor is a state or city Governmental Authority, Accounts with respect
to any such Governmental Authority whose total obligations owing to Borrower
exceed 15% of all Eligible Accounts (or, in the case of Accounts with respect to
which the Account Debtor is the State of Michigan, 30% of all Eligible Accounts)
shall not be included to the extent of the obligations owing by such Account
Debtor in excess of such percentage; (ii) Accounts with respect to which the
Account Debtor is MLC Group, Accounts resulting in the total obligations owing
by MLC Group to the Borrower exceeding 25% of all Eligible Accounts shall not be
included to the extent of the obligations in excess of such percentage; and
(iii) Accounts with respect to which the Account Debtor is Electronic Data
Systems, Accounts resulting in the total obligations owing by Electronic Data
Systems to the Borrower exceeding 25% of all Eligible Accounts shall not be
included to the extent of the obligations in excess of such percentage, further
provided, with respect to Accounts referred to in clauses (i), (ii) and (iii) of
this subparagraph, that Foothill, in its reasonable credit judgment, remains
satisfied with the credit quality of such Account Debtors;
(i) Accounts with respect to which the Account Debtor
is subject to any Insolvency Proceeding, or becomes insolvent, or goes out of
business;
(j) Accounts the collection of which Foothill, in its
reasonable credit judgment, believes to be doubtful by reason of the Account
Debtor's financial condition;
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(k) Accounts with respect to which the goods or
intangibles giving rise to such Account have not been shipped or delivered and
billed to, and accepted by, the Account Debtor, the services giving rise to such
Account have not been performed and accepted by the Account Debtor, or the
Account otherwise does not represent a final sale;
(l) Accounts with respect to which the Account Debtor
is located in the states of New Jersey, Minnesota, Indiana, or West Virginia (or
any other state that requires a creditor to file a Business Activity Report or
similar document in order to bring suit or otherwise enforce its remedies
against such Account Debtor in the courts or through any judicial process of
such state), unless Borrower has qualified to do business in New Jersey,
Minnesota, Indiana, West Virginia, or such other states, or has filed a Notice
of Business Activities Report with the applicable division of taxation, the
department of revenue, or with such other state offices, as appropriate, for the
then-current year, or is exempt from such filing requirement;
(m) Accounts, including without limitation, Accounts
arising from maintenance and support services performed by the Borrower pursuant
to maintenance contracts, that represent progress payments or other advance
billings that are due prior to the completion of performance by Borrower of the
subject contract (or relevant portion thereof) for goods or services or
intangibles; and
(n) Accounts related to, derived from or payable in
respect of computer software or other copyrightable subject matter (i) not owned
by Borrower (unless Foothill is satisfied, in its sole determination, that
Borrower has sufficient rights therein to enable it to sell such computer
software or other copyrightable subject matter and to perfect its Lien with
respect to Accounts related to, or derived or payable in respect of, such
computer software or other copyrightable subject matter), or (ii) with respect
to which a copyright has not been registered with the United States Copyright
Office or, if a copyright has been registered with the United States Copyright
Office, such copyright is not specifically encumbered in favor of Foothill by a
Copyright Security Agreement in the form of Exhibit C-2 that has been filed with
the United States Copyright Office.
"Equipment" means all of Borrower's present and
hereafter acquired machinery, machine tools, motors, equipment, furniture,
furnishings, fixtures, vehicles (including motor vehicles and trailers), tools,
parts, goods (other than consumer goods, farm products, or Inventory), wherever
located, including, (a) any interest of Borrower in any of the foregoing, and
(b) all attachments, accessories, accessions, replacements, substitutions,
additions, and improvements to any of the foregoing.
"ERISA" means the Employee Retirement Income Security
Act of 1974, 29 U.S.C. Sections 1000 et seq., amendments thereto, successor
statutes, and regulations or guidance promulgated thereunder.
"ERISA Affiliate" means (a) any corporation subject
to ERISA whose employees are treated as employed by the same employer as the
employees of Borrower under IRC Section 414(b), (b) any trade or business
subject to ERISA whose employees are treated as employed by the same employer as
the employees of Borrower under IRC Section 414(c), (c) solely for purposes of
Section 302 of ERISA and Section 412 of the IRC, any organization subject
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to ERISA that is a member of an affiliated service group of which Borrower is a
member under IRC Section 414(m), or (d) solely for purposes of Section 302 of
ERISA and Section 412 of the IRC, any party subject to ERISA that is a party to
an arrangement with Borrower and whose employees are aggregated with the
employees of Borrower under IRC Section 414(o).
"ERISA Event" means (a) a Reportable Event with
respect to any Benefit Plan or Multiemployer Plan, (b) the withdrawal of
Borrower, any of its Subsidiaries or ERISA Affiliates from a Benefit Plan during
a plan year in which it was a "substantial employer" (as defined in Section
4001(a)(2) of ERISA), (c) the providing of notice of intent to terminate a
Benefit Plan in a distress termination (as described in Section 4041(c) of
ERISA), (d) the institution by the PBGC of proceedings to terminate a Benefit
Plan or Multiemployer Plan, (e) any event or condition (i) that provides a basis
under Section 4042(a)(1), (2), or (3) of ERISA for the termination of, or the
appointment of a trustee to administer, any Benefit Plan or Multiemployer Plan,
or (ii) that may result in termination of a Multiemployer Plan pursuant to
Section 4041A of ERISA, (f) the partial or complete withdrawal within the
meaning of Sections 4203 and 4205 of ERISA, of Borrower, any of its Subsidiaries
or ERISA Affiliates from a Multiemployer Plan, or (g) providing any security to
any Plan under Section 401(a)(29) of the IRC by Borrower or its Subsidiaries or
any of their ERISA Affiliates.
"Event of Default" has the meaning set forth in
Section 8.
"Existing Lender" means NBD Bank.
"FEIN" means Federal Employer Identification Number.
"Foothill" has the meaning set forth in the preamble
to this Agreement.
"Foothill Account" has the meaning set forth in
Section 2.7.
"Foothill Expenses" means all: costs or expenses
(including taxes, and insurance premiums) required to be paid by Borrower under
any of the Loan Documents that are paid or incurred by Foothill; fees or charges
paid or incurred by Foothill in connection with Foothill's transactions with
Borrower, including, fees or charges for photocopying, notarization, couriers
and messengers, telecommunication, public record searches (including tax lien,
litigation, and UCC searches and including searches with the patent and
trademark office, the copyright office, or the department of motor vehicles),
filing, recording, publication, appraisal (including periodic Collateral
appraisals), costs and expenses incurred by Foothill in the disbursement of
funds to Borrower (by wire transfer or otherwise); charges paid or incurred by
Foothill resulting from the dishonor of checks; costs and expenses paid or
incurred by Foothill to correct any default or enforce any provision of the Loan
Documents, or in gaining possession of, maintaining, handling, preserving,
storing, shipping, selling, preparing for sale, or advertising to sell the
Collateral, or any portion thereof, irrespective of whether a sale is
consummated; and all fees, costs and expenses paid or incurred by Foothill in
examining Borrower's Books; costs and expenses of third party claims or any
other suit paid or incurred by Foothill in enforcing or defending the Loan
Documents or in connection with the transactions contemplated by the Loan
Documents or Foothill's relationship with Borrower or any guarantor; and
Foothill's reasonable attorneys fees and expenses incurred in advising,
structuring, drafting, reviewing, administering, amending, terminating,
enforcing
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(including attorneys fees and expenses incurred in connection with a "workout,"
a "restructuring," or an Insolvency Proceeding concerning Borrower or
any guarantor of the Obligations), defending, or concerning the Loan Documents,
irrespective of whether suit is brought.
"GAAP" means generally accepted accounting principles
as in effect from time to time in the United States, consistently applied.
"General Intangibles" means all of Borrower's present
and future general intangibles and other personal property (including contract
rights, rights arising under common law, statutes, or regulations, choses or
things in action, goodwill, patents, trade names, trademarks, servicemarks,
copyrights, computer software (whether or not considered to be a "good" rather
than an intangible and including the source code version thereof), blueprints,
drawings, purchase orders, customer lists, monies due or recoverable from
pension funds, route lists, rights to payment and other rights under any royalty
or licensing agreements, infringement claims, computer programs, information
contained on computer disks or tapes, literature, reports, catalogs, deposit
accounts, insurance premium rebates, tax refunds, and tax refund claims), other
than goods, Accounts, and Negotiable Collateral.
"Governing Documents" means the certificate or
articles of incorporation, by-laws, or other organizational or governing
documents of any Person.
"Governmental Authority" means any nation or
government, any state, province or other political subdivision thereof and any
department, commission, board, bureau, instrumentality, agency or other entity
exercising executive, legislative, judicial, regulatory or administrative
functions of or pertaining to government.
"Hazardous Materials" means (a) substances that are
defined or listed in, or otherwise classified pursuant to, any applicable laws
or regulations as "hazardous substances," "hazardous materials," "hazardous
wastes," "toxic substances," or any other formulation intended to define, list,
or classify substances by reason of deleterious properties such as ignitability,
corrosivity, reactivity, carcinogenicity, reproductive toxicity, or "EP
toxicity", (b) oil, petroleum, or petroleum derived substances, natural gas,
natural gas liquids, synthetic gas, drilling fluids, produced waters, and other
wastes associated with the exploration, development, or production of crude oil,
natural gas, or geothermal resources, (c) any flammable substances or explosives
or any radioactive materials, and (d) asbestos in any form or electrical
equipment that contains any oil or dielectric fluid containing levels of
polychlorinated biphenyls in excess of 50 parts per million.
"Indebtedness" means: (a) all obligations of Borrower
for borrowed money, (b) all obligations of Borrower evidenced by bonds,
debentures, notes, or other similar instruments and all reimbursement or other
obligations of Borrower in respect of letters of credit, bankers acceptances,
interest rate swaps, or other financial products, (c) all obligations of
Borrower under capital leases, (d) all obligations or liabilities of others
secured by a Lien on any property or asset of Borrower, irrespective of whether
such obligation or liability is assumed, and (e) any obligation of Borrower
guaranteeing or intended to guarantee (whether guaranteed, endorsed, co-made,
discounted, or sold with recourse to Borrower) any indebtedness, lease,
dividend, letter of credit, or other obligation of any other Person.
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<PAGE> 15
"Insolvency Proceeding" means any proceeding
commenced by or against any Person under any provision of the Bankruptcy Code or
under any other bankruptcy or insolvency law, assignments for the benefit of
creditors, formal or informal moratoria, compositions, extensions generally with
creditors, or proceedings seeking reorganization, arrangement, or other similar
relief.
"Intangible Assets" means, with respect to any
Person, that portion of the book value of all of such Person's assets that would
be treated as intangibles under GAAP.
"Intercreditor Agreement" means an intercreditor
agreement, in form and substance satisfactory to Foothill in its sole
discretion, dated the date hereof, between Foothill and IBM Credit Corporation
and acknowledged by the Borrower, as the same may be amended or otherwise
modified from time to time, setting forth the relative rights of such parties in
and to the Collateral.
"Interest Expense" means total interest obligations
(paid or accrued) of Borrower, determined in accordance with GAAP on a basis
consistent with the latest audited financial statements of Borrower.
"Inventory" means all present and future inventory in
which Borrower has any interest, including goods held for sale or lease or to be
furnished under a contract of service and all of Borrower's present and future
raw materials, work in process, finished goods, and packing and shipping
materials, wherever located.
"IRC" means the Internal Revenue Code of 1986, as
amended, and the regulations thereunder.
"L/C" has the meaning set forth in Section 2.2(a).
"L/C Guaranty" has the meaning set forth in Section
2.2(a).
"Letter of Credit" means an L/C or an L/C Guaranty,
as the context requires.
"Lien" means any interest in property securing an
obligation owed to, or a claim by, any Person other than the owner of the
property, whether such interest shall be based on the common law, statute, or
contract, whether such interest shall be recorded or perfected, and whether such
interest shall be contingent upon the occurrence of some future event or events
or the existence of some future circumstance or circumstances, including the
lien or security interest arising from a mortgage, deed of trust, encumbrance,
pledge, hypothecation, assignment, deposit arrangement, security agreement,
adverse claim or charge, conditional sale or trust receipt, or from a lease,
consignment, or bailment for security purposes and also including reservations,
exceptions, encroachments, easements, rights-of-way, covenants, conditions,
restrictions, leases, and other title exceptions and encumbrances affecting Real
Property.
"Loan Account" has the meaning set forth in Section
2.10.
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"Loan Documents" means this Agreement, the
Disbursement Letter, the Letters of Credit, the Lockbox Agreements, the
Trademark Security Agreement, the Copyright Security Agreement, the Pledge
Agreement, the Warrant, the Registration Rights Agreement, the Intercreditor
Agreement, any note or notes executed by Borrower and payable to Foothill, and
any other agreement entered into, now or in the future, in connection with this
Agreement.
"Lockbox Account" shall mean a depository account
established pursuant to one of the Lockbox Agreements.
"Lockbox Agreements" means those certain Lockbox
Operating Procedural Agreements and those certain Depository Account Agreements,
in form and substance satisfactory to Foothill, each of which is among Borrower,
Foothill, and one of the Lockbox Banks.
"Lockbox Banks" means NBD Bank and any other bank
acceptable to Foothill which agrees to enter into a Lockbox Agreement and
establish a Lockbox Account.
"Lockboxes" has the meaning set forth in Section 2.7.
"Material Adverse Change" means (a) a material
adverse change in the business, prospects, operations, results of operations,
assets, liabilities or condition (financial or otherwise) of Borrower, (b) the
material impairment of Borrower's ability to perform its obligations under the
Loan Documents to which it is a party or of Foothill to enforce the Obligations
or realize upon the Collateral, (c) a material adverse effect on the value of
the Collateral or the amount that Foothill would be likely to receive (after
giving consideration to delays in payment and costs of enforcement) in the
liquidation of such Collateral, or (d) a material impairment of the priority of
Foothill's Liens with respect to the Collateral.
"Maximum Amount" means $20,000,000.
"Maximum Revolving Amount" means $15,000,000,
provided that, subject to the terms of Section 2.1(c), the Maximum Revolving
Amount may be increased up to the Maximum Amount.
"Michigan Tax Accrual Reserve" means, initially, a
reserve in the amount of $20,000, which reserve may be adjusted from time to
time by Foothill, in its sole reasonable credit judgment for all due, and
anticipated to become due within one year of the date of adjustment to the
reserve, unpaid taxes, assessments, charges or levies imposed by a Governmental
Authority within the State of Michigan upon the Borrower or any of its property,
which if unpaid would result in a Lien against all or any part of the
Collateral.
"Multiemployer Plan" means a "multiemployer plan" (as
defined in Section 4001(a)(3) of ERISA) to which Borrower, any of its
Subsidiaries, or any ERISA Affiliate has contributed, or was obligated to
contribute, within the past six years.
"Negotiable Collateral" means all of Borrower's
present and future letters of credit, notes, drafts, instruments, investment
property, security entitlements, securities (including
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<PAGE> 17
the shares of stock of Subsidiaries of Borrower), documents, personal property
leases (wherein Borrower is the lessor), chattel paper, and Borrower's Books
relating to any of the foregoing.
"Net Income" means, for any period, the net income
(or net loss) of Borrower for such period after giving effect to deduction of or
provision for all operating expenses, all taxes and reserves (including reserves
for deferred taxes) and all other proper deductions, all determined in
accordance with GAAP, provided that there shall be excluded: (i) any restoration
of any contingency reserve for extraordinary items, except to the extent that
provision for such reserve was made out of income during such period, (ii) any
net gains or losses on the sale or other disposition, not in the ordinary course
of business, of capital assets, provided that there shall also be excluded any
related charges for taxes thereon, (iii) any net gain arising from the
collection of the proceeds of any insurance policy, (iv) any write-up of any
asset, and (v) any other extraordinary item.
"Obligations" means all loans, Advances, debts,
principal, interest (including any interest that, but for the provisions of the
Bankruptcy Code, would have accrued), contingent reimbursement obligations under
any outstanding Letters of Credit, premiums (including Early Termination
Premiums), liabilities (including all amounts charged to Borrower's Loan Account
pursuant hereto), obligations, fees, charges, costs, or Foothill Expenses
(including any fees or expenses that, but for the provisions of the Bankruptcy
Code, would have accrued), lease payments, guaranties, covenants, and duties
owing by Borrower to Foothill of any kind and description (whether pursuant to
or evidenced by the Loan Documents or pursuant to any other agreement between
Foothill and Borrower, and irrespective of whether for the payment of money),
whether direct or indirect, absolute or contingent, due or to become due, now
existing or hereafter arising, and including any debt, liability, or obligation
owing from Borrower to others that Foothill may have obtained by assignment or
otherwise, and further including all interest not paid when due and all Foothill
Expenses that Borrower is required to pay or reimburse by the Loan Documents, by
law, or otherwise.
"Overadvance" has the meaning set forth in Section
2.5.
"Participant" means any Person to which Foothill has
sold a participation interest in its rights under the Loan Documents.
"Pay-Off Letter" means a letter, in form and
substance reasonably satisfactory to Foothill, from Existing Lender respecting
the amount necessary to repay in full all of the obligations of Borrower owing
to Existing Lender and obtain a termination or release of all of the Liens
existing in favor of Existing Lender in and to the properties or assets of
Borrower.
"PBGC" means the Pension Benefit Guaranty Corporation
as defined in Title IV of ERISA, or any successor thereto.
"Permitted Liens" means (a) Liens held by Foothill,
(b) Liens for unpaid taxes that either (i) are not yet due and payable or (ii)
are the subject of Permitted Protests, (c) Liens set forth on Schedule P-1, (d)
the interests of lessors under operating leases and purchase money Liens of
lessors under capital leases to the extent that the acquisition or lease of the
underlying asset is permitted under Section 7.21 and so long as the Lien only
attaches to the asset purchased or
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<PAGE> 18
acquired and only secures the purchase price of the asset, (e) Liens arising
by operation of law in favor of warehousemen, landlords, carriers, mechanics,
materialmen, laborers, or suppliers, incurred in the ordinary course of
business of Borrower and not in connection with the borrowing of money,
and which Liens either (i) are for sums not yet due and payable, or
(ii) are the subject of Permitted Protests, (f) Liens arising from
deposits made in connection with obtaining worker's compensation or other
unemployment insurance, (g) Liens or deposits to secure performance of bids,
tenders, or leases (to the extent permitted under this Agreement), incurred in
the ordinary course of business of Borrower and not in connection with the
borrowing of money, (h) Liens arising by reason of security for surety or appeal
bonds in the ordinary course of business of Borrower, (i) Liens of or resulting
from any judgment or award that would not have a Material Adverse Effect and as
to which the time for the appeal or petition for rehearing of which has not yet
expired, or in respect of which Borrower is in good faith prosecuting an appeal
or proceeding for a review, and in respect of which a stay of execution pending
such appeal or proceeding for review has been secured, and (j) with respect to
any Real Property, easements, rights of way, zoning and similar covenants and
restrictions, and similar encumbrances that customarily exist on properties of
Persons engaged in similar activities and similarly situated and that in any
event do not materially interfere with or impair the use or operation of the
Collateral by Borrower or the value of Foothill's Lien thereon or therein, or
materially interfere with the ordinary conduct of the business of Borrower.
"Permitted Protest" means the right of Borrower to
protest any Lien other than any such Lien that secures the Obligations, payroll
taxes or taxes that are the subject of a United States federal tax lien, or
rental payments, provided that (a) a reserve with respect to such obligation is
established on the books of Borrower in an amount that is reasonably
satisfactory to Foothill, (b) any such protest is instituted and diligently
prosecuted by Borrower in good faith, and (c) Foothill is satisfied that, while
any such protest is pending, there will be no impairment of the enforceability,
validity, or priority of any of the Liens of Foothill in and to the Collateral.
"Person" means and includes natural persons,
corporations, limited liability companies, limited partnerships, general
partnerships, limited liability partnerships, joint ventures, trusts, land
trusts, business trusts, or other organizations, irrespective of whether they
are legal entities, and governments and agencies and political subdivisions
thereof.
"Pledge Agreement" means that certain Pledge and
Security Agreement, dated the date hereof, made by the Borrower in favor of
Foothill in the form of Exhibit P-1 hereto securing the Obligations, as the same
may be amended or otherwise modified from time to time.
"Plan" means any employee benefit plan, program, or
arrangement maintained or contributed to by Borrower or with respect to which it
may incur liability.
"Real Property" means any estates or interests in
real property now owned or hereafter acquired by Borrower.
"Reference Rate" means the variable rate of interest,
per annum, most recently announced by Norwest Bank Minnesota, National
Association, or any successor thereto, as its "base rate," irrespective of
whether such announced rate is the best rate available from such financial
institution.
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"Registration Rights Agreement" means the
registration rights agreement between Borrower and Foothill, dated as of the
date hereof, in the form of Exhibit R hereto, as the same may be amended or
otherwise modified from time to time.
"Renewal Date" has the meaning set forth in Section
3.4.
"Reportable Event" means any of the events described
in Section 4043(c) of ERISA or the regulations thereunder other than a
Reportable Event as to which the provision of 30 days notice to the PBGC is
waived under applicable regulations.
"Retiree Health Plan" means an "employee welfare
benefit plan" within the meaning of Section 3(1) of ERISA that provides benefits
to individuals after termination of their employment, other than as required by
Section 601 of ERISA.
"Revolving Facility Usage" means, as of any date of
determination, the aggregate outstanding amount of Advances and undrawn or
unreimbursed Letters of Credit.
"Securities Account" has the meaning specified
therefor in the Code.
"Solvent" means, with respect to any Person on a
particular date, that on such date (a) at fair valuations, all of the properties
and assets of such Person are greater than the sum of the debts, including
contingent liabilities, of such Person, (b) the present fair salable value of
the properties and assets of such Person is not less than the amount that will
be required to pay the probable liability of such Person on its debts as they
become absolute and matured, (c) such Person is able to realize upon its
properties and assets and pay its debts and other liabilities, contingent
obligations and other commitments as they mature in the normal course of
business, (d) such Person does not intend to, and does not believe that it will,
incur debts beyond such Person's ability to pay as such debts mature, and (e)
such Person is not engaged in business or a transaction, and is not about to
engage in business or a transaction, for which such Person's properties and
assets would constitute unreasonably small capital after giving due
consideration to the prevailing practices in the industry in which such Person
is engaged. In computing the amount of contingent liabilities at any time, it is
intended that such liabilities will be computed at the amount that, in light of
all the facts and circumstances existing at such time, represents the amount
that reasonably can be expected to become an actual or matured liability.
"Subsidiary" of a Person means a corporation,
partnership, limited liability company, or other entity in which that Person
directly or indirectly owns or controls the shares of stock or other ownership
interests having ordinary voting power to elect a majority of the board of
directors (or appoint other comparable managers) of such corporation,
partnership, limited liability company, or other entity.
"Tangible Net Worth" means, as of any date of
determination, the difference of (a) Borrower's total stockholder's equity,
minus (b) the sum of: (i) all Intangible Assets of Borrower, (ii) all of
Borrower's prepaid expenses, and (iii) all amounts due to Borrower from
Affiliates.
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<PAGE> 20
"Trademark Security Agreement" means a Trademark
Security Agreement of even date herewith, in the form of Exhibit C-2 hereto,
made by Borrower in favor of Foothill securing the Obligations, as the same may
be amended or otherwise modified from time to time.
"UNS Note" means that certain note, dated on or about
June 1, 1998 in the original principal sum of $3,000,000 payable by Unified
Network Services, Inc. ("UNS") to Borrower.
"Voidable Transfer" has the meaning set forth in
Section 15.8.
"Warrants" has the meaning set forth in Section 12.1.
"Warrant Stock" means Common Stock issued by Borrower
upon exercise of the Warrants.
1.2 ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP. When used herein, the
term "financial statements" shall include the notes and schedules thereto.
Whenever the term "Borrower" is used in respect of a financial covenant or a
related definition, it shall be understood to mean Borrower and its Subsidiaries
on a consolidated basis unless the context clearly requires otherwise.
1.3 CODE. Any terms used in this Agreement that are defined in
the Code shall be construed and defined as set forth in the Code unless
otherwise defined herein.
1.4 CONSTRUCTION. Unless the context of this Agreement clearly
requires otherwise, references to the plural include the singular, references to
the singular include the plural, the term "including" is not limiting, and the
term "or" has, except where otherwise indicated, the inclusive meaning
represented by the phrase "and/or." The words "hereof," "herein," "hereby,"
"hereunder," and similar terms in this Agreement refer to this Agreement as a
whole and not to any particular provision of this Agreement. An Event of Default
shall "continue" or be "continuing" until such Event of Default has been waived
in writing by Foothill. Section, subsection, clause, schedule, and exhibit
references are to this Agreement unless otherwise specified. Any reference in
this Agreement or in the Loan Documents to this Agreement or any of the Loan
Documents shall include all alterations, amendments, changes, extensions,
modifications, renewals, replacements, substitutions, and supplements, thereto
and thereof, as applicable.
1.5 SCHEDULES AND EXHIBITS. All of the schedules and exhibits
attached to this Agreement shall be deemed incorporated herein by reference.
2. LOAN AND TERMS OF PAYMENT.
2.1 REVOLVING ADVANCES.
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to make advances ("Advances") to Borrower in an
amount outstanding not to exceed at any one time the lesser of (i) the Maximum
Revolving Amount less the outstanding balance of all undrawn or unreimbursed
Letters of Credit, or (ii) the Borrowing Base less the aggregate amount of
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all undrawn or unreimbursed Letters of Credit. For purposes of this Agreement,
"Borrowing Base", as of any date of determination, shall mean the result of:
(x) the lesser of (i) 85% of Eligible
Accounts, less the amount, if any, of the Dilution Reserve,
and (ii) an amount equal to Borrower's Collections with
respect to Accounts for the immediately preceding 60 day
period, minus
(y) the Michigan Tax Accrual Reserve, minus
(z) the aggregate amount of reserves, if
any, established by Foothill under Section 2.1(b).
(b) Anything to the contrary in Section 2.1(a) above
notwithstanding, Foothill may create reserves against or reduce its advance
rates based upon Eligible Accounts without declaring an Event of Default if it
determines that there has occurred a Material Adverse Change.
(c) Upon the request of Borrower, the Maximum
Revolving Amount may be increased, not more frequently than once, to an amount
not greater than the Maximum Amount, provided that (i) Borrower requests such
increase in the Maximum Revolving Amount by giving written notice to Foothill,
substantially in the form of Exhibit M-1 to this Agreement, (ii) both before and
after giving effect to such requested increase in the Maximum Revolving Amount
(A) the representations and warranties contained in Section 5 of the Agreement
and in each other Loan Document and certificate and other writing delivered to
Foothill pursuant to this Agreement on or prior to the date of such requested
increase are correct on and as of such date as though made on and as of such
date (other than those representations which speak only as of a different date)
and (B) no Event of Default or Default has occurred and is continuing or would
result from such requested increase, (iii) Borrower has paid the fee described
in Section 2.11(a) on the amount of the requested increase in the Maximum
Revolving Amount, and (iv) Foothill consents in writing to such requested
increase in the Maximum Revolving Amount, which consent Foothill shall provide
unless the conditions set forth in clauses (i), (ii) and (iii) above have not
been satisfied. Foothill shall have no obligation to make Advances hereunder to
the extent they would cause the outstanding Obligations to exceed the Maximum
Revolving Amount, as such Maximum Revolving Amount may be increased pursuant to
the terms of this Section 2.1(c).
(d) Amounts borrowed pursuant to this Section 2.1 may
be repaid and, subject to the terms and conditions of this Agreement, reborrowed
at any time during the term of this Agreement.
2.2 LETTERS OF CREDIT.
(a) Subject to the terms and conditions of this
Agreement, Foothill agrees to issue letters of credit for the account of
Borrower (each, an "L/C") or to issue guarantees of payment (each such guaranty,
an "L/C Guaranty") with respect to letters of credit issued by an issuing bank
for the account of Borrower. Foothill shall have no obligation to issue a Letter
of Credit if any of the following would result:
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(i) the aggregate amount of all undrawn and
unreimbursed Letters of Credit, would exceed the Borrowing
Base less the amount of outstanding Advances less the
aggregate amount of reserves established under Section 2.1(b);
or
(ii) the aggregate amount of all undrawn or
unreimbursed Letters of Credit would exceed the lower of: (x)
the Maximum Revolving Amount less the amount of outstanding
Advances, or (y) $4,000,000; or
(iii) the outstanding Obligations would
exceed the Maximum Revolving Amount.
Borrower expressly understands and agrees that Foothill shall have no obligation
to arrange for the issuance by issuing banks of the letters of credit that are
to be the subject of L/C Guarantees. Borrower and Foothill acknowledge and agree
that certain of the letters of credit that are to be the subject of L/C
Guarantees may be outstanding on the Closing Date. Each Letter of Credit shall
have an expiry date no later than 60 days prior to the date on which this
Agreement is scheduled to terminate under Section 3.4 (without regard to any
potential renewal term) and all such Letters of Credit shall be in form and
substance acceptable to Foothill in its sole discretion. If Foothill is
obligated to advance funds under a Letter of Credit, Borrower immediately shall
reimburse such amount to Foothill and, in the absence of such reimbursement, the
amount so advanced immediately and automatically shall be deemed to be an
Advance hereunder and, thereafter, shall bear interest at the rate then
applicable to Advances under Section 2.6.
(b) Borrower hereby agrees to indemnify, save,
defend, and hold Foothill harmless from any loss, cost, expense, or liability,
including payments made by Foothill, expenses, and reasonable attorneys fees
incurred by Foothill arising out of or in connection with any Letter of Credit.
Borrower agrees to be bound by the issuing bank's regulations and
interpretations of any Letters of Credit guarantied by Foothill and opened to or
for Borrower's account or by Foothill's interpretations of any L/C issued by
Foothill to or for Borrower's account, even though this interpretation may be
different from Borrower's own, and Borrower understands and agrees that Foothill
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
Letter of Credit or any modifications, amendments, or supplements thereto.
Borrower understands that the L/C Guarantees may require Foothill 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, save,
defend, and hold Foothill harmless with respect to any loss, cost, expense
(including reasonable attorneys fees), or liability incurred by Foothill under
any L/C Guaranty as a result of Foothill's indemnification of any such issuing
bank.
(c) Borrower hereby authorizes and directs any bank
that issues a letter of credit guaranteed by Foothill to deliver to Foothill all
instruments, documents, and other writings and property received by the issuing
bank pursuant to such letter of credit, and to accept and rely upon Foothill's
instructions and agreements with respect to all matters arising in connection
with such letter of credit and the related application. Borrower may or may not
be the "applicant" or "account party" with respect to such letter of credit. In
the event of any conflict between the terms
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of any application for a Letter of Credit and this Agreement, for purposes of
this Agreement, the terms of this Agreement shall control.
(d) Any and all charges, commissions, fees, and costs
incurred by Foothill relating to the letters of credit guaranteed by Foothill
shall be considered Foothill Expenses for purposes of this Agreement and
immediately shall be reimbursable by Borrower to Foothill.
(e) Immediately upon the termination of this
Agreement, Borrower agrees to either (i) provide cash collateral to be held by
Foothill in an amount equal to 102% of the maximum amount of Foothill's
obligations under Letters of Credit, or (ii) cause to be delivered to Foothill
releases of all of Foothill's obligations under outstanding Letters of Credit.
At Foothill's discretion, any proceeds of Collateral received by Foothill after
the occurrence and during the continuation of an Event of Default may be held as
the cash collateral required by this Section 2.2(e).
(f) If by reason of (i) any change in any applicable
law, treaty, rule, or regulation or any change in the interpretation or
application by any governmental authority of any such applicable law, treaty,
rule, or regulation, or (ii) compliance by the issuing bank or Foothill with any
direction, request, or requirement (irrespective of whether having the force of
law) of any governmental authority or monetary authority including, without
limitation, Regulation D of the Board of Governors of the Federal Reserve System
as from time to time in effect (and any successor thereto):
(A) any reserve, deposit, or similar
requirement is or shall be imposed or modified in respect of any Letters of
Credit issued hereunder, or
(B) there shall be imposed on the issuing
bank or Foothill any other condition regarding any letter of credit, or Letter
of Credit, as applicable, issued pursuant hereto;
and the result of the foregoing is to increase, directly or indirectly, the cost
to the issuing bank or Foothill of issuing, making, guaranteeing, or maintaining
any letter of credit, or Letter of Credit, as applicable, or to reduce the
amount receivable in respect thereof by such issuing bank or Foothill, then, and
in any such case, Foothill may, at any time within a reasonable period after the
additional cost is incurred or the amount received is reduced, notify Borrower,
and Borrower shall pay on demand such amounts as the issuing bank or Foothill
may specify to be necessary to compensate the issuing bank or Foothill for such
additional cost or reduced receipt, together with interest on such amount from
the date of such demand until payment in full thereof at the rate set forth in
Section 2.6(a)(i) or (c)(i), as applicable. The determination by the issuing
bank or Foothill, as the case may be, of any amount due pursuant to this Section
2.2(f), as set forth in a certificate setting forth the calculation thereof in
reasonable detail, shall, in the absence of manifest or demonstrable error, be
final and conclusive and binding on all of the parties hereto.
2.3 RESERVED
2.4 RESERVED
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2.5 OVERADVANCES. If, at any time or for any reason, the
amount of Obligations owed by Borrower to Foothill pursuant to Sections 2.1 and
2.2 is greater than either the Dollar or percentage limitations set forth in
Sections 2.1 and 2.2 (an "Overadvance"), Borrower immediately shall pay to
Foothill, in cash, the amount of such excess to be used by Foothill first, to
repay Advances outstanding under Section 2.1 and, thereafter, to be held by
Foothill as cash collateral to secure Borrower's obligation to repay Foothill
for all amounts paid pursuant to Letters of Credit.
2.6 INTEREST AND LETTER OF CREDIT FEES: RATES, PAYMENTS,
AND CALCULATIONS.
(a) Interest Rate. Except as provided in clause (b)
below, all Obligations (except for undrawn Letters of Credit) shall bear
interest at a per annum rate of one percentage point (1.0%) above the Reference
Rate, provided, that if (i) the Borrower has delivered to Foothill its audited
annual financial statements for its 1998 fiscal year, (ii) such audited
financial statements show that Borrower has a positive Net Income for its 1998
fiscal year, (iii) the average Availability for the forty-five day period
immediately prior to the receipt by Foothill of the audited financial statements
for the 1998 fiscal year of Borrower is equal to or greater than $2,000,000, and
(iv) no Default or Event of Default has occurred and is continuing, then,
effective on the first day that each of the conditions set forth in clauses (i)
through (iv) of this subsection have been satisfied, the foregoing rate shall be
reduced to one-half percentage point (0.5%) above the Reference Rate.
(b) Letter of Credit Fee. Borrower shall pay Foothill
a fee (in addition to the charges, commissions, fees, and costs set forth in
Section 2.2(d)) equal to one and one-half percent (1.5%) per annum times the
aggregate undrawn amount of all outstanding Letters of Credit.
(c) Default Rate. Upon the occurrence and during the
continuation of an Event of Default, (i) all Obligations (except for undrawn
Letters of Credit) shall bear interest at a per annum rate equal to four
percentage points (4.0%) above the Reference Rate and (ii) the Letter of Credit
fee provided in Section 2.6(b) shall be increased to four and one-half percent
(4.5%) per annum times the amount of the undrawn Letters of Credit that were
outstanding during the immediately preceding month.
(d) Minimum Interest. In no event shall the rate of
interest chargeable hereunder for any day be less than seven percent (7.0%) per
annum. To the extent that interest accrued hereunder at the rate set forth
herein would be less than the foregoing minimum daily rate, the interest rate
chargeable hereunder for such day automatically shall be deemed increased to the
minimum rate. To the extent that interest accrued hereunder at the rate set
forth herein (including the minimum interest rate) would yield less than the
foregoing minimum amount, the interest rate chargeable hereunder for the period
in question automatically shall be deemed increased to that rate that would
result in the minimum amount of interest being accrued and payable hereunder.
(e) Payments. Interest and Letter of Credit fees
payable hereunder shall be due and payable, in arrears, on the first day of each
month during the term hereof. Borrower hereby authorizes Foothill, at its
option, without prior notice to Borrower, to charge such interest and Letter of
Credit fees, all Foothill Expenses (as and when incurred), the charges,
commissions, fees, and costs provided for in Section 2.2(d) (as and when accrued
or incurred), the fees and charges provided for in Section 2.11 (as and when
accrued or incurred), and all installments or other payments due under any Loan
Document to Borrower's Loan Account, which amounts
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thereafter shall accrue interest at the rate then applicable to Advances
hereunder. Any interest not paid when due shall be compounded and shall
thereafter accrue interest at the rate then applicable to Advances hereunder.
(f) Computation. The Reference Rate as of the date of
this Agreement is eight and one-half percent (8.5%) per annum. In the event the
Reference Rate is changed from time to time hereafter, the applicable rate of
interest hereunder automatically and immediately shall be increased or decreased
by an amount equal to such change in the Reference Rate. All interest and fees
chargeable under the Loan Documents shall be computed on the basis of a 360 day
year for the actual number of days elapsed.
(g) Intent to Limit Charges to Maximum Lawful Rate.
In no event shall the interest rate or rates payable under this Agreement, plus
any other amounts paid in connection herewith, exceed the highest rate
permissible under any law that a court of competent jurisdiction shall, in a
final determination, deem applicable. Borrower and Foothill, in executing and
delivering this Agreement, intend legally to agree upon the rate or rates of
interest and manner of payment stated within it; provided, however, that,
anything contained herein to the contrary notwithstanding, if said rate or rates
of interest or manner of payment exceeds the maximum allowable under applicable
law, then, ipso facto as of the date of this Agreement, Borrower is and shall be
liable only for the payment of such maximum as allowed by law, and payment
received from Borrower in excess of such legal maximum, whenever received, shall
be applied to reduce the principal balance of the Obligations to the extent of
such excess.
2.7 COLLECTION OF ACCOUNTS. Borrower shall at all times
maintain lockboxes (the "Lockboxes") and, immediately after the Closing Date,
shall instruct all Account Debtors with respect to the Accounts, General
Intangibles, and Negotiable Collateral of Borrower to remit all Collections in
respect thereof to such Lockboxes. Borrower, Foothill, and the Lockbox Banks
shall enter into the Lockbox Agreements, which among other things shall provide
for the opening of a Lockbox Account for the deposit of Collections at a Lockbox
Bank. Borrower agrees that all Collections and other amounts received by
Borrower from any Account Debtor or any other source immediately upon receipt
shall be deposited into a Lockbox Account. No Lockbox Agreement or arrangement
contemplated thereby shall be modified by Borrower without the prior written
consent of Foothill. Upon the terms and subject to the conditions set forth in
the Lockbox Agreements, all amounts received in each Lockbox Account shall be
wired each Business Day into an account (the "Foothill Account") maintained by
Foothill at a depositary selected by Foothill.
2.8 CREDITING PAYMENTS; APPLICATION OF COLLECTIONS. The
receipt of any Collections by Foothill (whether from transfers to Foothill by
the Lockbox Banks pursuant to the Lockbox Agreements or otherwise) immediately
shall be applied provisionally to reduce the Obligations outstanding under
Section 2.1, but shall not be considered a payment on account unless such
Collection item is a wire transfer of immediately available federal funds and is
made to the Foothill Account or unless and until such Collection item is honored
when presented for payment. From and after the Closing Date, Foothill shall be
entitled to charge Borrower for three (3) Business Days of `clearance' or
`float' at the rate set forth in Section 2.6(a)(i) or Section 2.6(c)(i), as
applicable, on all Collections that are received by Foothill (regardless of
whether forwarded by the Lockbox Banks to Foothill, whether provisionally
applied to reduce the Obligations under Section
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2.1, or otherwise). This across-the-board three (3) Business Day clearance
or float charge on all Collections is acknowledged by the parties to
constitute an integral aspect of the pricing of Foothill's financing of
Borrower, and shall apply irrespective of the characterization of whether
receipts are owned by Borrower or Foothill, and whether or not there are
any outstanding Advances, the effect of such clearance or float charge
being the equivalent of charging three (3) Business Days of interest
on such Collections. Should any Collection item not be honored when
presented for payment, then Borrower shall be deemed not to have made such
payment, and interest shall be recalculated accordingly. Anything to the
contrary contained herein notwithstanding, any Collection item shall be deemed
received by Foothill only if it is received into the Foothill Account on a
Business Day on or before 11:00 a.m. California time. If any Collection item is
received into the Foothill Account on a non-Business Day or after 11:00 a.m.
California time on a Business Day, it shall be deemed to have been received by
Foothill as of the opening of business on the immediately following Business
Day.
2.9 DESIGNATED ACCOUNT. Foothill is authorized to make the
Advances and the Letters of Credit, under this Agreement based upon telephonic
or other instructions received from anyone purporting to be an Authorized
Person, or without instructions if pursuant to Section 2.6(e). Borrower agrees
to establish and maintain the Designated Account with the Designated Account
Bank for the purpose of receiving the proceeds of the Advances requested by
Borrower and made by Foothill hereunder. Unless otherwise agreed by Foothill and
Borrower, any Advance requested by Borrower and made by Foothill hereunder shall
be made to the Designated Account.
2.10 MAINTENANCE OF LOAN ACCOUNT; STATEMENTS OF OBLIGATIONS.
Foothill shall maintain an account on its books in the name of Borrower (the
"Loan Account") on which Borrower will be charged with all Advances, made by
Foothill to Borrower or for Borrower's account, including, accrued interest,
Foothill Expenses, and any other payment Obligations of Borrower. In accordance
with Section 2.8, the Loan Account will be credited with all payments received
by Foothill from Borrower or for Borrower's account, including all amounts
received in the Foothill Account from any Lockbox Bank. Foothill shall render
statements regarding the Loan Account to Borrower, including principal,
interest, fees, and including an itemization of all charges and expenses
constituting Foothill Expenses owing, and such statements shall be conclusively
presumed to be correct and accurate and constitute an account stated between
Borrower and Foothill unless, within 30 days after receipt thereof by Borrower,
Borrower shall deliver to Foothill written objection thereto describing the
error or errors contained in any such statements.
2.11 FEES. Borrower shall pay to Foothill the following
nonrefundable fees in immediately available funds as follows:
(a) Facility Fee. On the Closing Date, a closing fee
of three-quarters of one-percent (0.75%) of the Maximum Revolving Amount and, on
or prior to the effective date of any increase of the Maximum Revolving Amount,
three-quarters of one-percent (0.75%) of such increase;
(b) Unused Line Fee. On the first day of each month
during the term of this Agreement, an unused line fee in an amount equal to
one-quarter of one percent (0.25%) per annum times the Average Unused Portion of
Maximum Revolving Amount in effect at such time;
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(c) Annual Facility Fee. On each anniversary of the
Closing Date, an annual facility fee in an amount equal to one-quarter of one
percent (0.25%) of the Maximum Revolving Amount in effect at such time;
(d) Financial Examination, Documentation, and
Appraisal Fees. Foothill's customary fee of $650 per day per examiner, plus
out-of-pocket expenses for each financial analysis and examination (i.e.,
audits) of Borrower performed by personnel employed by Foothill; Foothill's
customary appraisal fee of $1,500 per day per appraiser, plus out-of-pocket
expenses for each appraisal of the Collateral performed by personnel employed by
Foothill; and, the actual charges paid or incurred by Foothill if it elects to
employ the services of one or more third Persons to perform such financial
analyses and examinations (i.e., audits) of Borrower or to appraise the
Collateral; and
(e) Servicing Fee. On the first day of each month
during the term of this Agreement, and thereafter so long as any Obligations are
outstanding, a servicing fee in an amount equal to $2,500.
3. CONDITIONS; TERM OF AGREEMENT.
3.1 CONDITIONS PRECEDENT TO THE INITIAL ADVANCE AND INITIAL
LETTER OF CREDIT. The obligation of Foothill to make the initial Advance, or to
issue the initial Letter of Credit is subject to the fulfillment, to the
satisfaction of Foothill and its counsel, of each of the following conditions on
or before the Closing Date:
(a) the Closing Date shall occur on or before September
30, 1998;
(b) Foothill shall have received searches reflecting
the filing of its financing statements;
(c) Foothill shall have received each of the following
documents, duly executed, and each such document shall be in full force and
effect:
(i) the Lockbox Agreements;
(ii) the Disbursement Letter;
(iii) the Pay-Off Letter, together with UCC
termination statements and other
documentation evidencing the termination by
Existing Lender of its Liens in and to the
properties and assets of Borrower;
(iv) the Trademark Security Agreement;
(v) the Warrant;
(vi) the Registration Rights Agreement;
(vii) the Intercreditor Agreement; and
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(viii) the Pledge Agreement, together with the
original UNS Note duly endorsed or assigned to
Foothill, in form and substance satisfactory to
Foothill, together with such payment direction
letters as Foothill may request, and the shares
of the capital stock of UNS in Borrower's
possession.
(d) Foothill shall have received a certificate from
the Secretary of Borrower attesting to the resolutions of Borrower's Board of
Directors authorizing its execution, delivery, and performance of this Agreement
and the other Loan Documents to which Borrower is a party and authorizing
specific officers of Borrower to execute the same;
(e) Foothill shall have received copies of Borrower's
Governing Documents, as amended, modified, or
supplemented to the Closing Date, certified by the Secretary of Borrower;
(f) Foothill shall have received a certificate of
status with respect to Borrower, dated within 10 days of the Closing Date, such
certificate to be issued by the appropriate officer of the jurisdiction of
organization of Borrower, which certificate shall indicate that Borrower is in
good standing in such jurisdiction;
(g) Foothill shall have received certificates of
status with respect to Borrower, each dated within 15 days of the Closing Date,
such certificates to be issued by the appropriate officer of the jurisdictions
in which its failure to be duly qualified or licensed would constitute a
Material Adverse Change, which certificates shall indicate that Borrower is in
good standing in such jurisdictions;
(h) [Intentionally Omitted];
(i) [Intentionally Omitted];
(j) Foothill shall have received such Collateral
Access Agreements from lessors, warehousemen, bailees, and other third persons
as Foothill may require;
(k) Foothill shall have received an opinion of
Borrower's counsel in form and substance satisfactory to Foothill in its sole
discretion;
(l) Foothill shall have received a copy of any
shareholders agreement, registration rights agreement, warrants and/or option
agreements, and other documents or agreement of a similar nature affecting
Borrower's capital stock;
(m) Foothill shall have received satisfactory
evidence that all tax returns required to be filed by Borrower have been timely
filed and all taxes upon Borrower or its properties, assets, income, and
franchises (including real property taxes and payroll taxes) have been paid
prior to delinquency, except such taxes that are the subject of a Permitted
Protest;
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(n) Borrower shall have paid to Foothill the facility
fee then payable under Section 2.11(a), together with all Foothill Expenses
incurred by Foothill as of the Closing Date;
(o) Foothill shall have received (i) a field survey
and inspection with respect to the locations of Borrower, and (ii) reference
checks with respect to the management of Borrower, each of which shall be
satisfactory to Foothill in its sole discretion;
(p) Foothill shall have received satisfactory
evidence that after giving effect to (i) any Advances to be made and Letters of
Credit to be issued on the Closing Date, (ii) all amounts to be paid to the
Existing Lender and to satisfy all Liens other than Permitted Liens, and (iii)
reserves for the aggregate amount of unpaid accounts payable of the Borrower
more than sixty (60) days old as of the Closing Date, Availability is not less
than $2,000,000;
(q) Foothill shall have received projections, in form
and substance satisfactory to Foothill, for the 1999 fiscal year of Borrower and
balance sheet projections for the 1998 fiscal year of Borrower;
(r) Foothill shall have received each of the
following documents, in each case together with a certificate attesting to the
fact that such copy provided to Foothill is a true and correct copy thereof: (i)
Borrower's Agreement for Wholesale Financing with IBM Credit Corporation; (ii)
Borrower's form of maintenance contract and (iii) Borrower's Hooper Holmes
Master Agreement and Escrow Agreement, and the form and substance of each such
document shall be satisfactory to Foothill and its counsel; and
(s) all other documents and legal matters in
connection with the transactions contemplated by this Agreement shall have been
delivered, executed, or recorded and shall be in form and substance satisfactory
to Foothill and its counsel.
3.2 CONDITIONS PRECEDENT TO ALL ADVANCES AND ALL LETTERS OF
CREDIT. The following shall be conditions precedent to all Advances and all
Letters of Credit hereunder:
(a) the representations and warranties contained in
this Agreement and the other Loan Documents shall be true and correct in all
respects on and as of the date of such extension of credit, as though made on
and as of such date (except to the extent that such representations and
warranties relate solely to an earlier date);
(b) no Default or Event of Default shall have
occurred and be continuing on the date of such extension of credit, nor shall
either result from the making thereof; and
(c) no injunction, writ, restraining order, or other
order of any nature prohibiting, directly or indirectly, the extending of such
credit shall have been issued and remain in force by any governmental authority
against Borrower, Foothill, or any of their Affiliates.
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3.3 CONDITIONS SUBSEQUENT. As conditions subsequent to initial
closing hereunder, Borrower shall perform or cause to be performed the following
(the failure by Borrower to so perform or cause to be performed constituting an
Event of Default):
(a) within 30 days of the Closing Date, deliver to
Foothill the certified copies of the policies of insurance, together with the
endorsements thereto, as are required by Section 6.10, the form and substance of
which shall be satisfactory to Foothill and its counsel;
(b) use best efforts to obtain within 60 days of the
Closing Date, an executed pledge agreement, in form and substance satisfactory
to Foothill, pursuant to which 100% of the outstanding shares of the capital
stock of UNS is pledged as security for the UNS Note;
(c) within 60 days of the Closing Date, satisfy or
otherwise obtain the release or discharge of all state tax liens against
Borrower (which, as of the Closing Date, are in the approximate sum of $57,240,
plus interest and penalties, if any), provided that following such release or
discharge Foothill shall remove the $100,000 reserve against the Borrowing Base
imposed as of the Closing Date in respect of such tax liens, provided, further
that, the failure of Borrower to obtain such release or discharge within such 60
day-period may result in Foothill increasing such reserve in its reasonable
credit determination;
(d) within 30 days of the Closing Date, qualify as a
foreign corporation qualified to conduct BUSINESS in the States of Kentucky,
Illinois, Massachusetts, North Carolina, South Carolina, Georgia and Louisiana,
and provide to Foothill foreign qualification certificates for Borrower in each
such state;
(e) within 30 days of the Closing Date, obtain the
release of MLC Group, Inc. of that certain UCC-1 financing statement number
D336823 filed with the Michigan Secretary of Sate on February 10, 1998;
(f) within 30 days of the Closing Date, obtain
Collateral Access Agreements from the landlords of Borrower's North Carolina and
Farmington Hills, Michigan (warehouse) location and within 5 Business Days of
the Closing Date, obtain a Collateral Access Agreement from the landlord of
Borrower's Farmington Hills, Michigan corporate headquarters location;
(g) within five (5) Business Days of the Closing
Date, Foothill shall have received a certificate of insurance, together with the
endorsements thereto, as are required by Section 6.10, the form and substance of
which shall be satisfactory to Foothill and its counsel; and
(h) within 30 days of the Closing Date, satisfy, by
way of setoff or otherwise, all outstanding loans due to Michael Grieves and
Richard Burkhart, and their respective assigns, if any (which Borrower
represents are not, in the aggregate, in excess of $200,000 and are subject to
set-off in a similar amount), and provide evidence thereof to Foothill.
3.4 TERM; AUTOMATIC RENEWAL. This Agreement shall become
effective upon the execution and delivery hereof by Borrower and Foothill and
shall continue in full force and effect for a term ending on the date (the
"Renewal Date") that is three (3) years from the Closing
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Date and automatically shall be renewed for successive one (1) year periods
thereafter, unless sooner terminated pursuant to the terms hereof. Either party
may terminate this Agreement effective on the Renewal Date or on any one (1)
year anniversary of the Renewal Date by giving the other party at least 90 days
prior written notice. The foregoing notwithstanding, Foothill shall have the
right to terminate its obligations under this Agreement immediately and without
notice upon the occurrence and during the continuation of an Event of Default.
3.5 EFFECT OF TERMINATION. On the date of termination of this
Agreement, all Obligations (including contingent reimbursement obligations of
Borrower with respect to any outstanding Letters of Credit) immediately shall
become due and payable without notice or demand. No termination of this
Agreement, however, shall relieve or discharge Borrower of Borrower's duties,
Obligations, or covenants hereunder, and Foothill's continuing security
interests in the Collateral shall remain in effect until all Obligations have
been fully and finally discharged and Foothill's obligation to provide
additional credit hereunder is terminated. If Borrower has sent a notice of
termination pursuant to the provisions of Section 3.4, but fails to pay the
Obligations in full on the date set forth in said notice, then Foothill may, but
shall not be required to, renew this Agreement for an additional term of one (1)
year.
3.6 EARLY TERMINATION BY BORROWER. The provisions of Section
3.4 that allow termination of this Agreement by Borrower only on the Renewal
Date and certain anniversaries thereof notwithstanding, Borrower has the option,
at any time upon 90 days prior written notice to Foothill, to terminate this
Agreement by paying to Foothill, in cash, the Obligations (including an amount
equal to 102% of the undrawn amount of the Letters of Credit), in full, together
with a premium (the "Early Termination Premium") equal to (a) three percent (3%)
of the Maximum Revolving Amount then in effect, if such termination occurs
during the period from the Closing Date through the first anniversary thereof,
(b) two percent (2%) of the Maximum Revolving Amount then in effect, if such
termination occurs during the period from the day after such first anniversary
through the second anniversary of the Closing Date and (c) one percent (1%) of
the Maximum Revolving Amount then in effect, if such termination occurs from the
day after such second anniversary through the day prior to the third anniversary
of the Closing Date.
3.7 TERMINATION UPON EVENT OF DEFAULT. If Foothill terminates
this Agreement upon the occurrence of an Event of Default, in view of the
impracticability and extreme difficulty of ascertaining actual damages and by
mutual agreement of the parties as to a reasonable calculation of Foothill's
lost profits as a result thereof, Borrower shall pay to Foothill upon the
effective date of such termination, a premium in an amount equal to the Early
Termination Premium. The Early Termination Premium shall be presumed to be the
amount of damages sustained by Foothill as the result of the early termination
and Borrower agrees that it is reasonable under the circumstances currently
existing. The Early Termination Premium provided for in this Section 3.7 shall
be deemed included in the Obligations.
4. CREATION OF SECURITY INTEREST.
4.1 GRANT OF SECURITY INTEREST. Borrower hereby grants to
Foothill a continuing security interest in all currently existing and hereafter
acquired or arising Collateral in order to secure prompt repayment of any and
all Obligations and in order to secure prompt
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performance by Borrower of each of its covenants and duties under the Loan
Documents. Foothill's security interests in the Collateral shall attach to all
Collateral without further act on the part of Foothill or Borrower. Anything
contained in this Agreement or any other Loan Document to the contrary
notwithstanding, except for the sale of Inventory to buyers in the ordinary
course of business, Borrower has no authority, express or implied, to dispose
of any item or portion of the Collateral.
4.2 NEGOTIABLE COLLATERAL. In the event that any Collateral,
including proceeds, is evidenced by or consists of Negotiable Collateral,
Borrower, immediately upon the request of Foothill, shall endorse and deliver
physical possession of such Negotiable Collateral to Foothill.
4.3 COLLECTION OF ACCOUNTS, GENERAL INTANGIBLES, AND
NEGOTIABLE COLLATERAL. At any time that an Event of Default has occurred and is
continuing, Foothill or Foothill's designee may (a) notify customers or Account
Debtors of Borrower that the Accounts, General Intangibles, or Negotiable
Collateral have been assigned to Foothill or that Foothill has a security
interest therein, and (b) collect the Accounts, General Intangibles, and
Negotiable Collateral directly and charge the collection costs and expenses to
the Loan Account. Borrower agrees that it will hold in trust for Foothill, as
Foothill's trustee, any Collections that it receives and immediately will
deliver said Collections to Foothill in their original form as received by
Borrower.
4.4 DELIVERY OF ADDITIONAL DOCUMENTATION REQUIRED. At any time
upon the request of Foothill, Borrower shall execute and deliver to Foothill all
financing statements, continuation financing statements, fixture filings,
security agreements, pledges, assignments, endorsements of certificates of
title, applications for title, affidavits, reports, notices, schedules of
accounts, letters of authority, and all other documents that Foothill reasonably
may request, in form satisfactory to Foothill, to perfect and continue perfected
Foothill's security interests in the Collateral, and in order to fully
consummate all of the transactions contemplated hereby and under the other the
Loan Documents.
4.5 POWER OF ATTORNEY. Borrower hereby irrevocably makes,
constitutes, and appoints Foothill (and any of Foothill's officers, employees,
or agents designated by Foothill) as Borrower's true and lawful attorney, with
power to (a) if Borrower refuses to, or fails timely to execute and deliver any
of the documents described in Section 4.4, sign the name of Borrower on any of
the documents described in Section 4.4, (b) at any time that an Event of Default
has occurred and is continuing or Foothill deems itself insecure, sign
Borrower's name on any invoice or bill of lading relating to any Account, drafts
against Account Debtors, schedules and assignments of Accounts, verifications of
Accounts, and notices to Account Debtors, (c) send requests for verification of
Accounts, (d) endorse Borrower's name on any Collection item that may come into
Foothill's possession, (e) at any time that an Event of Default has occurred and
is continuing or Foothill deems itself insecure, notify the post office
authorities to change the address for delivery of Borrower's mail to an address
designated by Foothill, to receive and open all mail addressed to Borrower, and
to retain all mail relating to the Collateral (giving Borrower, upon Borrower's
reasonable request, a reasonable opportunity to review such retained mail) and
forward all other mail to Borrower, (f) at any time that an Event of Default has
occurred and is continuing or Foothill deems itself insecure, make, settle, and
adjust all claims under Borrower's policies of insurance and make all
determinations and decisions with respect to such policies of insurance, and (g)
at any
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time that an Event of Default has occurred and is continuing or Foothill
deems itself insecure, settle and adjust disputes and claims respecting the
Accounts directly with Account Debtors, for amounts and upon terms that Foothill
determines to be reasonable, and Foothill may cause to be executed and delivered
any documents and releases that Foothill determines to be necessary. The
appointment of Foothill as Borrower's attorney, and each and every one of
Foothill's rights and powers, being coupled with an interest, is irrevocable
until all of the Obligations have been fully and finally repaid and performed
and Foothill's obligation to extend credit hereunder is terminated.
4.6 RIGHT TO INSPECT. Foothill (through any of its officers,
employees, or agents) shall have the right, from time to time hereafter to
inspect Borrower's Books and to check, test, and appraise the Collateral in
order to verify Borrower's financial condition or the amount, quality, value,
condition of, or any other matter relating to, the Collateral.
5. REPRESENTATIONS AND WARRANTIES.
In order to induce Foothill to enter into this Agreement,
Borrower makes the following representations and warranties which shall be true,
correct, and complete in all respects as of the date hereof, and shall be true,
correct, and complete in all respects as of the Closing Date, and at and as of
the date of the making of each Advance or Letter of Credit made thereafter, as
though made on and as of the date of such Advance or Letter of Credit (except to
the extent that such representations and warranties relate solely to an earlier
date) and such representations and warranties shall survive the execution and
delivery of this Agreement:
5.1 NO ENCUMBRANCES. Borrower has good and indefeasible title
to the Collateral, free and clear of Liens except for Permitted Liens.
5.2 ELIGIBLE ACCOUNTS. The Eligible Accounts are bona fide
existing obligations created by the sale and delivery of Inventory or the
rendition of services to Account Debtors in the ordinary course of Borrower's
business, unconditionally owed to Borrower without defenses, disputes, offsets,
counterclaims, or rights of return or cancellation. The property giving rise to
such Eligible Accounts has been delivered to the Account Debtor, or to the
Account Debtor's agent for immediate shipment to and unconditional acceptance by
the Account Debtor. Borrower has not received notice of actual or imminent
bankruptcy, insolvency, or material impairment of the financial condition of any
Account Debtor regarding any Eligible Account.
5.3 INVENTORY. All Inventory is of good and merchantable
quality, free from defects.
5.4 EQUIPMENT. All of the Equipment is used or held for use
in Borrower's business and is fit for such purposes.
5.5 LOCATION OF INVENTORY AND EQUIPMENT. The Inventory and
Equipment are not stored with a bailee, warehouseman, or similar party (without
Foothill's prior written consent) and are located only at the locations
identified on Schedule 6.12 or otherwise permitted by Section 6.12.
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5.6 INVENTORY RECORDS. Borrower keeps correct and accurate
records itemizing and describing the kind, type, quality, and quantity of the
Inventory, and Borrower's cost therefor.
5.7 LOCATION OF CHIEF EXECUTIVE OFFICE; FEIN. The chief
executive office of Borrower is located at the address indicated in the preamble
to this Agreement and Borrower's FEIN is 38-2649874.
5.8 DUE ORGANIZATION AND QUALIFICATION; SUBSIDIARIES.
(a) Borrower is duly organized and existing and in
good standing under the laws of the jurisdiction of its incorporation and
qualified and licensed to do business in, and in good standing in, any state
where the failure to be so licensed or qualified reasonably could be expected to
have a Material Adverse Change.
(b) Set forth on Schedule 5.8, is a complete and
accurate list of Borrower's direct and indirect Subsidiaries, showing: (i) the
jurisdiction of their incorporation; (ii) the number of shares of each class of
common and preferred stock authorized for each of such Subsidiaries; and (iii)
the number and the percentage of the outstanding shares of each such class owned
directly or indirectly by Borrower. All of the outstanding capital stock of each
such Subsidiary has been validly issued and is fully paid and non-assessable.
(c) Except as set forth on Schedule 5.8, no capital
stock (or any securities, instruments, warrants, options, purchase rights,
conversion or exchange rights, calls, commitments or claims of any character
convertible into or exercisable for capital stock) of any direct or indirect
Subsidiary of Borrower is subject to the issuance of any security, instrument,
warrant, option, purchase right, conversion or exchange right, call, commitment
or claim of any right, title, or interest therein or thereto.
(d) On the Closing Date, after giving effect to the
transactions contemplated hereunder to occur on the Closing Date, (i) the
authorized Common Stock will consist of the types and number of shares of
capital stock set forth on Schedule 5.8 hereto and (ii) except for any Warrants
executed and delivered pursuant to Section 12 hereof and set forth on Schedule
5.8 hereto, there are no outstanding warrants issued by Borrower, nor are there
any outstanding obligations of Borrower to repurchase, redeem, or otherwise
acquire any shares of Common Stock of Borrower, nor are there any outstanding
obligations of Borrower to make payments to any Person, such as "phantom stock"
payments, where the amount thereof is calculated with reference to the fair
market value or equity value of Borrower.
5.9 DUE AUTHORIZATION; NO CONFLICT.
(a) The execution, delivery, and performance by
Borrower of this Agreement and the Loan Documents to which it is a party have
been duly authorized by all necessary corporate action.
(b) The execution, delivery, and performance by
Borrower of this Agreement and the Loan Documents to which it is a party do not
and will not (i) violate any
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provision of federal, state, or local law or regulation (including Regulations
G, T, U, and X of the Federal Reserve Board) applicable to Borrower, the
Governing Documents of Borrower, or any order, judgment, or decree of any
court or other Governmental Authority binding on Borrower, (ii) conflict
with, result in a breach of, or constitute (with due notice or lapse of time
or both) a default under any material contractual obligation or material
lease of Borrower, (iii) result in or require the creation or imposition
of any Lien of any nature whatsoever upon any properties or assets of
Borrower, other than Permitted Liens, or (iv) require any approval
of stockholders or any approval or consent of any Person under any material
contractual obligation of Borrower.
(c) Other than the filing of appropriate financing
statements, and filings with the United States Copyright Office and the United
States Patent and Trademark Office, the execution, delivery, and performance by
Borrower of this Agreement and the Loan Documents to which Borrower is a party
do not and will not require any registration with, consent, or approval of, or
notice to, or other action with or by, any federal, state, foreign, or other
Governmental Authority or other Person.
(d) This Agreement and the Loan Documents to which
Borrower is a party, and all other documents contemplated hereby and thereby,
when executed and delivered by Borrower will be the legally valid and binding
obligations of Borrower, enforceable against Borrower in accordance with their
respective terms, except as enforcement may be limited by equitable principles
or by bankruptcy, insolvency, reorganization, moratorium, or similar laws
relating to or limiting creditors' rights generally.
(e) The Liens granted by Borrower to Foothill in and
to its properties and assets pursuant to this Agreement and the other Loan
Documents are validly created, perfected, and first priority Liens, subject only
to Permitted Liens.
5.10 LITIGATION. There are no actions or proceedings pending
by or against Borrower before any court or administrative agency and Borrower
does not have knowledge or belief of any pending, threatened, or imminent
litigation, governmental investigations, or claims, complaints, actions, or
prosecutions involving Borrower or any guarantor of the Obligations, except for:
(a) ongoing collection matters in which Borrower is the plaintiff; (b) matters
disclosed on Schedule 5.10; and (c) matters arising after the date hereof that,
if decided adversely to Borrower, would not have a Material Adverse Change.
5.11 NO MATERIAL ADVERSE CHANGE. All financial statements
relating to Borrower or any guarantor of the Obligations that have been
delivered by Borrower to Foothill have been prepared in accordance with GAAP
(except, in the case of unaudited financial statements, for the lack of
footnotes and being subject to year-end audit adjustments) and fairly present
Borrower's (or such guarantor's, as applicable) financial condition as of the
date thereof and Borrower's results of operations for the period then ended.
There has not been a Material Adverse Change with respect to Borrower (or such
guarantor, as applicable) since the date of the latest financial statements
submitted to Foothill on or before the Closing Date.
5.12 SOLVENCY. Borrower is Solvent. No transfer of property is
being made by Borrower and no obligation is being incurred by Borrower in
connection with the transactions
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contemplated by this Agreement or the other Loan Documents with the intent to
hinder, delay, or defraud either present or future creditors of Borrower.
5.13 EMPLOYEE BENEFITS. None of Borrower, any of its
Subsidiaries, or any of their ERISA Affiliates maintains or contributes to any
Benefit Plan, other than those listed on Schedule 5.13. Borrower, each of its
Subsidiaries and each ERISA Affiliate have satisfied the minimum funding
standards of ERISA and the IRC with respect to each Benefit Plan to which it is
obligated to contribute. No ERISA Event has occurred nor has any other event
occurred that may result in an ERISA Event that reasonably could be expected to
result in a Material Adverse Change. None of Borrower or its Subsidiaries, any
ERISA Affiliate, or any fiduciary of any Plan is subject to any direct or
indirect liability with respect to any Plan under any applicable law, treaty,
rule, regulation, or agreement. None of Borrower or its Subsidiaries or any
ERISA Affiliate is required to provide security to any Plan under Section
401(a)(29) of the IRC.
5.14 ENVIRONMENTAL CONDITION. None of Borrower's properties or
assets has ever been used by Borrower or, to the best of Borrower's knowledge,
by previous owners or operators in the disposal of, or to produce, store,
handle, treat, release, or transport, any Hazardous Materials. None of
Borrower's properties or assets has ever been designated or identified in any
manner pursuant to any environmental protection statute as a Hazardous Materials
disposal site, or a candidate for closure pursuant to any environmental
protection statute. No Lien arising under any environmental protection statute
has attached to any revenues or to any real or personal property owned or
operated by Borrower. Borrower has not received a summons, citation, notice, or
directive from the Environmental Protection Agency or any other federal or state
governmental agency concerning any action or omission by Borrower resulting in
the releasing or disposing of Hazardous Materials into the environment.
5.15 INTELLECTUAL PROPERTY. Borrower owns or possesses
adequate licenses or other rights to use all patents, patent applications,
trademark, trademark applications, servicemarks, servicemark applications, trade
names, copyrights, source code, mask-works, trade secrets and know-how
(collectively, the "Intellectual Property") that are necessary for the operation
of Borrower's business as currently conducted, which such Intellectual Property
is described on Schedule 5.15. No claim is pending or threatened in writing to
the effect that Borrower infringes upon, or conflicts with, the asserted rights
of any other Person under any Intellectual Property, and there is no basis for
any such claim (whether pending or threatened, and which, if determined
adversely to Borrower, reasonably could be expected to result in a Material
Adverse Change). No claim is pending or threatened in writing to the effect that
any such Intellectual Property owned or licensed by any Obligor or in which any
Obligor otherwise has the right to use is invalid or unenforceable by such
Obligor, and there is no basis for any such claim (whether or not pending or
threatened, and which, if determined adversely to any Obligor, reasonably could
be expected to result in a Material Adverse Change).
5.16 YEAR 2000 COMPLIANCE. Any reprogramming required to
permit the proper functioning, in and following the year 2000, of (A) Borrower's
computer systems and (B) equipment containing embedded microchips (including
systems and equipment supplied by others or with which Borrower's systems
interface) and the testing of all such systems and equipment, as so
reprogrammed, will be completed by March 31, 1999. The cost to Borrower of such
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reprogramming and testing and of the reasonably foreseeable consequences of year
2000 to Borrower (including, without limitation, reprogramming errors and the
failure of others' systems or equipment) will not result in an Event of Default
or a Material Adverse Change. Except for such of the reprogramming referred to
in the preceding sentences of this Section 5.16 as may be necessary, the
computer and management information systems of Borrower are and, with ordinary
course upgrading and maintenance, will continue to be, sufficient to permit
Borrower to conduct its business without a Material Adverse Change.
6. AFFIRMATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, and unless Foothill shall otherwise consent in writing, Borrower
shall do all of the following:
6.1 ACCOUNTING SYSTEM. Maintain a standard and modern system
of accounting that enables Borrower to produce financial statements in
accordance with GAAP, and maintain records pertaining to the Collateral that
contain information as from time to time may be requested by Foothill. Borrower
also shall keep a modern inventory reporting system that shows all additions,
sales, claims, returns, and allowances with respect to the Inventory.
6.2 COLLATERAL REPORTING. Provide Foothill with the following
documents at the following times in form satisfactory to Foothill: (a) on each
Business Day, a sales journal, collection journal, and credit register since the
last such schedule and a calculation of the Borrowing Base as of such date, (b)
on a monthly basis and, in any event, by no later than the 20th day of each
month during the term of this Agreement, (i) a detailed calculation of the
Borrowing Base, and (ii) a detailed aging, by total, of the Accounts, together
with a reconciliation to the detailed calculation of the Borrowing Base
previously provided to Foothill, (c) on a monthly basis and, in any event, by no
later than the 20th day of each month during the term of this Agreement, a
summary aging, by vendor, of Borrower's accounts payable and any book overdraft,
including a summary of amounts owing by IBM Credit Corporation, (d) at the
request of Foothill, Inventory reports specifying Borrower's cost and the
wholesale market value of its Inventory by category, with additional detail
showing additions to and deletions from the Inventory, (e) at the request of
Foothill, notice of all returns, disputes, or claims, (f) upon request, copies
of invoices in connection with the Accounts, customer statements, credit memos,
remittance advices and reports, deposit slips, shipping and delivery documents
in connection with the Accounts and for Inventory and Equipment acquired by
Borrower, purchase orders and invoices, (g) at the request of Foothill, a
detailed list of Borrower's customers, (h) on a monthly basis, a calculation of
the Dilution for the prior month, (i) at the request of Foothill, copies of the
monthly deferred revenue/maintenance schedules and (j) such other reports as to
the Collateral or the financial condition of Borrower as Foothill may request
from time to time. Original sales invoices evidencing daily sales shall be
mailed by Borrower to each Account Debtor and, at Foothill's direction at any
time that an Event of Default has occurred and is continuing, the invoices shall
indicate on their face that the Account has been assigned to Foothill and that
all payments are to be made directly to Foothill.
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6.3 FINANCIAL STATEMENTS, REPORTS, CERTIFICATES. Deliver to
Foothill: (a) as soon as available, but in any event within 30 days after the
end of each month during each of Borrower's fiscal years, a company prepared
balance sheet, income statement, and statement of cash flow covering Borrower's
operations during such period; and (b) as soon as available, but in any event
within 90 days after the end of each of Borrower's fiscal years, financial
statements of Borrower for each such fiscal year, audited by independent
certified public accountants reasonably acceptable to Foothill and certified,
without any qualifications, by such accountants to have been prepared in
accordance with GAAP, together with a certificate of such accountants addressed
to Foothill stating that such accountants do not have knowledge of the existence
of any Default or Event of Default. Such audited financial statements shall
include a balance sheet, profit and loss statement, and statement of cash flow
and, if prepared, such accountants' letter to management. If Borrower is a
parent company of one or more Subsidiaries, or Affiliates, or is a Subsidiary or
Affiliate of another company, then, in addition to the financial statements
referred to above, Borrower agrees to deliver financial statements prepared on a
consolidating basis so as to present Borrower and each such related entity
separately, and on a consolidated basis.
Together with the above, Borrower also shall deliver
to Foothill Borrower's Form 10-Q Quarterly Reports, Form 10-K Annual Reports,
and Form 8-K Current Reports, and any other filings made by Borrower with the
Securities and Exchange Commission, if any, as soon as the same are filed, or
any other information that is provided by Borrower to its shareholders, and any
other report reasonably requested by Foothill relating to the financial
condition of Borrower.
Each month, together with the financial statements
provided pursuant to Section 6.3(a), Borrower shall deliver to Foothill a
certificate signed by its chief financial officer to the effect that: (i) all
financial statements delivered or caused to be delivered to Foothill hereunder
have been prepared in accordance with GAAP (except, in the case of unaudited
financial statements, for the lack of footnotes and being subject to year-end
audit adjustments) and fairly present the financial condition of Borrower, (ii)
the representations and warranties of Borrower contained in this Agreement and
the other Loan Documents are true and correct in all material respects on and as
of the date of such certificate, as though made on and as of such date (except
to the extent that such representations and warranties relate solely to an
earlier date), (iii) for each month that also is the date on which a financial
covenant in Section 7.20 is to be tested, a Compliance Certificate demonstrating
in reasonable detail compliance at the end of such period with the applicable
financial covenants contained in Section 7.20, and (iv) on the date of delivery
of such certificate to Foothill there does not exist any condition or event that
constitutes a Default or Event of Default (or, in the case of clauses (i), (ii),
or (iii), to the extent of any non-compliance, describing such non-compliance as
to which he or she may have knowledge and what action Borrower has taken, is
taking, or proposes to take with respect thereto).
Borrower shall have issued written instructions to
its independent certified public accountants authorizing them to communicate
with Foothill and to release to Foothill whatever financial information
concerning Borrower that Foothill may request. Borrower hereby irrevocably
authorizes and directs all auditors, accountants, or other financial consultants
to deliver to Foothill, at Borrower's expense, copies of Borrower's financial
statements, papers related thereto, and other accounting records of any nature
in their possession, and to disclose to Foothill any information they may have
regarding Borrower's business affairs and financial conditions.
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In addition to the financial statements required to
be delivered as set forth above, not later than 30 days prior to the end of each
fiscal year of Borrower, Borrower shall deliver to Foothill financial
projections (including projected income statements, balance sheets and
statements of cash flow, all projected on a monthly basis for the succeeding
fiscal year and on an annual basis for each fiscal year thereafter until the
termination of this Agreement and in each case prepared on a consolidated and
stand alone basis), in form and substance reasonably satisfactory to Foothill;
all such financial projections shall be reasonable, shall be prepared on a
reasonable basis and in good faith, and shall be based on assumptions believed
by Borrower to be reasonable at the time made and from the best information then
available to Borrower.
6.4 TAX RETURNS. Deliver to Foothill copies of each of
Borrower's future federal income tax returns, and any amendments thereto, within
30 days of the filing thereof with the Internal Revenue Service.
6.5 GUARANTOR REPORTS. Cause any guarantor of any of the
Obligations to deliver its annual financial statements at the time when Borrower
provides its audited financial statements to Foothill and copies of all federal
income tax returns as soon as the same are available and in any event no later
than 30 days after the same are required to be filed by law.
6.6 RETURNS. Cause returns and allowances, if any, as between
Borrower and its Account Debtors to be on the same basis and in accordance with
the usual customary practices of Borrower, as they exist at the time of the
execution and delivery of this Agreement. If, at a time when no Event of Default
has occurred and is continuing, any Account Debtor returns any Inventory to
Borrower, Borrower promptly shall determine the reason for such return and, if
Borrower accepts such return, issue a credit memorandum (with a copy to be sent
to Foothill) in the appropriate amount to such Account Debtor. If, at a time
when an Event of Default has occurred and is continuing, any Account Debtor
returns any Inventory to Borrower, Borrower promptly shall determine the reason
for such return and, if Foothill consents (which consent shall not be
unreasonably withheld), issue a credit memorandum (with a copy to be sent to
Foothill) in the appropriate amount to such Account Debtor.
6.7 TITLE TO EQUIPMENT. Upon Foothill's request, Borrower
immediately shall deliver to Foothill, properly endorsed, any and all evidences
of ownership of, certificates of title, or applications for title to any items
of Equipment.
6.8 MAINTENANCE OF EQUIPMENT. Maintain the Equipment in good
operating condition and repair (ordinary wear and tear excepted), and make all
necessary replacements thereto so that the value and operating efficiency
thereof shall at all times be maintained and preserved. Other than those items
of Equipment that constitute fixtures on the Closing Date, Borrower shall not
permit any item of Equipment to become a fixture to real estate or an accession
to other property, and such Equipment shall at all times remain personal
property.
6.9 TAXES. Cause all assessments and taxes, whether real,
personal, or otherwise, due or payable by, or imposed, levied, or assessed
against Borrower or any of its property to be paid in full, before delinquency
or before the expiration of any extension period, except to the extent that the
validity of such assessment or tax shall be the subject of a Permitted Protest.
Borrower shall make due and timely payment or deposit of all such federal,
state, and local
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taxes, assessments, or contributions required of it by law, and will
execute and deliver to Foothill, on demand, appropriate certificates
attesting to the payment thereof or deposit with respect thereto. Borrower will
make timely payment or deposit of all tax payments and withholding taxes
required of it by applicable laws, including those laws concerning F.I.C.A.,
F.U.T.A., state disability, and local, state, and federal income taxes, and
will, upon request, furnish Foothill with proof satisfactory to Foothill
indicating that Borrower has made such payments or deposits.
6.10 INSURANCE.
(a) At its expense, keep the Collateral insured
against loss or damage by fire, theft, explosion, sprinklers, and all other
hazards and risks, and in such amounts, as are ordinarily insured against by
other owners in similar businesses. Borrower also shall maintain business
interruption, public liability, product liability, and property damage insurance
relating to Borrower's ownership and use of the Collateral, as well as insurance
against larceny, embezzlement, and criminal misappropriation.
(b) All such policies of insurance shall be in such
form, with such companies, and in such amounts as may be reasonably satisfactory
to Foothill. All insurance required herein shall be written by companies which
are authorized to do insurance business in the States of Michigan and New York.
All hazard insurance and such other insurance as Foothill shall specify, shall
contain a standard form endorsement satisfactory to Foothill, showing Foothill
as sole loss payee thereof, and shall contain a waiver of warranties. Every
policy of insurance referred to in this Section 6.10 shall contain an agreement
by the insurer that it will not cancel such policy except after 30 days prior
written notice to Foothill and that any loss payable thereunder shall be payable
notwithstanding any act or negligence of Borrower or Foothill which might,
absent such agreement, result in a forfeiture of all or a part of such insurance
payment. Borrower shall deliver to Foothill certified copies of such policies of
insurance and evidence of the payment of all premiums therefor.
(c) Original policies or certificates thereof
satisfactory to Foothill evidencing such insurance shall be delivered to
Foothill at least 30 days prior to the expiration of the existing or preceding
policies. Borrower shall give Foothill prompt notice of any loss covered by such
insurance. At any time that an Event of Default has occurred and is continuing,
or if the loss is in excess of $250,000, Foothill shall have the exclusive right
to adjust any such losses payable under any such insurance policies without any
liability to Borrower whatsoever in respect of such adjustments. Any monies
received as payment for any loss under any insurance policy including the
insurance policies mentioned above, shall be paid over to Foothill to be applied
at the option of Foothill either to the prepayment of the Obligations without
premium, in such order or manner as Foothill may elect, or shall be disbursed to
Borrower under stage payment terms satisfactory to Foothill for application to
the cost of repairs, replacements, or restorations. All repairs, replacements,
or restorations shall be effected with reasonable promptness and shall be of a
value at least equal to the value of the items or property destroyed prior to
such damage or destruction. Upon the occurrence of an Event of Default, Foothill
shall have the right to apply all prepaid premiums to the payment of the
Obligations in such order or form as Foothill shall determine.
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(d) Borrower shall not take out separate insurance
concurrent in form or contributing in the event of loss with that required to be
maintained under this Section 6.10, unless Foothill is included thereon as named
insured with the loss payable to Foothill under a standard endorsement. Borrower
immediately shall notify Foothill whenever such separate insurance is taken out,
specifying the insurer thereunder and full particulars as to the policies
evidencing the same, and originals of such policies immediately shall be
provided to Foothill.
6.11 NO SETOFFS OR COUNTERCLAIMS. Make payments hereunder and
under the other Loan Documents by or on behalf of Borrower without setoff or
counterclaim and free and clear of, and without deduction or withholding for or
on account of, any federal, state, or local taxes.
6.12 LOCATION OF INVENTORY AND EQUIPMENT. Keep the Inventory
and Equipment only at the locations identified on Schedule 6.12; provided,
however, that Borrower may amend Schedule 6.12 so long as such amendment occurs
by written notice to Foothill not less than 30 days prior to the date on which
the Inventory or Equipment is moved to such new location, so long as such new
location is within the continental United States, and so long as, at the time of
such written notification, Borrower provides any financing statements or fixture
filings necessary to perfect and continue perfected Foothill's security
interests in such assets and also provides to Foothill a Collateral Access
Agreement.
6.13 COMPLIANCE WITH LAWS. Comply with the requirements of all
applicable laws, rules, regulations, and orders of any Governmental Authority,
including the Fair Labor Standards Act and the Americans With Disabilities Act,
other than laws, rules, regulations, and orders the non-compliance with which,
individually or in the aggregate, would not have and could not reasonably be
expected to have a Material Adverse Change.
6.14 EMPLOYEE BENEFITS.
(a) (i) Promptly, and in any event within 10 Business
Days after Borrower or any of its Subsidiaries knows or has reason to know that
an ERISA Event has occurred that reasonably could be expected to result in a
Material Adverse Change, provide to Foothill a written statement of the chief
financial officer of Borrower describing such ERISA Event and any action that is
being taken with respect thereto by Borrower, any such Subsidiary or ERISA
Affiliate, and any action taken or threatened by the IRS, Department of Labor,
or PBGC. Borrower or such Subsidiary, as applicable, shall be deemed to know all
facts known by the administrator of any Benefit Plan of which it is the plan
sponsor, (ii) promptly, and in any event within 3 Business Days after the filing
thereof with the IRS, a copy of each funding waiver request filed with respect
to any Benefit Plan and all communications received by Borrower, any of its
Subsidiaries or, to the knowledge of Borrower, any ERISA Affiliate with respect
to such request, and (iii) promptly, and in any event within 3 Business Days
after receipt by Borrower, any of its Subsidiaries or, to the knowledge of
Borrower, any ERISA Affiliate, of the PBGC's intention to terminate a Benefit
Plan or to have a trustee appointed to administer a Benefit Plan, copies of each
such notice.
(b) Cause to be delivered to Foothill, upon
Foothill's request, each of the following: (i) a copy of each Plan (or, where
any such plan is not in writing, a complete description thereof) (and if
applicable, related trust agreements or other funding instruments) and all
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amendments thereto, all written interpretations thereof and written descriptions
thereof that have been distributed to employees or former employees of Borrower
or its Subsidiaries; (ii) the most recent determination letter issued by the IRS
with respect to each Benefit Plan; (iii) for the three most recent plan years,
annual reports on Form 5500 Series required to be filed with any governmental
agency for each Benefit Plan; (iv) all actuarial reports prepared for the last
three plan years for each Benefit Plan; (v) a listing of all Multiemployer
Plans, with the aggregate amount of the most recent annual contributions
required to be made by Borrower or any ERISA Affiliate to each such plan and
copies of the collective bargaining agreements requiring such contributions;
(vi) any information that has been provided to Borrower or any ERISA Affiliate
regarding withdrawal liability under any Multiemployer Plan; and (vii) the
aggregate amount of the most recent annual payments made to former employees of
Borrower or its Subsidiaries under any Retiree Health Plan.
6.15 LEASES. Pay when due all rents and other amounts payable
under any leases to which Borrower is a party or by which Borrower's properties
and assets are bound, unless such payments are the subject of a Permitted
Protest. To the extent that Borrower fails timely to make payment of such rents
and other amounts payable when due under its leases, Foothill shall be entitled,
in its discretion, to reserve an amount equal to such unpaid amounts against the
Borrowing Base.
6.16 PRESERVATION OF EXISTENCE, ETC. Maintain and preserve its
existence, rights and privileges, and become or remain duly qualified and in
good standing in each jurisdiction in which the character of the properties
owned or leased by it or in which the transaction of its business makes such
qualification necessary.
6.17 KEEPING OF RECORDS AND BOOKS OF ACCOUNT. Keep, and cause
each of its Subsidiaries to keep, adequate records and books of account, with
complete entries made in accordance with GAAP.
6.18 MAINTENANCE OF PROPERTIES, ETC. Maintain and preserve all
of its properties which are necessary or useful in the proper conduct of its
business in good working order and condition, ordinary wear and tear excepted,
and comply at all times with the provisions of all leases to which it is a party
as lessee or under which each of it occupies property, so as to prevent any loss
or forfeiture thereof or thereunder.
6.19 COPYRIGHT REGISTRATIONS. Prior to the generation of any
Accounts from the marketing, sale, license or distribution of computer software
products or other copyrights, unless Foothill in Foothill's sole discretion
agrees otherwise, Borrower shall (i) cause all copyrights generated by Borrower
to be registered with the United States Copyright Office in a manner sufficient
to impart constructive notice of Borrower's ownership thereof which obligation
may be satisfied by the Borrower by filing Applications for Registration in
proper form for filing with the United States Copyright Office and otherwise
making proper application for, and paying all fees necessary to obtain,
expedited treatment from the United States Copyright Office for registration of
the copyrights related to such Applications for Registration, and (ii) cause to
be prepared, executed, and filed with the United States Copyright Office, a
Copyright Security Agreement or supplemental schedules to a Copyright Security
Agreement reflecting the security
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interest of Foothill in such copyrights, which shall be in form and content
suitable for registration with the United States Copyright Office so as to give
constructive notice of the transfer by Borrower to Foothill of a security
interest in such copyrights.
6.20 YEAR 2000 COMPATIBILITY. Borrower shall take all action
necessary to assure that Borrower's computer-based systems are to operate and
effectively process data including datafields requiring references to dates on
and after January 1, 2000. At the request of Foothill, Borrower shall provide to
Foothill written assurances and other evidence acceptable to Foothill of
Borrower's compliance with this Section.
6.21 FURTHER ASSURANCES. Take such action and execute,
acknowledge and deliver, and cause each of its Subsidiaries to take such action
and execute, acknowledge and deliver, at its sole cost and expense such
agreements, instruments or other documents as Foothill may reasonably require
from time to time in order (i) to carry out more effectively the purposes of
this Agreement and the other Loan Documents, (ii) to maintain the validity and
effectiveness of any of the Loan Documents, and (iii) to better assure, convey,
grant, assign, transfer and confirm unto Foothill the rights now or hereafter
intended to be granted to Foothill under this Agreement or any other Loan
Document.
7. NEGATIVE COVENANTS.
Borrower covenants and agrees that, so long as any credit
hereunder shall be available and until full and final payment of the
Obligations, Borrower will not do any of the following without Foothill's prior
written consent:
7.1 INDEBTEDNESS. Create, incur, assume, permit, guarantee, or
otherwise become or remain, directly or indirectly, liable with respect to any
Indebtedness, except:
(a) Indebtedness evidenced by this Agreement,
together with Indebtedness to issuers of letters of credit that are the subject
of L/C Guarantees;
(b) Indebtedness set forth in the latest financial
statements of Borrower submitted to Foothill on or prior to the Closing Date;
(c) Indebtedness secured by Permitted Liens; and
(d) refinancings, renewals, or extensions of
Indebtedness permitted under clauses (b) and (c) of this Section 7.1 (and
continuance or renewal of any Permitted Liens associated therewith) so long as:
(i) the terms and conditions of such refinancings, renewals, or extensions do
not materially impair the prospects of repayment of the Obligations by Borrower,
(ii) the net cash proceeds of such refinancings, renewals, or extensions do not
result in an increase in the aggregate principal amount of the Indebtedness so
refinanced, renewed, or extended, (iii) such refinancings, renewals, refundings,
or extensions do not result in a shortening of the average weighted maturity of
the Indebtedness so refinanced, renewed, or extended, and (iv) to the extent
that Indebtedness that is refinanced was subordinated in right of payment to the
Obligations, then the subordination terms and conditions of the refinancing
Indebtedness must be at least as favorable to Foothill as those applicable to
the refinanced Indebtedness.
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7.2 LIENS. Create, incur, assume, or permit to exist, directly
or indirectly, any Lien on or with respect to any of its property or assets, of
any kind, whether now owned or hereafter acquired, or any income or profits
therefrom, except for Permitted Liens (including Liens that are replacements of
Permitted Liens to the extent that the original Indebtedness is refinanced under
Section 7.1(d) and so long as the replacement Liens only encumber those assets
or property that secured the original Indebtedness).
7.3 RESTRICTIONS ON FUNDAMENTAL CHANGES. Enter into any
merger, consolidation, reorganization, or recapitalization, or reclassify its
capital stock, or liquidate, wind up, or dissolve itself (or suffer any
liquidation or dissolution), or convey, sell, assign, lease, transfer, or
otherwise dispose of, in one transaction or a series of transactions, all or any
substantial part of its property or assets.
7.4 DISPOSAL OF ASSETS. Sell, lease, assign, transfer, or
otherwise dispose of any of Borrower's properties or assets other than sales of
Inventory to buyers in the ordinary course of Borrower's business as currently
conducted.
7.5 CHANGE NAME. Change Borrower's name, FEIN, corporate
structure (within the meaning of Section 9-402(7) of the Code), or identity, or
add any new fictitious name.
7.6 GUARANTEE. Guarantee or otherwise become in any way liable
with respect to the obligations of any third Person except by endorsement of
instruments or items of payment for deposit to the account of Borrower or which
are transmitted or turned over to Foothill.
7.7 NATURE OF BUSINESS. Make any change in the principal
nature of Borrower's business.
7.8 PREPAYMENTS AND AMENDMENTS.
(a) Except in connection with a refinancing permitted
by Section 7.1(d), prepay, redeem, retire, defease, purchase, or otherwise
acquire any Indebtedness owing to any third Person, other than the Obligations
in accordance with this Agreement, and
(b) Directly or indirectly, amend, modify, alter,
increase, or change any of the terms or conditions of any agreement, instrument,
document, indenture, or other writing evidencing or concerning Indebtedness
owing to IBM Credit Corporation or any other Indebtedness permitted under
Sections 7.1(b), (c), or (d).
7.9 CHANGE OF CONTROL. Cause, permit, or suffer, directly or
indirectly, any Change of Control.
7.10 CONSIGNMENTS. Consign any Inventory or sell any Inventory
on bill and hold, sale or return, sale on approval, or other conditional terms
of sale.
7.11 DISTRIBUTIONS. Make any distribution or declare or pay
any dividends (in cash or other property, other than capital stock) on, or
purchase, acquire, redeem, or retire any of Borrower's capital stock, of any
class, whether now or hereafter outstanding.
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7.12 ACCOUNTING METHODS. Modify or change its method of
accounting or enter into, modify, or terminate any agreement currently existing,
or at any time hereafter entered into with any third party accounting firm or
service bureau for the preparation or storage of Borrower's accounting records
without said accounting firm or service bureau agreeing to provide Foothill
information regarding the Collateral or Borrower's financial condition. Borrower
waives the right to assert a confidential relationship, if any, it may have with
any accounting firm or service bureau in connection with any information
requested by Foothill pursuant to or in accordance with this Agreement, and
agrees that Foothill may contact directly any such accounting firm or service
bureau in order to obtain such information.
7.13 INVESTMENTS. Directly or indirectly make, acquire, or
incur any liabilities (including contingent obligations) for or in connection
with (a) the acquisition of the securities (whether debt or equity) of, or other
interests in, a Person, (b) loans, advances, capital contributions, or transfers
of property to a Person, except for loans and/or advances not to exceed in the
aggregate the sum of $250,000 outstanding at any time to officers and other
employees of Borrower (such sum to be net of offsetting loans payable by
Borrower to the relevant payors/debtors), or (c) the acquisition of all or
substantially all of the properties or assets of a Person.
7.14 TRANSACTIONS WITH AFFILIATES. Directly or indirectly
enter into or permit to exist any material transaction with any Affiliate of
Borrower except for (a) transactions that are in the ordinary course of
Borrower's business, upon fair and reasonable terms, that are fully disclosed to
Foothill, and that are no less favorable to Borrower than would be obtained in
an arm's length transaction with a non-Affiliate and (b) that certain sale, on
or about June 1, 1998, of Borrower's ownership of seventy percent (70%) of the
capital stock of Unified Network Services, Inc. to other shareholders thereof
for consideration consisting of cash and a secured promissory note in the
original principal amount of $3,000,000.
7.15 SUSPENSION. Suspend or go out of a substantial portion
of its business.
7.16 COMPENSATION. Increase the annual fee or per-meeting fees
paid to directors during any year by more than 15% over the prior year; pay or
accrue total cash compensation, during any year, to officers and senior
management employees in an aggregate amount in excess of 115% of that paid or
accrued in the prior year; provided, however, that Borrower may also pay
bonuses, as approved from time to time by the independent compensation committee
of Borrower's board of directors, pursuant to a bonus plan reviewed by, and
deemed acceptable to, Foothill in its reasonable credit judgment.
7.17 USE OF PROCEEDS. Use the proceeds of the Advances made
hereunder for any purpose other than (i) on the Closing Date, (y) to repay in
full the outstanding principal, accrued interest, and accrued fees and expenses
owing to Existing Lender, and (z) to pay transactional costs and expenses
incurred in connection with this Agreement, and (ii) thereafter, consistent with
the terms and conditions hereof, for its lawful and permitted corporate
purposes.
7.18 CHANGE IN LOCATION OF CHIEF EXECUTIVE OFFICE; INVENTORY
AND EQUIPMENT WITH BAILEES. Relocate its chief executive office to a new
location without providing 30 days prior written notification thereof to
Foothill and so long as, at the time of such written notification, Borrower
provides any financing statements or fixture filings necessary to perfect and
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continue perfected Foothill's security interests and also provides to Foothill a
Collateral Access Agreement with respect to such new location. The Inventory and
Equipment shall not at any time now or hereafter be stored with a bailee,
warehouseman, or similar party without Foothill's prior written consent.
7.19 NO PROHIBITED TRANSACTIONS UNDER ERISA. Directly or
indirectly:
(a) engage, or permit any Subsidiary of Borrower to
engage, in any prohibited transaction which is reasonably likely to result in a
civil penalty or excise tax described in Sections 406 of ERISA or 4975 of the
IRC for which a statutory or class exemption is not available or a private
exemption has not been previously obtained from the Department of Labor;
(b) permit to exist with respect to any Benefit Plan
any accumulated funding deficiency (as defined in Sections 302 of ERISA and 412
of the IRC), whether or not waived;
(c) fail, or permit any Subsidiary of Borrower to
fail, to pay timely required contributions or annual installments due with
respect to any waived funding deficiency to any Benefit Plan;
(d) terminate, or permit any Subsidiary of Borrower
to terminate, any Benefit Plan where such event would result in any liability of
Borrower, any of its Subsidiaries or any ERISA Affiliate under Title IV of
ERISA;
(e) fail, or permit any Subsidiary of Borrower to
fail, to make any required contribution or payment to any Multiemployer Plan;
(f) fail, or permit any Subsidiary of Borrower to
fail, to pay any required installment or any other payment required under
Section 412 of the IRC on or before the due date for such installment or other
payment;
(g) amend, or permit any Subsidiary of Borrower to
amend, a Plan resulting in an increase in current liability for the plan year
such that either of Borrower, any Subsidiary of Borrower or any ERISA Affiliate
is required to provide security to such Plan under Section 401(a)(29) of the
IRC; or
(h) withdraw, or permit any Subsidiary of Borrower to
withdraw, from any Multiemployer Plan where such withdrawal is reasonably likely
to result in any liability of any such entity under Title IV of ERISA;
which, individually or in the aggregate, results in or reasonably would be
expected to result in a claim against or liability of Borrower, any of its
Subsidiaries or any ERISA Affiliate in excess of $25,000.
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7.20 FINANCIAL COVENANTS. Fail to maintain:
(a) EBITDA: EBITDA of at least $1,300,000, less any
write-off or adjustment relating to Borrower's SofTech, Inc. receivable
outstanding on the Closing Date, measured on rolling four fiscal quarter basis;
(b) Tangible Net Worth: Tangible Net Worth of at
least ($1,100,000), measured on a fiscal quarter-end basis; provided however,
that during the term of this Agreement the cumulative Net Income from September
30, 1998 shall not be less than ($3,000,000).
7.21 CAPITAL EXPENDITURES. Make capital expenditures in
any fiscal year in excess of $1,000,000.
8. EVENTS OF DEFAULT.
Any one or more of the following events shall constitute an
event of default (each, an "Event of Default") under this Agreement:
8.1 If Borrower fails to pay when due and payable or when
declared due and payable, any portion of the Obligations (whether of principal,
interest (including any interest which, but for the provisions of the Bankruptcy
Code, would have accrued on such amounts), fees and charges due Foothill,
reimbursement of Foothill Expenses, or other amounts constituting Obligations);
8.2 If Borrower fails to perform, keep, or observe any term,
provision, condition, covenant, or agreement contained in this Agreement, in any
of the Loan Documents, or in any other present or future agreement between
Borrower and Foothill;
8.3 If there is a Material Adverse Change;
8.4 If any material portion of Borrower's properties or assets
is attached, seized, subjected to a writ or distress warrant, or is levied upon,
or comes into the possession of any third Person;
8.5 If an Insolvency Proceeding is commenced by Borrower;
8.6 If an Insolvency Proceeding is commenced against Borrower
and any of the following events occur: (a) Borrower consents to the institution
of the Insolvency Proceeding against it; (b) the petition commencing the
Insolvency Proceeding is not timely controverted; (c) the petition commencing
the Insolvency Proceeding is not dismissed within 45 calendar days of the date
of the filing thereof; provided, however, that, during the pendency of such
period, Foothill shall be relieved of its obligation to extend credit hereunder;
(d) an interim trustee is appointed to take possession of all or a substantial
portion of the properties or assets of, or to operate all or any substantial
portion of the business of, Borrower; or (e) an order for relief shall have been
issued or entered therein;
8.7 If Borrower is enjoined, restrained, or in any way
prevented by court order from continuing to conduct all or any material part of
its business affairs;
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8.8 If a notice of Lien, levy, or assessment is filed of
record with respect to any of Borrower's properties or assets by the United
States Government, or any department, agency, or instrumentality thereof, or by
any state, county, municipal, or governmental agency, or if any taxes or debts
owing at any time hereafter to any one or more of such entities becomes a Lien,
whether choate or otherwise, upon any of Borrower's properties or assets and the
same is not paid on the payment date thereof;
8.9 If a judgment or other claim becomes a Lien or encumbrance
upon any material portion of Borrower's properties or assets;
8.10 If there is a default in any agreement relating to
Indebtedness owing by Borrower to IBM Credit Corporation or in any other
material agreement to which Borrower is a party with one or more third Persons
and such default (a) occurs at the final maturity of the obligations thereunder,
or (b) results in a right by such third Person(s), irrespective of whether
exercised, to accelerate the maturity of Borrower's obligations thereunder;
8.11 If Borrower makes any payment on account of Indebtedness
that has been contractually subordinated in right of payment to the payment of
the Obligations, except to the extent such payment is permitted by the terms of
the subordination provisions applicable to such Indebtedness;
8.12 If any misstatement or misrepresentation exists now or
hereafter in any warranty, representation, statement, or report made to Foothill
by Borrower or any officer, employee, agent, or director of Borrower, or if any
such warranty or representation is withdrawn; or
8.13 If the obligation of any guarantor under its guaranty or
other third Person under any Loan Document is limited or terminated by operation
of law or by the guarantor or other third Person thereunder, or any such
guarantor or other third Person becomes the subject of an Insolvency Proceeding.
8.14 This Agreement, or any security document after delivery
thereof pursuant hereto, shall for any reason fail or cease to create a valid
and perfected and, except to the extent permitted by the terms hereof or
thereof, first priority Lien on or security interest in any Collateral covered
hereby or thereby; or
8.15 Any provision of any Loan Document shall at any time for
any reason be declared to be null and void, or the validity or enforceability
thereof shall be contested by Borrower, or a proceeding shall be commenced by
Borrower, or by any Governmental Authority or other regulatory body having
jurisdiction over Borrower, seeking to establish the invalidity or
unenforceability thereof, or Borrower shall deny that Borrower has any liability
or obligation purported to be created under any Loan Document.
9. FOOTHILL'S RIGHTS AND REMEDIES.
9.1 RIGHTS AND REMEDIES. Upon the occurrence, and during the
continuation, of an Event of Default Foothill may, at its election, without
notice of its election and without demand, do any one or more of the following,
all of which are authorized by Borrower:
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(a) Declare all Obligations, whether evidenced by
this Agreement, by any of the other Loan Documents, or otherwise, immediately
due and payable;
(b) Cease advancing money or extending credit to or
for the benefit of Borrower under this Agreement, under any of the Loan
Documents, or under any other agreement between Borrower and Foothill;
(c) Terminate this Agreement and any of the other
Loan Documents as to any future liability or obligation of Foothill, but without
affecting Foothill's rights and security interests in the Collateral and without
affecting the Obligations;
(d) Settle or adjust disputes and claims directly
with Account Debtors for amounts and upon terms which Foothill considers
advisable, and in such cases, Foothill will credit Borrower's Loan Account with
only the net amounts received by Foothill in payment of such disputed Accounts
after deducting all Foothill Expenses incurred or expended in connection
therewith;
(e) Cause Borrower to hold all returned Inventory in
trust for Foothill, segregate all returned Inventory from all other property of
Borrower or in Borrower's possession and conspicuously label said returned
Inventory as subject to the security interests of Foothill;
(f) Without notice to or demand upon Borrower or any
guarantor, make such payments and do such acts as Foothill considers necessary
or reasonable to protect its security interests in the Collateral. Borrower
agrees to assemble the Collateral if Foothill so requires, and to make the
Collateral available to Foothill as Foothill may designate. Borrower authorizes
Foothill to enter the premises where the Collateral is located, to take and
maintain possession of the Collateral, or any part of it, and to pay, purchase,
contest, or compromise any encumbrance, charge, or Lien that in Foothill's
determination appears to conflict with its security interests and to pay all
expenses incurred in connection therewith. With respect to any of Borrower's
owned or leased premises, Borrower hereby grants Foothill a license to enter
into possession of such premises and to occupy the same, without charge, for up
to 120 days in order to exercise any of Foothill's rights or remedies provided
herein, at law, in equity, or otherwise;
(g) Without notice to Borrower (such notice being
expressly waived), and without constituting a retention of any collateral in
satisfaction of an obligation (within the meaning of Section 9-505 of the Code),
set off and apply to the Obligations any and all (i) balances and deposits of
Borrower held by Foothill (including any amounts received in the Lockbox
Accounts), or (ii) indebtedness at any time owing to or for the credit or the
account of Borrower held by Foothill;
(h) Hold, as cash collateral, any and all balances
and deposits of Borrower held by Foothill, and any amounts received in the
Lockbox Accounts, to secure the full and final repayment of all of the
Obligations;
(i) Ship, reclaim, recover, store, finish, maintain,
repair, prepare for sale, advertise for sale, and sell (in the manner provided
for herein) the Collateral. Foothill is hereby granted a license or other right
to use, without charge, Borrower's labels, patents, copyrights,
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rights of use of any name, trade secrets, trade names, trademarks, service
marks, and advertising matter, or any property of a similar nature, as it
pertains to the Collateral, in completing production of, advertising for sale,
and selling any Collateral and Borrower's rights under all licenses and all
franchise agreements shall inure to Foothill's benefit;
(j) Sell the Collateral at either a public or private
sale, or both, by way of one or more contracts or transactions, for cash or on
terms, in such manner and at such places (including Borrower's premises) as
Foothill determines is commercially reasonable. It is not necessary that the
Collateral be present at any such sale;
(k) Foothill shall give notice of the disposition of
the Collateral as follows:
(1) Foothill shall give Borrower and each
holder of a security interest in the Collateral who has filed with Foothill a
written request for notice, a notice in writing of the time and place of
public sale, or, if the sale is a private sale or some other disposition
other than a public sale is to be made of the Collateral, then the
time on or after which the private sale or other disposition is to be made;
(2) The notice shall be personally delivered
or mailed, postage prepaid, to Borrower as provided in Section 12, at least 5
days before the date fixed for the sale, or at least 5 days before the date on
or after which the private sale or other disposition is to be made; no
notice needs to be given prior to the disposition of any portion of the
Collateral that is perishable or threatens to decline speedily in value or
that is of a type customarily sold on a recognized market. Notice to
Persons other than Borrower claiming an interest in the Collateral
shall be sent to such addresses as they have furnished to Foothill;
(3) If the sale is to be a public sale,
Foothill also shall give notice of the time and place by publishing a notice
one time at least 5 days before the date of the sale in a newspaper of
general circulation in the county in which the sale is to be held;
(l) Foothill may credit bid and purchase at any
public sale; and
(m) Any deficiency that exists after disposition of
the Personal Property Collateral as provided above will be paid immediately by
Borrower. Any excess will be returned, without interest and subject to the
rights of third Persons, by Foothill to Borrower.
9.2 REMEDIES CUMULATIVE. Foothill's rights and remedies under
this Agreement, the Loan Documents, and all other agreements shall be
cumulative. Foothill shall have all other rights and remedies not inconsistent
herewith as provided under the Code, by law, or in equity. No exercise by
Foothill of one right or remedy shall be deemed an election, and no waiver by
Foothill of any Event of Default shall be deemed a continuing waiver. No delay
by Foothill shall constitute a waiver, election, or acquiescence by it.
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<PAGE> 51
10. TAXES AND EXPENSES.
If Borrower fails to pay any monies (whether taxes,
assessments, insurance premiums, or, in the case of leased properties or assets,
rents or other amounts payable under such leases) due to third Persons, or fails
to make any deposits or furnish any required proof of payment or deposit, all as
required under the terms of this Agreement, then, to the extent that Foothill
determines that such failure by Borrower could result in a Material Adverse
Change, in its discretion and without prior notice to Borrower, Foothill may do
any or all of the following: (a) make payment of the same or any part thereof by
charging Borrower's Loan Account therefor; (b) set up such reserves to the
Borrowing Base as Foothill deems necessary to protect Foothill from the exposure
created by such failure, including, without limitation, a $100,000 reserve with
respect to state tax liens as of the Closing Date which such reserve shall be
released or increased in accordance with Section 3.3(c) of this Agreement; or
(c) obtain and maintain insurance policies of the type described in Section
6.10, and take any action with respect to such policies as Foothill deems
prudent. Any such amounts paid by Foothill shall constitute Foothill Expenses.
Any such payments made by Foothill shall not constitute an agreement by Foothill
to make similar payments in the future or a waiver by Foothill of any Event of
Default under this Agreement. Foothill need not inquire as to, or contest the
validity of, any such expense, tax, or Lien and the receipt of the usual
official notice for the payment thereof shall be conclusive evidence that the
same was validly due and owing.
11. WAIVERS; INDEMNIFICATION.
11.1 DEMAND; PROTEST; ETC. Borrower waives demand, protest,
notice of protest, notice of default or dishonor, notice of payment and
nonpayment, nonpayment at maturity, release, compromise, settlement, extension,
or renewal of accounts, documents, instruments, chattel paper, and guarantees at
any time held by Foothill on which Borrower may in any way be liable.
11.2 FOOTHILL'S LIABILITY FOR COLLATERAL. So long as Foothill
complies with its obligations, if any, under Section 9-207 of the Code, Foothill
shall not in any way or manner be liable or responsible for: (a) the safekeeping
of the Collateral; (b) any loss or damage thereto occurring or arising in any
manner or fashion from any cause; (c) any diminution in the value thereof; or
(d) any act or default of any carrier, warehouseman, bailee, forwarding agency,
or other Person. All risk of loss, damage, or destruction of the Collateral
shall be borne by Borrower.
11.3 INDEMNIFICATION. Borrower shall pay, indemnify, defend,
and hold Foothill, each Participant, and each of their respective officers,
directors, employees, counsel, agents, and attorneys-in-fact (each, an
"Indemnified Person") harmless (to the fullest extent permitted by law) from and
against any and all claims, demands, suits, actions, investigations,
proceedings, and damages, and all reasonable attorneys fees and disbursements
and other costs and expenses actually incurred in connection therewith (as and
when they are incurred and irrespective of whether suit is brought), at any time
asserted against, imposed upon, or incurred by any of them in connection with or
as a result of or related to the execution, delivery, enforcement, performance,
and administration of this Agreement and any other Loan Documents or the
transactions contemplated herein, and with respect to any investigation,
litigation, or proceeding related to this Agreement, any other Loan Document, or
the use of the proceeds of the credit provided hereunder (irrespective of
whether any
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<PAGE> 52
Indemnified Person is a party thereto), or any act, omission, event or
circumstance in any manner related thereto (all the foregoing, collectively,
the "Indemnified Liabilities"). Borrower shall have no obligation to any
Indemnified Person under this Section 11.3 with respect to any Indemnified
Liability that a court of competent jurisdiction finally determines to have
resulted from the gross negligence or willful misconduct of such Indemnified
Person. This provision shall survive the termination of this Agreement and the
repayment of the Obligations.
12. ISSUANCE OF EQUITY INTERESTS TO FOOTHILL
12.1 AUTHORIZATION AND ISSUANCE OF WARRANTS. Borrower has
authorized (a) the issuance of a common stock purchase warrant in the form of
Exhibit W hereto (such warrant, together with the rights to purchase Common
Stock provided thereby and all warrants covering such stock issued upon
transfer, division or combination of, or in substitution for, any thereof, being
herein called the "Warrants") for issuance to Foothill pursuant to this
Agreement, and (b) the issuance of such number of shares of Common Stock as
shall be necessary to permit Borrower to comply with its obligations to issue
Common Stock pursuant to the Warrants, which shall initially be an amount equal
to 50,000 of the issued and outstanding shares of Common Stock as of such date
on a fully diluted basis. It is understood and agreed that the Warrants contain
provisions affecting the number of shares of Common Stock that may be acquired,
which provisions are set forth in the Warrants. Such Warrants will have an
initial exercise price equal to an amount not greater than (i) $2.28 per share,
and will cease to be exercisable on a date that is the fifth anniversary of the
Effective Date.
12.2 SECURITIES ACT MATTERS. (a) Foothill warrants to
Borrower that:
(i) Foothill is acquiring the Warrants hereunder and
will acquire the Common Stock into which the Warrants are exercisable,
for investment purposes, for its own account, without a view to the
distribution thereof, all without prejudice, however, to the right of
Foothill at any time, in accordance with this Agreement, lawfully to
sell or otherwise to dispose of all or any part of the Warrants or
Warrant Stock held by it.
(ii) Foothill is an "accredited investor" within the
meaning of Regulation D under the Securities Act.
(b) Borrower represents and warrants to Foothill that:
(i) Assuming the truth and accuracy of Foothill's
representations and warranties contained in the preceding paragraph,
the issuance of the Warrants to Foothill hereunder and the issuance of
shares of Common Stock to Foothill pursuant to the Warrants are exempt
from the registration and prospectus delivery requirements of the
Securities Act.
(ii) All stock and securities of Borrower heretofore
issued and sold by Borrower were, and all securities of Borrower issued
and sold by Borrower on and after the date hereof are or will be issued
and sold in accordance with, or are or will be exempt from, the
registration and prospectus delivery requirements of the Securities
Act.
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<PAGE> 53
(iii) Borrower agrees that neither it nor any Person
acting on its behalf has offered or will offer the Warrants or Warrant
Stock or any part thereof or any similar securities for issue or sale
to, or has solicited or will solicit any offer to acquire any of the
same from, any Person so as to bring the issuance and sale of the
Warrants or Warrant Stock hereunder within the provisions of the
registration and prospectus delivery requirements of the Securities
Act.
12.3 CERTAIN TAXES. Borrower shall pay all taxes (other than
Federal, state or local income taxes) which may be payable in connection with
the execution and delivery of this Agreement or the issuance of the Warrants or
Warrant Stock hereunder or in connection with any modification of this Agreement
or the Warrants and shall hold Foothill harmless without limitation as to time
against any and all liabilities with respect to all such taxes. The obligations
of Borrower under this Section 12.3 shall survive any redemption, repurchase or
acquisition of Warrants or Warrant Stock by Borrower, any termination of this
Agreement, and any cancellation or termination of the Warrants.
12.4 CANCELLATION AND ISSUANCE. If Foothill assigns or
otherwise transfers all or any of its interests in the Advances (including by
selling participations therein) to any Person, Foothill may request (upon 10
days' prior notice to Borrower) that (a) a number of Warrants held by Foothill
be canceled on the date of such assignment and transfer and (b) a like number of
Warrants be issued by Borrower to the Person to whom such interests in the
Advances are being assigned or otherwise transferred.
Upon the date specified in such request:
(i) Borrower shall issue, and Foothill shall
surrender (or cause to be surrendered) for cancellation, such number of
Warrants as aforesaid, provided that such issuance shall not violate
the Securities Act or any applicable state securities laws;
(ii) Borrower will deliver to each Person that
receives a certificate for Warrants a favorable legal opinion from
counsel to Borrower acceptable to such Person, covering the matters set
forth in the opinion of counsel to Borrower delivered to Foothill on
the Closing Date (to the extent relating to the Warrants);
(iii) each Person that receives a certificate for
Warrants will deliver a certificate to Borrower affirming the
representations and warranties contained in Section 12.2 hereof as of
such date; and
(iv) Borrower will deliver a certificate to each
Person that receives a certificate for Warrants affirming the
representations and warranties contained in Section 12.2 hereof as of
such date.
13. NOTICES.
Unless otherwise provided in this Agreement, all notices or
demands by any party relating to this Agreement or any other Loan Document shall
be in writing and (except for financial statements and other informational
documents which may be sent by first-class mail, postage prepaid) shall be
personally delivered or sent by registered or certified mail (postage prepaid,
return
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<PAGE> 54
receipt requested), overnight courier, or telefacsimile to Borrower or to
Foothill, as the case may be, at its address set forth below:
IF TO BORROWER: DATA SYSTEMS NETWORK CORPORATION
34705 West Twelve Mile Road, Suite 300
Farmington Hills, Michigan 48331
Attn: John O. Lychos, Jr.
Fax No. 248-489-0071
WITH COPIES TO: BODMAN LONGLEY & DAHLING LLP
100 Renaissance Center, Suite 3400
Detroit, Michigan 48243
Attn: Robert J. Diehl, Jr., Esq.
Fax No. 313-393-7579
IF TO FOOTHILL: FOOTHILL CAPITAL CORPORATION
11111 Santa Monica Boulevard
Suite 1500
Los Angeles, California 90025-3333
Attn: Business Finance Division Manager
Fax No. 310-478.9788
WITH COPIES TO: SCHULTE ROTH & ZABEL LLP
900 Third Avenue
New York, New York 10022
Attn: Frederic L. Ragucci, Esq.
Fax No. 212.593.5955
The parties hereto may change the address at which they are to
receive notices hereunder, by notice in writing in the foregoing manner given to
the other. All notices or demands sent in accordance with this Section 13, other
than notices by Foothill in connection with Sections 9-504 or 9-505 of the Code,
shall be deemed received on the earlier of the date of actual receipt or 3 days
after the deposit thereof in the mail. Borrower acknowledges and agrees that
notices sent by Foothill in connection with Sections 9-504 or 9-505 of the Code
shall be deemed sent when deposited in the mail or personally delivered, or,
where permitted by law, transmitted telefacsimile or other similar method set
forth above.
14. CHOICE OF LAW AND VENUE; JURY TRIAL WAIVER.
THE VALIDITY OF THIS AGREEMENT AND THE OTHER LOAN DOCUMENTS
(UNLESS EXPRESSLY PROVIDED TO THE CONTRARY IN ANY OTHER LOAN DOCUMENT), THE
CONSTRUCTION, INTERPRETATION, AND ENFORCEMENT HEREOF AND THEREOF, AND THE RIGHTS
OF THE PARTIES HERETO AND THERETO WITH RESPECT TO ALL MATTERS ARISING HEREUNDER
OR THEREUNDER OR RELATED HERETO OR THERETO SHALL BE DETERMINED UNDER, GOVERNED
BY, AND CONSTRUED IN ACCORDANCE
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<PAGE> 55
WITH THE LAWS OF THE STATE OF NEW YORK. THE PARTIES AGREE THAT ALL ACTIONS
OR PROCEEDINGS ARISING IN CONNECTION WITH THIS AGREEMENT AND THE OTHER LOAN
DOCUMENTS SHALL BE TRIED AND LITIGATED ONLY IN THE STATE AND FEDERAL COURTS
LOCATED IN THE COUNTY OF NEW YORK, STATE OF NEW YORK OR, AT THE SOLE
OPTION OF FOOTHILL, IN ANY OTHER COURT IN WHICH FOOTHILL SHALL
INITIATE LEGAL OR EQUITABLE PROCEEDINGS AND WHICH HAS SUBJECT MATTER
JURISDICTION OVER THE MATTER IN CONTROVERSY. EACH OF BORROWER AND FOOTHILL
WAIVES, TO THE EXTENT PERMITTED UNDER APPLICABLE LAW, ANY RIGHT EACH MAY HAVE TO
ASSERT THE DOCTRINE OF FORUM NON CONVENIENS OR TO OBJECT TO VENUE TO THE EXTENT
ANY PROCEEDING IS BROUGHT IN ACCORDANCE WITH THIS SECTION 14. BORROWER AND
FOOTHILL HEREBY WAIVE THEIR RESPECTIVE RIGHTS TO A JURY TRIAL OF ANY CLAIM OR
CAUSE OF ACTION BASED UPON OR ARISING OUT OF ANY OF THE LOAN DOCUMENTS OR ANY OF
THE TRANSACTIONS CONTEMPLATED THEREIN, INCLUDING CONTRACT CLAIMS, TORT CLAIMS,
BREACH OF DUTY CLAIMS, AND ALL OTHER COMMON LAW OR STATUTORY CLAIMS. EACH OF
BORROWER AND FOOTHILL REPRESENTS THAT IT HAS REVIEWED THIS WAIVER AND EACH
KNOWINGLY AND VOLUNTARILY WAIVES ITS JURY TRIAL RIGHTS FOLLOWING CONSULTATION
WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, A COPY OF THIS AGREEMENT MAY BE
FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
15. DESTRUCTION OF BORROWER'S DOCUMENTS.
All documents, schedules, invoices, agings, or other papers
delivered to Foothill may be destroyed or otherwise disposed of by Foothill four
(4) months after they are delivered to or received by Foothill, unless Borrower
requests, in writing, the return of said documents, schedules, or other papers
and makes arrangements, at Borrower's expense, for their return.
16. GENERAL PROVISIONS.
16.1 EFFECTIVENESS. This Agreement shall be binding and deemed
effective when executed by Borrower and Foothill.
16.2 SUCCESSORS AND ASSIGNS. This Agreement shall bind and
inure to the benefit of the respective successors and assigns of each of the
parties; provided, however, that Borrower may not assign this Agreement or any
rights or duties hereunder without Foothill's prior written consent and any
prohibited assignment shall be absolutely void. No consent to an assignment by
Foothill shall release Borrower from its Obligations. Foothill may assign this
Agreement and all of its rights and duties hereunder with Borrower's consent,
which consent shall not be unreasonably withheld or delayed; provided, however,
that the consent of Borrower shall not be required for any assignment by
Foothill (a) to an Affiliate of Foothill, (b) in connection with a bulk sale of
all or a material portion of the assets of Foothill and/or (c) at any time when
an Event of Default shall have occurred and be continuing. Foothill reserves the
right to sell, assign, transfer, negotiate, or grant participations in all or
any part of, or any interest in Foothill's rights and benefits
-49-
<PAGE> 56
hereunder. In connection with any such assignment or participation, Foothill
may disclose all documents and information which Foothill now or hereafter may
have relating to Borrower or Borrower's business. To the extent that Foothill
assigns its rights and obligations hereunder to a third Person, Foothill
thereafter shall be released from such assigned obligations to Borrower and
such assignment shall effect a novation between Borrower and such third Person.
16.3 SECTION HEADINGS. Headings and numbers have been set
forth herein for convenience only. Unless the contrary is compelled by the
context, everything contained in each section applies equally to this entire
Agreement.
16.4 INTERPRETATION. Neither this Agreement nor any
uncertainty or ambiguity herein shall be construed or resolved against Foothill
or Borrower, whether under any rule of construction or otherwise. On the
contrary, this Agreement has been reviewed by all parties and shall be construed
and interpreted according to the ordinary meaning of the words used so as to
fairly accomplish the purposes and intentions of all parties hereto.
16.5 SEVERABILITY OF PROVISIONS. Each provision of this
Agreement shall be severable from every other provision of this Agreement for
the purpose of determining the legal enforceability of any specific provision.
16.6 AMENDMENTS IN WRITING. This Agreement can only be
amended by a writing signed by both Foothill and Borrower.
16.7 COUNTERPARTS; TELEFACSIMILE EXECUTION. This Agreement may
be executed in any number of counterparts and by different parties on separate
counterparts, each of which, when executed and delivered, shall be deemed to be
an original, and all of which, when taken together, shall constitute but one and
the same Agreement. Delivery of an executed counterpart of this Agreement by
telefacsimile shall be equally as effective as delivery of an original executed
counterpart of this Agreement. Any party delivering an executed counterpart of
this Agreement by telefacsimile also shall deliver an original executed
counterpart of this Agreement but the failure to deliver an original executed
counterpart shall not affect the validity, enforceability, and binding effect of
this Agreement.
16.8 REVIVAL AND REINSTATEMENT OF OBLIGATIONS. If the
incurrence or payment of the Obligations by Borrower or any guarantor of the
Obligations or the transfer by either or both of such parties to Foothill of any
property of either or both of such parties should for any reason subsequently be
declared to be void or voidable under any state or federal law relating to
creditors' rights, including provisions of the Bankruptcy Code relating to
fraudulent conveyances, preferences, and other voidable or recoverable payments
of money or transfers of property (collectively, a "Voidable Transfer"), and if
Foothill is required to repay or restore, in whole or in part, any such Voidable
Transfer, or elects to do so upon the reasonable advice of its counsel, then, as
to any such Voidable Transfer, or the amount thereof that Foothill is required
or elects to repay or restore, and as to all reasonable costs, expenses, and
attorneys fees of Foothill related thereto, the liability of Borrower or such
guarantor automatically shall be revived, reinstated, and restored and shall
exist as though such Voidable Transfer had never been made.
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<PAGE> 57
16.9 INTEGRATION. This Agreement, together with the other Loan
Documents, reflects the entire understanding of the parties with respect to the
transactions contemplated hereby and shall not be contradicted or qualified by
any other agreement, oral or written, before the date hereof.
16.10 BROKERS FEES. Borrower shall be solely responsible for
any and all brokerage commissions, finders fees or similar compensation payable
in connection with this Agreement and the transactions contemplated hereby, and
Borrower agrees to indemnify and hold harmless Foothill and its officers,
directors, employees, agents and representatives from any and all such
commissions, fees and similar compensation.
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<PAGE> 58
IN WITNESS WHEREOF, the parties hereto have caused this
Agreement to be executed in New York, New York.
DATA SYSTEMS NETWORK CORPORATION,
a Michigan corporation
By:
Name: John O. Lychos, Jr.
Title: Chief Financial Officer
FOOTHILL CAPITAL CORPORATION,
a California corporation
By:
Name: Allison J. M. Sellon
Title: Vice President
<PAGE> 59
-5-
<TABLE>
<CAPTION>
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FACILITY NAME ADDRESS CITY COUNTY STATE AND FOOTHILL NAME OF AMOUNT OF
ZIP CODE LIEN PRIOR PRIOR LIEN
POSITION LIENOR
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<S><C>
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- --------------- ------------ ------- ----------- ----------- ------------ ---------- ==============
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<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 2,431,405
<SECURITIES> 0
<RECEIVABLES> 20,983,771
<ALLOWANCES> 745,435
<INVENTORY> 752,889
<CURRENT-ASSETS> 23,677,249
<PP&E> 4,920,318
<DEPRECIATION> 2,237,711
<TOTAL-ASSETS> 31,830,623
<CURRENT-LIABILITIES> 26,443,577
<BONDS> 0
0
0
<COMMON> 48,592
<OTHER-SE> 5,248,775
<TOTAL-LIABILITY-AND-EQUITY> 31,830,623
<SALES> 52,846,174
<TOTAL-REVENUES> 69,527,472
<CGS> 43,423,438
<TOTAL-COSTS> 70,122,591
<OTHER-EXPENSES> 261,048
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 515,326
<INCOME-PRETAX> (856,167)
<INCOME-TAX> 0
<INCOME-CONTINUING> (856,167)
<DISCONTINUED> (1,686,054)
<EXTRAORDINARY> 1,605,304
<CHANGES> 0
<NET-INCOME> (936,917)
<EPS-PRIMARY> (.19)
<EPS-DILUTED> 0
</TABLE>
