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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED: MARCH 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ____________ TO ____________.
COMMISSION FILE NUMBER: 000-27690
INTELLIGENT MEDICAL IMAGING, INC.
---------------------------------------------
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 65-0136178
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(STATE OR OTHER JURISDICTION (IRS EMPLOYER IDENTIFICATION NO.)
OF INCORPORATION OR ORGANIZATION)
4360 NORTHLAKE BOULEVARD, SUITE 214, PALM BEACH GARDENS, FLORIDA 33410
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(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES AND ZIP CODE)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (561) 627-0344
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS REQUIRED
TO BE FILED BY SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 DURING
THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE REGISTRANT WAS
REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH FILING
REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
AS OF MAY 12, 1999, THERE WERE OUTSTANDING 12,280,021 SHARES OF COMMON STOCK,
PAR VALUE $.01, OF THE REGISTRANT.
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<PAGE>
INTELLIGENT MEDICAL IMAGING, INC.
QUARTER ENDED MARCH 31, 1999
INDEX
PAGE
----
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS (Unaudited)
CONDENSED BALANCE SHEETS AS OF
MARCH 31, 1999 AND DECEMBER 31, 1998 3
CONDENSED STATEMENTS OF OPERATIONS FOR THE THREE
MONTHS ENDED MARCH 31, 1999 AND 1998 4
CONDENSED STATEMENTS OF CASH FLOWS FOR
THE THREE MONTHS ENDED MARCH 31, 1999 AND 1998 5
NOTES TO CONDENSED FINANCIAL STATEMENTS 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL 9
CONDITION AND RESULTS OF OPERATIONS
PART II - OTHER INFORMATION 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
SIGNATURES 14
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PART I - FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
INTELLIGENT MEDICAL IMAGING, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
MARCH 31, DECEMBER 31,
ASSETS 1999 1998
-------------- -------------
<S> <C> <C>
Current assets:
Cash $27,093 $31,923
Accounts receivable, net of allowance for uncollectable
accounts of $40,000 at December 31, 1998 and 1997 407,249 1,002,781
Notes Receivable 88,563 86,684
Inventory 3,176,291 3,157,537
Prepaid expenses (11,351) 67,408
Current portion of investment in sales-type leases 497,000 497,000
-------------- -------------
Total current assets 4,184,844 4,843,333
Long-term portion of investment in sales-type leases 451,808 451,808
Revenue equipment, net 591,975 544,215
Property and equipment, net 2,113,870 2,556,350
Other assets 42,874 52,650
Deferred financing costs 287,302 297,000
-------------- -------------
$7,672,673 $ 8,745,353
============== =============
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable $1,494,035 $1,159,737
Accrued salaries and benefits 516,877 372,149
Note payable in default 285,493 335,493
Note payable Tyce Fitzmorris 40,000 0
Accrued interest payable 90,000 0
Other accrued liabilities 228,174 258,671
Due to factor 320,000 320,000
Current portion of amount due to financing companies 497,000 497,000
Current portion of capital lease obligation 30,562 30,562
Current portion of deferred revenue 318,381 318,381
-------------- -------------
Total current liabilities 3,820,522 3,291,993
Deferred Revenue 571,957 412,423
Amount due to financing companies 451,808 451,808
Capital lease obligation 49,211 54,719
Convertible debentures 2,655,000 0
Debt discount (168,302) 0
Convertible debentures, net of unamortized discount 2,486,698 2,788,000
Stockholders' equity:
Preferred stock, $.01 par value-authorized 2,000,000 shares;
no shares issues or outstanding 0 0
Common Stock, $.01 par value-authorized 35,000,000 shares;
issued and outstanding, 11,739,625 shares at March 31, 1999
and 11,631,486 shares at December 31, 1998 117,396 116,315
Additional paid-in capital 44,788,020 44,416,708
Deferred compensation (462,687) (486,000)
Net unrealized investment gains and (losses) 0 0
Accumulated deficit (44,150,252) (42,300,613)
-------------- ---------------
Total shareholders' equity 292,477 1,746,410
-------------- ---------------
$7,672,673 $8,745,353
============== ===============
</TABLE>
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INTELLIGENT MEDICAL IMAGING, INC.
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
---------------- --------------
<S> <C> <C>
Product sales 599,360 1,042,298
Licensing fees 500,000 0
------------ -------------
1,099,360 1,042,298
Cost of sales 601,267 761,292
------------ -------------
498,093 281,006
Operating expenses:
Selling, general and administrative 1,409,125 2,349,725
Research and development 881,385 1,417,025
------------ -------------
Total operating expenses 2,290,510 3,766,750
------------ -------------
Loss from operations (1,792,417) (3,485,744)
Other income (expense):
Investment and interest income 3,014 68,158
Interest expense (31,841) 0
Discount on debenture (28,398) 0
------------ -------------
Other income (expense) (57,225) 68,158
Net loss (1,849,642) (3,417,586)
loss per common share--basic and diluted: (0.16) (0.31)
Weighted average common shares outstanding 11,739,625 11,025,640
============ =============
</TABLE>
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INTELLIGENT MEDICAL IMAGING, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
THREE MONTHS THREE MONTHS
ENDED ENDED
MARCH 31, 1999 MARCH 31, 1998
------------------- -------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss (1,849,639) (3,417,586)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation 349,132 292,702
Amortization on deferred revenue (22,347) (22,486)
Amortization on discounts on convertible debentures 9,698 0
Services received in exchange for common stock and
stock options 23,313 23,313
Changes in operating assets and liabilities:
Accounts receivable 595,532 (104,526)
Inventory (18,754) 223,507
Prepaid expenses 78,759 37,824
Investment in sales-type leases 0 88,794
Other assets 9,776 (59,529)
Revenue equipment (47,760) (111,919)
Accounts payable 334,298 (304,337)
Note payable in default (50,000) 0
Accrued salaries and benefits 144,728 49,385
Accrued interest payable 90,000 0
Other accrued liabilities (30,497) (23,500)
Deferred revenue 181,881 91,829
--------------- ---------------
Net cash used by operating activities (201,880) (3,236,529)
INVESTING ACTIVITIES
Purchases of property and equipment 132,050 (187,688)
Sale of investments held for sale 0 3,659,833
Advances to related parties 0 (622,267)
Repayments of advances to related parties (1,879) 0
--------------- ---------------
Net cash used in investing activities 130,171 2,849,878
FINANCING ACTIVITIES
Proceeds from sale of common stock 333,689 16,091
Repayment of long-term notes payable
and capitalized lease obligations (5,508) 0
Proceeds from notes payable to related parties 40,000 0
Convertible debentures (301,302) 0
Net cash provided by financing activities 66,879 16,091
--------------- ---------------
Net (decrease) increase in cash (4,830) (370,560)
Cash at beginning of period 31,923 853,164
--------------- ---------------
Cash at end of period 27,093 482,604
=============== ===============
Supplemental Information
Stock purchase warrants issued for financing costs 116,400 0
Inventory transfered to property and equipment 0 414,477
</TABLE>
5
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INTELLIGENT MEDICAL IMAGING, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
1. BASIS OF PRESENTATION
The accompanying unaudited condensed financial statements have been prepared in
accordance with generally accepted accounting principles for interim financial
information and with the instructions to Form 10-Q and Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by generally accepted accounting principles for complete financial
statements. In the opinion of management, all adjustments (consisting of normal
recurring accruals) considered necessary for a fair presentation have been
included. These financial statements, footnotes and discussions should be read
in conjunction with audited financial statements and related footnotes included
in Intelligent Medical Imaging, Inc.'s ("IMI" or "the Company") annual report on
Form 10-K for the year ended December 31, 1998. Operating results for the three
month period ended March 31, 1999 are not necessarily indicative of the results
that may be expected for the year ending December 31, 1999.
2. REVENUE RECOGNITION
In October 1997, the American Institute of Certified Public Accountants (AICPA)
issued Statement of Position (SOP) 97-2, "Software Revenue Recognition" which
the Company has adopted for transactions entered into during the year beginning
January 1, 1998. SOP 97-2 provides guidance for recognizing revenue on software
transactions and supersedes SOP 91-1, "Software Revenue Recognition". In March
1998, the AICPA issued SOP 98-4, "Deferral of the Effective Date of a Provision
of SOP 97-2, Software Revenue Recognition". SOP 98-4 defers, for one year, the
application of certain passages in SOP 97-2 which limit what is considered
vendor-specific objective evidence necessary to recognize revenue for software
licenses in multiple-element arrangements when undelivered elements exist.
Additional guidance is expected to be provided prior to adoption of the deferred
provision of SOP 97-2. The Company will determine the impact, if any, the
additional guidance will have on the current revenue recognition practices when
issued. Adoption of the remaining provisions of SOP 97-2 did not have a material
impact on revenue recognition during 1998.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following:
March 31, March 31,
1999 1998
------------- -----------
Furniture, fixtures and office
equipment 2,615,866 2,289,023
Computer and development
equipment 2,578,113 2,678,526
------------- ------------
5,193,979 4,967,549
Accumulated depreciation (3,080,109) (1,868,393)
------------- ------------
2,113,870 3,099,156
============= ============
4. NOTE RECEIVABLE RELATED PARTIES
In January 1998, $196,000 was advanced to the Company's President and Chief
Executive Officer and $424,000 was advanced to an individual who was at that
time a member of the Board of Directors. The advance of $196,000 to the
Company's President, plus all accrued interest thereon, was repaid in full on
August 14, 1998. The original due date for the advance in the amount of
$424,000, which is secured by shares of the Company's common stock and bears
interest at the rate of prime plus 1% per annum, was April 8, 1998. During the
year, payments in the amount of $290,000, including accrued interest, plus a
$75,000 credit offset in consulting fees due the former member of the Board of
Directors have been made leaving a balance of $88,563 including accrued
interest. The balance of $88,563 has been extended to August 28, 1999.
5. CONVERTIBLE DEBENTURES
On June 30, 1998 ("Original Issue Date") the Company issued, in a private
placement transaction, $3,000,000 of 6% convertible debentures, due June 30,
2001 (the "Debentures"). Subject to adjustment in certain events, twenty-five
percent (25%) of the aggregate principal amount of the Debentures is convertible
into the common stock of the Company beginning on September 28, 1998 ("Initial
Conversion Date") and on the first, second and third month anniversaries of the
Initial Conversion Date up to 50%, 75% and 100%, respectively, of the aggregate
principal amount of the Debentures originally issued on the Original Issue Date
is convertible. The Debentures are convertible at a conversion price
("Conversion Price") equal to the lesser of (a) 120% of the average of the
closing bid price for the common stock of the Company for the five (5) trading
days immediately preceding the Original Issue Date or (b) 86% multiplied by the
average of the five (5) lowest closing bid prices of the common stock of the
Company during the twenty-five (25) trading days immediately preceding the date
of the applicable conversion notice. The Company recorded a debt discount of
$906,250 representing the intrinsic value of the beneficial conversion feature
of the Debentures. Interest is payable quarterly and
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may, at the Company's option and subject to certain restrictions, be paid in
shares of the Company's common stock based on the Conversion Price. Subject to
certain notification requirements and the payment of a prepayment premium which
is tied to the applicable Conversion Price and the closing bid price of the
common stock on the date of prepayment, the Company has the right to prepay all
or any portion of the outstanding principal amount of the Debentures which has
not previously been repaid or converted. The principal amount of the Debentures
for which conversion notices have not previously been received or for which
prepayment has not been made will be automatically converted on June 30, 2001 at
the Conversion Price on such date. The Debentures may be converted in whole or
in part at the option of the holder if the average of the closing sales prices
of the common stock for any twenty (20) consecutive trading days is equal to or
greater than 175% of the average of the per share market values for the five (5)
trading days immediately preceding the original issue date. The principal amount
of Debentures for which conversion notices have not previously been received or
for which prepayment has not been made or required shall be automatically
converted on the third anniversary of the Original Issue Date at the Conversion
Price on such date. This automatic conversion shall not occur if (a) (1) an
Underlying Securities Registration Statement is not then effective that names
the holder as a selling stockholder thereunder or (2) the holder is not
permitted to resell underlying shares pursuant to Rule 144(k) promulgated under
the Securities Act of 1993, without volume restrictions; (b) there are not
sufficient shares of common stock authorized and reserved for issuance upon such
conversion; and (c) the Company shall not have defaulted on its covenants and
obligations hereunder or under the Purchase Agreement or Registration Rights
Agreement. The Company incurred financing costs of $200,000 in connection with
the issuance of the Debentures, which will be amortized over the life of the
Debentures. On July 30, 1998, the Company filed a registration statement on Form
S-3 with the Securities and Exchange Commission ("SEC") to register the common
stock underlying the convertible debentures issued in connection with the
transaction. This registration statement was declared effective by the SEC on
October 20, 1998. Additional capital commitments of up to $7,000,000 are
available to IMI subject to the parties mutually agreeing on the terms.
In connection with the issuance of the Debentures, the Company issued warrants
to the holders of the Debentures to purchase 120,000 shares of the Company's
common stock at $3.93 per share. The warrants are exerciseable immediately
through June 30, 2003. The fair value of the warrants based on the Black-Scholes
valuation method is $1.87. The Company recorded a debt discount of $224,400
representing the fair value of the warrants.
In addition, the Company issued a warrant to a financial consultant to purchase
60,000 shares of the Company's common stock at $3.63 per share. The warrant is
exercisable immediately through June 30, 2003. The Company recorded deferred
financing costs of $116,400 in connection with the issuance of the warrant. Such
costs will be amortized over the term of the Debentures. The assumptions used to
compute the value of the warrants were as follows:
Risk-free interest rate 5.48%
Volatility factors of the
expected market price of the
Company's common stock .598
Expected life 5 Years
Dividend yield 0%
6. COMMITMENTS AND CONTINGENCIES
In November 1996, IMI and DiaSys Corporation ("DiaSys") (Nasdaq, DIYS) entered
into a Product Integration Agreement (the "DiaSys Agreement"). DiaSys designs,
develops, manufactures and distributes workstation products which prepare fluid
samples. Under the DiaSys Agreement, IMI was granted a nonexclusive,
nontransferable license to integrate the patented DiaSys wet-preparation
specimen handling system together with the MICRO21 in order to produce
integrated systems for resale to MICRO21 end users. The DiaSys Agreement was
terminated in July 1997, when IMI rejected products delivered by DiaSys and
returned them. The DiaSys Agreement provides for mandatory and binding
arbitration of disputes between the parties. On January 12, 1998, DiaSys filed a
demand for arbitration of the dispute. In its demand for arbitration, DiaSys
seeks damages in excess of $1,000,000 for IMI's alleged breach of the DiaSys
Agreement and IMI's alleged defamation of DiaSys and its products. IMI filed its
response on February 9, 1998. In its response, IMI denies that it breached the
DiaSys Agreement or defamed DiaSys, and states that it properly rejected
products supplied by DiaSys due to non-conformance. IMI also seeks damages for
libelous statements made by DiaSys in a July 2, 1997 press release issued by
DiaSys, and for delays in IMI's product development efforts caused by DiaSys's
breach of the DiaSys Agreement. On October 7, 1998 the arbitration hearings were
completed and on November 6, 1998 written arguments were presented to the
arbitration panel. Management is unable to make a meaningful estimate of the
likelihood or amount or range of loss that could result from an unfavorable
outcome of the pending arbitration. As of September 30, 1998, the Company has
not accrued any loss contingencies or related expenses in connection with this
arbitration. The Company believes that DiaSys's claims are without merit, and
that the Company will prevail in the arbitration. However, there can be no
assurance that the Company will prevail in the arbitration or in its
counterclaim asserted against DiaSys, or that any resolution of the dispute,
which is expected to occur within one year, will not have a material adverse
effect on the Company's liquidity, financial condition and results of
operations.
On March 7, 1997, the Company entered into a settlement agreement with
International Remote Imaging Systems, Inc. ("IRIS") effective March 1, 1997.
Under the settlement agreement, IRIS granted the Company a fully-paid,
royalty-free license for worldwide direct sales of the MICRO21 system by the
Company. The Company agreed to pay a 4 percent royalty on future sales of the
MICRO21 system through third-party distributors in the United States. The
Company does not believe the 4 percent royalty on U.S. sales through
distributors will significantly adversely impact the Company's results of
operations during the term of the license. This license and royalty obligation
expire in September 2000, when the IRIS patents that are the subject of the
license expire. The Company has the right, but not the obligation, to request a
license from IRIS for sales through third-party distributors outside of the
United States; however, the Company does not believe that the MICRO21 system
infringes any foreign patents held by IRIS and the Company has no current plans
to request such a license.
On November 16, 1998 the Company entered into three related agreements with
Bayer Corporation ("Bayer") involving the Company's blood slide maker, the HSM.
The three agreements, a Licensing Agreement, Instrument Supply Agreement and an
After Market Supply Agreement, provide Bayer with certain non-exclusive rights
to manufacture and sell products based on the HSM. Pursuant to the Licensing
Agreement Bayer paid the
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Company a one-time licensing fee of $1,100,000. The Licensing Agreement further
provides for Bayer to pay the Company a royalty payment of $2,000 on each of the
first 400 HSM-based units it manufactures and sells in exchange for the
non-exclusive right to manufacture and sell HSM-based products and the right to
negotiate for the manufacture and distribution of the Company's MICRO21 System,
Urine Slide Maker ("USM") and any other new Company products. The Instrument
Supply Agreement provides that Bayer will manufacture the HSM for the Company
for at least two years in the event the Company chooses not to manufacture the
HSM or chooses to have Bayer manufacture the HSM to supplement the Company's
manufacture of this product. Finally, pursuant to the After Market Supply
Agreement, with limited exceptions Bayer is required to recommend the Company as
a sole source of consumables used on all HSM-based products manufactured and
sold by Bayer until the earlier to occur of (a) three years following Bayer's
sale of 200 HSMs or (b) five years after Bayer's initial sale of an HSM.
On November 23, 1998, the Company entered into an Invoice Purchase and Sale
Agreement with Finova Capital Corporation ("Finova") pursuant to which Finova
purchased certain invoices from the Company at an invoice purchase price of 95%
of the net amount of the invoice. Eighty percent (80%) of the purchase price is
payable to the Company at the time of the acceptance of the invoice by Finova
and the remainder of the purchase price is due to the Company upon payment of
the invoice by the account debtor. As of April 9, 1999, the Company had sold
invoices with an aggregate net amount of $1,057,000 to Finova.
On December 17, 1998, the Company entered into a distribution agreement with
Beckman-Coulter involving the Company's blood slide maker, the HSM. The
non-exclusive distribution agreement has a term of ten years and allows
Beckman-Coulter to obtain the HSM on a volume discount basis for re-sale to its
customers. Domestically IMI will have prime responsibility for customer support,
with Beckman-Coulter field support personnel providing installation and field
maintenance services on a fixed fee basis. In foreign markets, Beckman-Coulter
will have total responsibility for customer support. Beckman-Coulter will
recommend IMI as the sole source for consumables on all HSMs it sells,
domestically and overseas. As of April 9, 1999, Beckman-Coulter had purchased
two HSMs under the distribution agreement.
7. MANAGEMENT'S PLANS
The Company has implemented strategic steps in an effort to remain viable until
sufficient market penetration for the Company's products is achieved. This plan,
which includes personnel reductions, has reduced monthly expenditures from
approximately $1,100,000 in July 1998 to $350,000 as of April 9, 1999, with the
reduction in extraordinary development expenditures coinciding with the
completion of the HSM instrument and across the board reductions in IMI's
operating costs. In connection with these cost reductions, the Company decided
to discontinue its operations in Europe and, instead, rely on qualified
distributors. The IMI Europe office was officially closed on July 31, 1998.
The Company has also reduced sales expenditures, while emphasizing a sales
process that better targets prospective customers who are closest to making a
purchase decision. The reduction of sales expenditures is in furtherance of the
strategy of focusing on specific customer groups and markets and the de-emphasis
on providing total market coverage to all types of prospects. The Company is
implementing a plan that will segment the market according to product fit and
geographic location.
On June 30, 1998 the Company completed the sale of $3,000,000 of 6% convertible
debentures, due June 30, 2001 (the "Debentures"). See Footnote 5 of Notes to
Financial Statements in Part I, Item 1 of this Form 10-Q. As of April 9, 1999,
the holder of the Debentures had converted $345,000 of the original $3,000,000
principal amount of the Debentures into shares of the Company's common stock,
leaving Debentures in the principal amount of $2,655,000 outstanding as of April
9, 1999. If the Company's common stock is delisted from the Nasdaq National
Market and not allowed to be listed on the Nasdaq Small Cap Market as discussed
below, the Debentures will be in default. The Company does not have capital
available to pay the outstanding principal amount of the Debentures in the event
of such a default.
On August 14, 1998 the Company received full repayment of all amounts due with
respect to an advance which the Company made to the Company's President in
January 1998 in the amount of $196,000. With respect to repayment of the
Company's advance to a former director, R. Wayne Fritzsche, as of December 31,
1998 payments in the amount of $290,000, plus a $75,000 credit offset for
consulting fees past due or payable to Mr. Fritzsche by the Company, had been
applied against the amount due, leaving a balance due of $88,563 including
accrued interest. Repayment of the balance of $88,563 has been extended to
August 28, 1999.
On October 30, 1998 the Company was notified by Nasdaq of a potential delisting
of the Company's common stock from the Nasdaq National Market, effective
February 1, 1999, due to the Company's failure to comply with Nasdaq's $1.00
minimum bid price requirement for continued listing on the Nasdaq National
Market. On January 28, 1999 the Company requested a hearing before a Nasdaq
hearing panel to appeal the proposed delisting, which effectively stayed the
delisting of the Company's common stock. On March 25, 1999 the Company was
further notified by Nasdaq that the Company did not meet the $4,000,000 net
tangible assets requirement for continued listing on the Nasdaq National Market.
The Company's request for a hearing was granted by Nasdaq and the hearing was
held on April 8, 1999. In the event that the Company's appeal is denied and the
Company's common stock is delisted from the Nasdaq National Market, the Company
has requested that Nasdaq permit the Company's common stock to be listed on the
Nasdaq Smallcap Market. There can be no assurance that the Company's appeal of
Nasdaq's proposed delisting of the Company's common stock will be successful and
it appears likely that the Company's common stock will eventually be delisted
from the Nasdaq National Market. There also can be no assurance that Nasdaq will
permit the Company's common stock to be listed on the Nasdaq Smallcap Market
since such listing will require that the Company convince Nasdaq that it can
sustain long term compliance with all applicable continued listing requirements.
In the event that the Company's common stock is delisted from the Nasdaq
National Market and the Company is not successful in its request that its common
stock be listed on the Nasdaq Smallcap Market, the Company's common stock will
commence trading on the OTC Bulletin Board, in which case a shareholder may find
it more difficult to sell, or to obtain quotations as to the price of, the
Company's common stock. In addition, the failure of the Company's common stock
to be listed for trading on the Nasdaq National Market or the Nasdaq Smallcap
Market would constitute an event of default under the Debentures, in which event
the full principal amount of the Debentures, together with all accrued interest
thereon, would become immediately due and payable in cash and the availability
of any remaining borrowing capacity under the related convertible
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debenture agreement could be further limited. Pending the Nasdaq hearing panel's
decision, the Company's common stock will remain listed on Nasdaq's National
Market System.
Notwithstanding the reductions in personnel and corporate expenditures and the
strategic planning referenced above, the Company has depleted its cash reserves
and has been delinquent in its payroll obligations since March 31, 1999. As of
May 13, 1999 the Company is delinquent in its payroll obligations (including
wages, severance pay and accrued vacation pay) in the amount of $500,000. The
Company is also currently delinquent in the payment of its accounts payable. In
addition, the Company is also currently in default in the amounts of $57,213 and
$178,280 with respect to the payment of two secured promissory notes to the
Company's legal counsel. These promissory notes were executed to provide for the
payment of past due legal fees owed to the Company's legal counsel, Edwards &
Angell, LLP. The Company's failure to pay its employees will adversely affect
the Company's efforts to maintain a competent and capable sales and marketing
staff. The Company will continue to lose employees unless it can raise capital
promptly. In addition, the Company's inability to timely pay its accounts
payable has had an adverse effect on the Company's relationship with its
vendors, resulting in some vendors refusing to ship products or to provide
services to the Company. On April 27, 1999, James Davis, William Whittaker,
George Masters and Gene Cochran resigned their positions with the Board of
Directors. Gene Cochran also resigned his position as Chief Financial Officer
effective April 30, 1999. The Company continues to explore a variety of
alternatives for increasing its sales and distribution capacity and raising
sufficient capital to fund its operations. Implementation of the Company's
business strategy requires significant expenditures of capital. The Company is
currently seeking additional funds through debt or equity. There can be no
assurance that such funds can be obtained on favorable terms, if at all. If the
Company's efforts to raise capital are unsuccessful, the Company will have to
cease operations.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
OVERVIEW
The Company has developed and is marketing the MICRO21(TM) system, an
intelligent, automated microscope system, for diagnostic use in hospital,
commercial reference and physician group laboratories. The MICRO21 system is
designed to automate a broad range of manual microscopic procedures, potentially
enabling the clinical laboratory to reduce costs and exposure to liabilities,
enhance analytical accuracy and consistency, increase the productivity of
medical technologists and improve patient care.
On April 20, 1998, the Company signed a customer financing agreement with Prime
Capital Corp. ("Prime") to provide up to $36 million of financing for customers
acquiring the MICRO21 System Workstation. Under the terms of the agreement, the
Company and Prime will establish a wholesale customer finance relationship under
which Prime will provide a "Private Label Fee Per Slide" financing facility to
customers of the Company for an ongoing vendor leasing program. Prime will
provide up to $12 million of customer financing per year over 3 years. This
agreement should help IMI to continue to meet its near-term cash flow needs and
provides a financing alternative for IMI's customers.
On June 30, 1998 the Company completed the sale of $3,000,000 of 6% convertible
debentures, due June 30, 2001. See Footnote 5 of Notes to Condensed Financial
Statements in Part I, Item 1 of this Form 10-Q. The sale of the convertible
debentures will help IMI to continue to meet its near-term cash flow needs.
On August 14, 1998 the Company received full repayment of all amounts due with
respect to an advance which the Company made to the Company's President in
January 1998 in the amount of $196,000. With respect to repayment of the
Company's advance to a former director, R. Wayne Fritzsche, as of December 31,
1998 payments in the amount of $290,000, plus a $75,000 credit offset for
consulting fees past due or payable to Mr. Fritzsche by the Company, had been
applied against the amount due, leaving a balance due of $86,684. Repayment of
the balance of $86,684 has been extended to August 28, 1999.
On October 30, 1998 Nasdaq notified the Company of its concern regarding the
continued listing of the Company's shares of common stock for trading on the
Nasdaq National Market as a result of the failure of the Company's common stock
to maintain a closing bid price of greater than or equal to $1.00 for thirty
(30) consecutive trade dates. Pursuant to Nasdaq rules, the Company has ninety
(90) calendar days in which to regain compliance with Nasdaq continued listing
requirements. If within this 90-day period the common stock complies with the
minimum closing bid price requirement of $1.00 for a minimum of ten (10)
consecutive days, and is in compliance with all other listing requirements,
continued listing will occur. However, if the Company is unable to demonstrate
compliance with the $1.00 minimum bid price requirement on or before January 28,
1999, the Company's securities will be delisted at the opening of business on
February 1, 1999. Such delisting would constitute an event of default under the
Debentures, in which event the full principal amount of the Debentures, together
with all accrued interest thereon, would become immediately due and payable in
cash and the availability of the remaining borrowing capacity under the related
convertible debenture agreement could be further limited.
On November 16, 1998 the Company entered into three related agreements with
Bayer Corporation ("Bayer") involving the Company's blood slide maker, the
Hematology Slide Master(TM) (HSM(TM)). The three agreements, a Licensing
Agreement, Instrument Supply Agreement and an After Market Supply Agreement,
provide Bayer with certain non-exclusive rights to manufacture and sell products
based on the HSM. Pursuant to the Licensing Agreement, Bayer will pay to IMI a
one-time licensing fee of $1,100,000 in installments with the last payment of
$500,000 subject to Bayer's acceptance of the Company's first commercially
manufactured HSM, as well as a royalty payment of $2,000 on each of the first
400 HSM-based units it manufactures and sells in exchange for the non-exclusive
right to manufacture and sell HSM-based products and the right to negotiate for
the manufacture and distribution of the Company's MICRO21 System, Urine Slide
Maker ("USM") and any other new Company products. The Instrument Supply
Agreement provides that Bayer will manufacture the HSM for the Company for at
least two years in the event the Company chooses not to manufacture the HSM or
chooses to have Bayer manufacture the HSM to supplement the Company's
manufacture of this product. Finally, pursuant to the After Market Supply
Agreement, with limited exceptions Bayer is required to recommend the Company as
a sole source of consumables used on all HSM-based products manufactured and
sold by Bayer until the earlier to occur of (a) three years following Bayer's
sale of 200 HSM's or (b) five years after Bayer's initial sale of an HSM.
9
<PAGE>
In December 1998 the Company's new blood slide maker, HSM, was commercially
released. The HSM fully automates the process of blood slide making/staining.
The HSM was designed so that results from the hematology analyzers manufactured
by Bayer and Beckman-Coulter can trigger the automatic preparation of a slide,
providing the lab significant labor savings and improved operational efficiency.
Once prepared, the slides can be automatically reviewed by the MICRO21,
providing even greater labor savings and improved operational efficiency.
The Company is implementing strategic steps so as to allow IMI to remain viable
until sufficient market penetration for the Company's products is achieved. This
plan, which includes personnel reductions, reduces monthly expenditures from
approximately $1,100,000 to $350,000 with the reduction in extraordinary
development expenditures coinciding with the completion of the HSM and USM
instruments and across the board reductions in IMI's operating costs. In
connection with these cost reductions, the Company decided to discontinue its
operations in Europe and, instead, rely on qualified distributors. The IMI
Europe office was officially closed on July 31, 1998.
The Company is moving forward to identify and implement reductions in sales
expenditures, while emphasizing a sales process that better targets prospective
customers who are closest to making a purchase decision. The reduction of sales
expenditures is in furtherance of the strategy of focusing on specific customer
groups and markets and the de-emphasis on providing total market coverage to all
types of prospects. The Company is implementing a plan that will segment the
market according to product fit and geographic location.
During the fourth quarter of 1997, the Company began to offer a short-term
rental program which provides for monthly or annual rentals of the MICRO21
system. The Company believes that this program will augment its sales and
long-term lease programs by giving potential customers the ability to fund a
MICRO21 with operating funds, thereby overcoming potential cost barriers
associated with limited or non-existent capital expenditure funds. Expansion of
the short-term rental program may require that the Company secure additional
financing.
The Company continues to explore a variety of alternatives for increasing its
sales and distribution capacity and raising sufficient capital to fund its
operations. Implementation of the Company's business strategy requires
significant expenditures of capital. The Company is currently seeking additional
funds through debt or equity. There can be no assurance that such funds can be
obtained on favorable terms, if at all.
RESULTS OF OPERATIONS
Product sales were $1,099,360 for the three months ended March 31, 1999 compared
with $1,042,298 for the three months ended March 31, 1998, a increase of
$57,062. The increase in sales for the quarter was primarily due to $500,000 in
licensing fees related to the Licensing Agreement with Bayer Corporation.
Cost of sales was $601,267 for the three months ended March 31, 1999 compared
with $761,292 for the three months ended March 31, 1998, an decrease of
$160,025. The decrease in cost of sales for the quarter was primarily due to the
fact that $500,000 of the revenue recorded was from licensing fees - no costs
are associated with this portion of the revenue resulting in a decrease in cost
of sales.
Selling, general and administrative expenses were $1,409,125 for the first
quarter of 1999 compared with $2,349,725 for the first quarter of 1998, a
decrease of $940,600. Selling, general and administrative expenses decreased
because of the staff and expense reductions implemented early in the third
quarter of 1998 and have continued into 1999.
Research and development expenses were $881,385 for the three months ended March
31, 1999 compared with $1,417,025 for the three months ended March 31, 1998, an
decrease of $535,640. Research and development expenses have decreased due to
resources being cut and development of new procedures, technologies and products
put on hold.
Interest income was $3,014 for the three months ended March 31, 1999 compared
with $68,158 for the three months ended March 31, 1998, a decrease of $65,144.
The decrease was primarily due to the sale of investment securities to fund
operations.
Interest expense was $60,239 for the three months ended March 31, 1999 compared
with $0 for the three months ended March 31, 1998. Interest expense represents
the amortization of the discounts and deferred financing costs related to the
issuance of the convertible debentures that were issued on June 30, 1998.
LIQUIDITY AND CAPITAL RESOURCES
For the three months ended March 31, 1999, net cash used in operating activities
of $201,880 was primarily due to the Company's operating loss.
For the three months ended March 31, 1999, net cash used in investing activities
of $130,171 was primarily the result of sales of investments available-for-sale,
partially offset by purchases of computer equipment to be used in research and
development and advances made to a former member of the Board of Directors.
For the three months ended March 31, 1999, net cash provided by financing
activities of $66,879 was the result of proceeds from the company's common
stock.
During 1998 the Company has experienced a reduction in revenue and increased
costs that have adversely affected the Company's current results of operations
and its liquidity. The Company's 1998 and 1999 operating plans contemplate
focusing activities on expanding sales revenue through the efforts of its
internal sales, marketing and service force. In addition, during the fourth
quarter of 1997 the Company began to offer a short-term rental program which it
believes will augment its sales and long-term lease programs by giving potential
customers the ability to fund a MICRO21 with operating funds, thereby overcoming
potential cost barriers associated with limited or non-existent capital
expenditure funds. Expansion of this program may require that the Company secure
additional financing. The Company's plans also contemplate continuing the cost
10
<PAGE>
control measures implemented in 1998 and cost and personnel reductions, which
reduce monthly expenditures from approximately $1,100,000 to $850,000; the cost
reductions also include closing the Company's office in Europe in July 1998. The
Company's plans also contemplate seeking alternative sources of financing and
exploring strategic alternatives. During 1998, the Company has introduced two
new products, a Hematology Slide Maker and Urine Slide Maker, and two additional
procedures which management believes will offer significant opportunities for
expanding the Company's potential customer base. In addition, the Company is
currently negotiating with a company for distribution and licensing agreements
associated with sales of the Company's products. Also, during the third quarter
of 1998, the Company implemented cost controls and personnel reductions. In June
1998, the Company issued $3 million of convertible debentures; an additional
$7,000,000 million of financing may be available to the Company subject to the
mutual agreement of the parties. At March 31, 1999 the Company's remaining cash
balance totaled $437,726. Although management believes that its plan will be
successful, there can be no assurance that the Company will be successful in its
attempt to expand revenue, secure additional financing or consummate the
distribution and licensing agreements.
As described above, in June 1998, the Company issued $3 million of convertible
debentures. An additional $7,000,000 million of financing may be available to
the Company, but the availability of such financing is at the discretion of the
lender after consideration of the trading characteristics of the common stock,
the lender's exposure to the Company at that time, the absence of any material
adverse change in the Company's financial condition or operations and the
Company's continued compliance with the terms of the financing. The debentures
include a requirement that the Company's common stock be listed for trading by
Nasdaq. On October 30, 1998 Nasdaq notified the Company that it's common stock
has failed to maintain a closing bid price of greater than or equal to $1.00 for
thirty consecutive dates. The Company has 90 calendar days to regain compliance
with Nasdaq rules. If the Company is unable to comply with the minimum bid price
requirement on or before January 28, 1999, the Company's common stock will be
delisted at the opening of business on February 1, 1999. Such delisting which
would constitute an event of default under the convertible debenture agreement,
in which event the full principal amount of the debentures, together with all
accrued interest thereon, would become immediately due and payable in cash and
the availability of the remaining borrowing capacity under the convertible
debenture agreement could be further limited. The Company is considering a
reverse stock split to rectify this situation, however, there can be no
assurance that such action will achieve the intended result or that it will
satisfy the event of default under the convertible debenture agreement.
Implementation of the Company's business strategy requires significant
expenditures of capital. The Company is currently seeking additional funds
through equity or debt. There can be no assurance that such funds can be
obtained on favorable terms, if at all.
YEAR 2000 ISSUE
The Company has implemented a process for identifying, prioritizing and
modifying or replacing certain computer and other systems and programs that may
be affected by the Year 2000 issue. The Company is also monitoring the adequacy
of the manner in which certain third parties and third party vendors of systems
are attempting to address the Year 2000 issue. The Company has substantially
completed an assessment of its computer and embedded systems and determined that
it needed to modify or replace portions of its software so that its computer
systems will function properly with respect to dates in the year 2000 and
thereafter. While the Company believes its process is designed to be successful,
because of the complexity of the Year 2000 issue, and the interdependence of
organizations using computer systems, it is possible that the Company's efforts,
or those of third parties with whom the Company interacts, will not be
successful or satisfactorily completed in a timely fashion.
The Company estimates that the total cost that it will incur in connection with
attempting to address the Year 2000 issue, including assessment development of a
modification or replacement plan, purchase of new hardware and software and
implementation of the modification or replacement plan or software, will be
approximately $50,000. To date, the Company has incurred approximately $35,000
(of which $-0- has been capitalized and $35,000 expensed). The Company funded
the costs incurred to date through cash flow from operations and expects to fund
future costs through cash flow from operations.
The project is estimated to be completed by September 1999, which is prior to
any anticipated impact on the Company's operating systems. The Company believes
that with modifications to existing software, conversions to new software and
replacement or modification of certain embedded systems, the Year 2000 issue
will not pose significant operational problems. However, if such modifications
and conversions are not made, or are not completed on a timely basis, the Year
2000 issue would have a material adverse impact on the Company's business,
financial condition and results of operations.
The estimated costs of the project and the date on which the Company believes
necessary modifications and replacements to address the Year 2000 issue will be
completed are based on management's estimates, which were derived utilizing
numerous assumptions of future events, including the continued availability of
certain resources and other factors. As the Company progresses in addressing the
Year 2000 issue, estimates of costs could change, and there can be no assurance
that the Company will not experience cost overruns or delays in connection with
its plan for modifying or replacing systems and programs. In addition, it may
not be possible to adequately assess the impact of the failure of third parties
to adequately address the Year 2000 issue. As a result, actual operating results
could differ materially from those anticipated. Specific factors that might
cause such material differences include, but are not limited to, the
availability and cost of personnel trained to address the Year 2000 issue, the
ability to locate and correct all relevant computer codes and similar
uncertainties.
Due to the fact that the Company believes it has secured sufficient resources to
address the Year 2000 issue as it relates to its computer systems, the
assessment of embedded systems is complete and the Company does not believe that
contingency planning is warranted at this time. The assessment of third parties
external to the Company is underway, and the results of this assessment, when
completed, may reveal the need for contingency planning at a later date. The
Company will regularly evaluate the need for contingency planning based on the
progress and findings of the Year 2000 project.
11
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FORWARD LOOKING STATEMENTS
Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are made pursuant to the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. The Company cautions
that a number of important factors could cause the Company's actual results for
1999 and beyond to differ materially from those expressed in any forward-looking
statements made by, or on behalf of, the Company.
Forward-looking statements involve a number of risks and uncertainties
including, but not limited to, the Company's history of operating losses;
uncertainty of profitability and uncertainty of widespread market acceptance for
the MICRO21 system; the immediate need for the Company to raise significant
additional capital to satisfy delinquent payroll, accounts payable and notes
payable obligations and to finance operations in the near-term, and the
inability to provide assurances that such capital will be available on terms
favorable to the Company, if at all; the delay in the Company's achievement of
substantial market penetration and widespread acceptance of the MICRO21 system;
the uncertainty of the commercial viability and potential market acceptance of
other IMI products such as the newly developed HSM and USM, which have not yet
been manufactured or sold in commercial volumes; the potential failure of the
Company's sales team, Bayer Corporation and Beckman-Coulter or other
distributors to sell HSMs in amounts sufficient to generate a meaningful
recurring revenue base associated with HSM consumables and to sell MICRO21
systems in amounts sufficient to help the Company achieve its sales goals;
uncertainty as to whether strategic partners will become involved in MICRO21
sales; uncertainty as to the ability of the Company to achieve sales and
marketing goals following implementation of the Company's revised sales
approach, including increased reliance on strategic partners for worldwide
sales/service and reductions in the Company's sales and marketing personnel, due
to the decrease in personnel, and the possible adverse impact on potential
customer perception of the Company; uncertainty due to industry consolidation
and customer budget processes and restrictions; the possibility that the
Company's appeal of Nasdaq's proposed delisting will be unsuccessful, resulting
in the termination of listing of the Company's common stock on Nasdaq or that,
even if such appeal is successful, the Company's future financial results will
not sustain continued listing on Nasdaq; the possible acceleration of the
Debentures due to a default in the event the Company's common stock is delisted
from Nasdaq. the possibility that agreements with strategic partners will not
result in significant improvements in results; the uncertainty as to the actual
amount of damages which the Company will be obligated to pay DiaSys pursuant to
a pending decision on damages by an arbitration panel; the risk that expansion
of sales in foreign markets may be possible only through distributors, such as
Coulter, at transfer prices too low for favorable profitability; the expense of
product development and the related delay and uncertainty as to receipt of any
requisite FDA clearance or other government clearance or approval for new
products and new procedures for use on the MICRO21 system; and the uncertainty
of profitability and sustainability of revenues and profitability.
12
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PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits:
LIST OF EXHIBITS DESCRIPTION
---------------- -----------
10.34 Advisco Capital Corp. Loan and
Security Agreement, dated April 29,1999
27 Financial Data Schedule
(b) Reports on Form 8-K:
None.
13
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
INTELLIGENT MEDICAL IMAGING, INC.
Date: May 14, 1999 By: /S/ TYCE M. FITZMORRIS
------------ --------------------------
Tyce M. Fitzmorris,
President and Chief
Executive Officer
EXHIBIT 10.34
ADVISCO CAPITAL CORP.
LOAN AND SECURITY AGREEMENT
Borrower: Intelligent Medical Imaging, Inc.
Address: 4360 Northlake Boulevard
Palm Beach Gardens, Florida 33410
Date: April 29, 1999
THIS LOAN AND SECURITY AGREEMENT is entered into on the above date between
ADVISCO CAPITAL CORP. a New York corporation, with offices at 210 East 49th
Street, 4th Floor, New York, NY 10017, as agent for the Lenders (in such
capacity, "Agent"), the lenders named in the Schedule hereto (collectively, the
"Lenders") and the borrower(s) named above (jointly and severally, the
"Borrower"), whose chief executive office is located at the above address
("Borrower's Address"). The Schedule to this Agreement (the "Schedule") shall
for all purposes be deemed to be a part of this Agreement, and the same is an
integral part of this Agreement. (Definitions of certain terms used in this
Agreement are set forth in Section 8 below).
1. LOANS.
1.1 Loans. Lenders will make loans to Borrower (the "Loans"), in amounts
determined by Lenders in their sole discretion, up to the amounts (the "Credit
Limit") referred to in Section 1.1.1 hereof and as shown on the Schedule,
provided no Default or Event of Default has occurred and is continuing, and
satisfaction in each case, or waiver, of the terms and conditions of borrowing
hereunder.
1.1.1 The Advances. Each Lender severally agrees, on the terms and
conditions hereof, to make one or more advances to the
Borrower from time to time on any Business Day during the
period from the Closing Date to, but excluding, the
Termination Date, in an aggregate amount not to exceed the
amount at any one time outstanding set forth on the Schedule
to this Agreement giving effect to the Eligible Inventory,
Eligible Receivables and eligible Fixed Assets advance rates
set forth therein.
1.2 Interest. All Loans and all other monetary Obligations shall bear interest
at the rate shown on the Schedule, except where expressly set forth to the
contrary in this Agreement. Interest shall be payable monthly, on the last day
of the month. Interest may, in Lender's discretion, be charged to Borrower's
loan account, and the same shall thereafter bear interest at the same rate as
the other Loans. Regardless of the amount of Obligations that may be outstanding
from time to time, Borrower shall pay Lenders minimum monthly interest during
the term of this Agreement with respect to all of the Loans based on the minimum
daily loan balance set forth on the Schedule (the "Minimum Monthly Interest").
Following a Default or Event of Default, interest shall accrue at the Default
Interest Rate, as defined in the Schedule hereto. The parties agree that the
Default Interest Rate shall not be a penalty but is a reasonable adjustment to
reflect the circumstances of the Loans.
1.3 Fee. Borrower shall pay Lenders the fee(s) shown on the Schedule, which are
in addition to all interest and other sums payable to Lenders and are not
refundable.
1.4 Advances. Notwithstanding anything herein to the contrary, the advance rate
for Loans may be reduced at any time by Agent, in its reasonable discretion (i)
if a receivable or inventory dilution percentage in excess of five percent (over
amounts reported to Lenders) is confirmed in any field examination conducted by
or on behalf of Lenders and (ii) reserves may be reasonably established at any
time by a Lender in its sole discretion including, without limitation, reserves
with respect to (x) exposure under foreign exchange contracts, hedging and other
financial instruments and (y) collateral locations for which landlord waiver and
consent agreements in form and substance satisfactory to Lenders have not been
obtained.
<PAGE>
1.4.1 The obligations of each Lender to make any advances is subject
to the satisfaction or each of the conditions precedent set
forth as conditions to borrowing hereunder, and to those
specific conditions set forth in this Section 1.4. and the
Schedule hereto.
1.4.2 The initial borrowing consisting of Advances shall be made on
notice, given by the Borrower to the Agent not later than
11:00 A.M. (EST) on the third business day prior to the date
of the proposed Borrowing, pursuant to a Notice of Borrowing
in the form set forth in Exhibit A hereto. The Agent shall
give to each appropriate Lender, prompt notice thereof by
facsimile. Each appropriate lender shall, before 11:00 A.M.
(EST) on the Closing Date make available for the account of
the domestic lending office of the Lender in same day funds,
such amount of the Lender's ratable portion of the Advance.
After receipt of such funds, and upon fulfillment of all of
the conditions of borrowing hereunder, Agent shall make such
funds available to Borrower.
1.4.3 Each notice of Borrowing shall be irrevocable and binding on
the Borrower and, the Borrower shall indemnify each Lender
against any loss, cost or expense incurred by such Lender
solely as a result of any failure by the Borrower to borrow on
the date specified in the Notice for such Borrowing,
including, without limitation, any loss (including anticipated
profits), cost or expense incurred by reason of the
liquidation or reemployment of deposits or other funds
acquired by such Lender to fund the advance, and such event
may be deemed by the Lender an Event of Default hereunder.
1.5 Notes. All revolving credit loans made by a Lender to the Borrowers shall be
evidenced by a revolving credit note, duly executed on behalf of the Borrower,
dated the Closing Date, in substantially the form of Exhibit B annexed hereto,
delivered and payable to such Lender in a principal amount equal to its credit
commitment in respect of the Borrowers on such date. The outstanding balance of
each revolving credit loan, as evidenced by any such note, shall mature and be
due and payable on the Termination Date of the Loan. Each revolving credit note
shall bear interest from its date on the outstanding principal balance thereof,
as provided in Section 1.2 hereof. Each lender, or the Agent, shall and is
hereby authorized by the Borrower to, endorse on the schedule attached to the
revolving credit note of such Lender an appropriate notation evidencing the date
and amount of each Loan to each Borrower from such Lender, as well as the date
and amount of each payment and prepayment with respect thereto, provided,
however, that the failure of any person to make such a notation on a note shall
not affect any obligations of the Borrower under such note. Any such notation
shall be conclusive and binding as to the date and amount of such Loan or
portion thereof, or payment or prepayment of principal or interest thereon,
absent manifest error.
2. SECURITY INTEREST.
2.1 Security Interest. To secure the payment and performance of all of the
Obligations when due, Borrower hereby grants to Lenders a security interest in
all of Borrower's interest in the following, whether now owned or hereafter
acquired, and wherever located: all of the Borrower's right, title and interest
in, to and under all assets and property, tangible and intangible, of any nature
whatsoever of the Borrower, including, without limitation, property, plant and
equipment, real estate, and rights under any contracts; all Receivables,
Inventory, Equipment, investment property and General Intangibles, (as defined
herein and as such terms are defined under the New York Uniform Commercial Code
as may from time to time be in effect,) including, without limitation, all of
Borrower's Deposit Accounts, and all money, and all property now or at any time
in the future in Lender's possession (including claims and credit balances), and
all proceeds of any of the foregoing (including proceeds of any insurance
policies, proceeds of proceeds, and claims against third parties), all products
of any of the foregoing, and all books and records related to any of the
foregoing (all of the foregoing, together with all other property in which
Lenders may now or in the future be granted a Lien or security interest, is
referred to herein, collectively, as the "Collateral").
Page 2
<PAGE>
3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE BORROWER
In order to induce Lenders to enter into this Agreement and to make
Loans, Borrower represents and warrants to Lenders as follows, and Borrower
covenants that the following representations will continue to be true, and that
Borrower will at all times comply with all of the following covenants:
3.1 Corporate Existence and Authority. Borrower, if a corporation, is and will
continue to be, duly organized, validly existing and in good standing under the
laws of the jurisdiction of its incorporation. Borrower is and will continue to
be qualified and licensed to do business in all jurisdictions in which any
failure to do so would have a material adverse effect on Borrower. The
execution, delivery and performance by Borrower of this Agreement, and all other
documents contemplated hereby (i) have been duly and validly authorized, (ii)
are enforceable against Borrower in accordance with their terms (except as
enforcement may be limited by equitable principles and by bankruptcy,
insolvency, reorganization, moratorium or similar laws relating to creditors'
rights generally), and (iii) do not violate Borrower's articles or certificate
of incorporation, or Borrower's by-laws, or any law or any material agreement or
instrument which is binding upon Borrower or its property, and (iv) do not
constitute grounds for acceleration of any material indebtedness or obligation
under any material agreement or instrument which is binding upon Borrower or its
property.
3.2 Name; Trade Names and Styles. The name of Borrower set forth in the heading
to this Agreement is its correct name. Listed on the Schedule are all prior
names of Borrower and all of Borrower's present and prior trade names. Borrower
shall give Lenders 30 days' prior written notice before changing its name or
doing business under any other name. Borrower has complied, and will in the
future comply, with all laws relating to the conduct of business under a
fictitious business name.
3.3 Place of Business; Location of Collateral. The address set forth in the
heading to this Agreement is Borrower's chief executive office. In addition,
Borrower has places of business and Collateral is located only at the locations
set forth on the Schedule. Borrower will give Lenders at least 30 days prior
written notice before opening any additional place of business, changing its
chief executive office, or moving any of the Collateral to a location other than
Borrower's Address or one of the locations set forth on the schedule.
3.4 Title to Collateral; Permitted Liens. Borrower is now, and will at all times
in the future be, the sole owner of all the Collateral, except for items of
Equipment which are leased by Borrower. The Collateral now is and will remain
free and clear of any and all Liens, charges, security interests, encumbrances
and adverse claims, except for Permitted Liens. Lenders now have, and will
continue to have, a first-priority perfected and enforceable security interest
in all of the Collateral, subject only to the Permitted Liens, and Borrower will
at all times defend Lenders and the Collateral against all claims of others.
None of the Collateral now is or will be affixed to any real property in such
manner, or with such intent, as to become a fixture, unless such Collateral will
continue to constitute Collateral as a result thereof. Borrower is not and will
not become a lessee under any real property lease pursuant to which the lessor
may obtain any rights in any of the Collateral and no such lease now prohibits,
restrains, impairs or will prohibit, restrain or impair Borrower's right to
remove any Collateral from the leased premises. Whenever any Collateral is
located upon premises in which any third party has an interest (whether as
owner, mortgagee, beneficiary under a deed of trust, Lien or otherwise),
Borrower shall, whenever requested by Lenders, use its best efforts to cause
such third party to execute and deliver to Lenders, in form acceptable to
Lenders, such waivers and subordinations as Lenders shall specify, so as to
ensure that Lender's rights in the Collateral are, and will continue to be,
superior to the rights of any such third party. Borrower will keep in full force
and effect, and will comply with all the terms of; any lease of real property
where any of the Collateral now or in the future may be located. The Borrower
shall duly execute and deliver all security documents, all consents of
third-parties necessary to permit the effective granting of the Liens created in
such agreements, financing statements pursuant to the UCC and other documents,
all in form and substance satisfactory to Lenders, as may be reasonably required
by Lenders to grant a valid, perfected and enforceable first priority Lien on
and security interest in the Collateral (subject only to Permitted Liens). The
Borrower shall, at its sole cost and expense, cause all instruments and
documents given as evidence of security pursuant to this Agreement to be duly
recorded and/or filed or otherwise perfected in all places necessary, in the
opinion of Lenders, and take such other actions as Lenders may reasonably
request, in order to
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perfect and protect the Liens of Lenders in the Collateral. Borrower, to the
extent permitted by law and for the purposes of perfecting Lender's security
interest granted hereunder, hereby authorizes Lenders to file any financing
statement(s) in respect of any Lien created pursuant to the security documents
which may at any time be required or which, in the opinion of Lenders, may at
any time be desirable although the same may have been executed only by the
Borrower, to sign such financing statement on behalf of the Borrower and file
the same, and the Borrower hereby irrevocably designates Lenders, its agents,
representatives and designees as its agent and attorney-in-fact for this
purpose. In the event that any re-recording or re-filing thereof (or the filing
of any statements of continuation or assignment of any financing statement) is
required to protect and preserve such Lien, the Borrower shall, at the
Borrower's cost and expense, cause the same to be recorded and/or re-filed at
the time and in the manner requested by Lenders.
3.5 Maintenance of Collateral. Borrower will maintain the Collateral in good
working condition, and Borrower will not use the Collateral for any unlawful
purpose. Borrower will immediately advise Lenders in writing of any material
loss or damage to the Collateral.
3.6 Books and Records. Borrower has maintained and will maintain at Borrower's
Address complete and accurate books and records, comprising an accounting system
in accordance with generally accepted accounting principles.
3.7 Financial Condition, Statements and Reports. All financial statements now or
in the future delivered to Lenders have been, and will be, prepared in
conformity with generally accepted accounting principles (except, in the case of
unaudited financial statements, for the absence of footnotes and subject to
normal yearend adjustments) and now and in the future will fairly reflect the
financial condition of Borrower, at the times and for the periods therein
stated. Between the last date covered by any such statement provided to Lenders
and the date hereof, there has been no material adverse change in the financial
condition, business or prospects of Borrower. The financial statements are based
upon the information contained in the books and records of Borrower and fairly
present the financial condition of Borrower as at the dates thereof and results
of operations for the periods referred to therein. Borrower is now and will
after giving effect to the transactions contemplated hereby will continue to be
Solvent.
3.8 Tax Returns and Payments; Pension contributions Borrower has timely filed,
and will timely file, all tax returns and reports required by foreign, federal,
state and local law, and Borrower has timely paid, and will timely pay, all
foreign, federal, state and local taxes, assessments, deposits and contributions
now or in the future owed by Borrower. Borrower may, however, defer payment of
any contested taxes set forth on the schedule hereto, provided that Borrower (i)
in good faith contests Borrower's obligation to pay the taxes by appropriate
proceedings promptly and diligently instituted and conducted and (ii) notifies
Lenders in writing of the commencement of, and any material development in, the
proceedings, and (iii) posts bonds or takes any other steps required to keep the
contested taxes from becoming a Lien upon any of the Collateral. As of the date
hereof; Borrower is unaware of any claims or adjustments proposed for any of
Borrower's prior tax years which could result in additional taxes becoming due
and payable by Borrower. Borrower has paid, and shall continue to pay all
amounts necessary to fund all present and future pension, profit sharing and
deferred compensation plans in accordance with their terms, and Borrower has not
and will not withdraw from participation in, permit partial or complete
termination of; or permit the occurrence of any other event with respect to, any
such plan which could result in any liability of Borrower, including any
liability to the Pension Benefit Guaranty Corporation or its successors or any
other governmental agency. Borrower shall, at all times, utilize the services of
an outside payroll service providing for the automatic deposit of all payroll
taxes payable by Borrower.
3.9 Compliance with Law. Borrower has complied, and will comply, in all material
respects, with all provisions of all material foreign, federal, state and local
laws and regulations relating to Borrower, including, but not limited to, those
relating to Borrower's ownership of real or personal property, the conduct and
licensing of Borrowers business, and environmental matters.
3.10 Litigation. Except as disclosed in the Schedule, there is no claim, suit,
litigation, proceeding or investigation pending or (to best of Borrower's
knowledge) threatened by or against or affecting Borrower in any court or before
any governmental agency (or any basis therefor known to Borrower) which may
result, either separately or in the aggregate, in any material adverse change in
the financial condition or business of Borrower, or in any material impairment
in the ability of Borrower to carry on its business in substantially the same
manner as it is now being conducted. Borrower will promptly inform Lenders in
writing of any claim, proceeding, litigation or investigation in the future
threatened or instituted by or against Borrower involving any single claim of
$50,000 or more, or involving $100,000 or more in the aggregate.
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3.11 Use of proceeds. All proceeds of all Loans shall be used solely for lawful
business purposes and as set forth on the Schedule hereto. Borrower is not
purchasing or carrying any "margin stock" (as defined in Regulation G of the
Board of Governors of the Federal Reserve System, or subsequent regulatory or
legislative provisions with similar effect) and no part of the proceeds of any
Loan will be used to purchase or carry any "margin stock" or to extend credit to
others for the purpose of purchasing or carrying any "margin stock."
3.12 Real Property. Borrower does not own any real property, except as set forth
in the financial statements (the "Real Property").
3.13 Environmental Matters. Borrower and the Real Property are in material
compliance with all applicable federal, state, local and foreign laws, rules,
regulations, codes, ordinances, orders, decrees, directives, permits, licenses
and judgments relating to pollution, contamination or protection of the
environment (the "Environmental Laws"). The Borrower has obtained, and
maintained in full force and effect, all environmental permits, licenses,
certificates of compliance, approvals and other authorizations necessary to
conduct its business and own or operate the Real Property on which its business
is performed (collectively, the "Environmental Permits"). Borrower has conducted
its business in compliance with all terms and conditions of the Environmental
Permits, other than immaterial and unintentional deficiencies which either
singly or taken as a whole could not have a material adverse effect on the
business or operations of Borrower. Borrower has filed all reports and
notifications required to be filed under and pursuant to all applicable
Environmental Laws. Except as set forth on the Schedule hereto, Borrower is not
aware of any facts indicating that a claim may be made against Borrower for
damages or environmental remediation under any Environmental Laws.
3.14 Subsidiaries. Borrower does not own any subsidiaries and is not party to
any joint venture agreement(s).
3.15 Composition Agreements. Borrower has obtained valid and binding composition
agreements under which the principal, interest and penalties of any and all
obligations of Borrower to its creditors has been irrevocably and permanently
adjusted to the amounts or in the manner set forth on the Schedule hereto.
Pursuant to the terms of such agreements, each of the Borrower's creditors has
agreed (i) to forbear from exercising any of their rights and remedies arising
under its relationship with Borrower, under any agreement or understanding or
otherwise as a result of defaults by Borrower now in existence or hereafter
occurring other than as set forth on Schedule 3.15; (ii) to waive any and all
claims against Borrower as a result of any default or breach by Borrower; and
(iii) to subordinate any and all obligations of Borrower to the obligations of
Borrower to Lenders hereunder.
3.16 Absence of Undisclosed Liabilities. Except as reflected in the financial
statements delivered to Lenders, Borrower has no liabilities (whether accrued,
absolute, contingent, unliquidated or otherwise, whether due or to become due,
whether known or unknown, and regardless of when asserted) arising out of
transactions or events heretofore entered into, or any action or inaction, or
any state of facts existing, with respect to or based upon transactions or
events heretofore occurring, except (i) liabilities which have arisen after the
date of the latest balance sheet delivered to Lenders in the ordinary course of
business (none of which is a material uninsured liability for breach of
contract, breach of warranty, tort, infringement, claim or lawsuit), or (ii) as
otherwise set forth on the Schedule hereto.
3.17 Evidence of Perfection of Security Interests. As soon as possible after the
Closing Date, Borrower shall deliver to Agent: (a) certified copies of all
financing statements that name any Borrower as debtor and that are filed in the
jurisdictions required pursuant to this Agreement, together with copies of such
other financing statements (none of which shall cover any of the collateral
purported to be covered by this Agreement), and (b) evidence of filings of
assignment in form and substance satisfactory to the Agent with the United
States Patent and Trademark Office with respect to any Patent or Trademark
Security Agreement contemplated hereunder.
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4. RECEIVABLES.
4.1 Representations Relating to Receivables. Borrower represents and warrants to
Lenders as follows: Each Receivable with respect to which Loans are requested by
Borrower shall, on the date each Loan is requested and made, represent an
undisputed bona fide existing unconditional obligation of the Account Debtor
created by the sale, delivery, and acceptance of goods or the rendition of
services in the ordinary course of Borrower's business.
4.2 Representations Relating to Documents and Legal Compliance. Borrower
represents and warrants to Lenders as follows: All statements made and all
unpaid balances appearing in all invoices, purchase orders, contracts,
instruments and other documents evidencing the Receivables are and shall be true
and correct and all such invoices, instruments and other documents and all of
Borrower's books and records are and shall be genuine and in all respects what
they purport to be. All sales and other transactions underlying or giving rise
to each Receivable shall fully comply with all applicable laws and governmental
rules and regulations. All signatures and endorsements on all documents,
instruments, and agreements relating to all Receivables are and shall be
genuine, and all such documents, instruments and agreements are and shall be
legally enforceable in accordance with their terms.
4.3 Schedules and Documents Relating to Receivables. Borrower shall deliver to
Lenders transaction reports and loan requests, schedules of Receivables, and
schedules of collections, all on Lender's standard forms; provided, however,
that Borrower's failure to execute and deliver the same shall not affect or
limit Lender's security interest and other rights in all of Borrower's
Receivables, nor shall Lender's failure to advance or lend against a specific
Receivable affect or limit Lender's security interest and other rights therein.
Loan requests received after 10:30 AM EST will not be considered by Lenders
until the next Business Day. Together with each such schedule, or later if
requested by Lenders, Borrower shall furnish Lenders with certified copies (or,
at Lender's request, permit Lenders or its representatives to review originals)
of all contracts, orders, invoices, and other similar documents, and all
original shipping instructions, delivery receipts, bills of lading, and other
evidence of delivery, for any goods the sale or disposition of which gave rise
to such Receivables, and Borrower warrants the genuineness of all of the
foregoing. Borrower shall also furnish to Lenders an aged accounts receivable
trial balance in such form and at such intervals as Lenders shall request. In
addition, Borrower shall deliver to Lenders the originals of all instruments,
chattel paper, security agreements, guarantees and other documents and property
evidencing or securing any Receivables, upon receipt thereof and in the same
form as received, with all necessary endorsements, all of which shall be with
recourse. Borrower shall also provide Lenders with copies of all credit memos as
and when requested by Lenders.
4.4 Collection of Receivables. Borrower shall have the right to collect all
Receivables, unless and until an Event of Default has occurred. Borrower shall
hold all payments on, and proceeds of, Receivables in trust for Lenders, and
Borrower shall deliver all such payments and proceeds to Lenders within one
Business Day after receipt by Borrower, in their original form, duly endorsed to
Lenders, to be applied to the Obligations in such order as Lenders shall
determine. Lenders may, in its discretion, require that all proceeds of
Collateral be deposited by Borrower into a lockbox account, or such other
"blocked account" as Lenders may specify, pursuant to a blocked account
agreement in such form as Lenders may specify. Lenders or its designee may, at
any time, notify Account Debtors that Lenders has been granted a security
interest in the Receivables. If Lenders consent to the factoring or assignment
of any Receivables, the proceeds thereof shall be directed to be paid directly
to Lenders in an amount necessary to pay all Obligations to Lenders at such time
existing.
4.5 Remittance of Proceeds. All proceeds arising from the disposition of any
Collateral shall be delivered to Lenders within one Business Day after receipt
by Borrower, in their original form, duly endorsed to Lenders, to be applied to
the Obligations in such order as Lenders shall determine. Borrower agrees that
it will not commingle proceeds of Collateral with any of Borrower's other funds
or property, but will hold such proceeds separate and apart from such other
funds and property and in an express trust for Lenders. Nothing in this Section
limits the restrictions on disposition of Collateral set forth elsewhere in this
Agreement.
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4.6 Disputes. Borrower shall notify Lenders promptly of all disputes or claims
relating to Receivables. Borrower shall not forgive (completely or partially),
compromise or settle any Receivable for less than payment in full, or agree to
do any of the foregoing, except that Borrower may do so, provided that: (i)
Borrower does so in good faith, in a commercially reasonable manner, in the
ordinary course of business, and in arm's length transactions, which are
reported to Lenders on the regular reports provided to Lenders, (ii) no Default
or Event of Default has occurred and is continuing; and (iii) taking into
account all such discounts settlements and forgiveness, the total outstanding
Loans will not exceed the Credit Limit. Lenders may, at any time after the
occurrence of an Event of Default, settle or adjust disputes or claims directly
with Account Debtors for amounts and upon terms which Lenders considers
advisable in its reasonable credit judgment and, in all cases, Lenders shall
credit Borrower's Loan account with only the net amounts received by Lenders in
payment of any Receivables.
4.7 Returns. Provided no Event of Default has occurred and is continuing, if any
Account Debtor returns any Inventory to Borrower in the ordinary course of its
business, Borrower shall promptly determine the reason for such return and
promptly issue a credit memorandum to the Account Debtor in the appropriate
amount. In the event any attempted return occurs after the occurrence of any
Event of Default, Borrower shall (i) hold the returned Inventory in trust for
Lenders, (ii) segregate all returned Inventory from all of Borrower's other
property, (iii) conspicuously label the returned Inventory as subject to
Lender's security interest, and (iv) immediately notify Lenders of the return of
any Inventory, specifying the reason for such return, the location and condition
of the returned Inventory, and on Lender's request deliver such returned
Inventory to Lenders or render such Inventory to the sole and exclusive control
of Lender's agent.
4.8 Verification. Lenders may, from time to time, verify directly with the
respective Account Debtors the validity, amount and other matters relating to
the Receivables, by means of mail, telephone or otherwise, either in the name of
Borrower or Lenders or such other name as Lenders may choose.
4.9 No Liability. Lenders shall not under any circumstances be responsible or
liable for any shortage or discrepancy in, damage to, or loss or destruction of,
any goods, the sale or other disposition of which gives rise to a Receivable, or
for any error, act, omission, or delay of any kind occurring in the settlement,
failure to settle, collection or failure to collect any Receivable, or for
settling any Receivable in good faith for less than the full amount thereof, nor
shall Lenders be deemed to be responsible for any of Borrower's obligations
under any contract or agreement giving rise to a Receivable. Nothing herein
shall, however, relieve Lenders from liability for its own gross negligence or
willful misconduct.
5. ADDITIONAL DUTIES OF THE BORROWER.
5.1 Financial and Other Covenants. Borrower shall at all times comply with the
financial and other covenants set forth in the Schedule.
5.2 Insurance. Borrower shall, at all times insure all of the tangible personal
property Collateral and carry such other business insurance, with insurers
reasonably acceptable to Lenders, in such form and amounts as Lenders may
reasonably require, and Borrower shall provide evidence of such insurance to
Lenders, so that Lenders is satisfied that such insurance is, at all times, in
full force and effect. All liability insurance policies of Borrower shall name
Lenders as an additional insured, and all property casualty and related
insurance policies of Borrower shall name Lenders as a loss payee thereon and
Borrower shall cause a lenders loss payee endorsement in form reasonably
acceptable to Lenders. Upon receipt of the proceeds of any such insurance,
Lenders shall apply such proceeds in reduction of the Obligations as Lenders
shall determine in its sole discretion, except that, provided no Default or
Event of Default has occurred and is continuing, Lenders shall release to
Borrower insurance proceeds with respect to Equipment totaling less than
$25,000, which shall be utilized by Borrower for the replacement of the
Equipment with respect to which the insurance proceeds were paid. Lenders may
require reasonable assurance that the insurance proceeds so released will be so
used. If Borrower fails to provide or pay for any insurance, Lenders may, but is
not obligated to, obtain the same at Borrower's expense. Borrower shall promptly
deliver to Lenders copies of all reports made to insurance companies.
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5.3 Reports. Borrower, at its expense, shall provide Lenders with the written
reports set forth in the Schedule, and such other written reports with respect
to Borrower (including budgets, sales projections, operating plans and other
financial documentation), as Lenders shall from time to time reasonably specify.
5.4 Access to Collateral, Books and Records. At reasonable times, and on one
Business Day's notice, Lenders, or its agents, shall have the right to inspect,
audit and copy Borrower's books and records and the Collateral (the "Audits").
Lenders shall take reasonable steps to keep confidential all confidential
information obtained in any Audit, but Lenders shall have the right to disclose
any such information to its auditors, regulatory agencies, and attorneys, and
pursuant to any subpoena or other legal process The Audits shall be at
Borrower's expense and the charge for the Audits shall be $750 per person per
day (or such higher amount as shall represent Lender's then current standard
charge for the same), plus reasonable out of pocket expenses. Borrower will not
enter into any agreement with any accounting firm, service bureau or third party
to store Borrower's books or records at any location other than Borrower's
Address, without first notifying Lenders of the same and obtaining the written
agreement from such accounting firm, service bureau or other third party to give
Lenders the same rights with respect to access to books and records and related
rights as Lenders has under this Loan Agreement.
5.5 Negative Covenants. Borrower shall not, without Lender's prior written
consent, do any of the following: (i) merge or consolidate with another
corporation or entity, except in a transaction in which (A) the shareholders of
the Borrower hold at least 50% of the common stock and all other capital stock
of the surviving corporation immediately after such merger or consolidation, and
(B) the Borrower is the surviving corporation; (ii) acquire any assets, except
(A) in the ordinary course of business, or (B) in a transaction or a series of
transactions not involving the payment of an aggregate amount in excess of
$5,000 for any single asset or $15,000 in any calendar year (iii) enter into any
other transaction outside the ordinary course of business; (iv) sell or transfer
any Collateral, except for the sale of finished Inventory in the ordinary course
of Borrower's business, and except for the sale of obsolete or unneeded
Equipment in the ordinary course of business; (v) store any Inventory or other
Collateral with any warehouseman or other third party; (vi) make any loans of
any money or other assets or repaid any past due amount to any vendor or
supplier, except (A) advances to vendors or suppliers for the purpose of
completion of Inventory for sale to customers for which a purchase order or
contract for sale has been obtained and approved by Lender and (B) travel
advances, employee relocation loans and other employee loans and advances in the
ordinary course of business not in excess of $1,500 per person; (vii) incur any
debts, outside the ordinary course of business, which would have a material,
adverse effect on Borrower or on the prospect of repayment of the Obligations;
(viii) guarantee or otherwise become liable with respect to the obligations of
another party or entity; (ix) pay or declare any dividends on Borrower's stock
(except for dividends payable solely in stock of Borrower); (x) redeem, retire,
purchase or otherwise acquire, directly or indirectly, any of Borrowers stock;
(xi) make any change in Borrower's capital structure which would have a material
adverse effect on Borrower or on the prospect of repayment of the Obligations;
(xii) dissolve or elect to dissolve; (xiii) enter into any agreement (other than
this Agreement) which (A) prohibits the creation or assumption of any Lien upon
any of the Collateral, including, without limitation, any hereafter acquired
property, or (B) specifically prohibits the amendment or other modification of
this Agreement or any other document contemplated hereby; or (xiv) directly or
indirectly, (A) prepay, redeem, purchase or retire any indebtedness, including,
without limitation, any subordinated indebtedness, other than indebtedness
incurred hereunder (B) modify, amend or otherwise alter the terms and provisions
of any subordinated indebtedness; (C) modify, amend or alter the certificate or
articles of incorporation or other constitutive charter document if such
modification, amendment or alteration could have a material adverse affect upon
the Collateral or the obligations of Borrower to Lenders hereunder. Transactions
permitted by the foregoing provisions of this Section are only permitted if no
Default or Event of Default would occur as a result of such transaction.
5.6 Litigation Cooperation. Should any third-party suit or proceeding be
instituted by or against Lenders with respect to any Collateral or relating to
Borrower, Borrower shall, without expense to Lenders, make available Borrower
and its officers, employees and agents and Borrower's books and records, to the
extent that Lenders may deem them reasonably necessary in order to prosecute or
defend any such suit or proceeding.
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5.7 Indemnity. Borrower hereby agrees to indemnify Agent and Lenders and hold
harmless Agent and Lenders from and against any and all claims, debts,
liabilities, demands, obligations, actions, causes of action, penalties, costs
and expenses (including reasonable attorneys' fees), of every nature, character
and description, which Agent or Lenders may sustain or incur based upon or
arising out of any of the Obligations, any actual or alleged failure to collect
and pay over any withholding or other tax relating to Borrower or its employees,
any relationship or agreement between Lenders and Borrower, any actual or
alleged failure of Agent or Lenders to comply with any writ of attachment or
other legal process relating to Borrower or any of its property, or any other
matter, cause or thing whatsoever occurred, done, omitted or suffered to be done
by Agent or Lenders relating to Borrower or the Obligations (except any such
amounts sustained or incurred as the result of the gross negligence or willful
misconduct of Lenders). Notwithstanding any provision in this Agreement to the
contrary, the indemnity agreement set forth in this Section shall survive any
termination of this Agreement and shall for all purposes continue in full force
and effect and be applicable to all of Agent and Lender's directors, officers,
employees, agents, attorneys, advisors and representatives
5.8 Further Assurances. Borrower agrees, at its expense, on request by Lenders,
to execute all documents and take all actions, as Lenders, may deem reasonably
necessary or useful in order to perfect and maintain Lender's perfected security
interest in the Collateral, and in order to fully consummate the transactions
contemplated by this Agreement.
6. TERM.
6.1 Maturity Date. This Agreement shall continue in full force and effect until
the maturity date set forth on the Schedule (the "Maturity Date" or "Termination
Date").
6.2 Early Termination. This Agreement may be terminated prior to the Maturity
Date as follows: (i) by Borrower, effective three Business Days after written
notice of termination is given to Lenders; or (ii) by Lenders at any time after
the occurrence of an Event of Default, without notice, effective immediately. If
this Agreement is terminated by Borrower or by Lenders under this Section 6.2,
Borrower shall pay to Lenders a termination fee (the "Early Termination Fee") in
the amount shown on the Schedule. The Early Termination Fee shall be due and
payable on the effective date of termination and thereafter shall bear interest
at a rate equal to the rate applicable to the Receivable Loans.
6.3 Payment of Obligations. On the Maturity Date or on any earlier effective
date of termination, Borrower shall pay and perform in full all Obligations,
whether evidenced by installment notes or otherwise, and whether or not all or
any part of such Obligations are otherwise then due and payable. Without
limiting the generality of the foregoing, if on the Maturity Date, or on any
earlier effective date of termination, there are any outstanding Letters of
Credit issued by Lenders or issued by another institution based upon an
application, guarantee, indemnity or similar agreement on the part of Lenders,
then on such date Borrower shall provide to Lenders cash collateral in an amount
equal to the face amount of all such Letters of Credit plus all interest, fees
and cost due or to become due in connection therewith, to secure all of the
Obligations relating to said Letters of Credit, pursuant to Lender's then
standard form cash pledge agreement. Notwithstanding any termination of this
Agreement, all of Lender's security interests in all of the Collateral and all
of the terms and provisions of this Agreement shall continue in full force and
effect until all Obligations have been paid and performed in full; provided
that, without limiting the fact that Loans are subject to the discretion of
Lenders, Lenders may, in its sole discretion, refuse to make any further Loans
after termination. No termination shall in any way affect or impair any right or
remedy of Lenders, nor shall any such termination relieve Borrower of any
Obligation to Lenders, until all of the Obligations have been paid and performed
in full. Upon payment and performance in full of all the Obligations and
termination of this Agreement, Lenders shall promptly deliver to Borrower
termination statements, requests for re-conveyances and such other documents as
may be required to fully terminate Lender's security interests.
7. EVENTS OF DEFAULT AND REMEDIES.
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7.1 Events of Default. The occurrence of any of the following events shall
constitute an "Event of Default" under this Agreement, and Borrower shall give
Lenders immediate written notice thereof: (a) Any material warranty,
representation, statement, report or certificate made or delivered to Lenders by
Borrower or any of Borrower's officers, employees or agents, now or in the
future, shall be untrue or misleading in a material respect; or (b) Borrower
shall fail to pay when due any Loan or any interest thereon or any other
monetary Obligation; or (c) the total Loans and other Obligations outstanding at
any time shall exceed the Credit Limit; or (d) Borrower shall fail to deliver
the proceeds of Collateral to Lenders as provided in Section 4.5 above, or shall
fail to give Lenders access to its books and records or Collateral as provided
in Section 5.4 above, or shall breach any negative covenant set forth in Section
5.5 above; or (e) Borrower shall fail to comply with the financial covenants (if
any) set forth in the Schedule or shall fail to perform any other non-monetary
Obligation which by its nature cannot be cured; or (f) Borrower shall fail to
perform any other non-monetary Obligation, which failure is not cured within 5
Business Days after the date due; or (g) Any levy, assessment, attachment,
seizure, Lien or encumbrance (other than a Permitted Lien) is made on all or any
part of the Collateral which is not cured within 10 days after the occurrence of
the same; or (h) any default or event of default occurs under any obligation
secured by a Permitted Lien, which is not cured within any applicable cure
period or waived in writing by the holder of the Permitted Lien; or (i) Borrower
breaches any material contract or obligation, which has or may reasonably be
expected to have a material adverse effect on Borrower's business or financial
condition; or (j) Dissolution, termination of existence, insolvency or business
failure of Borrower; or appointment of a receiver, trustee or custodian, for all
or any part of the property of, assignment for the benefit of creditors by, or
the commencement of any proceeding by Borrower under any reorganization,
bankruptcy, insolvency, arrangement, readjustment of debt, dissolution or
liquidation law or statute of any jurisdiction, now or in the future in effect;
or (k) the commencement of any proceeding against Borrower or any guarantor of
any of the Obligations under any reorganization, bankruptcy, insolvency,
arrangement, readjustment of debt, dissolution or liquidation law or statute of
any jurisdiction, now or in the future in effect, which is not cured by the
dismissal thereof within 30 days after the date commenced; or (1) revocation or
termination of or limitation or denial of liability upon, any guaranty of the
Obligations or any attempt to do any of the foregoing, or commencement of
proceedings by any guarantor of any of the Obligations under any bankruptcy or
insolvency law; or (m) revocation or termination of, or limitation or denial of
liability upon, any pledge of any certificate of deposit, securities or other
property or asset of any kind pledged by any third party to secure any or all of
the Obligations, or any attempt to do any of the foregoing, or commencement of
proceedings by or against any such third party under any bankruptcy or
insolvency law; or (n) Borrower makes any payment on account of any indebtedness
or obligation which is subject to a Composition Agreement or which has been
subordinated to the Obligations, other than as permitted in the applicable
Composition Agreements as set forth on Schedule 3.14 hereof or if any Person who
has agreed to a Composition Agreement or subordinated such indebtedness or
obligations terminates or in any way limits his composition or subordination
agreement; or (o) there shall be a change in the record or beneficial ownership
of an aggregate of more than 20% of the outstanding shares of stock of Borrower,
in one or more transactions, compared to the ownership of outstanding shares of
stock of Borrower in effect on the date hereof, without the prior written
consent of Lenders; or (p) Borrower shall generally not pay its debts as they
become due, or Borrower shall conceal, remove or transfer any part of its
property, with intent to hinder, delay or defraud its creditors, or make or
suffer any transfer of any of its property which may be fraudulent under any
bankruptcy, fraudulent conveyance or similar law; or (q) there shall be a
material adverse change in Borrowers business or financial condition; or (r)
Lenders, acting in good faith and in a commercially reasonable manner, deems
itself insecure because of the occurrence of an event prior to the effective
date hereof of which Lenders had no knowledge on the effective date or because
of the occurrence of an event on or subsequent to the effective date; or (s)
upon the occurrence of any breach, Default or any Event of Default as such terms
are defined pursuant those certain agreements by and between JNC Opportunity
Fund and Borrower dated as of June 30, 1998 relating to the Borrower's 6%
Convertible Debenture due June 30, 2002. Lenders may cease making any Loans
hereunder during any of the above cure periods, and thereafter if an Event of
Default has occurred.
7.2 Remedies. Upon the occurrence, and during the continuance, of any Event of
Default, Agent, at its option, and without notice or demand of any kind (all of
which are hereby expressly waived by Borrower), may do any one or more of the
following: (a) Cease making Loans or otherwise extending credit to Borrower
under this Agreement or any other document or agreement; (b) Accelerate and
declare all or any part of the Obligations to be immediately due, payable, and
performable, notwithstanding any deferred or installment payments allowed by any
instrument evidencing or relating to any Obligation; (c) Take possession of any
or all of the Collateral wherever it may be found, and for that purpose Borrower
hereby authorizes Agent without judicial process to enter onto any of Borrower's
premises without interference to search for, take possession of, keep, store, or
remove any of the Collateral, and remain on the premises or cause a custodian to
remain on the premises in exclusive control thereof, without charge for so long
as Agent deems it reasonably necessary in order to complete the enforcement of
its rights under this Agreement or any other agreement; provided, however, that
should Agent seek to take possession of any of the Collateral by Court process,
Borrower hereby irrevocably waives: (i) any bond and any surety or security
relating thereto required by any statute, court rule or otherwise as an incident
to such possession; (ii) any demand for possession prior to the commencement of
any suit or action to recover possession thereof; and (iii) any requirement that
Agent retain possession of, and not dispose of, any such Collateral until after
trial or final judgement;
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(d) Require Borrower to assemble any or all of the Collateral and make it
available to Agent at places designated by Agent which are reasonably convenient
to Agent and Borrower, and to remove the Collateral to such locations as Agent
may deem advisable; (e) Complete the processing, manufacturing or repair of any
Collateral prior to a disposition thereof and, for such purpose and for the
purpose of removal, Agent shall have the right to use Borrowers premises,
vehicles, hoists, lifts, cranes, equipment and all other property without
charge; (f) Sell, lease or otherwise dispose of any of the Collateral, in its
condition at the time Agent obtains possession of it or after further
manufacturing, processing or repair, at one or more public and/or private sales,
in lots or in bulk, for cash, exchange or other property, or on credit, and to
adjourn any such sale from time to time without notice other than oral
announcement at the time scheduled for sale. Agent shall have the right to
conduct such disposition on Borrowers premises without charge, for such time or
times as Agent deems reasonable, or on Lender's premises, or elsewhere and the
Collateral need not be located at the place of disposition. Agent may directly
or through any affiliated company purchase or lease any Collateral at any such
public disposition, and if permissible under applicable law, at any private
disposition. Any sale or other disposition of Collateral shall not relieve
Borrower of any liability Borrower may have if any Collateral is defective as to
title or physical condition or otherwise at the time of sale; (g) Demand payment
of and collect any Receivables and General Intangibles comprising Collateral
and, in connection therewith, Borrower irrevocably authorizes Agent to endorse
or sign Borrower's name on all collections, receipts, instruments and other
documents, to take possession of and open mail addressed to Borrower and remove
therefrom payments made with respect to any item of the Collateral or proceeds
thereof and, in Lender's sole discretion, to grant extensions of time to pay,
compromise claims and settle Receivables and the like for less than face value;
(h) offset against any sums in any of Borrower's general, special or other
Deposit Accounts with Agent; and (i) Demand and receive possession of any of
Borrower's federal and state income tax returns and the books and records
utilized in the preparation thereof or referring thereto. All reasonable
attorneys' fees, expenses, costs, liabilities and obligations incurred by Agent
with respect to the foregoing shall be due from the Borrower to Agent on demand.
Agent may charge the same to Borrower's loan account, and the same shall
thereafter bear interest at the same rate as is applicable to the receivable
Loans. Without limiting any of Lender's rights and remedies, from and after the
occurrence of any Event of Default, the interest rate applicable to the
Obligations shall be increased as provided on the Schedule a part hereof.
7.3 Standards for Determining Commercial Reasonableness. Borrower and Agent
agree that a sale or other disposition (collectively, "sale") of any Collateral
which complies with the following standards will conclusively be deemed to be
commercially reasonable: (i) Notice of the sale is given to Borrower at least
five days prior to the sale, and, in the case of a public sale, notice of the
sale is published at least five days before the sale in a newspaper of general
circulation in the county where the sale is to be conducted; (ii) Notice of the
sale describes the collateral in general, non-specific terms; (iii) The sale is
conducted at a place designated by Agent, with or without the Collateral being
present; (iv) The sale commences at any time between 8:00 a.m. and 6:00 p.m.;
(v) Payment of the purchase price in cash or by cashier's check or wire transfer
is required; (vi) With respect to any sale of any of the Collateral, Agent may
(but is not obligated to) direct any prospective purchaser to ascertain directly
from Borrower any and all information concerning the same. Agent shall be free
to employ other methods of noticing and selling the Collateral, in its
discretion, if they are commercially reasonable.
7.4 Power of Attorney. Upon the occurrence, and during the continuance, of any
Event of Default, without limiting Lender's other rights and remedies, Borrower
grants to Agent an irrevocable power of attorney coupled with an interest,
authorizing and permitting Agent (acting through any of its employees, attorneys
or agents) at any time, at its option, but without obligation, with or without
notice to Borrower, and at Borrower's expense, to do any or all of the following
in Borrower's name or otherwise, but Agent agrees to exercise the following
powers in a commercially reasonable manner:
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(a) Execute on behalf of Borrower any documents that Agent may, in its sole
discretion, deem advisable in order to perfect and maintain Lender's security
interest in the Collateral, or in order to exercise a right of Borrower or
Agent, or in order to fully consummate all the transactions contemplated under
this Agreement, and all other present and future agreements; (b) Execute on
behalf of Borrower any document exercising, transferring or assigning any option
to purchase, sell or otherwise dispose of or to lease (as lessor or lessee) any
real or personal property which is part of Lender's Collateral or in which Agent
has an interest; (c) Execute on behalf of Borrower, any invoices relating to any
Receivable, any draft against any Account Debtor and any notice to any Account
Debtor, any proof of claim in bankruptcy, any Notice of Lien, claim of
mechanic's, materialman's or other Lien, or assignment or satisfaction of
mechanic's, materialman's or other Lien; (d) Take control in any manner of any
cash or non-cash items of payment or proceeds of Collateral; endorse the name of
Borrower upon any instruments, or documents, evidence of payment or Collateral
that may come into Lender's possession; (e) Endorse all checks and other forms
of remittances received by Agent; (f) Pay, contest or settle any Lien, charge,
encumbrance, security interest and adverse claim in or to any of the Collateral,
or any judgment based thereon, or otherwise take any action to terminate or
discharge the same; (g) Grant extensions of time to pay, compromise claims and
settle Receivables and General Intangibles for less than face value and execute
all releases and other documents in connection therewith; (h) Pay any sums
required on account of Borrower's taxes or to secure the release of any Liens
therefor, or both; (i) Settle and adjust, and give releases of, any insurance
claim that relates to any of the Collateral and obtain payment therefor; (j)
Instruct any third party having custody or control of any books or records
belonging to, or relating to, Borrower to give Agent the same rights of access
and other rights with respect thereto as Agent has under this Agreement; and (k)
Take any action or pay any sum required of Borrower pursuant to this Agreement
and any other present or future agreements. Any and all reasonable sums paid and
any and all reasonable costs, expenses, liabilities, obligations and attorneys'
fees incurred by Agent with respect to the foregoing shall be added to and
become part of the Obligations, and shall be payable on demand Agent may charge
the foregoing to Borrower's loan account and the foregoing shall thereafter bear
interest at the same rate applicable to the Receivable Loans. In no event shall
Lender's rights under the foregoing power of attorney or any of Lender's other
rights under this Agreement be deemed to indicate that Agent is in control of
the business, management or properties of Borrower.
7.5 Application of Proceeds. All proceeds realized as the result of any sale of
the Collateral shall be applied by Agent first to the reasonable costs,
expenses, liabilities, obligations and attorneys' fees incurred by Agent in the
exercise of its rights under this Agreement, second to the interest due upon any
of the Obligations, and third to the principal of the Obligations, in such order
as Agent shall determine in its sole discretion. Any surplus shall be paid to
Borrower or other persons legally entitled thereto; Borrower shall remain liable
to Agent for any deficiency. If Agent, in its sole discretion, directly or
indirectly enters into a deferred payment or other credit transaction with any
purchaser at any sale of Collateral, Agent shall have the option, exercisable at
any time, in its sole discretion, of either reducing the Obligations by the
principal amount of purchase price or deferring the reduction of the Obligations
until the actual receipt by Agent of the cash therefor.
7.6 Remedies Cumulative. In addition to the rights and remedies set forth in
this Agreement, Agent shall have all the other rights and remedies accorded a
secured party under the New York Uniform Commercial Code and under all other
applicable laws, and under any other instrument or agreement now or in the
future entered into between Agent and Borrower, and all of such rights and
remedies are cumulative and none is exclusive. Exercise or partial exercise by
Agent of one or more of its rights or remedies shall not be deemed an election,
nor bar Agent from subsequent exercise or partial exercise of any other rights
or remedies. The failure or delay of Agent to exercise any rights or remedies
shall not operate as a waiver thereof; but all rights and remedies shall
continue in full force and effect until all of the Obligations have been fully
paid and performed.
7.7 Right of First Refusal. The Borrower shall not, directly or indirectly,
without the prior written consent of the Agent, offer, sell, grant any option to
purchase, or otherwise dispose of (or announce any offer, sale, grant or any
option to purchase or other disposition ) of any of its equity or
equity-convertible securities in a transaction intended to be exempt or not
subject to registration under the Securities Act of 1933, as amended or place
any senior or subordinated debt ("Placement") for a period of 180 days after the
Closing Date, except (i) the granting of options granted under any stock option
plan heretofore or hereafter duly adopted by the Company; (ii) shares of Common
Stock issued upon exercise of any currently outstanding warrants and upon
conversion of any currently outstanding convertible securities of the Borrower;
(iii) securities which may be issued in connection with a joint venture or
strategic alliance, unless Borrower deliver to Agent a written notice of its
intention which shall describe in reasonable detail the terms proposes, the
amount and the person with whom intended to be affected an attaching a term
sheet relating thereto and Agent shall have not have notified Borrower within 30
days of its receipt of notice that it desires to seek to obtain a comparable
lender or investor on substantially the same terms and conditions as set forth
in such notice. If Lender's shall fail to notify the Borrower of its intention
to enter into such negotiations, Borrower shall be free to effect such
transaction for a period of 45 days thereafter after which time Borrower shall
be required to provide additional notification as provided herein.
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8. DEFINITIONS. As used in this Agreement, the following terms have the
following meanings:
"Advances" has the meaning set forth in Section 1.1.1 hereof.
"Lender" means that lender or lenders designated as Lenders set forth on the
Schedule hereto as the Lender or Lenders.
"Account Debtor" means the obligor on a Receivable.
'Affiliate" means, with respect to any Person, a relative, parent, shareholder,
director, officer, or employee of such Person, or any parent or subsidiary of
such Person, or any Person controlling, controlled by or under common control
with such Person.
"Advances" has the meaning set forth in Section 1.1 hereof.
"Business Day" means a day on which Agent is open for business.
"Closing Date " means April 28, 1999 or such later date as the closing of the
loan shall occur.
"Code" means the Uniform Commercial Code as adopted and in effect in the State
of New York from time to time.
"Collateral' has the meaning set forth in Section 2.1 above.
"Default" means any event which with notice or passage of time or both, would
constitute an Event of Default.
"Deposit Account" has the meaning set forth in Section 9105 of the Code.
"Eligible Inventory" means Inventory which Lenders, in its sole judgment, deems
eligible for borrowing, based on such considerations as Lenders may from time to
time deem appropriate. Without limiting the fact that the determination of which
Inventory is eligible for borrowing is a matter of Lender's discretion (which
may be fixed and revised from time to time in the sole discretion of Lenders)
Inventory which does not meet the following requirements will not be deemed to
be Eligible Inventory: Inventory which (i) consists of finished goods or raw
material, in good, new and salable condition which is not perishable, not
obsolete or unmerchantable, and is not comprised of work in process, packaging
materials or supplies; (ii) meets all applicable governmental standards; (iii)
has been manufactured in compliance with the Fair Labor Standards Act; (iv)
conforms in all respects to the warranties and representations set forth in this
Agreement; (v) is at all times subject to Lender's duly perfected, first
priority security interest; (vi) is situated at a one of the locations set forth
on the Schedule; and (vii) has not been consigned.
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"Eligible Receivables" means Receivables arising in the ordinary course of
Borrower's business from the sale of goods, rendition of services or royalty
payments arising from licensing agreements of Borrower to the extent
specifically approved by Lenders in writing from time to time, which Lenders, in
its good faith business judgment, shall deem eligible for borrowing, based on
such considerations as Lenders may from time to time deem appropriate. Without
limiting the fact that the determination of which Receivable is eligible for
borrowing is a matter of Lender's discretion (which may be fixed and revised
from time to time in the sole discretion of Lenders) Receivables which do not
meet the following requirements will not be deemed to be Eligible Receivables:
Receivables which (i) arise in the ordinary course of business; (ii) all
payments due on the Receivable have been invoiced (and the underlying goods have
been shipped and the payment due on the Receivable is not more than 90 days past
the original invoice date which date has not been extended (iii) the payments
due on more than 50% of all Receivables from the same customer are less than 90
days past the original invoice date; (iv) the Receivable arose from a completed,
outright and lawful sale of goods, to which title has passed to the customer, by
or on behalf of Borrower; (v) the Receivable is in full conformity with the
representations and warranties made by the Borrower to Lenders and is free and
clear of all security interests and Liens of any nature whatsoever other than
any security interest deemed to be held by Lenders or Borrower or Permitted
Liens; (vi) the Receivable constitutes an "account" or "chattel paper" within
the meaning of the Uniform Commercial Code of the state in which the Receivable
is located; (vii) the customer has not asserted that the Receivable, and
Borrower is not aware that the Receivable (a) arises out of a bill and hold,
consignment or progress billing arrangement or (b) is subject to any setoff,
contras, net-out contract, offset, deduction, dispute, credit, counterclaim or
other defense arising out of the transactions represented by the receivable or
independent thereof and if the customer has not finally accepted the goods form
the sale out of which the Receivable arose, the Borrower is not aware that the
customer has objected to its liability thereon or returned, rejected or
repossessed any of such goods, except for complaints made or goods returned in
the ordinary course of business for which goods of equal or greater value have
been shipped in return; (viii) the customer is not (A) the United States
Government or the government of any state or political subdivision thereof, or
any agency or department of any thereof or (B) an Affiliate of the borrower;
(ix) the customer is a United States Person or an obligor in the United States
or, if the customer is not such a person, the Borrower has purchased insurance
in form and amounts satisfactory to Lenders or a letter of credit acceptable to
Lenders has been collaterally assigned to Lenders; (x) the Receivable complies
with all material requirements of all applicable laws and regulations, whether
Federal, state or local (including, without limitation, usury laws and laws,
rules and regulations relating to truth in lending, fair credit billing, fair
credit reporting, equal credit opportunity, fair debt collection practices and
privacy); (xi) the receivable has not been and is not required to be charged off
or written off as uncollectable in accordance with GAAP or the customary
business practices of the Borrower; (x) Lenders possesses a valid, perfected
first priority security interest in such Receivable as security for payment of
the Loans; and (xii) Lenders is satisfied with the credit standing of the
customer in relation to the amount of credit extended.
"Equipment" means all of Borrower's present and hereafter acquired machinery,
molds, machine tools, motors, furniture, equipment, furnishings, fixtures, trade
fixtures, motor vehicles, tools, parts, dyes, jigs, goods and other tangible
personal property (other than Inventory) of every kind and description used in
Borrower's operations or owned by Borrower and any interest in any of the
foregoing, and all attachments, accessories, accessions, replacements,
substitutions, additions or improvements to any of the foregoing, wherever
located.
"EST" means Eastern Standard Time.
"Event of Default" means any of the events set forth in Section 7.1 of this
Agreement.
"Facility" means the Loan as described herein and on the Schedule hereto.
"General Intangibles" means all general intangibles of Borrower, whether now
owned or hereafter created or acquired by Borrower, including, without
limitation, all choses in action, causes of action, corporate or other business
records, Deposit Accounts, inventions, designs, drawings, blueprints, patents,
patent applications, trademarks and the goodwill of the business symbolized
thereby, names, trade names, trade secrets, goodwill, copyrights, registrations,
licenses, franchises, customer lists, security and other deposits, rights in all
litigation presently or hereafter pending for any cause or claim (whether in
contract, tort or otherwise), and all judgments now or hereafter arising
therefrom, all claims of Borrower against Lenders, rights to purchase or sell
real or personal property, rights as a licensor or licensee of any kind,
royalties, telephone numbers, proprietary information, purchase orders, and all
insurance policies and claims (including without limitation life insurance, key
man insurance, credit insurance, liability insurance, property insurance and
other insurance, tax refunds and claims, computer programs, discs, tapes and
tape files, claims under guaranties, security interests or other security held
by or granted to Borrower, all rights to indemnification and all other
intangible property of every kind and nature (other than Receivables).
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"Inventory" means all of Borrower's now owned and hereafter acquired goods,
merchandise or other personal property, wherever located, to be finished under
any contract of service or held for sale or lease (including without limitation
all raw materials, work in process, finished goods and goods in transit, and
including without limitation all farm products), and all materials and supplies
of every kind, nature and description which are or might be used or consumed in
Borrower's business or used in connection with the manufacture, packing,
shipping, advertising, selling or finishing of such goods, merchandise or other
personal property, and all warehouse receipts, documents of tide and other
documents representing any of the foregoing.
"Loan Documents" means this Agreement and all schedules, documents, agreements,
certificates and consents required in connection herewith.
"Liens" means, with respect to any asset, (i) any mortgage, lien pledge,
encumbrance, charge or security interest in or on such asset, (ii) the interest
of a vendor or a lessor under any conditional sale agreement, capital lease or
other title retention agreement relating to such asset, (iii) in the case of
securities, any purchase option, call or similar right or a third party with
respect to such securities or (iv) any other right of or arrangement with any
creditor to have such creditor's claim satisfied out of such assets or the
proceeds therefrom, prior to the general creditors of the owner thereof.
"Maximum Dollar Amount" has the meaning set forth in Section 1 of the Schedule.
"Obligations" means all present and future Loans, advances, debts, liabilities,
obligations, guaranties, covenants, duties and indebtedness at any time owing by
Borrower to Lenders, whether evidenced by this Agreement or any note or other
instrument or document, whether arising from an extension of credit, opening of
a letter of credit, banker's acceptance, loan, guaranty, indemnification or
otherwise, whether direct or indirect (including, without limitation, those
acquired by assignment and any participation by Lenders in Borrower's debts
owing to others), absolute or contingent, due or to become due, including,
without limitation, all interest, charges, expenses, fees, attorney's fees,
expert witness fees, audit fees, letter of credit fees, collateral monitoring
fees, closing fees, facility fees, termination fees, minimum interest charges
and any other sums chargeable to Borrower under this Agreement or under any
other present or future instrument or agreement between Borrower and Lenders.
"Permitted Liens" means the following: (i) purchase money security interests in
specific items of Equipment; (ii) leases of specific items of Equipment; (iii)
Liens for taxes not yet payable; (iv) additional security interests and Liens
consented to in writing by Lenders, which consent shall not be unreasonably
withheld; (v) security interests being terminated substantially concurrently
with this Agreement; (vi) Liens of materialmen, mechanics, warehousemen,
carriers, or. other similar Liens arising in the ordinary course of business and
securing obligations which are not delinquent; (vii) Liens incurred in
connection with the extension, renewal or refinancing of the indebtedness
secured by Liens of the type described above in clauses (i) or (ii) above,
provided that any extension, renewal or replacement Lien is limited to the
property encumbered by the existing Lien and the principal amount of the
indebtedness being extended, renewed or refinanced does not increase; (viii)
Liens in favor of customs and revenue authorities which secure payment of
customs duties in connection with the importation of goods; and (ix) Liens and
obligations in favor of Lenders. Lenders will have the right to require, as a
condition to its consent under subparagraph (iv) above, that the holder of the
additional security interest or Lien sign an intercreditor agreement on Lender's
then standard form, acknowledge that the security interest is subordinate to the
security interest in favor of Lenders, and agree not to take any action to
enforce its subordinate security interest so long as any Obligations remain
outstanding, and that Borrower agree that any uncured default in any obligation
secured by the subordinate security interest shall also constitute an Event of
Default under this Agreement.
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"Person" means any individual, sole proprietorship, partnership, joint venture,
trust, unincorporated organization, association, corporation, government, or any
agency or political division thereof, or any other entity.
"Receivables" means all of Borrower's now owned and hereafter acquired accounts
(whether or not earned by performance), royalty payments arising from Borrower's
licensing agreements, letters of credit, contract rights, chattel paper,
installments, securities, documents and all other forms of obligations at any
time owing to Borrower, all guaranties and other security therefor, all
merchandise returned to or repossessed by Borrower, and all rights of stoppage
in transit and all other rights or remedies of an unpaid vendor, lienor or
secured party.
"Solvent" means (i) the fair value of Borrower's assets (both at fair valuation
and at present fair salable value) is in excess of the total amount of
Borrower's liabilities, including, without limitation, contingent liabilities;
and (ii) Borrower is then able and expects to be able to pay its debts as they
mature (taking into account the timing and amounts of cash to be received and
the amounts to be payable on or in respect of its debts), and (iii) Borrower has
capital sufficient to carry on its business as presently conducted and as
proposed to be conducted.
"Termination Date" means the date set forth on the Schedule hereto as the
Termination Date or Maturity Date .
Other Terms. All accounting terms used in this Agreement, unless otherwise
indicated, shall have the meanings given to such terms in accordance with
generally accepted accounting principles, consistently applied. All other terms
contained in this Agreement, unless otherwise indicated, shall have the meanings
provided by the Code, to the extent such terms are defined therein.
9. GENERAL PROVISIONS.
9.1 Interest Computation. In computing interest on the Obligations, all checks,
wire transfers and other items of payment received by Lenders (including
proceeds of Receivables and payment of the Obligations in full) shall be deemed
applied by Lenders on account of the Obligations three Business Days after
receipt by Lenders of immediately available funds, and, for purposes of the
foregoing, any such funds received after 10:30 AM EST on any day shall be deemed
received on the next Business Day. Lenders shall not, however, be required to
credit Borrower's account for the amount of any item of payment which is
unsatisfactory to Lenders in its sole discretion, and Lenders may charge
Borrower's loan account for the amount of any item of payment which is returned
to Lenders unpaid. In the event any Default results in an increase in the
interest rate calculable hereunder, such increase shall be adjusted if required
so that the rate as so adjusted shall not exceed the maximum rate permitted by
applicable law.
9.2 Application of Payments. All payments with respect to the Obligations may be
applied, and in Lender's sole discretion reversed and re-applied, to the
Obligations, in such order and manner as Lenders shall determine in its sole
discretion.
9.3 Charges to Accounts. Lenders may, in its discretion, require that Borrower
pay monetary Obligations in cash to Lenders, or charge them to Borrower's Loan
account, in which event they will bear interest at the same rate applicable to
the Loans. Lenders may also, in its discretion, charge any monetary Obligations
to Borrower's Deposit Accounts maintained with Lenders.
9.4 Monthly Accountings. Lenders shall provide Borrower monthly with an account
of advances, charges, expenses and payments made pursuant to this Agreement.
Such account shall be deemed correct, accurate and binding on Borrower and an
account stated (except for reverses and reapplications of payments made and
corrections of errors discovered by Lenders), unless Borrower notifies Lenders
in writing to the contrary within thirty days after each account is rendered,
describing the nature of any alleged errors or admissions.
9.5 Notices. All notices to be given under this Agreement shall be in writing
and shall be given either personally or by reputable private delivery service or
by regular first-class mail, or certified mail return receipt requested,
addressed to Agent or Lenders and to Borrower at the addresses shown in the
heading to this Agreement, or at any other address designated in writing by one
party to the other party. Notices to Lenders shall be directed to the attention
of Philip A. Newman, President. All notices shall be deemed to have been given
upon delivery in the case of notices personally delivered, or at the expiration
of one Business Day following delivery to the private delivery or overnight
service, or two Business Days following the deposit thereof in the United States
mail, with postage prepaid.
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9.6 Severability. Should any provision of this Agreement be held by any court of
competent jurisdiction to be void or unenforceable, such defect shall not affect
the remainder of this Agreement, which shall continue in full force and effect.
9.7 Integration. This Agreement and such other written agreements, documents and
instruments as may be executed in connection herewith are the final, entire and
complete agreement between Borrower and Lenders and supersede all prior and
contemporaneous negotiations and oral representations and agreements, all of
which are merged and integrated in this Agreement. There are no oral
understandings representations or agreements between the Parties which are not
set forth in this Agreement.
9.8 Waivers. The failure of Lenders at any time or times to require Borrower to
strictly comply with any of the provisions of this Agreement or any other
present or future agreement between Borrower and Lenders shall not waive or
diminish any right of Lenders later to demand and receive strict compliance
therewith. Any waiver of any default shall not waive or affect any other
default, whether prior or subsequent, and whether or not similar. None of the
provisions of this Agreement or any other agreement now or in the future
executed by Borrower and delivered to Lenders shall be deemed to have been
waived by any act or knowledge of Lenders or its agents or employees, but only
by a specific written waiver signed by an authorized officer of Lenders and
delivered to Borrower. Borrower waives demand, protest, notice of protest and
notice of default or dishonor, notice of payment and nonpayment, release,
compromise, settlement, extension or renewal of any commercial paper,
instrument, account, General Intangible, document or guaranty at any time held
by Lenders on which Borrower is or may in any way be liable, and notice of any
action taken by Lenders, unless expressly required by this Agreement.
9.9 No Liability for Ordinary Negligence. Neither Lenders, nor any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Lenders shall be liable for any claims, demands, losses or
damages, of any kind whatsoever, made, claimed, incurred or suffered by Borrower
or any other party through the ordinary negligence of Lenders, or any of its
directors, officers, employees, agents, attorneys or any other Person affiliated
with or representing Lenders, but nothing herein shall relieve Lenders from
liability for its own gross negligence or willful misconduct.
9.10 Amendment. The terms and provisions of this Agreement may not be waived or
amended, except in a writing executed by Borrower and a duly authorized officer
of Lenders.
9.11 Time of Essence. Time is of the essence in the performance by Borrower of
each and every obligation under this Agreement.
9.12 Attorneys Fees, Costs and Charges. Borrower shall reimburse Lenders for all
reasonable attorneys' fees and all filing, recording, search, title insurance,
appraisal, audit, and other reasonable costs incurred by Lenders, pursuant to,
or in connection with, or relating to this Agreement (whether or not a lawsuit
is filed), including, but not limited to, any reasonable attorneys' fees and
costs Lenders incurs in order to do the following: prepare and negotiate this
Agreement and the documents relating to this Agreement; obtain legal advice in
connection with this Agreement or Borrower; enforce, or seek to enforce, any of
its rights; prosecute actions against, or defend actions by, Account Debtors;
commence, intervene in, or defend any action or proceeding; initiate any
complaint to be relieved of the automatic stay in bankruptcy; file or prosecute
any probate claim, bankruptcy claim, third-party claim, or other claim; examine,
audit, copy, and inspect any of the Collateral or any of Borrower's books and
records; protect, obtain possession of, lease, dispose of, or otherwise enforce
Lender's security interest in, the Collateral; and otherwise represent Lenders
in any litigation relating to Borrower. If either Lenders or Borrower files any
lawsuit against the other predicated on a breach of this Agreement, the
prevailing party in such action shall be entitled to recover its reasonable
costs and attorneys' fees, including but not limited to, reasonable attorneys'
fees and costs incurred in the enforcement of, execution upon or defense of any
order, decree, award or judgment. Borrower shall also pay Lender's standard
charges for returned checks and for wire transfers, in effect from time to time.
All attorneys' fees, costs and charges to which Lenders may be entitled pursuant
to this Paragraph may be charged by Lenders to Borrower's loan account and shall
thereafter bear interest at the same rate as the Receivable Loans.
Page 17
<PAGE>
9.13 Benefit of Agreement. The provisions of this Agreement shall be binding
upon and inure to the benefit of the respective successors, assigns, heirs,
beneficiaries and representatives of Borrower and Lenders, provided, however,
that Borrower may not assign or transfer any of its rights under this Agreement
without the prior written consent of Lenders, and any prohibited assignment
shall be void. No consent by Lenders to any assignment shall release Borrower
from its liability for the Obligations. This Agreement and the duties and
obligations contained herein shall be solely for the benefit of the parties
hereto and no third party beneficiary shall have any rights hereunder as a third
party beneficiary or otherwise.
9.14 Joint and Several Liability. If Borrower consists of more than one Person,
their liability shall be joint and several, and the compromise of any claim
with, or the release of; any Borrower shall not constitute a compromise with, or
a release of, any other Borrower.
9.15 Limitation of Actions. Any claim or cause of action by Borrower against
Lenders, its directors, officers, employees, agents, accountants or attorneys,
based upon, arising from, or relating to this Loan Agreement, or any other
present or future document or agreement, or any other transaction contemplated
hereby or thereby or relating hereto or thereto, or any other matter, cause or
thing whatsoever, occurred, done, omitted or suffered to be done by Lenders, its
directors, officers, employees, agents, accountants or attorneys, shall be
barred unless asserted by Borrower by the commencement of an action or
proceeding in a court of competent jurisdiction by the filing of a complaint
within one year after the first act, occurrence or omission upon which such
claim or cause of action, or any part thereof; is based, and the service of a
summons and complaint on an officer of Lenders, or on any other person
authorized to accept service on behalf of Lenders, within thirty (30) days
thereafter. Borrower agrees that such one-year period is a reasonable and
sufficient time for Borrower to investigate and act upon any such claim or cause
of action. The one-year period provided herein shall not be waived, tolled, or
extended except by the written consent of Lenders in its sole discretion. This
provision shall survive any termination of this Loan Agreement or any other
present or future agreement.
9.16 Paragraph Headings; Construction. Paragraph headings are only used in this
Agreement for convenience. Borrower and Lenders acknowledge that the headings
may not describe completely the subject matter of the applicable paragraph, and
the headings shall not be used in any manner to construe, limit, define or
interpret any term or provision of this Agreement. The term "including",
whenever used in this Agreement, shall mean "including but not limited to". This
Agreement has been fully reviewed and negotiated between the parties and no
uncertainty or ambiguity in any term or provision of this Agreement shall be
construed strictly against Lenders or Borrower under any rule of construction or
otherwise.
9.17 Mutual Waiver of Jury Trial. BORROWER AND LENDERS EACH HEREBY WAIVE THE
RIGHT TO TRIAL BY JURY IN ANY ACTION OR PROCEEDING BASED UPON, ARISING OUT OF,
OR IN ANY WAY RELATING TO, THIS AGREEMENT OR ANY OTHER PRESENT OR FUTURE
INSTRUMENT OR AGREEMENT BETWEEN LENDERS AND BORROWER, OR ANY CONDUCT, ACTS OR
OMISSIONS OF LENDERS OR BORROWER OR ANY OF THEIR DIRECTORS, OFFICERS, EMPLOYEES,
AGENTS, ATTORNEYS OR ANY OTHER PERSONS AFFILIATED WITH LENDERS OR BORROWER, IN
ALL OF THE FOREGOING CASES, WHETHER SOUNDING IN CONTRACT OR TORT OR OTHERWISE.
10 THE AGENT AND CO-AGENTS
Authorization and Action. Each Lender hereby appoints and authorizes the Agent
and the Co-Agents, respectively, to take such action as agent on its behalf and
to exercise such powers and discretion under the Loan as are delegated to the
Agent and the Co-Agents, respectively, by the terms hereof, together with such
powers as are reasonably incidental thereto. As to any matters not expressly
provided for by the Loan documents (including, without limitation, enforcement
or collection of the debt resulting from the advances), neither the Agent nor
the Co-Agents shall be required to exercise any discretion or take any action,
but shall be required to act or to refrain from acting (and shall be fully
protected in so acting or refraining from acting) upon the instruction of the
Majority Lenders, and such instructions shall be binding upon all Lenders;
provided, however, that neither the Agent nor the Co-Agents shall be required to
take any action which exposes any of them to liability or which is contrary to
any Loan document or applicable law.
Page 18
<PAGE>
Without limitation of the foregoing, if the Agent receives funds for application
to the Advances in circumstances under which the Loan documents do not specify
the Advances or the Facility to which such funds are to be applied, the Agent
may elect to distribute such Advances to each Lender ratably in accordance with
such Lender's proportionate share of all outstanding Advances, in payment or
prepayment of such of the outstanding Advances of such Lender as the Agent shall
direct or in reduction of the Facility B Loan first.
Reliance. Neither the Agent nor any of the Co-Agents or any of their respective
directors, officers, agents, attorneys or employees shall be liable for any
action taken or omitted to be taken by it or them under or in connection with
any Loan documents, except for its or their own gross negligence or willful
misconduct. Without limitation of the generality of the foregoing, the Agent and
the Co-Agents: (i) may treat the Lender which made any Advances as the holder of
the Debt resulting therefrom until the Agent receives and accepts an Assignment
and Acceptance entered into by such Lender, as assignor, and an Eligible
Assignee, as assignee; (ii) may consult with legal counsel (including counsel
for the Borrower) independent public accountants and other experts selected by
the Agent or the Co-Agents and shall not be liable for any action taken or
omitted to be taken in good faith by them in accordance with the advice of such
counsel, accountants or experts; (iii) make no warranty or representation to any
Lender and shall not be responsible to any Lender for any statements, warranties
or representations made in, or in connection with, any Loan document; (iv) shall
not have any duty to ascertain or to inquire as to the performance or observance
of any of the terms, covenants or conditions of any Loan document on the part of
the Borrower or any guarantor or to inspect the property (including the books
and records) of the Borrower or any of its Subsidiaries; (v) shall not be
responsible' to any Lender for the due execution, legality, validity,
enforceability, genuineness, sufficiency or value of any Loan document or
collateral covered thereby or any other instrument or document furnished
pursuant thereto; and (vi) shall incur no liability under or in respect of any
Loan document by acting upon any notice, consent, certificate or other
instrument or writing (which may be by telegram, cable, telecopier or telex)
believed by the Agent or the Co-Agents as the case may be, to be genuine and
signed or sent by the proper party or parties.
Agent, Co-Agents and Affiliates. With respect to its Commitment and the Advances
made by it, the Agent and each Co-Agent shall have the same rights and powers
under the Loan documents as any other Lender and may exercise the same as though
it were not the Agent or a Co-Agent; and the term Lender or Lenders shall,
unless otherwise expressly indicated, include the Agent and each Co-Agent in its
individual capacity. The Agent and each Co-Agent and its affiliates may accept
deposits from, lend money to, act as trustee under indentures of, and generally
engage in any kind of business with the Borrower and any of its subsidiaries and
any person who may do business with or own securities of the Borrower or any
such subsidiary, all as if the Agent or each Co-Agent were not the Agent or a
Co-Agent and without any duty to account therefor to the Lenders.
Page 19
<PAGE>
Lender Credit Decision. Each Lender acknowledges that it has, independently and
without reliance upon the Agent or any Co-Agent or any other Lender and based on
the financial and such other documents and information as it has deemed
appropriate, made its own credit analysis and decision to enter into this
Agreement. Each Lender also acknowledges that it will, independently and without
reliance upon the Agent or any Co-Agent or any other Lender and based on such
documents and information as it shall deem appropriate at the time, continue to
make its own credit decisions in taking or not taking action under this
Agreement and the other Loan Documents.
Indemnification. The Lenders agree to indemnify the Agent and each Co-Agent (to
the extent not reimbursed by the Borrower), ratably according to the respective
principal amounts of the Advances then owing to each of them (or if no Advances
are at the time outstanding or if any Advances are then owing to Persons which
are not Lenders, ratably according to the respective amounts of their
Commitments), from and against any and all liabilities, obligations, losses,
damages, penalties1 actions, judgments, suits, costs, expenses or disbursements
of any kind or nature whatsoever which may be imposed on, incurred by, or
asserted against the Agent or such Co-Agent in any way relating to or arising
out of the Loan documents or any action taken or omitted by the Agent or such
Co-Agent under any Loan document1 provided that no Lender shall be liable for
any portion of such liabilities, obligations, losses, damages, penalties,
actions, judgments, suits, costs, expenses or disbursements resulting from the
Agent's or a Co-Agent's gross negligence or willful misconduct as determined by
a final judgment of a court of competent jurisdiction. Without limitation of the
foregoing, each Lender agrees to reimburse the Agent and each Co-Agent promptly
upon demand for its ratable share of any out-of-pocket expenses (including
counsel fees) incurred by the Agent or such Co-Agent in connection with the
preparation, execution, delivery, administration, modification, amendment or
enforcement (whether through negotiations, legal proceedings or otherwise) of,
or legal advice in respect of rights or responsibilities under, the Loan
documents, or any of them, to the extent that the Agent or such Co-Agent is not
reimbursed for such expenses by the Borrower.
Successor Administrative Agent or Co-Agents. The Agent and any Co-Agent. may
resign at any time as Agent or Co-Agent, as the case may be, under the Loan
documents by giving written notice thereof to the Lenders and the Borrower and
may be removed as Agent or Co-Agent, as the case may be, under the Loan
documents at any time with cause by the Majority Lenders. Upon any such
resignation or removal, the Majority Lenders shall have the right to appoint a
successor Agent or Co-Agent, as the case may be, under the Loan Documents. If no
successor Agent or Co-Agent, as the case may be, shall have been so appointed by
the Majority Lenders, and shall have accepted such appointment, within 30 days
after the retiring Agent's or the Co-Agent's giving of notice of resignation or
the Majority Lenders' removal of the retiring Agent or Co-Agent, then the
retiring Agent or Co-Agent may, on behalf of the Lenders, appoint a successor
Agent or Co-Agent, as the case may be, which shall be a commercial bank
organized under the laws of the United States of America or any State thereof
and having a combined capital and surplus of at least $500,000,000. Upon the
acceptance of any appointment as Agent or Co-Agent, as the case may be, under
the Loan documents by a successor Agent or Co-Agent, as the case may be, such
successor Agent or Co-Agent shall thereupon succeed to and become vested with
all the rights, powers, privileges and duties of the retiring Agent or Co-Agent,
as the case may be, and the retiring Agent or Co-Agent shall be discharged from
its duties and obligations under the Loan Documents. After any retiring Agent's
or Co-Agent's resignation or removal under the Loan documents, the provisions of
this Article shall inure to its benefit as to any actions taken or omitted to be
taken by it while it was Agent or co-Agent, as the case may be, under the Loan
documents.
Page 20
<PAGE>
Majority Lender. As used herein, "Majority Lenders" means, at any time, Lenders
holding at least 51% of the sum of (a) the then aggregate unpaid principal
amount of all outstanding advances and (b) the then aggregate unused amount of
the commitments.
Collateral Holder. (a) Except for action expressly required of the Collateral
holder hereunder and under the Collateral documents, the Collateral holder shall
in all cases be fully justified in refusing to act hereunder and thereunder
unless it shall be further indemnified to its satisfaction by the Lenders,
proportionately in accordance with the Obligations then due and payable to each
of them against any and all liability and expense that may be incurred by it by
reason taking or continuing to take any such action.
(b) Except as expressly provided herein, the Collateral holder shall have no
duty to take any affirmative steps with respect to the collection of amounts
payable in respect of the Collateral. The Collateral holder shall incur no
liability as a result of any private sale of the Collateral.
(c) The Lenders hereby consent, and agree upon written request by the Collateral
holder to execute and deliver such instruments and other documents as the
Collateral holder may deem desirable to confirm such consent, to the release of
the liens and security interests in the Collateral, including any release in
connection with any sale, transfer or other disposition of the Collateral or any
part thereof in accordance with the Loan documents.
(d) The Collateral holder shall be deemed to have exercised reasonable care in
the custody and preservation of the Collateral. in its possession if the
Collateral is accorded treatment substantially equal to that which the
Collateral holder accords its own property, it being understood that none of the
Collateral holder, any Lender shall have responsibility for (a) ascertaining or
taking action with respect to calls, conversions, exchanges, maturities, tenders
or other matters relative to any Collateral, whether or not the Collateral
holder or any has or is deemed to have knowledge of such matters, or (b) taking
any necessary steps to preserve rights against any parties with respect to any
Collateral.
Page 21
<PAGE>
AGENT:
ADVISCO CAPITAL CORP.
By: /s/ Philip A. Newman
-------------------------------------
Name: Philip A. Newman, President
BORROWER:
INTELLIGENT MEDICAL IMAGING, INC.
By: /s/ Tyce Fitzmorris
-------------------------------------
Name: Tyce Fitzmorris, President
LENDERS:
ADVISCO CAPITAL CORP.
By: /s/ Philip A. Newman
-------------------------------------
Name: Philip A. Newman, President
<PAGE>
EXHIBIT A TO THE
CREDIT AGREEMENT
FORM OF NOTICE OF BORROWING
Date:
Advisco Capital Corp., as Administrative Agent for the Lenders parties to the
Credit Agreement referred to below
210 East 49th Street
Fourth Floor
New York, NY 10017
Gentlemen:
The undersigned refers to the Credit Agreement, dated as of
April __, 1999 among the Agent, certain Lenders named thereto, and Borrower (the
"Credit Agreement", the terms defined therein being used herein as therein
defined), and hereby gives you notice, irrevocably, pursuant to Section 1.4. of
the Credit Agreement that the undersigned hereby requests a Borrowing under the
Credit Agreement, and in that connection sets forth below the information
relating to such Borrowing (the Proposed B Borrowing as required by Section
1.4.1 (b) of the Credit Agreement:
(i) The Business Day of the Proposed Borrowing is _________, l999.
(ii) The aggregate amount of the Proposed Borrowing is $___________
(iii) The Advances comprising the Proposed Borrowing are required
for purposes permitted under the Credit Agreement and pursuant
to documentation attached hereto.
(iv) Attached hereto is a true and correct copy of a purchase
order, equipment, inventory list, receivable aging or other
permitted basis pursuant to which this Borrowing Notice
relates.
The undersigned hereby certifies that the following statements are true on the
date hereof, and will be true on the date of the Proposed Borrowing, before and
after giving effect to such Proposed Borrowing and to the application of the
proceeds therefrom as though made on and as of such date:
(A) the representations and warranties of the Borrower contained
herein, or made in connection with, the Loan Documents and the
Related Documents to which it is, or will be, a party are true
and correct in all material respects; and
(B) no event has occurred and is continuing, or would result from
such Proposed Borrowing or from the application of the
proceeds therefrom, which constitutes a Default or and Event
of Default.
(C) no Collateral underlying the Loan for which the Borrowing has
been requested has heretofore been mortgaged, pledged, liened
or assigned to any third party, and Lender shall continue to
have a perfected first priority security interest in all
orders, equipment, inventory, receivables, proceeds and other
items the subject of this request and pursuant to the Loan
Agreement.
I HEREBY CERTIFY THE FOREGOING TO BE TRUE AND CORRECT:
-----------------------
By: Tyce Fitzmorris
Title: President
<PAGE>
EXHIBIT B
FORM OF REVOLVING CREDIT NOTE
$2,000,000 APRIL --,1999
FOR VALUE RECEIVED, the undersigned, Intelligent Medical Imaging, Inc., a
Florida corporation ("the "Borrower"), hereby promise to pay to the order of
Advisco Capital Corporation (the "Lender") at the office of the Lender, 210 East
49th Street, Fourth Floor, New York, NY 10017, ATT: Philip A. Newman on the
Termination Date as defined in the Loan and Security Agreement dated as of April
__, 1999, among the Agent, Borrower, and the Lenders named therein (as the same
may be amended, modified or supplemented from time to time in accordance with
its terms, the "Credit Agreement ") or earlier as provided for in the Credit
Agreement, the lesser of the principal sum of two million dollars and no cents
($2,000,000) or the aggregate unpaid principal amount of all Loans to the
Borrower from the Lender pursuant to the terms of the Credit Agreement, in
lawful money of the United States of America in immediately available funds, and
to pay interest from the date hereof on the principal amount hereof from time to
time outstanding, in like funds, at said office, at a rate or rates per annum
and payable on such dates as determined pursuant to the terms of the Credit
Agreement.
The Makers promise to pay interest, on demand, on any overdue principal and fees
and, to the extent permitted by law, overdue interest from their due dates at a
rate or rates determined as set forth in the Credit Agreement.
The Makers hereby waive diligence, presentment, demand, protest and notice of
any kind whatsoever. The non-exercise by the holder of any of its rights
hereunder in any particular instance shall not constitute a waiver thereof in
that or any subsequent instance.
All borrowings evidenced by this Note and all payments and prepayments of
the principal hereof and interest hereon and the respective dates thereof shall
be endorsed by the holder hereof on the schedule attached hereto and made a part
hereof, or on a continuation thereof which shall be attached hereto and made a
part hereof, or otherwise recorded by such holder in its internal records;
provided, however, that the failure of the holder hereof to make such a notation
or any error in such a notation shall not in any manner affect the obligation of
the Makers to make payments of principal and interest in accordance with the
terms of this Note and the Credit Agreement.
This Note is one of the Notes referred to in the Credit Agreement, which, among
other things, contains provisions for the acceleration of the maturity hereof
upon the happening of certain events, for optional and mandatory prepayment of
the principal hereof prior to the maturity hereof and for the amendment or
waiver of certain provisions of the Credit Agreement, all upon the terms and
conditions therein specified. THIS NOTE SHALL BE CONSTRUED IN ACCORDANCE WITH
AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK (OTHER THAN THE CONFLICTS OF
LAWS PRINCIPLES THEREOF) AND ANY APPLICABLE LAWS OF THE UNITED STATES OF
AMERICA.
INTELLIGENT MEDICAL IMAGING INC
By
-----------------------------------
Name:
Title:
<PAGE>
ADVISCO CAPITAL CORP.
SCHEDULE TO LOAN AND SECURITY AGREEMENT
Borrower: Intelligent Medical Imaging, Inc.
Address: 4360 Northlake Boulevard
Palm Beach Gardens, Florida 33410
Date: April __, 1999
This Schedule forms an integral part of the Loan and Security Agreement (the
"Agreement") dated as of April __, 1999 between ADVISCO CAPITAL CORP. a New York
corporation, with offices at 210 East 49th Street, 4th Floor, New York, NY
10017, as agent for the Lenders (in such capacity, "Agent"), the lenders named
in this Schedule (collectively, the "Lenders") and the borrower(s) named above
(jointly and severally, the "Borrower"), whose chief executive office is located
at the above address ("Borrower's Address").
1. CREDIT LIMIT
(SECTION 1.1):
Name of Lender Facility Address
Advisco Capital Corp. ("Advisco") 2,000,000 210 East 49th Street
4th Floor
New York, NY 10017
Att: Philip A. Newman
ADVANCES SHALL BE SUBJECT TO THE FOLLOWING ADDITIONAL TERMS AND CONDITIONS:
Loans (secured bridge loan) in an amount not to exceed the lesser of (i) a total
of $2,000,000 at any one time outstanding (the "Maximum Dollar Amount"), or (ii)
the sum of (1), (2), (3) and (4) below;
(1) Loans (the "Receivable Loans") in an
amount up to 80% of the amount of Borrower's
domestic Eligible Receivables (as defined in
Section 8 of the Agreement), and up to 65% of
the amount of Borrower's selected foreign
Eligible Receivables which in no event are
more than 90 days old from original invoice
date. Without limiting the foregoing:
a. foreign Receivables may be considered
Eligible Receivables (subject to all of
the other criteria herein) if (i) the
Receivable is due from an account debtor
which has a verifiable credit history,
(ii) the account debtor is a foreign
subsidiary of a large United States
company with a demonstrated credit
history, (iii) the account debtor has a
Dun & Bradstreet rating of 3A2 or
better, (iv) the account is backed by a
letter of credit assigned to Lenders or
(v) the account is insured by insurance
acceptable to and assigned to Lenders,
but all such foreign accounts shall be
acceptable in the sole discretion of
Lenders, and;
b. Receivables owing from _______N/A_____
shall not be Eligible Receivables.
(2) Loans (the "Inventory Loans") in an
amount not to exceed the lesser of:
(a) up to 40% of eligible raw material
and 40% of eligible finished goods of
Borrower's Eligible Inventory (as
defined in Section 8 of the Agreement),
calculated at the lower of cost or
liquidation value and determined on a
first-in, first-out basis, or
(b) $1,000,000.
(3) Loans (the "Fixed Asset Loans") in an
amount not to exceed the lesser of 40%
of the orderly liquidation value of
tangible fixed assets, calculated at the
lower of cost or liquidation value.
Proceeds of all Loans shall be used solely and exclusively for the
completion of work in process inventory, creation of new HSM inventory and for
such other costs and expenses related to the foregoing as are approved by the
Lenders. Proceeds of the Loans may also be used for the payment of rent,
utilities and other costs and expenses as each are contained in an approved
budget submitted for approval and approved by Lenders in advance. Borrower shall
promptly following the Closing Date submit for approval its proposed
expenditures budget for the following month and shall thereafter update such
budget from time to time. Lender shall approve such budget or advise Borrower
that budget has not been approved promptly following receipt thereof.
Page 2
<PAGE>
2. INTEREST
INTEREST RATE
(SECTION 1.2):
FACILITY ADVANCES SHALL BE SUBJECT TO THE FOLLOWING ADDITIONAL TERMS AND
CONDITIONS:
A rate equal to one and one-quarter
percent (1.25%) per month of the
outstanding loan balance, payable
monthly in arrears.
One-half of one percent (0.5%) per
month, of the unused portion of the
Facility, payable monthly, in arrears.
2. FEES
(SECTION 1.3):
THE LOAN SHALL BE SUBJECT TO THE FOLLOWING ADDITIONAL TERMS AND CONDITIONS:
Commitment Fee: Upon the signing of the Committment,
$20,000.
Points: Three (3) points on the Facility amount
payable to Agent as follows: Two (2)
points payable to Agent upon signing of
the Loan Agreement (one Point of which
represents the Commitment Fee); the
balance on the Funding Date of the Loan.
In the event the Borrower elects not to
fund the loan for any reason whatsoever,
Agent shall be entitled to a fee of one
percent (1%) of the gross loan amount in
addition to the initial Commitment Fee
of $20,000.
Five year Warrants to purchase 100,000
shares of Common Stock of Borrower at
100% of the Fair Market Value thereof
(average of the average high and low
trading prices for the 5 trading days
immediately preceding the execution of
the Loan documents).
All fees shall be deemed earned on the
Closing Date.
Page 3
<PAGE>
Administrative Fee: None.
Early Termination Fee
(Section 6.2): None.
4. MATURITY DATE
(SECTION 6.1):
Twelve months following the Closing
Date.
5. REPORTING
(SECTION 5.3):
Borrower shall provide Agent with the
following:
1. Monthly Receivable aging, aged by
invoice date, within ten days after the
end of each month.
2. Monthly accounts payable aging, aged
by invoice date, and outstanding or held
check registers within ten days after
the end of each month.
3. Monthly perpetual inventory reports
for the Inventory valued on a first-in,
first-out basis at the lower of cost or
market (in accordance with generally
accepted accounting principles)
including, without limitation, a list of
consigned inventory by product, dollar
value and identity of the consignee, or
such other inventory reports as are
reasonably requested by Agent, all
within ten days after the end of each
month.
4. Monthly internally prepared financial
statements, as soon as available, and in
any event within thirty days after the
end of each month.
5. Quarterly financial statements
together with Borrower's IOQ filed with
the Securities and Exchange Commission ,
if prepared, as soon as available, and
in any event within forty five days
after the end of each fiscal quarter.
6. Quarterly customer lists, including
customer name, address, and phone
number.
7. Annual audited financial statements,
together with the Borrower's 10K filed
with the Securities & Exchange
Commission, if prepared, as soon as
available, and in any event within 90
days following the end of Borrower's
fiscal year, certified by independent
certified public accountants acceptable
to Agent.
Page 4
<PAGE>
8. Copies of all supply and distribution
contracts and all intellectual property
licensing contracts within 10 days after
Borrower's receipt thereof.
6. BORROWER INFORMATION:
Prior Names of Borrower
(Section 3.2): None
Prior Trade Names of Borrower
(Section 3.2): None
Existing Trade Names of Borrower
(Section 3.2): None
Other Locations and Addresses
(Section 3.3): No other domestic locations
Material Litigation
(Section 3.10): Diasys
Diasys Corporation (as described in From 10K for the year
ended 12/31/98)
Environmental Conditions
(Section 3.13): None.
Composition Agreements Required:
(Section 3.15): JNC Opportunity Fund Ltd. Convertible
Debenture due June 30, 2001. Waiver of
acceleration right and collection from
Borrower in event of default a long as
Obligations remain outstanding to
Lenders hereunder.
Secured Promissory Note ($178,280
original principal amount) due December
29, 1998 (Edwards & Angel LLP).
Secured Promissory Note ($257,213
original principal amount) due October
2, 1998 (Edwards & Angel LLP).
Permitted Liens:
Permitted Liens shall consist of
agreements with George Merkelson or
assignee with respect to equipment
purchase orders with BC Biomedical, UNC
and El Camino representing in total 3
HSM and 3 Micro 21 (200) machines to
which Lender consents.. Borrower shall
not request any advances from Lender
with respect to such agreements or
equipment or receivables resulting
therefrom. The proceeds of such sales
shall continue to constitute Collateral
hereunder.
Page 5
<PAGE>
7. OTHER CONDITIONS AND COVENANTS
(SECTION 5.1):
Without limiting any other term or condition herein, in no event shall Lenders
have any obligations under this Agreement, including without limitation to make
any Advances under the Agreement unless and until each of the following
conditions have been satisfied as of the Closing Date or such later date as a
borrowing notice for an advance is received:
a. Satisfactory completion of due
diligence, including financial review,
including but not limited to appraisals
of plant and equipment, audit of
accounts receivable, review of financial
statements, forecasts and projections;
valuation of intangibles and other due
diligence as deemed appropriate by
Agent.
b. Continuing accuracy of all
representations, warranties, covenants
and agreements.
c. Borrower shall provide evidence
satisfactory to Agent of settlement
and/or other agreements with secured
creditors and unsecured and trade
creditors, in a form satisfactory to
Agent. Agent shall provide assistance in
securing settlement of the secured
creditors claims and the trade debts.
d. Borrower shall provide Agent with
audited/certified financial statements
for the year ended December 31, 1998;
and quarterly financial statements
within forty-five (45) days of each
calendar quarter.
e. Borrower shall provide evidence of
hazard and liability insurance. The
insurance must be for an amount to be
determined prior to closing, from an
insurance carrier acceptable to Agent.
Page 6
<PAGE>
f. Borrower shall have incurred and
shall incur no additional debt without
the prior written approval of Agent,
except debts occurring in the ordinary
course of business.
g. There shall have been and shall be no
changes in senior management without the
written consent of Agent.
h. The loan shall be without cost to
Agent; Borrower assumes liability for
and will pay all reasonable costs and
expenses required to satisfy the
conditions hereof, and the making of the
loan.
i. Borrower shall have a minimum excess
lending availability of at least
$200,000 after accounting for Agent's
initial funding.
j. Omitted.
k. The Borrower shall have established a
lockbox in favor of Agent for the
collection of remittances. The Borrower
shall agree to procedures acceptable to
Lenders for collection and deposit of
funds to an account controlled by
Lenders which shall constitute Lender's
Collateral from which operating funds in
accordance with approved budgets will be
disbursed to Borrower from time to time
during all times that any Obligations
are owing to Lenders.
l. Agent shall have a first priority
lien on all assets of Borrower,
including, but not limited to account
receivable, inventory, work in process,
furniture, fixtures and office
equipment, real estate, if any, and all
other assets, both tangible and
intangible.
m. All taxes shall be currently paid.
n. Agent shall have received such
composition or subordinations
(standstills and collateral waivers) and
other documents, agreements and opinions
as may be required by Agent in form and
substance acceptable to Agent in its
sole discretion including, without
limitation, from JNC Opportunity Fund,
Ltd. and from Edwards & Angell LLP
Page 7
<PAGE>
o. Use of proceeds of the Loan shall be
limited to (a) purchase of parts and
labor to complete inventory to satisfy
pending purchase orders in hand on the
Closing Date ($ ______) ; (b) settlement
of unpaid vender claims ($_____); (c)
unpaid salary for terminated employees
($______) and (d) Fees and closing costs
($_____). Loan proceeds will be paid at
closing in accordance with the required
use of proceeds herein. Notwithstanding
the foregoing, no payments of expenses
or liabilities shall be made during the
time any Obligations are outstanding and
prior to termination of the Loan without
the prior consent of Lenders, such
consent to be evidenced by a written
approved budget or other written
acknowledgement that the Lender's have
determined the payment to be consistent
with the purposes of the Loan.
p. All documentation, including without
limitation, those relating to any
subordination, composition or deferral
agreements and convertible securities
shall be reasonably satisfactory to the
Agent.
q. The corporate and legal structure and
capitalization of the Borrower and its
subsidiaries, the terms and conditions
of all charters and bylaws of each
Borrower and its subsidiaries and all
agreements and instruments relating to
such structure and capitalization, and
the terms, conditions and amounts of all
capital stock of the Borrower shall be
satisfactory to the Agent.
r. All fees and expenses shall have been
paid, including the reasonable fees and
expenses of counsel to the Agent and
Lenders in connection with the
preparation, execution and delivery of
this Agreement, any other loan document
and the consummation of the transactions
contemplated hereby and thereby.
Page 8
<PAGE>
s. There shall have occurred no material
adverse change in the business,
condition (financial or otherwise),
performance, operations, properties or
prospects of any Borrower.
t. There shall exist no default or event
of default under any loan agreement to
which Borrower is a party, whether or
not subordinate to Lender's loan, and
the representations and warranties of
the Borrower therein and herein shall be
true and correct in all material
respects.
u. No change of control shall have
occurred or been proposed and Agent
shall be satisfied with the management
structure of Borrower in all respects,
including key personnel.
v. There shall be received: Notice of
Borrowing, executed security agreements,
acknowledgement of receipt copies of
proper Financing Statements (required or
desirable in the opinion of the Agent to
perfect the security interests and liens
in the Collateral), and evidence that
all other actions necessary or, in the
reasonable opinion of the Agent,
desirable or required to perfect and
protect the security interest and liens
have been taken, incumbency certificate
with certified copies of Board
resolutions approving the transactions
contemplated hereby, deeds of trust,
mortgages or similar documents, if
applicable, on Borrower's real property,
copies of all financial statements
certified by the chief financial officer
as well as all current financial
statements as filed with the SEC, a
favorable opinion of counsel acceptable
to Agent, in form and substance
satisfactory to Agent. in its sole
discretion, and such additional
documents or certificates as Agent may
reasonably require in order to certify
the continuing accuracy of the
representations, warranties and
continuing conformity with the
conditions of borrowing hereunder
Page 9
<PAGE>
w. Lender shall have no funding
obligation hereunder unless and until
composition agreements referred to
above, with acceptable modifications to
any security interests related thereto,
have been obtained and are in effect.
Borrower shall comply with the following additional covenants:
Borrower shall at all times have a
minimum Tangible Net Worth (as
determined by generally accepted
accounting principles) of _n/a___.
"Tangible Net Worth" shall mean as of
any particular date, consolidated
stockholders equity, plus subordinated
debt, if any, less goodwill, patents,
trademarks, copyrights, franchises,
formulas, leaseholds, non-compete
agreements, engineering plans, deferred
tax benefits and organization costs.
Borrower shall notify Agent in writing
of the expiration or termination of any
supply contract, distribution contract
or intellectual property licensing
contract, all within one business day
thereof.
<PAGE>
Permitted Liens shall include assignment
of Purchase Orders for two HSM machines
constituting work-in-process to George
Merkelson, or assignee, and the proceeds
therefrom in connection with an advance
of $200,000 to Borrower on such terms
and conditions as are acceptable to
Borrower and not in violation of any of
the terms of the Loan hereunder.
Borrower:
By:
--------------------------------
Name:
Agent:
ADVISCO CAPITAL CORP.
By:
---------------------------------
Name: Philip A. Newman, President
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> MAR-31-1999
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<SECURITIES> 0
<RECEIVABLES> 447,595
<ALLOWANCES> (40,346)
<INVENTORY> 3,176,291
<CURRENT-ASSETS> 4,184,844
<PP&E> 5,155,277
<DEPRECIATION> 3,080,109
<TOTAL-ASSETS> 7,672,673
<CURRENT-LIABILITIES> 3,820,522
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0
0
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