<PAGE> 1
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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 AND EXCHANGE ACT OF 1934
FOR QUARTERLY PERIOD ENDED MAY 4, 1997
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 0-21085
---------------
JTS CORPORATION
(EXACT NAME AS SPECIFIED IN ITS CHARTER)
DELAWARE 77-0364572
(STATE OR OTHER JURISDICTION (IRS EMPLOYER
INCORPORATION OR ORGANIZATION) IDENTIFICATION NO.)
166 BAYPOINTE PARKWAY, SAN JOSE, CA 95134
(ADDRESS OF PRINCIPAL EXECUTIVE (ZIP CODE)
OFFICES)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:(408) 468-1800
NONE
- --------------------------------------------------------------------------------
(FORMER NAME, FORMER ADDRESS AND FORMER FISCAL YEAR,
IF CHANGED SINCE LAST REPORT.)
Indicate by check mark whether the registrant (1) has filed all reports 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 / /
---------------
Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date.
<TABLE>
<CAPTION>
SHARES OUTSTANDING AT
CLASS MAY 30, 1997
- ----- ---------------------
<S> <C>
Common Stock............................................... 112,862,604
</TABLE>
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<PAGE> 2
JTS CORPORATION
<TABLE>
<CAPTION>
TABLE OF CONTENTS
PAGE
<S> <C> <C>
PART I. FINANCIAL INFORMATION
ITEM 1. CONDENSED FINANCIAL STATEMENTS
CONSOLIDATED BALANCE SHEETS................................ 3
CONSOLIDATED STATEMENTS OF OPERATIONS FOR THE QUARTER...... 4
CONSOLIDATED STATEMENTS OF CASH FLOWS FOR THE QUARTER...... 5
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS....... 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND
FINANCIAL CONDITION........................................
8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.......................................... 11
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K........................... 11
SIGNATURE.......................................................... 12
</TABLE>
2
<PAGE> 3
JTS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
MAY 4, FEBRUARY 2,
1997 1997
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (including $2,100, and $1,800 held as
restricted balances at May 4, 1997 and February 2, 1997,
respectively) ...................................................... $ 13,396 $ 24,766
Accounts receivable, less allowance for doubtful accounts of $1,409 and
$1,615 at May 4, 1997 and February 2, 1997, respectively ........... 30,257 21,445
Inventories ........................................................... 28,131 17,750
Other current assets .................................................. 3,473 2,341
--------- ---------
Total current assets ............................................... 75,257 66,302
PROPERTY AND EQUIPMENT, net ............................................. 31,399 27,674
ACQUIRED TECHNOLOGY, net ................................................ 18,917 19,618
GOODWILL, net ........................................................... 16,256 16,673
OTHER ASSETS ............................................................ 427 450
--------- ---------
TOTAL ....................................................... $ 142,256 $ 130,717
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Bank lines of credit .................................................. $ 12,009 $ 10,540
Borrowings under factoring arrangement ................................ 4,650 2,981
Accounts payable ...................................................... 55,280 33,327
Accrued liabilities ................................................... 14,166 16,415
Current portion of long-term obligations .............................. 1,583 1,967
--------- ---------
Total current liabilities ................................... 87,688 65,230
--------- ---------
LONG-TERM OBLIGATIONS ................................................... 54,365 53,081
--------- ---------
STOCKHOLDERS' EQUITY:
Convertible preferred stock, $.001 par value -- authorized, 10,000,000
shares; outstanding, 35,807 and 40,000 shares; liquidation value of
$36,491 and $40,227 at May 4, 1997 and February 2, 1997,
respectively ...................................................... --
Common stock, $.001 par value -- authorized, 150,000,000 shares;
outstanding, 107,151,842 and 104,744,765 at May 4, 1997 and February
2, 1997, respectively .............................................. 107 105
Additional paid-in capital ............................................ 350,036 349,961
Notes receivable from shareholders .................................... (2,510) (2,510)
Accumulated deficit ................................................... (347,430) (335,150)
--------- ---------
Total stockholders' equity ......................................... 203 12,406
--------- ---------
TOTAL ....................................................... $ 142,256 $ 130,717
========= =========
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
3
<PAGE> 4
JTS CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE THREE MONTHS ENDED MAY 4, 1997 AND MARCH 31, 1996
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
----------------------
MAY 4, MARCH 31
1997 1996
----------------------
<S> <C> <C>
NET SALES .................................... $ 73,413 $ 1,272
--------- ---------
Cost of sales ............................. 70,220 6,211
========= =========
GROSS MARGIN (DEFICIT) ....................... 3,193 (4,939)
Amortization of acquired technology ....... 701 --
Research and development expense .......... 6,700 201
Selling, general and administrative expense 6,081 2,009
--------- ---------
Total operating expenses ..................... 13,482 2,210
--------- ---------
OPERATING LOSS ............................... (10,289) (7,149)
Exchange loss ................................ (25) (60)
Other income (loss), net ..................... (135) 6,640
Interest income .............................. 291 332
Interest expense ............................. (1,666) (569)
--------- ---------
NET LOSS ..................................... $ (11,824) $ (806)
Preferred stock dividends .................... 456 --
NET LOSS ATTRIBUTABLE TO COMMON STOCK ........ (12,280) (806)
LOSS PER COMMON SHARE ........................ $ (0.116) $ (0.01)
========= =========
Weighted average number of shares used in
computations .............................. 105,841 63,701
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
4
<PAGE> 5
JTS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
--------------------
MAY 4, MARCH 31,
1997 1996
-------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operating activities ................. $ (9,659) $ (947)
-------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Sale of marketable securities ......................... -- 20,908
Purchase of property and equipment .................... (5,704) --
Proceeds from the sale of property .................... -- 33
Borrowing by JTS ...................................... -- (25,000)
Decrease in other assets .............................. -- 22
Game software development costs ....................... -- (103)
-------- --------
Net cash used in investing
activities ......................................... (5,704) (4,140)
-------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit and factoring liability 4,411 --
Payment on capital leases ............................. (233) --
Extinguishment of 5-1/4% convertible
subordinated debentures ............................ -- (75)
Preferred stock dividends paid ........................ (185) --
Issuance of common stock .............................. -- 63
-------- --------
Net cash used in financing activities ................ 3,993 (12)
-------- --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH
AND CASH EQUIVALENTS .................................. (94)
-------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS ............... (11,370) (5,193)
CASH AND CASH EQUIVALENTS:
Beginning of period ................................... 24,766 28,941
-------- --------
End of period ......................................... $ 13,396 $ 23,748
======== ========
OTHER CASH FLOW INFORMATION FROM CONTINUING
OPERATIONS:
Interest paid ......................................... $ 3,165 $ (12)
Conversion Preferred stock to Common stock ............ 2
Capital leases entered into ........................... 265
</TABLE>
(See Condensed Notes to Consolidated Financial Statements)
5
<PAGE> 6
JTS CORPORATION
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The condensed financial statements included herein have been prepared by the
Company, without audit, pursuant to the rules and regulations of the Securities
and Exchange Commission. Certain information and footnote disclosures normally
included in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to such rules and
regulations. However, the Company believes that the disclosures are adequate to
make the information presented not misleading. It is suggested that these
condensed financial statements be read in conjunction with the financial
statements and notes thereto included in the Company's 1997 Annual Report on
Form 10-K, filed with the Securities and Exchange Commission.
The unaudited condensed financial statements included herein reflect all
adjustments (which include only normal, recurring adjustments), which are, in
the opinion of management, necessary to state fairly the results for the periods
presented. The results for such periods are not necessarily indicative of the
results to be expected for the full fiscal year.
On July 30, 1996, Atari Corporation ("Atari") was merged with and into JTS
Corporation ("JTS") and the separate existence of Atari ceased. Although the
business combination resulted in Atari merging into the JTS legal entity, the
substance of the transaction was that Atari, as a public company with
substantially greater operating history and net worth owns approximately 62% of
the equity of the merged company. Therefore, for accounting purposes, the merger
was accounted for as a purchase of JTS by Atari. See Note 2.
Subsequent to the merger, the Company changed its fiscal year from a 52/53
week fiscal year ending on the Saturday closest to December 31 to a 52/53 week
fiscal year ending on the Sunday closest to January 31. Accordingly, the
Company's current fiscal year commenced on February 2, 1997 and the current
quarter ended on May 4, 1997.
Due to this fiscal year change, the end of the quarter does not coincide with
the end of the quarter of the previous year. The Company did not recast the
financial information for the prior fiscal year as management believes that
financial statements for the quarters of the preceding year are nearly
comparable to the quarters in the newly adopted fiscal year and that there are
no seasonal factors and other factors that could affect the comparability of the
information or trends reflected.
NOTE 2. MERGER WITH JTS CORPORATION ("JTS")
The following unaudited pro forma information shows the results of
operations for the three months ended March 31, 1996 as if the JTS acquisition
had occurred at the beginning of the period at the purchase price established on
July 30, 1996. The results are not necessarily indicative of what would have
occurred had the acquisition actually been made at the beginning of each of the
respective periods presented or of future operations of the combined companies.
The pro forma results for 1996 combine Atari's results for the three month
period ended March 31 1996 with JTS' three month fiscal period (13 weeks) ended
April 28, 1996. The following unaudited pro forma results include the
straight-line amortization of intangibles over periods ranging from seven years
to ten years in the first quarter of 1997.
<TABLE>
<CAPTION>
QUARTER ENDED
MAY 4 MARCH 31
1997 1996
--------- ----------
(Pro Forma)
<S> <C> <C>
Revenue .......................... $ 73,413 $ 18,853
Gross Margin ..................... 3,193 (9,068)
Net (loss) ....................... (11,824) (16,578)
Net loss attributable to
Common Stock..................... (12,280) (16,578)
Net (loss) per share ............. $ (0.116) $ (0.16)
Weighted average common and common
equivalent shares outstanding .. 105,841 103,701
</TABLE>
6
<PAGE> 7
NOTE 3. INVENTORIES
Inventories consist of the following (in thousands):
<TABLE>
<CAPTION>
MAY 4, FEBRUARY 2,
1997 1997
------- -------
<S> <C> <C>
Finished goods .................. $ 1,094 $ 489
Raw materials and work-in-process 27,037 17,261
------- -------
Total ...................... $28,131 $17,750
======= =======
</TABLE>
NOTE 4. NEW ACCOUNTING STANDARD
The Financial Accounting Standards Board issued FASB No. 128, "Earnings
per share." This statement becomes effective for periods ending after December
15, 1997. The Company will adopt the statement from its fourth quarter, ending
February 1, 1998. The impact of the statement is expected to be immaterial on
the previously reported earnings per share results.
7
<PAGE> 8
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
Except for the historical information contained herein, the following
discussion contains forward-looking statements that involve risks and
uncertainties. The Company's actual results could differ materially from those
discussed here. Factors that could cause or contribute to such differences
include, but are not limited to, those discussed in this section, as well as
those discussed in the Company's Form 10-K for the year ended February 2, 1997.
On July 30, 1996, Atari Corporation ("Atari") was merged into JTS Corporation
("JTS" or the "Company") and subsequent to the merger the Company changed its
fiscal year from a 52/53 week fiscal year ending on the Saturday closest to
December 31 to a 52/53 week fiscal year ending on the Sunday closest to January
31. The merger was accounted for as a purchase of JTS by Atari and, as such, the
historical balance sheets and the statements of operations for the three months
ended March 31, 1996 include Atari only.
The unaudited pro forma condensed combined statements of operations included
in footnote two to the financial statements give effect to the merger as if the
acquisition were completed at the beginning of the first quarter of 1996. The
following discussion and analysis is based on these pro forma condensed combined
statements for the prior year which combine the historical results of operations
of Atari for the three months ended March 31, 1996 with the JTS unaudited pro
forma combined results of operations for the three months ended April 28, 1996
and for the current year which reflects the actual results of the merged company
for the three month period ended May 4, 1997. The liquidity and capital
resources discussion and analysis is based on the unaudited balance sheet of the
merged company as of May 4, 1997. Throughout this discussion, "fiscal 1998"
refers to the fiscal year ending February 1, 1998.
JTS AND ATARI BACKGROUND
The most significant portion of the Company's business today is its disk
drive division, which designs, manufactures and markets hard disk drives for use
in notebook computers and desktop personal computers. The Company currently has
two disk drive product families in production, the 3-inch form factor "Nordic"
family for notebook computers and the 3.5-inch form factor "Champion" family for
desktop personal computers. Total disk drives shipped to date have primarily
consisted of 3.5-inch drives. While shipments of Nordic disk drives to Compaq
Computer Corporation ("Compaq") began in the second quarter of fiscal 1997,
volume shipments have only recently commenced. The Company markets its disk
drives to computer companies and second-tier systems integrators for
incorporation into their computer systems and subsystems and to original
equipment manufacturers ("OEMs"). The Company sells its products through a
direct sales force operating throughout the United States, Europe and Asia, as
well as through distributors in the United States, Europe, Latin America and
Canada.
JTS was incorporated in February 1994 and remained in the development stage
until October 1995, when it began shipping its 3.5-inch disk drives to customers
in the United States and Europe. All of JTS' products are manufactured in
Madras, India by its subsidiary, JTS Technology Ltd. (formerly Moduler
Electronics (India) Pvt. Ltd.), which was acquired in April 1996 and employs
over 6,000 individuals. Since its inception, JTS has incurred significant losses
which have resulted from the substantial costs associated with the design,
development and marketing of new products, the establishment of manufacturing
operations and the development of a supplier base.
Prior to acquiring JTS, Atari had significantly downsized its video game
operations, primarily due to the lack of market acceptance of its video game
console, Jaguar. This downsizing resulted in significant reductions in Atari's
workforce, and significant curtailment of research and development and sales and
marketing activities for Jaguar and related products. As a result of continued
disappointing sales of the Jaguar product, management revised estimates and
wrote- down the Jaguar inventory by $5.0 million in the first quarter of 1996.
During July 1996, the Company wrote-down an additional $3.3 million in
inventory. The prior business of Atari is now conducted through the Company's
Atari division; however, the Atari division is not expected to represent a
significant portion of the Company's business going forward.
8
<PAGE> 9
RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MAY 4, 1997 COMPARED TO THE JTS
AND ATARI PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED
APRIL 28, 1996.
Revenues for the three months ended May 4, 1997 were $73.4 million. Revenues
from the disk drive division increased from $17.6 million for the same quarter
in the prior year to $72.3 million for the current quarter. Such increase
reflects increased sales of disk drives starting in October 1995. During the
quarter ended May 4, 1997, the Company shipped 540,000 disk drives, compared to
106,000 in the three months ended April 28, 1996, which primarily consisted of
the 3.5-inch drives, in capacities ranging from 1 gigabyte to 1.6 gigabytes.
Sales to the top six customers for the three months ended May 4, 1997 were 72%
of net sales and four customers had sales greater than 10% of total net sales
for the three month period. The Atari division revenues including royalty income
for the current quarter amounted to $1.1 million. Pro forma combined revenues
for the first quarter in the previous year totaled $18.9 million and included
approximately $1.3 million of Atari revenues recorded for the three month period
ended March 31, 1996.
The gross margin for the three month period ended May 4, 1997 was $3.2
million compared to a deficit of $9.1 million on a pro forma basis for the first
quarter in the prior year. The portion of the current quarter's gross margin
attributable to the disk drive division was $2.1 million compared to a deficit
of $1.9 million incurred by the disk drive division in the three month period
ended April 28, 1996. The improvement in the gross margin resulted principally
from the greater absorption of fixed costs due to increased production volumes.
The gross margin for the Atari division for the three month period ended May 4,
1997 was $1.1 million compared to a deficit of $5.3 million for the three month
period ended March 31, 1996. The improvement in the Atari division's gross
margin resulted from sales of the Jaguar product and inventory that had been
previously written off in the first quarter of the prior year.
Research and development expenses for the three months ended May 4, 1997 were
$6.7 million compared to research and development expenses on a pro forma basis
of $7.6 million for the first quarter in the prior year. The quarter over
quarter decrease for the disk drive division was $0.7 million and was primarily
attributed to significant investments in firmware and disk drive platforms
during the first quarter of fiscal 1997. The Atari division experienced a
quarter over quarter decline in research and development expenses of $0.2
million due to the elimination of the game development team.
Selling, general and administrative expenses for the three months ended May
4, 1997 were $6.1 million, including $5.7 million from the disk drive division,
compared to $5.8 million pro forma selling, general administrative expenses
incurred during the first quarter of the previous year which included $3.1
million from the disk drive division. The $2.6 million increase incurred by the
disk drive division resulted primarily from increases in sales office locations
(including an increase in personnel, office and related expenses) and increases
in promotion and marketing expenses. In addition, professional fees required to
support the expansion of JTS' operations and the continuation of marketing and
sales efforts increased significantly. Selling, general and administrative
expenses for the Atari division declined $2.3 million as a result of staff
reductions, reduced rent and other reductions in operating costs for the
division.
9
<PAGE> 10
LIQUIDITY AND CAPITAL RESOURCES
At May 4, 1997, JTS had cash and cash equivalents of $13.4 million, a
working capital deficit of $11.6 million and a net worth of $0.2 million.
At May 4, 1997, total debt, including bank credit lines and notes payable,
was $71.7 million. JTS also had equipment lease financing of $0.9 million at May
4, 1997. There were $6.0 million of working capital loans outstanding between
JTS Technology and three Indian banks as of May 4, 1997 each at an interest rate
of 13%, as well as term loan facilities with the Industrial Credit and
Investment Corporation of India Limited (ICICI) and the Shipping Credit and
Investment Corporation of India Limited (SICI) in the aggregate amount of $12.5
million at interest rates of LIBOR plus 2.75% and LIBOR plus 4%, respectively.
At May 4, 1997, JTS Technology's borrowings under these term loan facilities
were $12.3 million, which borrowings have maturities ranging from 2000 through
2002. Amounts borrowed under these loan agreements have been used for working
capital purposes, tooling, facilities expansion and purchases of capital
equipment.
At May 4, 1997, the Company had $42.3 million of 5 1/4% convertible
subordinated debentures due April 29, 2002, which had been issued in 1987 by
Atari.
On April 30, 1997, the Company entered into an agreement with a finance
company for a revolving line of credit to refinance present debt and to provide
working capital of up to $30 million and a term loan to finance capital
expenditures of up to $2 million. The revolving line of credit has an initial
term of three years with automatic annual renewals thereafter unless terminated
by the finance company. The Company granted the finance company a first and
exclusive lien on all of the Company's present and future accounts receivable,
inventory, equipment and intangible assets to secure the obligations. The
agreement contains restrictions on the Company's and its subsidiaries' ability
to incur additional indebtedness, dispose of assets, pay dividends and, in the
case of JTS Technology, to sell inventory to parties other than the Company or
its European subsidiary. The agreement further requires the Company to maintain
a specified minimum tangible net worth and fixed charge coverage ratio and to
limit its capital expenditures. JTS cannot assure that any level of future
revenues will be attained or that JTS will achieve or maintain successful
operations in the future. The Company's accounts receivable are heavily
concentrated with a small number of customers. If any large customer of the
Company became unable to pay its debts to the Company, liquidity would be
adversely affected. In the event the Company is unable to increase sales or
maintain production yields at acceptable levels there would be a significant
adverse impact on liquidity. This would require the Company to either obtain
additional capital from external sources or to curtail its capital, research and
development and working capital expenditures. Such curtailment could adversely
affect the Company's operations and competitive position. Due to delays in the
receipt of additional financing, the Company took action in September 1996 to
conserve its cash resources by reducing the production of drives planned for the
third and fourth quarters of fiscal 1997.
The Company will need significant additional financing resources over the
next several years for facilities expansion, capital expenditures, working
capital, research and development and vendor tooling. In addition, significant
cash resources will be required to fund purchases of inventory needed to achieve
anticipated sales levels. The precise amount and timing of the Company's funding
needs cannot be determined at this time, and will depend upon a number of
factors, including the market demand for the purchase of its products, the
progress of the Company's product development efforts and the Company's
inventory and accounts receivable management. The Company currently expects that
it would seek to obtain such funds from additional borrowing arrangements and/or
a public offering of debt and equity securities. There can be no assurance that
funds required by the Company in the future will be available on terms
satisfactory to the Company or at all. Failure to obtain such cash resources
would negatively impact the Company's ability to manufacture its products at
required levels and would have a materially adverse effect on the Company's
business operating results and financial condition.
As of May 4, 1997, the Company had Federal and state net operating loss
("NOL") carryforwards of approximately $245 million and $94 million,
respectively, and Federal and state research and development tax credit
carryforwards of approximately $2.1 million and $1.0 million, respectively, all
of which will expire on various dates through 2012.
Under the Internal Revenue Code of 1986, as amended, certain changes in the
ownership or business of a corporation that has Federal NOLs or tax credit
carryforwards will result in the inability to use, or the imposition of
significant restrictions on the use of such NOLs or tax credit carryforwards to
offset future income and tax liabilities of the Company. The merger between
Atari and JTS constituted a change in ownership of JTS and, accordingly,
restricts the use of JTS' pre-merger NOLs against post-merger income of the
Company to the maximum of $12.5 million per year, unless previously expired. In
addition, subsequent events may result in the
10
<PAGE> 11
imposition of restrictions on the ability of the Company to utilize its NOLs and
tax credit carryforwards. There can be no assurance that the Company will be
able to utilize all or any of its NOL's or tax credit carryforwards.
PART II
OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company was a defendant in a civil action brought in the Superior Court
of the State of California in and for the county of Santa Clara by Citizen
America Corporation ("Citizen"), a former supplier, in February 1994 seeking
damages of approximately $900,000 for alleged breach of contract and related
claims. The Company filed a countersuit alleging damages of approximately $8.3
million. The matter was settled on May 23, 1997. Pursuant to the settlement
agreement, Citizen paid $5.5 million to JTS and agreed to the cancellation of
$900,000 in accounts payable allegedly owed to Citizen by JTS.
The Company was a plaintiff in a civil action brought in the Superior Court
of the State of California in and for the county of Santa Clara, and removed to
the United States District Court, Northern district of California, against Probe
Entertainment Limited (Probe") for breach of contract and related claims. A
counterclaim was filed by Probe against the Company for alleged breach of
contract. In connection with this matter, Acclaim Entertainment ("Acclaim"), an
affiliate of Probe, joined in the claim against the Company seeking damages in
excess of $1.25 million. This matter was settled with respect to both Probe and
Acclaim on May 30, 1997. Pursuant to the settlement agreement, JTS paid $525,000
to Acclaim.
On January 3, 1997, Dusseldorf Securities Limited ("DSL") and Greystone
Capital, Ltd., ("GCL"), through counsel, made a letter demand on the Company for
payment of $1,250,000 allegedly due under a letter agreement between DSL and the
Company dated December 21, 1996 (the "Agreement"). DSL and GCL claim that the
company owes $1,250,000 as fees for a January 1997 private placement of the
Company's stock which was not completed through DSL and/or GCL. On February 26,
1997, DSL and GCL filed suit against the Company in Los Angeles County Superior
Court, No. BC166450, entitled Dusseldorf Securities, Limited v. JTS Corporation.
The lawsuit asserts claims for breach of contract, breach of warranty, and
misrepresentation against the Company and asserts those and other tort claims
against Michael Arnous, an individual not affiliated with the Company, through
whom it is alleged the Company recently completed a private placement of its
securities. An application for writ of attachment was filed and argued on May 9,
1997; the application was denied. The Company has filed counterclaims for breach
of contract and fraud.
The Company is a defendant in a claim brought by Creative Talents, Inc. in
the Superior Court of the State of California in and for the County of Santa
Clara, Case No. CV765828. The complaint alleges breach of a software licensing
agreement. The plaintiff seeks damages in the amount of approximately $297,000.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
10.38 Financing Agreement
27.1 Financial Data Schedule
(b) Reports on Form 8-K -- None
11
<PAGE> 12
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.
JTS CORPORATION
-----------------------------------------------
(Registrant)
Date: June 18, 1997
By /s/ Joseph Prezioso
---------------------
Joseph Prezioso
Acting Chief Financial Officer
12
<PAGE> 13
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBITS
- --------
<S> <C>
10.38 Financing Agreement dated April 30, 1997, by and between JTS
and the CIT Group/Business Credit, Inc.
27.1 Financial Data Schedule
</TABLE>
13
<PAGE> 1
FINANCING AGREEMENT
The CIT Group/Business Credit, Inc.
(as Agent and as Lender)
And
JTS Corporation
(as Borrower)
Dated: as of April 30, 1997
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C> <C>
SECTION 1. Definitions . . . . . . . . . . . . . . . . . . . . . 1
SECTION 2. Conditions Precedent . . . . . . . . . . . . . . . . 13
SECTION 3. Revolving Loans . . . . . . . . . . . . . . . . . . . 15
SECTION 4. Letters of Credit . . . . . . . . . . . . . . . . . . 18
SECTION 4A. CAPEX Term Loans . . . . . . . . . . . . . . . . . . 19
SECTION 5. Collateral . . . . . . . . . . . . . . . . . . . . . 20
SECTION 6. Representations, Warranties and Covenants . . . . . . 23
SECTION 7. Interest, Fees and Expenses . .. . . . . . . . . . . 30
SECTION 8. Powers. . . .. .. .. . . . . . . . . . . . . . . . . 32
SECTION 9. Events of Default and Remedies. . . . . . . . . . . 32
SECTION 10. Termination . . . . . . . . . . . . . . . . . . . . 35
SECTION 11. Agency . . . . . . . . . . . . . . . . . . . . . . . 35
SECTION 12. Agreements between the Lenders . . . . . . . . . . . 38
SECTION 13. Miscellaneous . . . . . . . . . . . . . . . . . . . 40
SCHEDULE P-1 Outstanding Letters of Credit
SCHEDULE S-1 Certain Liens Affecting Subsidiaries of the Company
SCHEDULE 6.10 Certain Permitted Flooring Contracts
</TABLE>
<PAGE> 3
THE CIT GROUP/BUSINESS CREDIT, INC., a New York corporation
(hereinafter "CITBC"), with offices located at 300 South Grand Avenue, Third
Floor, Los Angeles, CA 90071, and the other lenders that may, subsequent to
the date hereof, purchase from CITBC a portion of CITBC's rights and
obligations under this Financing Agreement (CITBC and such other lenders each
individually sometimes referred to as a "Lender" and collectively as the
"Lenders") and CITBC as agent for the Lenders (hereinafter the "Agent") are
pleased to confirm the terms and conditions under which the Lenders shall make
revolving loans, advances and other financial accommodations to JTS CORPORATION
(herein the "Company"), a Delaware corporation with a principal place of
business at 166 Baypointe Parkway, San Jose, CA 95134.
SECTION 1. DEFINITIONS
ACCOUNTS shall mean all of the Company's now existing and future: (A) accounts
receivable, (whether or not specifically listed on schedules furnished to
CITBC), and any and all instruments, documents, contract rights, chattel paper,
general intangibles, including, without limitation, all accounts created by or
arising from all of the Company's sales of goods or rendition of services to
its customers, and all accounts arising from sales or rendition of services
made under any of the Company's trade names or styles, or through any of the
Company's divisions; (B) unpaid seller's rights (including rescission,
replevin, reclamation and stoppage in transit) relating to the foregoing or
arising therefrom; (C) rights to any goods represented by any of the foregoing,
including rights to returned or repossessed goods; (D) reserves and credit
balances arising hereunder; (E) guarantees or collateral for any of the
foregoing; (F) insurance policies or rights relating to any of the foregoing;
(G) cash and non-cash proceeds of any and all the foregoing; and (H) deposits.
AGREEMENT shall mean this Financing Agreement as it may from time to time be
amended, modified, supplemented, renewed, extended, or restated.
ANNIVERSARY DATE shall mean the date occurring one (1) year from the date
hereof and the same date in every year thereafter.
ASPERAL shall mean Asperal Holdings, Inc., a corporation organized under the
laws of Panama.
ATARI SUBORDINATED DEBT shall mean the $75 million 5 1/4% Convertible
Subordinated Debentures Due 2002 issued pursuant to an Indenture dated 4/29/87.
AVAILABILITY shall mean at any time the excess of the sum of a) Eligible
Domestic Accounts Receivable multiplied by the percentage provided for in
clause (a) of paragraph 1 of Section 3 of this Agreement, b) Eligible Foreign
Accounts Receivable multiplied by the percentage provided for in clause (b) of
paragraph 1 of Section 3 of this Agreement, and c) Eligible Domestic Finished
Goods multiplied by the percentage provided for in clause (c) of paragraph 1 of
Section 3 of this Agreement but not to exceed the Inventory Sub-Limit in effect
from time to time, less the sum of x) the outstanding aggregate amount of all
Obligations (exclusive of the then outstanding amount of all Letters of Credit
and exclusive of any Obligations relating to the CAPEX Term Loans) of the
Company and y) the Availability Reserve.
AVAILABILITY RESERVE shall mean, at any time of determination y) the then
outstanding amount of all Letters of Credit, plus z) in the reasonable
discretion of the Agent, any reserve that the Agent may require.
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<PAGE> 4
THE BROKERS shall mean Sierra Financial Associates and any other person or
entity performing the function of a broker or finder in connection with the
transactions contemplated hereby.
BUSINESS DAY shall mean any day on which the Agent and The Chase Manhattan Bank
are open for business.
CAPEX LIBOR MARGIN shall mean the percentages set forth below determined with
respect to the Profit to Sales Percent of the Company, with any change to occur
on the first day of the month following each filing of a 10Q or 10K report by
the Company with the SEC, and the Agent's receipt and review of a copy thereof.
Should the Company fail timely to file and provide to the Agent a copy of the
aforementioned reports (without giving effect to any extension of time), then
interest will be computed based on the highest margin set forth below during
such period of delinquency until the Agent's receipt and review of the
Company's next 10Q or 10K report:
<TABLE>
<CAPTION>
If Profit to Sales Percent is: Margin is:
------------------------------ ----------
<S> <C>
< or = 0% 4.25%
> 0% and < or = 8% 3.75%
> 8% 3.50%
</TABLE>
CAPEX NON-LIBOR MARGIN shall mean the percentages set forth below determined
with respect to the Profit to Sales Percent of the Company, with any change to
occur on the first day of the month following each filing of a 10Q or 10K
report by the Company with the SEC, and the Agent's receipt and review of a
copy thereof. Should the Company fail timely to file and provide to the Agent
a copy of the aforementioned reports (without giving effect to any extension of
time), then interest will be computed based on the highest margin set forth
below during such period of delinquency until the Agent's receipt and review of
the Company's next 10Q or 10K report:
<TABLE>
<CAPTION>
If Profit to Sales Percent is: Margin is:
------------------------------ ----------
<S> <C>
< or = 0% 1.75%
> 0% and < or = 8% 1.25%
> 8% 1.00%
</TABLE>
CAPEX TERM LOANS shall mean the term loans made and to be made to the Company
by the Lenders in the aggregate principal amount of up to $2,000,000.00 as more
fully described in Section 4A of this Agreement.
CAPEX TERM LOAN LINE OF CREDIT shall mean the commitment of the Lenders to make
CAPEX Term Loans to the Company pursuant to Section 4A of this Agreement in the
aggregate amount of $2,000,000.00.
CAPEX TERM LOAN PROMISSORY NOTES shall mean the promissory notes each in the
form of Exhibit A hereto executed and delivered by the Company to the Lenders
to evidence a CAPEX Term Loan extended pursuant to and repayable in accordance
with, the provisions of Section 4A hereof.
CAPITAL EXPENDITURES for any period shall mean the aggregate of all
expenditures of the Company during
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<PAGE> 5
such period that in conformity with GAAP are required to be included in or
reflected by the property, plant or equipment or similar fixed asset account
reflected in the balance sheet of the Company.
CAPITAL IMPROVEMENTS shall mean operating Equipment acquired or installed for
use in the Company's domestic United States business operations.
CAPITAL LEASE shall mean any lease of property (whether real, personal or
mixed) which, in conformity with GAAP, is accounted for as a capital lease or a
Capital Expenditure on the balance sheet of the Company.
CHASE MANHATTAN BANK RATE shall mean the rate of interest per annum announced
by The Chase Manhattan Bank from time to time as its prime rate in effect at
its principal office in the City of New York. (The prime rate is not intended
to be the lowest rate of interest charged by The Chase Manhattan Bank to its
borrowers).
COLLATERAL shall mean all present and future Accounts, Equipment, Documents of
Title, Inventory, Investment Property, Deposit Accounts, General Intangibles,
and Other Collateral of the Company, and, at the sole option of Lenders, any
Real Estate of the Company.
COLLATERAL MANAGEMENT FEE shall mean the sum of $50,000.00 which shall be paid
to the Agent in accordance with paragraph 8 of Section 7 hereof to offset the
expenses and costs of the Agent in connection with record keeping, periodic
examinations, analyzing and evaluating the Collateral.
CONSOLIDATED BALANCE SHEET shall mean a consolidated balance sheet for the
Company and its consolidated subsidiaries eliminating all inter-company
transactions and prepared in accordance with GAAP.
CONSOLIDATING BALANCE SHEET shall mean a Consolidated Balance Sheet plus
individual balance sheets for the Company and its subsidiaries showing all
eliminations of inter-company transactions and prepared in accordance with GAAP
and including a balance sheet for the Company exclusively.
CUSTOMARILY PERMITTED LIENS shall mean
(a) liens of local or state authorities for franchise or other like
taxes provided the aggregate amounts of such liens shall not exceed $100,000.00
in the aggregate at any one time;
(b) statutory liens of landlords and vendors and liens of carriers,
warehousemen, mechanics, materialmen and other like liens imposed by law,
created in the ordinary course of business and for amounts not yet due (or
which are being contested in good faith by appropriate proceedings or other
appropriate actions which are sufficient to prevent imminent foreclosure of
such liens) and with respect to which adequate reserves or other appropriate
provisions are being maintained in accordance with GAAP;
(c) deposits made (and the liens thereon) in the ordinary course of
business (including, without limitation, security deposits for leases, surety
bonds and appeal bonds) in connection with workers' compensation, unemployment
insurance and other types of social security benefits or to secure the
performance of tenders, bid contracts (other than for the repayment or
guarantee of borrowed money or purchase money obligations), foreign currency
exchange contracts, statutory obligations and other similar obligations arising
as a result of progress payments under government contracts;
(d) easements (including, without limitation, reciprocal easement
agreements and utility agreements), encroachments, minor defects or
irregularities in title, variation and other restrictions, charges or
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<PAGE> 6
encumbrances (whether or not recorded) affecting the Real Estate and which
do not interfere in any material respect with the use or enjoyment of such Real
Estate in the ordinary course of the Company's business;
(e) liens that are not prior to the liens of the Agent or the Lenders
that constitute rights of setoff of a customary nature or bankers' liens with
respect to amounts on deposit, whether arising by operation of law or by
contract, in connection with arrangements (other than the borrowing of money)
entered into with banks in the ordinary course of business; and
(f) leases or subleases and non-exclusive licenses and sublicenses
granted to others in the ordinary course of business not interfering in any
material respect with the business of the Company, and any interest or title of
a lessor or licensor under any lease or license.
DEFAULT shall mean any event specified in Section 9 hereof, whether or not any
requirement for the giving of notice, the lapse of time, or both, or any other
condition, event or act specified therein, has been satisfied.
DEFAULT RATE OF INTEREST shall mean a rate of interest per annum equal to the
sum of: a) four percent (4%) and b) the Chase Manhattan Bank Rate, which the
Agent shall be entitled to charge the Company on all Obligations due the
Lenders by the Company to the extent provided in paragraph 2 of Section 9 of
this Agreement.
DEPOSIT ACCOUNTS shall have the meaning set forth in the Uniform Commercial
Code as in effect in the State of California.
DEPOSITORY ACCOUNTS shall mean those accounts owned by, and in the name of, the
Agent and designated by the Agent for the deposit of proceeds of Collateral.
DEUTSCHE shall mean Deutsche Financial Services Corporation.
DEXAR shall mean Dexar Holdings, Inc., a corporation organized under the laws
of Panama.
DOCUMENTARY LETTER OF CREDIT shall mean a Letter of Credit that is a commercial
or documentary letter of credit, as such term is commonly understood by letter
of credit issuers, and that is not a standby letter of credit, as such term is
commonly understood by letter of credit issuers.
DOCUMENTS OF TITLE shall mean all present and future warehouse receipts, bills
of lading, shipping documents, chattel paper, instrument and similar documents,
all whether negotiable or not and all goods and inventory relating thereto and
all cash and non-cash proceeds of the foregoing.
EARLY TERMINATION DATE shall mean the date on which the Company terminates this
Agreement or the Line of Credit which date is before the third Anniversary
Date.
EARLY TERMINATION FEE shall: I) mean the fee the Lenders are entitled to
charge the Company in the event the Company terminates the Line of Credit or
this Agreement on a date before the third Anniversary Date; and II) be
determined by multiplying the Line of Credit by one percent (1.00%) per annum
for the number of days from the Early Termination Date to the third Anniversary
Date.
EBIT shall mean, in any period, all consolidated earnings of the Company before
all interest and tax obligations of the Company for said period, determined in
accordance with GAAP.
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<PAGE> 7
EBITDA shall mean, in any period, all consolidated earnings of the Company
before all interest and tax obligations of the Company for said period, and
before depreciation and amortization for such period, determined in accordance
with GAAP.
EFFECTIVE DATE shall mean the date on which the initial loans and advances are
available hereunder.
EVENT(S) OF DEFAULT shall have the meaning provided for in Section 9 of this
Agreement.
ELIGIBLE DOMESTIC ACCOUNTS RECEIVABLE shall mean the gross amount of the
Company's accounts receivable, payable in United States currency, due from
customers residing in the United States of America and Canada that conform to
the warranties contained herein and at all times continue to be acceptable to
the Agent in the exercise of its reasonable business judgment, less, without
duplication, the sum of a) any returns, discounts, claims, credits and
allowances of any nature (whether issued, owing, granted or outstanding), and
b) reserves for: i) sales to the United States of America or to any agency,
department or division thereof; ii) accounts that remain unpaid more than
ninety (90) days from invoice date; iii) contras; iv) sales to any subsidiary
or to any company affiliated with the Company in any way; v) bill and hold
(deferred shipment) or consignment sales; vi) sales to any customer which is a)
insolvent, b) the debtor in any bankruptcy, insolvency, arrangement,
reorganization, receivership or similar proceedings under any federal or state
law, c) negotiating, or has called a meeting of its creditors for purposes of
negotiating, a compromise of its debts or d) in the Agent's reasonable business
judgment, financially unacceptable to the Agent or has a credit rating
unacceptable to the Agent; vii) all sales to any customer if fifty percent
(50%) or more of either x) all outstanding invoices or y) the aggregate dollar
amount of all outstanding invoices, are unpaid ninety (90) days from invoice
date; viii) all deposits due customers; ix) the amount by which the then
outstanding amount of all invoices due from customers residing in Canada
exceeds $5,000,000.00; x) Flooring Accounts; xi) any other reasons deemed
necessary by the Agent in its reasonable business judgment and which are
customary either in the commercial finance industry or in the lending practices
of the Lenders; and xii) in the Agent's reasonable business judgment, an amount
representing, historically, two hundred percent (200%) of returns, discounts,
claims, credits and allowances.
ELIGIBLE DOMESTIC FINISHED GOODS shall mean the gross cost of the Company's
finished goods Inventory that conforms to the warranties herein less any i)
supplies, ii) Inventory not present in the United States of America, iii)
Inventory returned or rejected by the Company's customers other than Inventory
that is undamaged and resalable in the normal course of business, iv) Inventory
to be returned to the Company's suppliers, v) Inventory in transit to third
parties, vi) shrinkage, and vii) reserves required by the Agent in accordance
with the standard set forth below and without duplication but only for the
following: (a) Inventory specially ordered for specific customers which
Inventory is uniquely different in size, shape, quality or color and which
uniquely different Inventory is not customarily sold by the Company; (b) market
value declines, to the extent the Inventory's value is below its cost; (c) bill
and hold (deferred shipment or consignment sales); (d) markdowns, to the extent
the Inventory's value is below its cost; (e) Inventory which is not located at
the Company's domestic United States locations or warehouses (other than
Inventory in transit between the Company's facilities); (f) demonstration
items, to the extent the Inventory's value is below its cost; (g) damaged or
defective Inventory; (h) obsolete Inventory (but not including undamaged
Inventory which is solely out-of- season); (i) Inventory held for lease; and
(j) Inventory imported under letters of credit issued without the assistance of
the Letter of Credit Guaranty and then only until the bank issuing such letters
of credit has been reimbursed by the Company for any drafts under such letters
of credit. The amount of such reserves shall be determined solely by the Agent
in its reasonable discretion and in the exercise of its reasonable business
judgment using standards customarily applied by the Agent to transactions
involving clients engaged in comparable businesses and taking into account the
nature of the Company's
5
<PAGE> 8
business, consistently applied by the Agent. Such standards shall take into
consideration amounts representing, historically, the Company's reserves,
discounts, returns, claims, credits and allowances. Flooring Inventory that
otherwise meets the requirements of Eligible Domestic Finished Goods but for
the fact that it has been sold and delivered to account debtors of the Company
shall be considered Eligible Domestic Finished Goods to the extent that the
related Flooring Accounts are excluded from Eligible Domestic Accounts
Receivable or Eligible Foreign Accounts Receivable by reason of being "Flooring
Accounts."
ELIGIBLE FOREIGN ACCOUNTS RECEIVABLE shall mean the gross amount of the
Company's account receivable, payable in United States currency, due from
customers residing in other than the United States of America and Canada but
that conform to the warranties contained herein and at all times continue to be
acceptable to the Agent in the exercise of its reasonable business judgment,
and that are either guaranteed by The CIT Group/Commercial Services, Inc. or
another third party acceptable to the Lenders with the Company's rights with
respect to such guarantees assigned to the Agent for the benefit of the
Lenders, or covered by credit insurance acceptable to the Lenders with the
Company's rights with respect to such insurance assigned to the Agent for the
benefit of the Lenders, less, without duplication, the sum of a) any returns,
discounts, claims, credits and allowances of any nature (whether issued, owing,
granted or outstanding) and b) reserves for: i) sales to any foreign
government or to any agency, department or division thereof; ii) accounts that
remain unpaid more than ninety (90) days from invoice date; iii) contras; iv)
sales to any subsidiary or to any company affiliated with the Company in any
way; v) bill and hold (deferred shipment) or consignment sales; vi) sales to
any customer which is a) insolvent, b) the debtor in any bankruptcy,
insolvency, arrangement, reorganization, receivership or similar proceedings
under any foreign, federal or state law, c) negotiating, or has called a
meeting of its creditors for purposes of negotiating, a compromise of its debts
or d) in the Agent's reasonable business judgment, financially unacceptable to
the Agent or has a credit rating unacceptable to the Agent; vii) all sales to
any customer if fifty percent (50%) or more of either x) all outstanding
invoices or y) the aggregate dollar amount of all outstanding invoices, are
unpaid more than ninety (90) days from invoice date; viii) all deposits due
customer; ix) Flooring Accounts; x) any other reason deemed necessary by the
Agent in its reasonable business judgment and which are customary either in the
commercial finance industry or in the lending practices of the Lenders; and xi)
in the Agent's reasonable business judgment, an amount representing,
historically, two hundred percent (200%) of returns, discounts, claims, credits
and allowances.
EQUIPMENT shall mean all present and hereafter acquired machinery, equipment,
furnishings and fixtures, and all additions, substitutions and replacements
thereof, wherever located, together with all attachments, components, parts,
equipment and accessories installed thereon or affixed thereto and all proceeds
of whatever sort.
ERISA shall mean the Employee Retirement Income Security Act or 1974, as
amended from time to time and the rules and regulations promulgated thereunder
from time to time.
EXCESS AVAILABILITY shall mean the amount by which Availability on any date of
determination exceeds all past due or then due debts, obligations and payables
of the Company.
EXISTING MATERIAL AGREEMENTS shall have the meaning provided in Section 2(m) of
this Agreement.
FINOVA shall mean FINOVA Capital Corporation.
FIXED CHARGE COVERAGE RATIO shall mean, with respect to any period, a fraction,
the numerator of which is
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<PAGE> 9
the Company's consolidated EBITDA for such period, and the denominator of which
is the sum of interest expense, principal amortization, and non-financed
capital expenditures of the Company on a consolidated basis, determined in
accordance with GAAP.
FLOORING ACCOUNTS shall mean Accounts with respect to which the account
debtors of Company have flooring financing arrangements in effect that could
permit the Flooring Lenders to return the related goods to the Company.
FLOORING INVENTORY shall mean Inventory sold to account debtors of the Company
giving rise to Flooring Accounts, prior to payment of such Flooring Accounts by
the account debtors to the Flooring Lenders.
FLOORING LENDERS shall mean lenders who provide flooring financial arrangements
to account debtors of the Company, including, without limitation, FINOVA and
Deutsche.
GAAP shall mean generally accepted accounting principles in the United States
of America as in effect on the date hereof.
GENERAL INTANGIBLES shall have the meaning set forth in the Uniform Commercial
Code as in effect in the State of California and shall include, without
limitation, all present and future right, title and interest in and to all
tradenames, trademarks (together with the goodwill associated therewith),
patents, patent applications, patent registrations, licenses, copyrights,
copyright registrations, copyright recordings, copyright applications,
copyright licenses, customer lists, distribution agreements, service
agreements, supply agreements, and tax refunds, together with all monies and
claims for monies now or hereafter due and payable in connection with any of
the foregoing or otherwise, and all cash and non-cash proceeds thereof.
INDEBTEDNESS shall mean, without duplication, all liabilities, which are any of
the following: (a) obligations in respect of money (borrowed or otherwise) or
for the deferred purchase price of property, services or assets, other than
Inventory, or (b) lease obligations which, in accordance with GAAP, have been,
or which should be capitalized.
INVENTORY shall mean all of the Company's present and hereafter acquired
merchandise, inventory and goods, and all additions, substitutions and
replacements thereof, wherever located, together with all goods and materials
used or usable in manufacturing, processing, packaging or shipping same; in all
stages of production- from raw materials through work-in-process to finished
goods - and all proceeds thereof of whatever sort.
INVENTORY SUB-LIMIT shall mean, on the initial date of this Agreement,
$1,000,000.00, provided that, on each three-month anniversary of the initial
date of this Agreement, if no Default or Event of Default then exists, the
Inventory Sub-Limit shall be increased by $500,000.00, provided, further, that
in no event shall the Inventory Sub-Limit exceed $5,000,000.00.
INVESTMENT PROPERTY shall have the meaning set forth in the Uniform Commercial
Code as in effect in the State of California.
ISSUING BANK shall mean the bank issuing Letters of Credit for the Company.
JTS EUROPE shall mean Atari Corp. (U.K.) Ltd., a company organized under the
laws of England.
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<PAGE> 10
JTS MAURITIUS shall mean JTS Mauritius Holdings, a company organized under the
laws of Mauritius.
JTS TECHNOLOGY shall mean JTS Technology Pvt. Ltd., a company organized under
the laws of India.
LETTERS OF CREDIT shall mean all letters of credit issued with the assistance
of the Lenders by the Issuing Bank for or on behalf of the Company. A Letter
of Credit shall be either a Documentary Letter of Credit or a Standby Letter of
Credit.
LETTER OF CREDIT GUARANTY shall mean the guaranty delivered by the Agent on
behalf of the Lenders to the Issuing Bank of the Company's reimbursement
obligation under the Issuing Bank's Reimbursement Agreement, Application for
Letter of Credit or other like document.
LETTER OF CREDIT GUARANTY FEE shall mean the fee the Lenders may charge the
Company under Section 7 of this Agreement for: i) issuing the Letter of Credit
Guaranty or ii) otherwise aiding the Company in obtaining Letters of Credit, or
iii) indemnifying, as of the date hereof, any bank that had previously issued
letters of credit for the Company.
LIBOR shall mean, at any time of determination, and subject to availability,
the London Interbank Offered Rate paid in London by The Chase Manhattan Bank on
one month, two month, three month or six month dollar deposits and if such
rates are not otherwise available, then those rates as published, under "Money
Rates", in the New York City edition of the Wall Street Journal or if there is
no such publication or statement therein as to Libor, then in any publication
used in the New York City financial community.
LIBOR LOAN shall mean the loans for which the Company has elected to use Libor
for interest rate computations.
LIBOR PERIOD shall mean the Libor for one month, two month, three month or six
month dollar deposits, as selected by the Company.
LINE OF CREDIT shall mean the commitment of the Lenders to make loans and
advances pursuant to Section 3 of this Agreement, to the Company in the amount
equal to $30,000,000.00.
LINE OF CREDIT FEE shall: I) mean the fee due the Lenders at the end of each
month for the Line of Credit, and II) be determined by multiplying the
difference between the Line of Credit, and the average daily Revolving Loans
and Letters of Credit of the Company for said month by one-half of one percent
(1/2 of 1%) per annum for the number of days in said month.
LOAN FACILITY FEE shall mean the non-refundable fee payable to the Lenders in
accordance with, and pursuant to, the provisions of paragraph 4 of Section 7 of
this Agreement.
OBLIGATIONS shall mean all loans and advances made or to be made by the Lenders
or by the Agent on behalf of the Lenders to the Company or to others for the
Company's account; any and all indebtedness and obligations which may at any
time be owing by the Company to the Lenders howsoever arising, whether now in
existence or incurred by the Company from time to time hereafter; whether
secured by pledge, lien upon or security interest in any of the Company's
assets or property or the assets or property of any other person, firm, entity
or corporation; whether such indebtedness is absolute or contingent, joint or
several, matured or unmatured, direct or indirect and whether the Company is
liable to the Lenders for such indebtedness as principal, surety, endorser,
guarantor or otherwise. Obligations shall also include indebtedness owing to
the
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<PAGE> 11
Lenders by the Company under this Agreement or under any other agreement or
arrangement now or hereafter entered into between the Company and the Lenders;
indebtedness or obligations incurred by, or imposed on, the Lenders and/or the
Agent as a result of environmental claims (other than as a result of actions of
the Lenders and/or the Agent) arising out of the Company's operation, premises
or waste disposal practices or sites; the Company's liability to the Lenders as
maker or endorser on any promissory note or other instrument for the payment of
money; the Company's liability to the Lenders and/or the Agent under any
instrument of guaranty or indemnity, or arising under any guaranty, endorsement
or undertaking which the Lenders and/or the Agent may make or issue to others
for the Company's account, including any accommodation extended with respect to
applications for letters of credit, the Lenders' and/or the Agent's acceptance
of drafts or the Lenders and/or the Agent's endorsement of notes or other
instruments for the Company's account and benefit. Without limiting the
generality of the foregoing, the term "Obligations" as used in this Agreement
shall also include, without limitation, all indebtedness, obligations and
liabilities of the Company to the Agent or the Lenders pursuant to the CAPEX
Term Loans and/or arising under the CAPEX Term Loan Line of Credit, provided
that the term "Obligations" as used in the definition of "Availability" shall
exclude all CAPEX Term Loan Obligations and Availability shall be determined by
excluding such CAPEX Term Loan Obligations from such determination.
OPERATING LEASES shall mean all leases of property (whether real, personal or
mixed) other than Capital Leases.
OPERATING PROFIT shall mean EBIT minus the sum of all special charges and
extraordinary items.
OTHER COLLATERAL shall mean all now owned or hereafter acquired: cash and
other monies and property in the possession or control of the Agent and/or the
Lenders at any time; all books, records, ledger cards, disks and related data
processing software at any time evidencing or containing information relating
to any of the Collateral or otherwise necessary or helpful in the collection
thereof or realization thereon; all letters of credit and proceeds of letters
of credit; and all cash and non-cash proceeds of any of the foregoing.
OUT-OF-POCKET EXPENSES shall mean all of the Lenders' and/or the Agent's
present and future expenses incurred relative to this Agreement, whether
incurred heretofore or hereafter, which expenses shall include, without being
limited to, the cost of record searches, all costs and expenses incurred by the
Agent in opening bank accounts, depositing checks, receiving and transferring
funds, and any charges imposed on the Agent due to "insufficient funds" of
deposited checks and the Agent's standard fee relating thereto, any amounts
paid by the Agent, incurred by or charged to the Agent by the Issuing Bank
under the Letter of Credit Guaranty or the Company's Reimbursement Agreement,
Application for Letter of Credit or other like document which pertain either
directly or indirectly to such Letters of Credit, and the Agent's standard fees
relating to the Letters of Credit and any drafts thereunder, outside counsel
fees, fees and taxes relative to the filing of financing statements, and all
expenses, costs and fees set forth in Section 9 of this Agreement.
PERMITTED ENCUMBRANCES shall mean: I) liens expressly permitted, or consented
to, by the Agent; II) Purchase Money Liens; III) Customarily Permitted Liens;
IV) liens granted the Agent for the benefit of the Lenders by the Company; V)
liens of judgment creditors provided such liens do not exceed, in the
aggregate, at any time, $100,000.00 (other than liens bonded or insured to the
reasonable satisfaction of the Agent); VI) cash collateral pledged to secure
the letters of credit listed on Schedule P-1 attached hereto provided x) such
cash collateral does not exceed one hundred and five percent (105%) of the then
outstanding amount of such letters of credit and y) such letters of credit may
not be renewed; VII) liens for taxes not yet due and payable or which are being
diligently contested in good faith by the Company by appropriate proceedings
and which liens are not x) senior to the liens of the Agent or y) for taxes due
the United States of America or z) for
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<PAGE> 12
amounts in excess of $100,000.00; VIII) liens in favor of the purchaser/lessor
in connection with sale/leasebacks consented to in writing by the Agent; and
IX) liens in favor of Compaq Computer Corporation in rights of the Company with
respect to Western Digital Corporation, to the extent and only to the extent
provided for in Section 2.1(i) of that certain Amendment to Development
Agreement dated as of June 16, 1996, between the Company and Compaq Computer
Corporation.
PERMITTED INDEBTEDNESS shall mean: I) current indebtedness maturing in less
than one year and incurred in the ordinary course of business for raw
materials, supplies, equipment, services, utilities, taxes or labor; II) the
indebtedness secured by the Purchase Money Liens; III) the Subordinated Debt
and the Subordinated Replacement Debt; IV) indebtedness arising under this
Agreement; V) deferred taxes and other expenses incurred in the ordinary course
of business; vi) indebtedness for the letters of credit listed on Schedule P-1
attached hereto; VII) other indebtedness existing on the date of execution of
this Agreement and listed in the most recent financial statement delivered to
the Lenders or otherwise disclosed to the Lenders in writing on or before the
date of execution of this Agreement; VIII) indebtedness of the Company to
purchasers/lessors in connection with sale/leasebacks permitted by paragraph 4
of Section 5 hereof; and IX) indebtedness for borrowed money of any direct or
indirect subsidiary of the Company.
PROFIT TO SALES PERCENT shall mean, with respect to any fiscal quarter of the
Company, the percentage derived from the fraction of which the numerator is the
Company's Operating Profit for such fiscal quarter and the denominator is the
Company's sales for such fiscal quarter.
PURCHASE MONEY INDEBTEDNESS shall mean the Indebtedness incurred by the Company
either concurrent with the acquisition by the Company of Equipment or not more
than ninety (90) days after the acquisition by the Company of Equipment and
secured solely by the Equipment acquired x) concurrent with the incurrence of
the Indebtedness or y) within ninety (90) days of the incurrence of the
Indebtedness provided i) the Indebtedness so incurred is to facilitate the
Company's acquisition of Equipment or to reimburse the Company for the cash
purchase price paid by the Company for the purchase of Equipment, ii) the
Company shall deliver to the Agent a description of the Equipment so pledged,
iii) the Indebtedness in each transaction is not less than fifty percent (50%)
of the then book value of the Equipment pledged to secure such Indebtedness and
iv) the Indebtedness incurred shall not exceed, in the aggregate, $500,000.00
in any fiscal year.
PURCHASE MONEY LIENS shall mean the lien granted by the Company to secure the
Purchase Money Indebtedness.
RBC shall mean RBC Trade Finance (USA) Inc. or any replacement factor that has
entered into an intercreditor agreement with the Agent on substantially the
same terms as the intercreditor agreement between the Agent and RBC.
REAL ESTATE shall mean the Company's fee and/or leasehold interests in real
property.
REQUIRED LENDERS shall mean Lenders holding not less than fifty-one percent
(51%) of the Obligations.
REVOLVER LIBOR MARGIN shall mean the percentages set forth below determined
with respect to the Profit to Sales Percent of the Company, with any change to
occur on the first day of the month following each filing of a 10Q or 10K
report by the Company with the SEC, and the Agent's receipt and review of a
copy thereof. Should the Company fail timely to file and provide to the Agent
a copy of the aforementioned reports (without giving effect to any extension of
time), then interest will be computed based on the highest margin
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<PAGE> 13
set forth below during such period of delinquency until the Agent's receipt and
review of the Company's next 10Q or 10K report:
<TABLE>
<CAPTION>
If Profit to Sales Percent is: Margin is:
------------------------------ ----------
<S> <C>
< or = 0% 3.75%
> 0% and < or = 8% 3.25%
> 8% 3.00%
</TABLE>
REVOLVER NON-LIBOR MARGIN shall mean the percentages set forth below determined
with respect to the Profit to Sales Percent of the Company, with any change to
occur on the first day of the month following each filing of a 10Q or 10K
report by the Company with the SEC, and the Agent's receipt and review of a
copy thereof. Should the Company fail timely to file and provide to the Agent
a copy of the aforementioned reports (without giving effect to any extension of
time), then interest will be computed based on the highest margin set forth
below during such period of delinquency until the Agent's receipt and review of
the Company's next 10Q or 10K report:
<TABLE>
<CAPTION>
If Profit to Sales Percent is: Margin is:
------------------------------ ----------
<S> <C>
< or = 0% 1.25%
> 0% and < or = 8% 0.75%
> 8% 0.50%
</TABLE>
REVOLVING LOANS shall mean the loans and advances made, from time to time, to
or for the account of the Company by the Agent on behalf of the Lenders
pursuant to Section 3 of this Agreement.
SETTLEMENT DATE shall mean the date, weekly, and more frequently, at the
discretion of the Agent, upon the occurrence of an Event of Default or a
continuing decline or increase of the Revolving Loans that the Agent and the
Lenders shall settle amongst themselves so that x) the Agent shall not have, as
Agent, any money at risk and y) on such Settlement Date the Lenders shall have
a pro rata amount of all outstanding Revolving Loans and CAPEX Term Loans.
SIGNIFICANT ASSETS shall mean, with respect to any person or entity, assets of
such person or entity with an aggregate value in excess of $25,000.00.
STANDBY LETTER OF CREDIT shall mean a Letter of Credit that is a standby letter
of credit as such term is commonly understood by letter of credit issuers.
SUBORDINATED DEBT shall mean the Atari Subordinated Debt and the debt due a
Subordinating Creditor (and any note evidencing such debt) which has been
subordinated, by a Subordination Agreement, to the prior payment and
satisfaction of the Obligations of the Company to the Agent and/or the Lenders
(in form and substance satisfactory to the Agent).
SUBORDINATED REPLACEMENT DEBT shall mean any debt incurred by the Company to
repay, in whole or in
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<PAGE> 14
part, the Subordinated Debt provided the Subordinated Replacement Debt is on
terms and conditions substantially similar to the Subordinated Debt, and is not
greater in principal amount than the Subordinated Debt being repaid.
SUBORDINATING CREDITOR shall mean any holder of any Atari Subordinated Debt and
any other party hereafter executing a Subordination Agreement.
SUBORDINATION AGREEMENT shall mean the agreement among the Company, a
Subordinating Creditor, and the Agent, pursuant to which Subordinated Debt is
subordinated to the prior payment and satisfaction of the Company's Obligations
to the Agent and the Lenders (in form and substance satisfactory to the Agent).
SUBSIDIARY PERMITTED ENCUMBRANCES shall mean: i) liens expressly permitted, or
consented to, by the Agent; ii) liens in existence on the date hereof and
disclosed on Schedule S-1 attached hereto, and liens on the same property
hereafter securing indebtedness incurred in connection with re-fundings or
refinancings of the indebtedness secured by such scheduled liens, on terms and
conditions substantially similar to those of the indebtedness so re-funded or
refinanced, which re-funded or refinanced indebtedness is not greater in
principal amount than the indebtedness being re-funded or refinanced; iii)
liens or charges secured by the assets of JTS Technology provided a) except as
otherwise permitted by clause iv) of this definition, no lien or charge
pursuant to this clause iii) may attach to, or be granted on, the inventory and
accounts receivable of JTS Technology; b) the aggregate amount of such
indebtedness related to the acquisition, construction, or financing of new
facilities in India (including land, buildings, improvements, fixtures,
equipment, and furnishings) secured by such liens or charges shall in no event
ever be greater than $50,000,000.00 in the aggregate at any one time; c) the
aggregate amount of indebtedness secured by such liens or charges (other than
indebtedness referred to in clause b) above) shall in no event ever be greater
than $20,000,000.00 in the aggregate at any one time; d) not more than
$10,000,000.00 of indebtedness secured by such liens or charges (other than
indebtedness referred to in clause b) above) may be incurred in any fiscal
year; and (e) at the time of creation of the lien or charge, the indebtedness
to be secured may not be less than fifty percent (50%) of the market value of
the property securing said indebtedness; and iv) liens on current assets
(including inventory and accounts receivable) of any direct or indirect
subsidiary of the Company securing indebtedness of such subsidiary permitted
under clause ix) of the definition of "Permitted Indebtedness," except for and
excluding (except as permitted by clause ii) of this definition) liens on
inventory of JTS Technology or liens on rights to payment of JTS Technology
with respect to which the obligor is the Company or JTS Mauritius, unless the
holder of such liens has entered into an intercreditor agreement with the
Agent, reasonably satisfactory to the Agent, ensuring the priority of the liens
of the Agent on the Inventory and Accounts of the Company as against any claim,
lien, or tracing rights such other lienholder might have on or with respect to
such Inventory or Accounts as proceeds of its lien on property of JTS
Technology.
TANGIBLE NET WORTH shall mean assets in excess of liabilities, determined in
accordance with GAAP, on a consistent basis with the latest annual audited
statement, plus outstanding principal of Subordinated Debt, less intangible
assets.
TRADE ACCOUNTS PAYABLE shall mean the trade accounts payable for Inventory sold
to the Company, all as determined in accordance with GAAP.
TRADE ACCOUNTS RECEIVABLE shall mean the trade accounts receivable due the
Company as a result of a sale of Inventory by the Company, all as determined in
accordance with GAAP.
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<PAGE> 15
SECTION 2. CONDITIONS PRECEDENT
The obligation of the Lenders to make loans hereunder and to assist in
the issuance of Letters of Credit is subject to the satisfaction of, or waiver
of, immediately prior to or concurrently with the making of such loans, the
following conditions precedent (except to the extent that a condition is
expressly stated to be a condition subsequent, in which case the Company
covenants that such condition shall be satisfied within the stated period after
the Effective Date):
A) LIEN SEARCHES - The Agent shall have received tax, judgment,
Uniform Commercial Code and lien searches, satisfactory to the Agent for all
locations presently occupied or used by the Company.
B) CASUALTY INSURANCE - The Company shall have delivered to the Agent
evidence satisfactory to the Agent that casualty insurance policies listing the
Agent as loss payee or mortgagee, as the case may be, are in full force and
effect, all as set forth in Section 6, paragraph 5 of this Agreement.
C) PERSONAL PROPERTY LIENS - Any documents (including, without
limitation, financing statements and notices to depositary institutions)
required to be filed in order to create, in favor of the Agent on behalf of the
Lenders, a first and exclusive perfected security interest, subject only to the
Permitted Encumbrances, in the Collateral with respect to which a security
interest may be perfected by a filing under the Uniform Commercial Code or
other applicable law (foreign, state or federal) shall have been properly filed
in each office in each jurisdiction required in order to create in favor of the
Agent a perfected lien on the Collateral. The Agent shall have received
acknowledgement copies of all such filings (or, in lieu thereof, the Agent
shall have received other evidence satisfactory to the Agent that all such
filings have been made); and the Agent shall have received evidence that all
necessary filing fees and all taxes or other expenses related to such filings
have been paid in full.
D) EXAMINATION & VERIFICATION- The Agent shall have completed to the
satisfaction of the Lenders an examination and verification of the Accounts,
Inventory, books and records of the Company.
E) ADDITIONAL DOCUMENTS - The Company shall have executed and
delivered to the Agent all loan documents necessary to consummate the lending
arrangement contemplated between the Company and the Lenders and to convey and
perfect liens to the Agent on all, or substantially all, of the assets of the
Company.
F) BOARD RESOLUTION - The Lenders shall have received a copy of the
resolutions of the Board of Directors of the Company authorizing the execution,
delivery and performance of (i) this Agreement, and (ii) any related
agreements, in each case certified by the Secretary or Assistant Secretary of
the Company as of the date hereof, together with a certificate of the Secretary
or Assistant Secretary of the Company as to the incumbency and signature of the
officers of the Company executing this Agreement and any certificate or other
documents to be delivered by it pursuant hereto, together with evidence of the
incumbency of such Secretary or Assistant Secretary.
G) CORPORATE ORGANIZATION - The Lenders shall have received (i) a
copy of the Certificate of Incorporation of the Company certified by the
Secretary of State of its incorporation, and (ii) a copy of the By-Laws (as
amended through the date hereof) of the Company and certified by the Secretary
or Assistant Secretary of the Company.
H) OFFICER'S CERTIFICATE - The Agent shall have received an executed
Officer's Certificate of the Company, satisfactory in form and substance to the
Agent, certifying that (i) the representations and warranties contained herein
are true and correct in all material respects on and as of the date hereof;
(ii) the Company is in compliance with all of the terms and provisions set
forth herein; and (iii) no Default, or any event which, with the giving of
notice or the passage of time or both would constitute an Event of Default, has
occurred.
I) ABSENCE OF DEFAULT - No Default, Event of Default or material
adverse change in the financial condition, business, prospects, profits,
operations or assets of the Company shall have occurred.
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<PAGE> 16
J) EXCESS AVAILABILITY - On the date of the initial disbursement of
Revolving Loans, the Company must have, after giving effect to all Revolving
Loans and disbursements, an Excess Availability of $5,000,000.00 - this
requirement contemplates that all debts, obligations and payables of the
Company are current.
K) SHARE PLEDGES - The Company shall i) execute and deliver to the
Agent a pledge and stock powers in blank pledging to the Agent as additional
collateral for the Obligations sixty five percent (65%) of the issued and
outstanding stock of 1) JTS Europe, 2) JTS Mauritius, 3) Asperal, and 4) Dexar;
and ii) deliver to the Agent the stock certificates evidencing the stock so
pledged.
L) COMMITMENT LETTER - The Company shall have fully complied, to the
satisfaction of CITBC, with all of the terms and conditions of the commitment
letter, dated April 16, 1997, issued by CITBC to, and accepted by, the Company,
as modified by that certain amendment thereto dated as of April 29, 1997.
M) THIRD PARTY AGREEMENTS/CONSENTS - The Company shall have provided
to the Agent, and the Agent and its counsel shall have reviewed, with results
satisfactory to the Agent, all material agreements of the Company or its
subsidiaries with third parties requested by the Agent, including, without
limitation, the existing agreements with Western Digital, Compaq Computer,
TEAC, and Pont Peripherals Corporation (the "Existing Material Agreements");
and, to the extent requested by the Agent in the reasonable exercise of its
sole discretion, third party consents or agreements shall have been obtained
from such third parties to facilitate the ability of Agent to hold an
enforceable, perfected, first-priority security interest in the Collateral.
N) LEGAL RESTRAINTS/LITIGATION - At the date of execution of this
Agreement, there shall be no x) litigation, investigation or proceeding
(judicial or administrative) pending or, to the Company's knowledge, threatened
against the Company or its assets, by any agency, division or department of any
county, city, state, federal or foreign government arising out of this
Agreement, y) injunction, writ or restraining order restraining or prohibiting
the consummation of the financing arrangements contemplated under this
Agreement or z) suit, action, investigation or proceeding (judicial or
administrative) pending or threatened against the Company or its assets, which,
in the opinion of the Agent, if adversely determined could have a material
adverse effect on the business, operation, assets, financial condition or
Collateral of the Company.
O) DISBURSEMENT AUTHORIZATION - The Company shall have delivered to
the Agent all information necessary for the Agent on behalf of the Lenders to
issue wire transfer instructions on behalf of the Company for the initial and
subsequent loans and/or advances to be made under this Agreement including, but
not limited to, disbursement authorizations in form acceptable to the Agent.
P) OPINIONS - Counsel for the Company shall have delivered to the
Agent opinions satisfactory to CITBC opining, inter alia, that subject to the
i) filing, priority and remedies provisions of the Uniform Commercial Code, ii)
the provisions of the Bankruptcy Code, insolvency statutes or other like laws,
iii) the equity powers of a court of law and iv) such other matters as may be
agreed upon with the Agent: a) this Agreement and all documents executed by
the Company in connection therewith are x) valid, binding and enforceable
according to the terms, y) duly authorized and z) do not violate any terms,
provisions, representations or covenants in the charter of either or, to the
best knowledge of such counsel, of any loan agreement, mortgage, deed of trust,
note, security or pledge agreement or indenture to which the Company is a
signatory or by which the Company or its assets are bound; and b) the
provisions of all securities laws have been fully complied with or that
compliance is not legally appropriate and the reasons supporting such
non-compliance. Without limiting the generality of the foregoing, (A) with
respect to the share pledges of the shares of JTS Europe, JTS Mauritius,
Asperal, and/or Dexar, the Agent shall be entitled in the reasonable exercise
of its sole discretion to request legal advice from counsel in England,
Mauritius, and/or Panama as to the validity, enforceability, perfection,
priority, registration or recordation, and/or compliance with local law of such
share pledges, and B) with respect to sales by JTS Technology to the Company of
goods, the Agent shall be entitled in the reasonable exercise of its sole
discretion to request legal advice from counsel in India as to the effect of
such sales on any liens of any Indian secured lenders to JTS Technology in the
goods so sold and any proceeds thereof, including any Accounts of the Company
resulting from the resale of such goods by the
14
<PAGE> 17
Company.
Q) DEPOSITORY ACCOUNTS - The Company, the Agent and the applicable
banks have executed all documents, and taken all necessary action, to set up
the Depository Accounts; provided that (A) if such actions cannot be completed
prior to the Effective Date, the Company shall complete such actions as soon as
possible subsequent to the Effective Date, and it shall be a condition
subsequent hereunder that such actions shall be completed within 15 days after
the Effective Date; and (B) in any event, at all times prior to such time as
all collections of the Company are redirected to the Depository Accounts, the
Company, the Agent, and Silicon Valley Bank shall have entered into, and there
shall be in full force and effect, a tri-party letter agreement in form and
substance satisfactory to the Agent regarding the deposit by the Company with
Silicon Valley Bank, and the daily sweep by Silicon Valley Bank to the Agent
for the benefit of the Lenders, of all collections of the Company.
R) LANDLORD CONSENTS AND WAIVERS - Within ninety (90) days after the
Effective Date, as a condition subsequent hereunder, the landlords of the
Company shall have executed and delivered to the Agent landlord consents and
waivers in form and substance satisfactory to the Agent; provided that,
anything herein to the contrary notwithstanding, prior to the execution and
delivery of such landlord waivers, the Company shall not be entitled to borrow
any CAPEX Term Loan, and the Company shall not be entitled to obtain Revolving
Loans against Inventory not physically located at locations subject to
effective landlord waivers (which Inventory, until such time, shall not be
eligible to be included in the borrowing base hereunder or for purposes of
determining Availability hereunder).
S) EXISTING CREDIT AGREEMENT - (x) The Company's existing credit
agreement with Silicon Valley Bank shall be terminated, (y) all loans and
obligations of the Company and/or any subsidiary of the Company thereunder
shall be paid or satisfied in full utilizing cash on hand of the Company and/or
the proceeds of the initial Revolving Loans to be made under this Agreement,
and (z) all liens upon or security interests in favor of Silicon Valley Bank in
connection therewith shall be terminated and/or released upon such payment.
T) BROKER LETTER AGREEMENT - The Brokers shall have executed and
delivered to the Agent a letter agreement, in form and substance satisfactory
to the Agent, regarding payment in full at closing of any and all brokers' or
finders' fees payable in connection with the transactions contemplated hereby.
U) CONTROL AGREEMENT - Within 30 days after the Effective Date, as a
condition subsequent hereunder, the Company shall cause Smith Barney to enter
into a control agreement reasonably satisfactory in form and substance to the
Agent with respect to any securities accounts, and any related Investment
Property, of the Company with Smith Barney.
Upon the execution of this Agreement and the initial disbursement of loans
hereunder, all of the above Conditions Precedent shall have been deemed
satisfied except as the Company and the Agent shall otherwise agree herein or
in a separate writing.
SECTION 3. REVOLVING LOANS
1. The Lenders severally agree, subject to the terms and conditions
of this Agreement from time to time, and within x) the Availability and y) the
Line of Credit, but subject to the Lenders' right to make "overadvances", to
make loans and advances to the Company on a revolving basis (i.e. subject to
the limitations set forth herein, the Company may borrow, repay and re-borrow
Revolving Loans). Such loans and advances shall be in amounts up to: A)
eighty-five percent (85%) of the outstanding Eligible Domestic Accounts
Receivable of the Company, B) eighty-five percent (85%) of the outstanding
Eligible Foreign Accounts Receivable of the Company, and C) twenty-five percent
(25%) of Eligible Domestic Finished Goods, at lower of cost or market, but not
to exceed the Inventory Sub-Limit from time to time in effect. All requests
for loans and advances (other than Libor Loans) must by received by an officer
of the Agent no later than 1:00 p.m., New York time, of the day on which such
loans and advances are required. Should the
15
<PAGE> 18
Agent for any reason honor requests for advances in excess of the limitations
set forth herein, such advances shall be considered "overadvances" and shall be
made in the Agent's sole discretion, subject to any additional terms the Agent
or the Lenders deems necessary. The Company may elect to use Libor as to any
new or then outstanding Revolving Loans provided x) there is then no unwaived
Default or Event of Default, and y) the Company has so advised the Agent of its
election to use Libor and the Libor Period selected no later than three (3)
Business Days prior to the proposed borrowing or, in the case of a Libor
election with respect to a then outstanding Revolving Loan, three (3) Business
Days prior to the conversion of any then outstanding Revolving Loans to Libor
Loans and z) the election and Libor shall be effective, provided, there is then
no unwaived Default or Event of Default, on the fourth Business Day following
said notice. The Libor elections must be for $100,000.00 or whole multiples
thereof. No more than three (3) Libor elections in the aggregate may be in
effect at any one time (including elections relating to Revolving Loans and
elections relating to CAPEX Term Loans) unless the Agent agrees otherwise.
2. In furtherance of the continuing assignment and security interest
in the Company's Accounts, the Company will, upon the creation of Accounts,
execute and deliver to the Agent for the benefit of the Lenders in such form
and manner as the Agent may reasonably require, solely for the Agent's
convenience in maintaining records of collateral, such confirmatory schedules
of Accounts as the Agent may reasonably request, and such other appropriate
reports designating, identifying and describing the Accounts as the Agent may
reasonably require. In addition, upon the Agent's request the Company shall
provide the Agent with copies of agreements with, or purchase orders from, the
Company's customers, and copies of invoices to customers, proof of shipment or
delivery and such other documentation and information relating to said Accounts
and other collateral as the Agent may reasonably require. Failure to provide
the Agent with any of the foregoing shall in no way affect, diminish, modify or
otherwise limit the security interests granted herein. The Company hereby
authorizes the Agent to regard the Company's printed name or rubber stamp
signature on assignment schedules or invoices as the equivalent of a manual
signature by one of the Company's authorized officers or agents.
3. The Company hereby represents and warrants that: each Account is
based on an actual and bona fide lease or sale and delivery of goods or
rendition of services to customers, made by the Company in the ordinary course
of its business; the goods and inventory being sold and the Accounts created
are the exclusive property of the Company and are not and shall not be subject
to any lien, consignment arrangement, encumbrance, security interest or
financing statement whatsoever, other than the Permitted Encumbrances; the
invoices evidencing such Accounts are in the name of the Company; and the
customers of the Company have accepted the goods or services, owe and are
obligated to pay the full amounts stated in the invoices according to their
terms, without dispute, offset, defense, counterclaim or contra, except for de
minimis error, disputes and other matters arising in the ordinary course of
business of which the Company has advised the Agent pursuant to paragraph 5 of
this Section 3. The Company confirms to the Lenders that any and all taxes or
fees relating to its business, its sales, the Accounts or goods relating
thereto, are its sole responsibility and that same will be paid by the Company
when due and that none of said taxes or fees represent a lien on or claim
against the Accounts. The Company also warrants and represents that it is a
duly and validly existing corporation and is qualified in all states and
foreign countries where the failure to so qualify would have a material adverse
effect on the business of the Company or the ability of the Company to enforce
collection of Accounts due from customers residing in that state or foreign
country. The Company agrees to maintain such books and records regarding
Accounts as the Agent may reasonably require and agrees that the books and
records of the Company will reflect the Lenders' interest in the Accounts.
4. Until the Agent has advised the Company to the contrary after the
occurrence of an Event of Default, the Company may and will enforce, collect
and receive all amounts owing on the Accounts for the Lenders'
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<PAGE> 19
benefit and on the Lenders' behalf, but at the Company's expense; such
privilege shall terminate automatically upon the institution by or against the
Company of any proceeding under any bankruptcy or insolvency law or, at the
election of the Agent, upon the occurrence of any other Event of Default and
until such Event of Default is waived. Any checks, cash, notes or other
instruments or property received by the Company with respect to any Accounts
shall be held by the Company in trust for the Lenders, separate from the
Company's own property and funds, and immediately turned over to the Agent with
proper assignments or endorsements by deposit to the Depository Accounts. All
amounts received by the Agent in payment of Accounts will be credited to the
Company's account upon the Agent's receipt of "collected funds" in United
States currency at the Agent's bank account in New York, New York on the
Business Day of receipt if received no later than 1:00 pm or on the next
succeeding Business Day if received after 1:00 pm. No checks, drafts or other
instrument received by the Agent shall constitute final payment to the Agent
unless and until such instruments have actually been collected.
5. The Company agrees to notify the Agent: a) promptly of any matters
materially affecting the value, enforceability or collectibility of any Account
in excess of $50,000.00 and of all material customer disputes, offsets,
defenses, counterclaims, returns, rejections and reclaimed or repossessed
merchandise or goods and b) periodically, but no less frequently than monthly,
of all matters affecting the value, enforceability or collectibility of any
Account and of all customer disputes, offsets, defenses, counterclaims,
returns, rejections and reclaimed or repossessed goods. The Company agrees to
issue credit memoranda promptly (with duplicates to the Agent upon request
after the occurrence of an Event of Default) upon accepting returns or granting
allowances, and may continue to do so until the Agent has notified the Company
that an Event of Default has occurred and that all future credits or allowances
are to be made only after the Agent's prior written approval. Upon the
occurrence of an Event of Default and until such time as such Event of Default
is waived and on notice from the Agent, the Company agrees that all returned,
reclaimed or repossessed merchandise or goods shall be set aside by the
Company, marked with the Agent's name and held by the Company for the Agent's
account.
6. The Agent shall maintain a separate account on its books in the
Company's name in which the Company will be charged with loans and advances
made by the Agent to the Company or for its account, and with any other
Obligations, including any and all costs, expenses and reasonable attorney's
fees which the Agent or any Lender reasonably may incur in connection with the
exercise by or for the Agent or the Lenders of any of the rights or powers
herein conferred upon the Agent or the Lenders, or in the prosecution or
defense of any action or proceeding to enforce or protect any rights of the
Agent and the Lenders in connection with this Agreement or the Collateral
assigned hereunder, or any Obligations owing to the Lenders by the Company.
The Company will be credited with all amounts received by the Agent from the
Company or from others for the Company's account, including, as above set
forth, all amounts received by the Agent in payment of assigned Accounts and
such amounts will be applied to payment of the Obligations. In no event shall
prior recourse to any Accounts or other security granted to or by the Company
be a prerequisite to the Agent's right to demand payment of any Obligation.
Further, it is understood that the Agent and the Lenders shall have no
obligation whatsoever to perform in any respect any of the Company's contracts
or obligations relating to the Accounts.
7. After the end of each month, the Agent shall promptly send the
Company a statement showing the accounting for the charges, loans, advances and
other transactions occurring between the Agent and the Lenders and the Company
during that month. The monthly statements shall be deemed correct and binding
upon the Company and shall constitute an account stated between the Company,
the Agent and the Lenders unless the Agent receives a written statement of the
exceptions within thirty (30) days of the date of the monthly statement.
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SECTION 4. LETTERS OF CREDIT
In order to assist the Company in establishing or opening Documentary
Letters of Credit or Standby Letters of Credit with an Issuing Bank to cover
the purchase and importation of Inventory, Equipment or otherwise, the Company
has requested the Lenders to join in the applications for such Letters of
Credit, and/or guarantee payment or performance of such Letters of Credit and
any drafts or acceptances thereunder through the issuance of the Letter of
Credit Guaranty, thereby lending the Lenders' credit to the Company and the
Lenders have agreed to do so. These arrangements shall be handled by the Agent
subject to the terms and conditions set forth below.
1. The amount and extent of the Letters of Credit and changes or
modifications thereof by the Company and/or the Issuing Bank of the terms and
conditions thereof shall in all respects be subject to the prior approval of
the Agent in the exercise of its reasonable discretion provided however, that:
a) in no event may the aggregate amount of all such outstanding Letters of
Credit exceed, in the aggregate, at any one time $3,000,000.00 and b) the
Letters of Credit and all documentation in connection therewith shall be in
form and substance satisfactory to the Company, the Agent and the Issuing Bank.
2. The Agent shall have the right, without notice to the Company, to
charge the Company's account on the Agent's books with the amount of any and
all indebtedness, liability or obligation of any kind outstanding under the
Letter of Credits at the earlier of a) payment by the Agent under the Letter of
Credit Guaranty, or b) the occurrence of an Event of Default which is not
waived. Any amount charged to Company's loan account shall be deemed a
Revolving Loan hereunder and shall incur interest at the rate provided in
Section 7, paragraph 1 of this Agreement.
3. The Company unconditionally indemnifies the Agent and the Lenders
and holds them harmless from any and all loss, claim or liability incurred by
them arising from any transactions or occurrences relating to Letters of Credit
established or opened for the Company's account, the collateral relating
thereto and any drafts or acceptances thereunder, and all obligations
thereunder, including any such loss or claim due to any action taken by any
Issuing Bank, other than for any such loss, claim or liability arising out of
the gross negligence or willful misconduct by the Agent. The Company agrees
that any action taken by any Issuing Bank, under or in connection with the
Letters of Credit, the guarantees, the drafts or acceptances, or the
Collateral, shall be binding on the Company and shall not put the Agent and the
Lenders in any resulting liability to the Company. The Company further agrees
to hold the Agent and the Lenders harmless from any errors or omission,
negligence or misconduct by the Issuing Bank. The Company's unconditional
obligation to the Agent and the Lenders hereunder shall not be modified or
diminished for any reason or in any manner whatsoever, other than as a result
of Agent's gross negligence or willful misconduct. The Company agrees that any
charges incurred for the Company's account by the Issuing Bank shall be
conclusive on the Agent and may be charged to the Company's account.
4. The Agent and the Lenders shall not be responsible for: the
existence, character, quality, quantity, condition, packing, value or delivery
of the goods purporting to be represented by any documents; any difference or
variation in the character, quality, quantity, condition, packing, value or
delivery of the goods from that expressed in the documents; the validity,
sufficiency or genuineness of any documents or of any endorsements thereon,
even if such documents should in fact prove to be in any or all respects
invalid, insufficient, fraudulent or forged; the time, place, manner or order
in which shipment is made; partial or
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incomplete shipment, or failure or omission to ship any or all of the goods
referred to in the Letters of Credit or documents; any deviation from
instructions; delay, default, or fraud by the shipper and/or anyone else in
connection with the Collateral or the shipping thereof; or any breach of
contract between the beneficiary and the Company.
5. Upon the occurrence of an Event of Default which has not been
waived, the Agent shall have the full right and authority to clear and resolve
any questions of non-compliance of documents; to give any instructions as to
acceptance or rejection of any documents or goods; to execute any and all
steamship or airways guaranties (and applications therefor), indemnities or
delivery orders; to grant any extensions of the maturity of, time of payment
for, or time of presentation of, any drafts, acceptances, or documents; and to
agree to any amendments, renewals, extensions, modifications, changes or
cancellations of any of the terms or conditions of any of the applications,
Letters of Credit, drafts or acceptances; all in the Agent's sole name, and the
Issuing Bank shall be entitled to comply with and honor any and all such
documents or instruments executed by or received solely from the Agent, all
without any notice to or any consent from the Company.
6. Without the Agent's express consent and endorsement in writing,
the Company agrees: a) not to execute any and all applications for steamship
or airway guaranties, indemnities or delivery orders; to grant any extensions
of the maturity of, time of payment for, or time of presentation of, any
drafts, acceptances or documents; or to agree to any amendments, renewals,
extensions, modifications, changes or cancellations of any of the terms or
conditions of any of the applications, Letters of Credit, drafts or
acceptances; and b) after the occurrence of an Event of Default which is not
waived, not to i) clear and resolve any questions of non-compliance of
documents, or ii) give any instructions as to acceptances or rejection of any
documents or goods.
7. The Company agrees that any necessary import, export or other
licenses or certificates for the import or handling of the Collateral will have
been promptly procured; all foreign and domestic governmental laws and
regulations in regard to the shipment and importation of the Collateral, or the
financing thereof will have been promptly and fully complied with; and any
certificates in that regard that the Agent may at any time request will be
promptly furnished. In this connection, the Company warrants and represents
that, to the best of its knowledge, all shipments made under any such Letters
of Credit are in accordance with the laws and regulations of the countries in
which the shipments originate and terminate, and are not prohibited by any such
laws and regulations. The Company assumes all risk, liability and
responsibility for, and agrees to pay and discharge, all present and future
local, state, federal or foreign taxes, duties, or levies. Any embargo,
restriction, laws, customs or regulations of any country, state, city, or other
political subdivision, where the Collateral is or may be located, or wherein
payments are to be made, or wherein drafts may be drawn, negotiated, accepted,
or paid, shall be solely the Company's risk, liability and responsibility.
8. Upon any payments made to the Issuing Bank under the Letter of
Credit Guaranty, the Agent and the Lenders shall acquire, by subrogation, any
rights, remedies, duties or obligations granted or undertaken by the Company to
the Issuing Bank in any application for Letters of Credit, any standing
agreement relating to Letters of Credit or otherwise, all of which shall be
deemed to have been granted to the Agent and the Lenders and apply in all
respects to the Agent and the Lenders and shall be in addition to any rights,
remedies, duties or obligations contained herein.
SECTION 4A. CAPEX TERM LOANS
1. Within the available and unused CAPEX Term Loan Line of Credit and
upon receipt of CAPEX Term Loan Promissory Notes, in the form of Exhibit A
attached hereto, from the Company aggregating the amount
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of the requested CAPEX Term Loans, the Lenders severally will extend to the
Company CAPEX Term Loans aggregating such requested amount, provided: a) no
Default or Event of Default has occurred or would occur after giving effect to
such CAPEX Term Loan, b) all of the conditions listed below are fulfilled to
the sole but reasonable satisfaction of the Agent.
2. CAPEX Term Loan proceeds: x) are to be used exclusively to pay
for, or reimburse the Company for, the acquisition by the Company of newly
acquired Capital Improvements which are not subject to Purchase Money Liens;
and y) will be disbursed upon completion of, or within three (3) months after,
the delivery, assembly and installation of the Capital Improvement.
3. The Company must give the Agent thirty (30) days prior written
notice of its intention to enter into a CAPEX Term Loan and draw down the CAPEX
Term Loans no earlier than the date occurring six (6) months from the date
hereof and no later than the close of business on the date occurring two (2)
years from the date hereof.
4. No more than $1,000,000.00 of CAPEX Term Loans may be borrowed in
any consecutive twelve (12) month period.
5. No CAPEX Term Loan may exceed sixty percent (60%) of the total
acquisition costs of the Capital Improvements, exclusive of assembly costs,
software costs, installation expenses, maintenance, shipping costs, taxes and
import or custom charges for which the CAPEX Term Loan is sought.
6. The CAPEX Term Loans must be in increments of $250,000.00 or more.
7. Each CAPEX Term Loan will be repaid to the Lenders by the Company
in thirty six (36) equal monthly installments of principal commencing on the
first Business Day of the next calendar month after initial funding thereof.
To the extent repaid, CAPEX Term Loans may not be reborrowed under this Section
4A of this Agreement and the CAPEX Term Loan Line of Credit shall be
permanently reduced by the amount of any such repayment(s).
8. In the event this Agreement or the Line of Credit is terminated by
either the Lenders or the Company for any reason whatsoever, the CAPEX Term
Loan Line of Credit shall be terminated and the CAPEX Term Loans shall become
due and payable on the effective date of such termination notwithstanding any
provision to the contrary in the CAPEX Term Loan Promissory Notes or this
Agreement.
9. The Company may prepay at any time, at its option, in whole or in
part, the CAPEX Term Loans, provided that on each such prepayment, the Company
shall pay accrued interest on the principal so prepaid to the date of such
prepayment.
10. Each prepayment shall be applied to the then last maturing
installments of principal of the CAPEX Term Loans.
11. The Company hereby authorizes the Agent to charge its Revolving
Loan Account with the amount of all amounts due under this Section 4A as such
amounts become due. The Company confirms that any charges which the Agent may
so make to its account as herein provided will be made as an accommodation to
the Company and solely at the Agent's discretion.
SECTION 5. COLLATERAL
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1. As security for the prompt payment in full of all loans and
advances made and to be made to the Company from time to time by the Agent on
behalf of the Lenders, pursuant hereto, as well as to secure the payment in
full of the other Obligations, the Company hereby pledges and grants to the
Agent for the benefit of the Lenders a continuing general lien upon and
security interest in all of its:
(A) present and hereafter acquired Inventory;
(B) present and hereafter acquired Equipment;
(C) present and future Accounts;
(D) present and future General Intangibles;
(E) present and future Documents of Title;
(F) present and future Investment Property;
(G) present and future Other Collateral; and
(H) present and future Deposit Accounts.
2. The security interests granted hereunder shall extend and attach
to:
(A) All Collateral which is presently in existence and which is owned
by the Company or in which the Company has any interest, whether held by the
Company or others for its account, and, if any Collateral is Equipment, whether
the Company's interest in such Equipment is as owner or lessee under a
capitalized lease or conditional vendee, except, with respect to any Equipment
subject to a lease as to which the Company is the lessee, or subject to a
conditional purchase agreement as to which the Company is the purchaser, to the
extent and only for so long as such grant of security interest expressly is
prohibited by the terms of any enforceable provision of any applicable lease or
conditional purchase agreement;
(B) All Equipment whether the same constitutes personal property or
fixtures, including, but without limiting the generality of the foregoing, all
dies, jigs, tools, benches, tables, accretions, component parts thereof and
additions thereto, as well as all accessories, motors, engines and auxiliary
parts used in connection with or attached to the Equipment; and
(C) All Inventory and any portion thereof which may be returned,
rejected, reclaimed or repossessed by either the Agent or the Company from the
Company's customers, as well as to all supplies, goods, incidentals, packaging
materials, labels and any other items which contribute to the finished goods or
products manufactured or processed by the Company, or to the sale, promotion or
shipment thereof.
3. The Company agrees to safeguard, protect and hold all Inventory
for the Lenders' account and make no disposition thereof except in the regular
course of the business of the Company as herein provided. Inventory may be
sold and shipped by the Company to its customers in the ordinary course of the
Company's business, for cash or on open account and on terms currently being
extended by the Company to its customers, provided that all proceeds of all
sales (including cash, accounts receivable, checks, notes, instruments for the
payment of money and similar proceeds) are forthwith transferred, endorsed, and
turned over and delivered to the Agent in accordance with paragraph 4 of
Section 3 of this Agreement. Sales of Inventory in which a
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lien upon, or security interest in, Inventory is retained by the Company shall
be made by the Company only with the approval of the Agent, and the proceeds of
such sales or sales of inventory for cash shall not be commingled with the
Company's other property, but shall be segregated, held by the Company in trust
for the Lenders as the Lenders' exclusive property, and shall be delivered
immediately by the Company to the Agent in the identical form received by the
Company by deposit to the Depository Accounts. Upon the sale, exchange, or
other disposition of Inventory, as herein provided, the security interest in
the Company's Inventory provided for herein shall, without break in continuity
and without further formality or act, continue in, and attach to, all proceeds,
including any instruments for the payment of money, accounts receivable,
contract rights, documents of title, shipping documents, chattel paper and all
other cash and non-cash proceeds of such sale, exchange or disposition. As to
any such sale, exchange or other disposition, the Agent shall have all of the
rights of an unpaid seller, including stoppage in transit, replevin, rescission
and reclamation.
4. The Company agrees at its own cost and expense to keep the
Equipment in as good and substantial repair and condition as the same is now or
at the time the lien and security interest granted herein shall attach thereto,
reasonable wear and tear excepted, making any and all repairs and replacements
when and where necessary, provided, however, that the Company need not maintain
Equipment which, in the Company's business judgment is obsolete or no longer
needed in the Company's operations. The Company also agrees to safeguard,
protect and hold all Equipment for the Lenders' account and make no
disposition thereof unless the Company first obtains the prior written approval
of the Agent. Any sale, exchange or other disposition of any Equipment shall
only be made by the Company with the prior written approval of the Agent, and
the proceeds of any such sales shall not be commingled with the Company's other
property, but shall be segregated, held by the Company in trust for the Lenders
as the Lenders' exclusive property, and shall be delivered immediately by the
Company to the Agent in the identical form received by the Company by deposit
to the Depository Accounts. Upon the sale, exchange, or other disposition of
the Equipment, as herein provided, the security interest provided for herein
shall, without break in continuity and without further formality or act,
continue in, and attach to, all proceeds, including any instruments for the
payment of money, accounts receivable, contract rights, documents of title,
shipping documents, chattel paper and all other cash and non-cash proceeds of
such sales, exchange or disposition. As to any such sale, exchange or other
disposition, the Agent shall have all of the rights of an unpaid seller,
including stoppage in transit, replevin, rescission and reclamation.
Notwithstanding anything hereinabove contained to the contrary, the Company may
sell, exchange or otherwise dispose of obsolete Equipment or Equipment no
longer needed in the Company's operations, other than Equipment financed with
CAPEX Term Loans, provided, however, that (a) the then book value of the
Equipment so disposed of does not exceed $250,000.00 in the aggregate in any
fiscal year and (b) the proceeds of such sales or dispositions are delivered to
the Agent in accordance with the foregoing provisions of this paragraph, except
that the Company may retain and use such proceeds to purchase forthwith
replacement Equipment which the Company determines in its reasonable business
judgment to have a collateral value at least equal to the Equipment so disposed
of or sold, provided, however, that the aforesaid right shall automatically
cease upon the occurrence of an Event of Default which is not waived.
5. The rights and security interests granted to the Agent for the
benefit of the Lenders hereunder are to continue in full force and effect,
notwithstanding the termination of this Agreement or the fact that the account
maintained in the Company's name on the books of the Agent may from time to
time be temporarily in a credit position, until the final payment in full to
the Agent and the Lenders of all Obligations and the termination of this
Agreement. Any delay, or omission by the Agent to exercise any right
hereunder, shall not be deemed a waiver thereof, or be deemed a waiver of any
other right, unless such waiver be in writing and signed by the Agent. A
waiver on any one occasion shall not be construed as a bar to or waiver of any
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right or remedy on any future occasion.
6. To the extent that the Obligations are now or hereafter secured by
any assets or property other than the Collateral or by the guarantee,
endorsement, assets or property of any other person, then the Agent shall have
the right in its sole discretion to determine which rights, security, liens,
security interests or remedies the Agent shall at any time pursue, foreclose
upon, relinquish, subordinate, modify or take any other action with respect to,
without in any way modifying or affecting any of them, or any of the Agent's
rights hereunder.
7. Any reserves or balances to the credit of the Company and any
other property or assets of the Company in the possession of the Agent or any
Lender may be held by such holder as security for the Obligations and applied
in whole or partial satisfaction of such Obligations when due. The liens and
security interests granted herein and any other lien or security interest the
Agent or any Lender may have in any other assets of the Company, shall secure
payment and performance of all now existing and future Obligations. The Agent
may in its discretion charge any or all of the Obligations to the account of
the Company when due.
8. The Company shall give or shall cause the appropriate party to
give, to the Agent, for the benefit of the Lenders, from time to time such
mortgage, pledge or security agreements with respect to the General
Intangibles, Investment Property, and Deposit Accounts of the Company and the
capital stock of any and all present or future first tier subsidiaries of the
Company, including, without limitation, JTS Europe, JTS Mauritius, Asperal,
and/or Dexar, as the Agent shall require to obtain valid first liens thereon,
provided, however, that such liens shall not encumber more than sixty-five
percent (65%) of the issued and outstanding stock or capital of the first tier
foreign subsidiaries of the Company, including, without limitation, JTS Europe,
JTS Mauritius, Asperal, or Dexar.
9. The Company shall not sell Accounts, and shall not permit its
subsidiaries to sell Accounts, other than (a) sales of foreign Accounts by the
Company or JTS Europe to RBC pursuant to the terms of a written intercreditor
agreement or agreements entered into, or to be entered into, between the Agent
and RBC, in form and substance satisfactory to the Agent; and (b) sales by JTS
Europe to Credit Lyonnais of foreign Accounts of JTS Europe pursuant to the
terms of the agreements in effect between such parties as of the Effective
Date. The Company shall: (y) keep any collections with respect to foreign
Accounts sold to RBC separate from collections with respect to the Collateral,
and not commingle same; and (z) keep any returned goods relating to foreign
Accounts sold to RBC, to the extent that RBC has a security interest in such
returned goods, separate from any other Collateral in which the Agent has a
security interest, and not commingle same.
SECTION 6. REPRESENTATIONS, WARRANTIES AND COVENANTS
1. The Company hereby warrants and represents and/or covenants that:
i) the fair value of the Company's assets exceeds the book value of the
Company's liabilities; ii) the Company is generally able to pay its debts as
they become due and payable; and iii) the Company does not have unreasonably
small capital to carry on its business as it is currently conducted absent
extraordinary and unforeseen circumstances. The Company further warrants and
represents that except for the Permitted Encumbrances, the security interests
granted herein constitute and shall at all times constitute the first and only
liens on the Collateral; that, except for the Permitted Encumbrances, the
Company is or will be at the time additional Collateral is acquired by it, the
absolute owner of the Collateral with full right to pledge, sell, consign,
transfer and create a security interest therein, free and clear of any and all
claims or liens in favor of others; that the Company will at its expense
forever warrant and, at the Agent's request, defend the same from any and all
claims and demands of any other person other than the Permitted Encumbrances;
that the Company will not grant, create or permit to
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exist, any lien upon or security interest in the Collateral, or any proceeds
thereof, in favor of any other person other than the holders of the Permitted
Encumbrances; and that the Equipment does not comprise a part of the Inventory
of the Company and that the Equipment is and will only be used by the Company
in its business and will not be held for sale or lease, or removed from its
premises, or otherwise disposed of by the Company without the prior written
approval of the Agent except as otherwise permitted in paragraph 4 of Section 5
of this Agreement.
2. The Company agrees to maintain books and records pertaining to the
Collateral in such detail, form and scope as the Agent shall reasonably
require. The Company agrees that the Agent or any Lender may enter upon the
Company's premises at any time upon prior notice (provided, however, that
notice need not be given if there is then an Event of Default which has not
been waived) during normal business hours, and from time to time, for the
purpose of inspecting the Collateral, any and all records pertaining thereto
and the books and records of the Company. The Company agrees to afford the
Agent prior written notice of any change in the location of any Collateral,
other than to locations, that as of the date hereof, are known to the Agent and
at which the Agent has filed financing statements and otherwise fully perfected
liens thereon. The Company is also to advise the Agent promptly, in sufficient
detail, of any material adverse change relating to the type, quantity or
quality of the Collateral or on the security interests granted therein. The
Company represents and warrants that its chief executive office is located at
the address set forth in Section 13, paragraph 6C of this Agreement and that
its federal taxpayer identification number is 77-0364572.
3. The Company agrees to: execute and deliver to the Agent, from
time to time, solely for the Agent's convenience in maintaining a record of the
Collateral, such written statements and schedules as the Agent may reasonably
require, designating, identifying or describing the Collateral pledged
hereunder. The Company's failure, however, to promptly give the Agent such
statements or schedules shall not affect, diminish, modify or otherwise limit
the Agent's security interests in the Collateral.
4. The Company agrees, upon request, to comply with the requirements
of all foreign, state and federal laws in order to grant to the Agent for the
benefit of the Lenders valid and perfected first security interests in the
Collateral, subject only to the Permitted Encumbrances. The Company agrees to
do whatever the Agent may reasonably request, from time to time, by way of:
filing notices of liens, financing statements, amendments, renewals and
continuations thereof; cooperating with the Agent's employees; keeping
Inventory records; transferring proceeds of Collateral to the Agent's
possession; and performing such further acts as the Agent or the Lenders may
reasonably require in order to effect the purposes of this Agreement.
5. The Company agrees to maintain insurance on the Real Estate,
Equipment and Inventory under such policies of insurance, with such insurance
companies, in such reasonable amounts and covering such insurable risks as are
at all times reasonably satisfactory to the Agent. All policies covering the
Equipment and Inventory are, subject to the rights of any holders of Permitted
Encumbrances holding claims senior to the Lenders, to be made payable to the
Agent for the account of the Lenders, in case of loss, under a standard
non-contributory "mortgagee", "lender" or "secured party" clause and are to
contain such other provisions as the Agent may require to fully protect the
Agent's and Lenders' interest in the Inventory and Equipment and to any
payments to be made under such policies. In the event of any loss or damage by
fire or other casualty, insurance proceeds relating to Collateral shall reduce
the Company's Revolving Loans and/or CAPEX Term Loans. True copies of the
insurance policies or original certificates of insurance are to be delivered to
the Agent, with all premiums current, with the loss payable endorsement in the
Agent's favor, and shall provide for not less than thirty (30) days prior
written notice to the Agent of the exercise of any right of cancellation. At
the Company's request, or if the Company fails to maintain such insurance, the
Agent may arrange for such insurance, but at the Company's expense and without
any responsibility on the
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Agent's part for: obtaining the insurance, the solvency of the insurance
companies, the adequacy of the coverage, or the collection of claims. Upon the
occurrence of an Event of Default which is not waived, the Agent shall, subject
to the rights of any holders of Permitted Encumbrances holding claims senior to
the Agent's, have the sole right, in the name of the Agent and the Lenders' or
the Company, to file claims under any insurance policies, to receive, receipt
and give acquittance for any payments that may be payable thereunder, and to
execute any and all endorsements, receipts, releases, assignments,
reassignments or other documents that may be necessary to effect the
collection, compromise or settlement of any claims under any such insurance
policies. All proceeds of insurance received by the Agent shall be promptly
deposited by the Agent and applied as hereinabove provided.
6. The Company agrees to pay, when due, all taxes, assessments,
claims and other charges (herein "taxes") lawfully levied or assessed upon the
Company or the Collateral or collected by the Company and if such taxes remain
unpaid after the date fixed for the payment thereof (unless such taxes are
being diligently contested in good faith by the Company by appropriate
proceedings) or if any lien shall be claimed thereunder x) for taxes due the
United States of America or y) which is senior to the lien of the Agent or z)
for an amount in excess of $100,000.00, the Agent may, on the Company's behalf,
pay such taxes, and the amount thereof shall be an Obligation secured hereby
and due the Agent on demand.
7. The Company: (a) agrees to comply with all acts, rules,
regulations and orders of any legislative, administrative or judicial body or
official, which the failure to comply with would have a material and adverse
impact on the Collateral, or any material part thereof, or on the operation of
the Company's business; provided that the Company may contest any acts, rules,
regulations, orders and directions of such bodies or officials in any
reasonable manner which will not, in the Agent's reasonable opinion, materially
and adversely effect the Agent's and Lenders' rights or priority in the
Collateral; (b) agrees to comply with all environmental statutes, acts, rules,
regulations or orders as presently existing or as adopted or amended in the
future, applicable to the ownership and/or use of its real property and
operation of its business, which the failure to comply with would have a
material and adverse impact on the Collateral, or any material part thereof, or
on the operation of the business of the Company. The Company hereby
indemnifies the Agent and the Lenders and agrees to defend and hold the Agent
and the Lenders harmless from and against any and all loss, damage, claim,
liability, injury or expense which the Agent and the Lenders may sustain or
incur (other than as a result of actions of the Agent and the Lenders) in
connection with: any claim or expense asserted against the Agent and the
Lenders as a result of any environmental pollution, hazardous material or
environmental clean-up of the Company's real property; or any claim or expense
which results from the Company's operations (including, but not limited to, the
Company's off-site disposal practices) and the Company further agrees that this
indemnification shall survive termination of this Agreement as well as the
payment of all Obligations or amounts payable hereunder; and (c) shall not be
deemed to have breached any provision of this paragraph 7 if (i) the failure to
comply with the requirements of this paragraph 7 resulted from good faith error
or innocent omission, (ii) the Company promptly commences and diligently
pursues a cure of such breach and (iii) such failure is cured within thirty
(30) business days following the Company's receipt of notice of such failure.
8. Until termination of this Agreement and payment and satisfaction
of all Obligations due hereunder, the Company agrees that, unless the Agent
shall have otherwise consented in writing, the Company will furnish to the
Agent and each Lender, (x) within ninety (90) days after the end of each fiscal
year of the Company, an audited Consolidated Balance Sheet and a Consolidating
Balance Sheet as at the close of such year, statements of profit and loss, and
cash flow of the Company and its subsidiaries for such year, audited by
independent public accountants selected by the Company and satisfactory to the
Agent; y) within thirty (30) days after the end of each fiscal month end (other
than a fiscal month end that is also a fiscal quarter end), a
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Consolidated Balance Sheet and a Consolidating Balance Sheet as at the end of
such period and statements of profit and loss of the Company and all
subsidiaries for such period, certified by an authorized financial or
accounting officer of the Company; and (z) within forty-five (45) days after
the end of each fiscal month end that is also a fiscal quarter end, a
Consolidated Balance Sheet and a Consolidating Balance Sheet as at the end of
such period and statements of profit and loss and cash flow of the Company and
all subsidiaries for such period (or, in the case of the cash flow statement,
for the fiscal quarter then ended), certified by an authorized financial or
accounting officer of the Company; and from time to time, such further
information regarding the business affairs and financial condition of the
Company as the Agent may reasonably request, including, without limitation,
annual cash flow projections in form satisfactory to the Agent. Each financial
statement which the Company is required to submit hereunder must be accompanied
by an officer's certificate, signed by the President, Vice President,
Controller, or Treasurer, pursuant to which any one such officer must certify
that: (i) the financial statement(s) fairly and accurately represent(s) the
Company's financial condition at the end of the particular accounting period,
as well as the Company's operating results during such accounting period,
subject to year-end audit adjustments; (ii) during the particular accounting
period: (x) there has been no event or condition which would constitute a
Default or Event of Default under this Agreement, provided, however, that if
any such officer has knowledge that any such Default or Event of Default, has
occurred during such period, the existence of and a detailed description of
same shall be set forth in such officer's certificate; and (y) the Company has
not received any notice of cancellation with respect to its property insurance
policies; and (iii) as to the quarterly statements, the exhibits attached to
such financial statement(s) constitute detailed calculations showing compliance
with all financial covenants contained in this Agreement.
9. The Company shall have on the last day of each fiscal quarter set
forth below a Tangible Net Worth of not less than:
<TABLE>
<CAPTION>
Fiscal Quarter Ended Tangible Net Worth
-------------------- ------------------
<S> <C> <C>
a) July 31, 1997 $ 3,000,000
b) October 31, 1997 $ 7,000,000
c) January 31, 1998 $10,000,000
d) April 30, 1998 $17,000,000
e) July 31, 1998 $25,000,000
f) October 31, 1998 $33,000,000
g) January 31, 1999 $44,000,000
h) April 30, 1999 $52,000,000
i) July 31, 1999 $61,000,000
j) October 31, 1999 $70,000,000
k) January 31, 2000 and at the end of each $80,000,000
fiscal quarter thereafter
</TABLE>
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<PAGE> 29
10. Until termination of this Agreement and payment and satisfaction
of all Obligations due hereunder, the Company agrees that, without the prior
written consent of the Agent, except as otherwise herein provided, the Company
will not, and will not permit its direct or indirect subsidiaries to:
A. Mortgage, assign, pledge, transfer or otherwise permit any lien,
charge, security interest, encumbrance or judgment, (whether as a
result of a purchase money or title retention transaction, or other
security interest,or otherwise) to exist on any of the Company's
assets or goods, whether real, personal or mixed, whether now owned or
hereafter acquired, except for the Permitted Encumbrances;
B. Incur or create any Indebtedness other than the Permitted
Indebtedness;
C. Borrow any money on the security of the Company's Collateral;
D. Sell, lease, assign, transfer or otherwise dispose of i) Collateral,
except as otherwise specifically permitted by this Agreement or the
Grant of Security Interest in Patents, Trademarks and Licenses (except
that the Company may grant non-exclusive licenses, in the ordinary
course of its business, of patents, trademarks, copyrights, or other
intellectual property rights), or ii) either all or substantially all
of the Company's assets, which do not constitute Collateral;
E. Merge, consolidate or otherwise alter or modify its corporate name,
its federal taxpayer identification number, principal place of
business, corporate organization or state of incorporation or enter
into or engage in any operation or activity materially different from
that presently being conducted by the Company, provided, however, that
the Company may change its name, without the consent of the Agent if
the Company has given the Agent thirty (30) days prior written notice
of such change;
F. Assume, guarantee, endorse, or otherwise become liable upon the
obligations of any person, firm, entity or corporation, except by the
endorsement of negotiable instruments for deposit or collection or
similar transactions in the ordinary course of business, provided,
however, that the Company may guarantee the debts and obligations of
x) JTS Technology, provided, however, that the amount of such
guaranteed indebtedness does not exceed, in the aggregate,
$18,000,000.00 at any one time and y) all other subsidiaries
(excluding JTS Technology), provided, however, that the amount of such
guaranteed indebtedness does not exceed, in the aggregate,
$1,000,000.00 at any one time;
G. Other than dividends by one subsidiary of the Company to another
subsidiary of the Company that is its linear parent, stock dividends
or stock distributions by the Company to the holders of its preferred
stock with respect thereto or with respect to the conversion thereof
into common stock, or dividends by a subsidiary of the Company to the
Company, declare or pay any dividend of any kind on, or purchase,
acquire, redeem or retire, any of the capital stock or equity
interest, of any class whatsoever, whether now or hereafter
outstanding, except that the Company may redeem its capital stock
owned by its retired, deceased or terminated officers, directors or
shareholders which the Company is contractually obligated to redeem,
provided that (i) no Default or Event of Default then exists or will
exist after giving effect to such redemptions and (ii) in no event
shall the aggregate amount of such redemptions exceed $250,000.00 in
the aggregate in any fiscal year;
H. Make any advance or loan to, or any investment in or acquisition of,
any firm, entity, person or corporation, provided, however, that the
Company may, without the consent of the Agent but consistent with
Company's business practices in existence on the date hereof: i)
advance business and travel expenses to its officers and employees;
ii) provide relocation loans to its officers and employees provided
such loans are evidenced by a promissory note and are secured by a
lien on such officer's or employee's residence; iii) issue restricted
stock to officers of the Company in exchange for deferred promises to
pay the purchase price thereof secured by such stock; iv) make
miscellaneous unsecured loans and advances not to exceed $50,000 in
the aggregate at any one time outstanding, which loans
27
<PAGE> 30
and advances either shall be on open book account and not evidenced by
an instrument, or, if evidenced by an instrument, such original
instrument promptly upon issuance shall be endorsed to and delivered
in pledge to the Agent for the benefit of the Lenders; and v) the
Company shall be permitted to have and continue to hold the loans,
advances and investments that it has on the Effective Date in JTS
Europe, JTS Mauritius, Asperal, Dexar, and JTS Technology, provided
that no such loans, advances, or investments that are in the form of
debt on the Effective Date may be thereafter converted to equity
without the prior written consent of the Agent, and, in addition,
after the Effective Date, the Company may continue to extend
intercompany credit to JTS Technology consistent with past practices
so long as, at any time, the net indebtedness of JTS Technology to the
Company (after netting out and deducting all indebtedness of the
Company to JTS Technology) shall not at any time exceed by more than
$3,500,000.00 the amount of such net indebtedness in existence on
April 30, 1997.
I. Permit any lien or security interest, other than the Subsidiary
Permitted Encumbrances, to attach to the assets of JTS Europe, JTS
Mauritius, Asperal, Dexar, or JTS Technology; or
J. Enter into or approve any contract, agreement or arrangement with a
Flooring Lender, other than those described on Schedule 6.10 attached
hereto, or amend or modify in any material respect any such contract,
agreement or arrangement (including, without limitation, any future
amendment or modification of any contract, agreement, or arrangement
described on Schedule 6.10 attached hereto) without the prior written
approval of the Agent.
11. Without the prior written consent of the Agent, the Company will
not: a) enter into any Operating Lease if after giving effect thereto the
aggregate obligations with respect to Operating Leases of the Company during
any fiscal year would exceed $2,000,000 or b) contract for, purchase, make
expenditures for, lease pursuant to a Capital Lease or otherwise incur
obligations with respect to Capital Expenditures (whether subject to a security
interest or otherwise) during any fiscal year in the aggregate amount in excess
of $16,000,000; provided, however, that Capital Expenditures during any fiscal
quarter may not exceed $8,000,000 in the aggregate.
12. The Company shall have for each fiscal quarter during the
applicable periods below a Fixed Charge Coverage Ratio of not less than:
<TABLE>
<CAPTION>
Period Fixed Charge Coverage Ratio
------ ---------------------------
<S> <C> <C>
a) On July 31, 1997, October 31, 1997, and
January 31, 1998, in each case, for the
4 fiscal quarters then ended 1.10:1.0
b) On April 30, 1998, July 31, 1998, October 31, 1998,
and January 31, 1999, in each case, for the
4 fiscal quarters then ended 1.25:1.0
c) On April 30, 1999 and on the last day of
each fiscal quarter thereafter, in each case,
for the 4 fiscal quarters then ended 1.50:1.0
</TABLE>
13. The Company agrees to advise the Agent in writing of: a) all
expenditures (actual or anticipated) in excess of $150,000.00 for x)
environmental clean-up, y) environmental compliance or z) environmental testing
and the impact of said expenses on the Company's working capital; and b) any
written notices the
28
<PAGE> 31
Company receives from any local, state, federal or foreign authority advising
the Company of any environmental liability (real or potential) stemming from
the Company's operations, its premises, its waste disposal practices, or waste
disposal sites used by the Company and to provide the Agent with copies of all
such notices if so required.
14. The Company agrees that: a) all present and future Accounts
are, and will be, payable in United States currency, b) the Company shall
assume any and all risks associated with Accounts paid in a currency other than
the currency of the United States and c) sales to foreign customers and
payments on account thereof, are not subject to any currency or exchequer
restrictions prohibiting, restricting or limiting the amount of currency that
such foreign customers may remit from such jurisdictions or countries in
payment of the Accounts for which such foreign customers are obligated.
15. Without the prior written consent of the Lenders, the Company
agrees that it will not enter into any transaction, including, without
limitation, any purchase, sale, lease, loan or exchange of property with any
subsidiary or affiliate of the Company unless such is conducted on an
arms-length basis and on terms no less beneficial to the Company than the
Company would have obtained from any entity that was not related in any fashion
with the Company.
16. To the extent that any charge, withholding or tax is imposed on
the Lenders or on any interest or fees earned or paid to the Lenders by the
United Kingdom, Mauritius, India, or any other country or governmental
authority, all as a result of this Agreement (other than domestic taxes payable
by the Agent or the Lenders with respect to their income or revenues), the
Company shall indemnify the Agent and the Lenders and hold them harmless from
any such tax, charge or withholding.
17. The Company owns or possesses its trademarks, permits, service
marks, tradenames and licenses necessary for its business, free from any
interest, lien, restriction or encumbrance, other than the Permitted
Encumbrances, and none of the foregoing is subject to any outstanding order,
decree, judgment or stipulation. To the extent that proceedings are now, or in
the future, instituted or pending or, to the best knowledge of the Company,
threatened charging that any of the foregoing was misappropriated or infringes
on the rights of any third party, the Company shall x) promptly notify the
Agent, y) take all action necessary to defend its interest in the foregoing and
z) provide the Agent with such information as the Agent may reasonably request
so as to assess the impact of such proceedings or claims on the Company.
18. The Company shall remit any and all sales taxes when due to the
appropriate sales tax authorities when any such remittances are due, provided,
however, that such remittances need not be made on or before such due date if:
i) such sales taxes are being diligently contested by the Company in good faith
and by appropriate proceedings; ii) the Company establishes such reserves as
may be required by GAAP; and iii) the failure to remit such sales taxes does
not create a lien in favor of such sales tax authorities or impose upon the
Lenders and/or the Agent any obligation to segregate proceeds.
19. Other than JTS Europe, JTS Mauritius, JTS Technology, Asperal,
and Dexar, the Company's subsidiaries as of the Effective Date consist of
inactive corporations or other entities which do not, and shall not after the
Effective Date, hold or own any Significant Assets. The Company shall
immediately notify the Agent if, after the Effective Date, the Company acquires
or owns any subsidiary with Significant Assets other than JTS Europe, JTS
Mauritius, JTS Technology, Asperal, or Dexar.
20. The Company shall not permit JTS Technology to sell more than
five (5) percent (measured by total revenues) of its inventory to any person or
entity other than the Company or JTS Europe without the prior
29
<PAGE> 32
written consent of the Agent.
21. The Company shall immediately notify the Agent in writing of
any transfer or sale by the Company to Western Digital Corporation of any
Inventory.
22. The Company shall immediately notify the Agent in writing of
the occurrence of any event or circumstance of which it has knowledge that has
resulted in either (a) the crystalisation of any floating charge on any current
assets of JTS Technology into a fixed charge thereon, or (b) the attachment of
any fixed charge to any current assets of JTS Technology.
SECTION 7. INTEREST, FEES AND EXPENSES
1. (a) Interest on the Revolving Loans (other than Libor Loans) shall
be payable monthly as of the end of each month and shall be an amount equal to
the sum of the applicable Revolver Non-Libor Margin plus the Chase Manhattan
Bank Rate per annum, on the average of the net balances (other than Libor
Loans) owing by the Company to the Lenders in the Company's account at the
close of each day during such month. Any change in said Chase Manhattan Bank
Rate shall be effective as of the first of the month following any change. The
rates hereunder shall be calculated on a per annum basis and will be based on a
360-day year. The Agent shall be entitled to charge the Company's account at
the rate provided for herein when due until all Obligations have been paid in
full. Interest on the Revolving Loans which are Libor Loans shall be payable
monthly as of the end of each month and shall be an amount equal to the sum of
the applicable Revolver Libor Margin and the applicable Libor on each then
outstanding Revolving Loan which is a Libor Loan, on a per annum basis, on the
average of the net balance owing by the Company on such Libor Loan at the close
of each day during such month. The Company may elect to use Libor as to any
new or then outstanding Revolving Loans provided x) there is then no unwaived
Default or Event of Default, and y) the Company has so advised the Agent of its
election to use Libor and the Libor Period selected no later than three (3)
Business Days prior to the proposed borrowing or, in the case of a Libor
election with respect to a then outstanding Revolving Loan, three (3) Business
Days prior to the conversion of any then outstanding Revolving Loans to Libor
Loans and z) the election and Libor shall be effective, provided, there is then
no unwaived Default or Event of Default, on the fourth Business Day following
said notice. The Libor elections must be for $100,000.00 or whole multiples
thereof. No more than three (3) Libor elections in the aggregate may be in
effect at any one time (including elections relating to Revolving Loans and
elections relating to CAPEX Term Loans) unless the Agent agrees otherwise. If
no such election is timely made or can be made, then the Agent shall use the
Chase Manhattan Bank Rate to compute interest. In the event of any change in
said Chase Manhattan Bank Rate, the rate hereunder shall change
correspondingly, as of the first of the month following any change. The rates
hereunder shall be calculated based on a 360-day year. The Agent shall be
entitled to charge the Company's account at the rate provided for herein when
due until all Obligations have been paid in full.
(b) Interest on the CAPEX Term Loans shall be payable monthly as of
the end of each month on the unpaid balance or on payment in full prior to
maturity in an amount equal to (a) the applicable CAPEX Non-Libor Margin plus
the Chase Manhattan Bank Rate per annum on balances other than Libor Loans and
(b) the applicable CAPEX Libor Margin plus the applicable Libor on any Libor
Loan, on a per annum basis, on the average of the net balance of the CAPEX Term
Loans owing by the Company to the Lenders at the close of each day during such
month. In the event of any change in said Chase Manhattan Bank Rate, the rate
under clause (a) of this sub-paragraph (b) shall change correspondingly, as of
the first of the month following any change. The rates hereunder shall be
calculated based on a 360-day year. The Agent shall be entitled to charge the
Company's Revolving Loan Account at the rate provided for herein when due until
all Obligations
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<PAGE> 33
have been paid in full. The Company may make Libor elections with respect to
CAPEX Term Loans on the same basis, in the same manner, and subject to the same
notice requirements and limitations, as set forth above with respect to
Revolving Loans that are Libor Loans. No more than three (3) Libor elections
in the aggregate may be in effect at any one time (including elections relating
to Revolving Loans and elections relating to CAPEX Term Loans) unless the Agent
agrees otherwise.
2. The Company shall reimburse or pay the Agent for all Out-of-Pocket
Expenses of the Agent and, after the occurrence of an unwaived Event of
Default, the Lenders.
3. Upon the last business day of each month, commencing with May 31,
1997, the Company shall pay the Agent for the account of the Lenders the Line
of Credit Fee.
4. To induce the Lenders to enter into this Agreement and to extend
to the Company the Revolving Loan, the Company shall pay to the Agent for the
account of the Lenders a Loan Facility Fee in the amount of $320,000.00 payable
on the Effective Date, of which one-half thereof shall be paid over upon
receipt by the Agent to the Brokers in full satisfaction of any finder's fees,
broker's fees, or related claims of the Brokers in connection with the
transactions contemplated by this Agreement. The Commitment Fee of $150,000.00
referred to in the Commitment Letter (less any portion thereof applied to
Out-of-Pocket Expenses) will, on the Effective Date, be credited to the
Company's account.
5. The Company shall pay the Agent's standard charges for the Agent's
personnel used by the Agent for reviewing the books and records of the Company
and for verifying, testing protecting, safeguarding, preserving or disposing of
all or any part of the Collateral provided, however, that the foregoing shall
not be payable until the occurrence of an Event of Default if the Company is
paying a Collateral Management Fee.
6. In consideration of the Letter of Credit Guaranty, the Company
shall pay the Agent for the account of the Lenders the Letter of Credit
Guaranty Fee which shall be an amount equal to (a) two percent (2%) per annum,
payable monthly, on the face amount of each Standby Letter of Credit less the
amount of any and all amounts previously drawn under such Standby Letter of
Credit; and b) one and one half percent (1.5%) per annum, payable monthly, on
the face amount of each Documentary Letter of Credit less the amount of any and
all amounts previously drawn under such Documentary Letter of Credit.
7. Any changes, fees, commissions, costs and expenses charged to the
Agent for the Company's account by any Issuing Bank in connection with or
arising out of Letters of Credit issued pursuant to this Agreement or out of
transactions relating thereto will be charged to the Company's account in full
when charged to or paid by the Agent and when made by any such Issuing Bank
shall be conclusive on the Agent.
8. On the Effective Date and on each Anniversary Date, the Company
shall pay to the Agent for the Agent's account the Collateral Management Fee.
9. The Company shall pay to the Agent for the account of the Lenders
such amount or amounts as shall compensate the Agent, the Lenders or their
Participants (as defined below), if any, for any loss, costs or expenses
incurred by the Agent, the Lenders or their Participants if any, (as reasonably
determined by the Agent, the Lenders or their Participants if any) as a result
of: (i) any payment or prepayment on a date other than the last day of a Libor
Period for such Libor Loan, or (ii) any failure of the Company to borrow a
Libor Loan on the date for such borrowing specified in the relevant notice;
such compensation to include, without limitation, an amount equal to any loss
or expense suffered by the Agent, the Lenders or their Participants if any,
during the period from the date of receipt of such payment or prepayment or the
date of such failure to
31
<PAGE> 34
borrow to the last day of such Libor Period if the rate of interest obtained by
the Agent, the Lenders or their Participants if any, upon the reemployment of
an amount of funds equal to the amount of such payment, prepayment or failure
to borrow is less than the rate of interest applicable to such Libor Loan for
such Libor Period. The determination by the Agent, the Lenders or their
Participants, if any, of the amount of any such loss or expense, when set forth
in a written notice to the Company, containing the calculations thereof in
reasonable detail, shall constitute prima facie evidence thereof.
10. The Company hereby authorizes the Agent to charge the Company's
accounts with the Agent with the amount of all payments due hereunder as such
payments become due. The Company confirms that any charges which the Agent may
so make to the Company's account as herein provided will be made as an
accommodation to the Company and solely at the Agent's discretion.
SECTION 8. POWERS
The Company hereby constitutes the Agent or any person or agent the
Agent may designate as its attorney-in-fact, at the Company's cost and expense,
to exercise all of the following powers, which being coupled with an interest,
shall be irrevocable until all of the Company's Obligations have been paid in
full:
(A) To receive, take, endorse, sign, assign and deliver, all in the
name of the Agent, the Lenders or the Company, any and all checks, notes,
drafts, and other documents or instruments relating to the Collateral;
(B) To receive, open and dispose of all mail addressed to the Company
and to notify postal authorities to change the address for delivery thereof to
such address as the Agent may designate;
(C) To request from customers indebted on Accounts at any time, in
the name of the Agent or the Company or that of the Agent's designee,
information concerning the amounts owing on the Accounts;
(D) To transmit to customers indebted on Accounts notice of the
Agent's and Lenders' interest therein and to notify customers indebted on
Accounts to make payment directly to the Agent for the Company's account; and
(E) To take or bring, in the name of the Agent, the Lenders or the
Company, all steps, actions, suits or proceedings deemed by the Agent necessary
or desirable to enforce or effect collection of the Accounts.
Notwithstanding anything hereinabove contained to the contrary, the
powers set forth in (b), (d) and (e) above may only be exercised after the
occurrence of an Event of Default which has not been waived and until such time
as such Event of Default is waived.
SECTION 9. EVENTS OF DEFAULT AND REMEDIES
1. Notwithstanding anything hereinabove to the contrary, the Agent
may terminate this Agreement immediately upon the occurrence of any of the
following (herein "Events of Default"):
A) cessation of the business of the Company or any of its
subsidiaries or the calling of a meeting by the Company of its
creditors for purposes of compromising the debts and
obligations of the Company or any of its subsidiaries;
B) the failure of the Company or any of its subsidiaries to
generally meet debts as they mature;
C) the commencement by the Company or any of its subsidiaries of
any bankruptcy, insolvency,
32
<PAGE> 35
arrangement, reorganization, receivership or similar
proceedings under any foreign, federal or state law;
D) the commencement against the Company or any of its
subsidiaries of any bankruptcy, insolvency, arrangement,
reorganization, receivership or similar proceedings under any
foreign, federal or state, provided, however, that such
Default shall not be deemed an Event of Default if such is
dismissed within sixty (60) days from the date of
commencement;
E) breach by the Company or any of its subsidiaries of any
warranty, representation or covenant contained herein (other
than those referred to in sub-paragraph f below) or in any
other written agreement between the Company or any subsidiary
of the Company and the Lenders, provided that such Default by
the Company or any of its subsidiaries of any of the
warranties, representations or covenants referred in this
clause e shall not be deemed to be an Event of Default unless
and until such Default shall remain unremedied to the Agent's
reasonable satisfaction for a period of ten (10) days from the
date of such breach;
F) breach by the Company or any of its subsidiaries of any
warranty, representation or covenant of Section 3, Paragraphs
3 (other than the third sentence of paragraph 3) and 4 (other
than the third and fourth sentences of paragraph 4); Section
5, Paragraphs 3 and 4 (other than the first sentence of
paragraph 4); Section 6, Paragraphs 1, 5, 6, 9 through 13, and
15;
G) failure of the Company to pay any of the Obligations within
five (5) business days of the due date thereof, provided that
nothing contained herein shall prohibit the Agent from
charging such amounts to the Company's account on the due date
thereof;
H) the occurrence of any default or event of default which is not
cured within any applicable grace period or waived under any
instrument or agreement evidencing Subordinated Debt, the
Subordinated Replacement Debt or any other Indebtedness having
a principal amount in excess of $2,000,000.00;
I) the Company or any of its subsidiaries shall i) engage in any
"prohibited transaction" as defined in ERISA, ii) have any
"accumulated funding deficiency" as defined in ERISA, iii)
have any Reportable Event as defined in ERISA, iv) terminate
any Plan, as defined in ERISA or v) be engaged in any
proceeding in which the Pension Benefit Guaranty Corporation
shall seek appointment, or is appointed, as trustee or
administrator of any Plan, as defined in ERISA, and with
respect to this sub-paragraph i such event or condition x)
remains uncured for a period of thirty (30) days from date of
notice of occurrence and y) could, in the reasonable opinion
of the Lenders, subject the Company or any of its subsidiaries
to any tax, penalty or other liability material to the
business, operations or financial condition of the Company and
its subsidiaries; or
J) without the prior written consent of the Agent, the Company
shall x) amend or modify the Subordinated Debt or Subordinated
Replacement Debt or y) make any pre-payment on account of the
Subordinated Debt or the Subordinated Replacement Debt, or
redeem or repurchase any of same (except that, so long as no
Default or Event of Default has occurred and is continuing,
and if, after giving effect to each such redemption or
repurchase there exists Excess Availability of not less than
$5,000,000.00, the Company may redeem or repurchase same for
aggregate consideration not to exceed $500,000.00 during any
fiscal quarter of the Company), provided, however, that the
Company may prepay the Subordinated Debt with the proceeds of
any Subordinated Replacement Debt or an equity offering of the
Company.
The Company shall not have any grace period or right of cure with respect to
any Event of Default except as specifically set forth herein or in any
ancillary loan document. To the extent that the Company has any such grace
period or right of cure, and if the Company cures an Event of Default in
accordance therewith, such Event of Default immediately upon being cured shall
cease to exist prospectively for all purposes of this Agreement and any
ancillary loan documents.
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<PAGE> 36
2. Upon the occurrence of a Default and/or an Event of Default, at
the option of the Agent (subject to the instructions of the Required Lenders),
all loans and advances provided for in paragraph 1 of Section 3, all CAPEX Term
Loans, and the obligation of the Agent under this Agreement to assist the
Company in opening Letters of Credit shall be thereafter in the Agent's sole
discretion and the obligation of the Lenders to make revolving loans, CAPEX
Term Loans, and to assist the Company in opening Letters of Credit shall cease
unless such Default is cured or Event of Default is waived, and at the option
of the Agent or pursuant to instructions from the Required Lenders upon the
occurrence of an Event of Default: I) all Obligations shall become immediately
due and payable; II) the Agent may charge the Company the Default Rate of
Interest on all then outstanding or thereafter incurred Obligations in lieu of
the interest provided for in paragraph 1 of Section 7 of this Agreement
provided a) the Agent has given the Company written notice of the Event of
Default, provided, however, that no notice is required if the Event of Default
is the event listed in paragraph 1(c) or 1(d) of this Section 9 and b) the
Company has failed to cure the Event of Default within ten (10) days after x)
the Agent deposited such notice in the United States mail or y) the occurrence
of the Event of Default listed in paragraph 1(c) or 1(d) of this Section 9; and
III) the Agent may immediately terminate this Agreement upon notice to the
Company, provided, however, that no notice of termination is required if the
Event of Default is the event listed in paragraph 1(c) or 1(d) of this Section
9. The exercise of any option is not exclusive of any other option which may
be exercised at any time by the Agent and/or the Lenders.
3. Immediately upon the occurrence of any Event of Default and while
any Event of Default is continuing, the Agent may to the extent permitted by
law (whether foreign, federal or state): (A) remove from any premises where
same may be located any and all documents, instruments, files and records, and
any receptacles or cabinets containing same, relating to the Accounts, or the
Agent may use, at the Company's expense, such of the Company's personnel,
supplies or space at the Company's places of business or otherwise, as may be
necessary to properly administer and control the Accounts or the handling of
collections and realizations thereon; (B) bring suit, in the name of the
Company or the Agent or the Lenders, and generally shall have all other rights
respecting said Accounts, including, without limitation, the right to:
accelerate or extend the time of payment, settle, compromise, release in whole
or in part any amounts owing on any Accounts and issue credits in the name of
the Company or the Agent; (C) exercise (directly or through an assignee or
nominee) all of the rights, remedies and powers of the Company under or with
respect to the Accounts, the General Intangibles, the Investment Property, the
Other Collateral, or the Deposit Accounts, (D) sell, assign and deliver the
Collateral and any returned, reclaimed or repossessed merchandise, with or
without advertisement, at public or private sale, for cash, on credit or
otherwise, at the Agent's sole option and discretion, and the Agent, the
Lenders or a Lender may bid or become a purchaser at any such sale, free from
any right of redemption, which right is hereby expressly waived by the Company;
(E) foreclose the security interests created herein by any available judicial
procedure, or to take possession of any or all of the Inventory, Equipment,
and/or Other Collateral without judicial process, and to enter any premises
where any Inventory, Equipment, and/or Other Collateral may be located for the
purpose of taking possession of or removing the same; (F) demand by written
notice to the Company that the Company cease or limit, to the extent specified
in such demand, sales of Accounts; and (G) exercise any other rights and
remedies provided in law (whether foreign, federal or state), in equity, by
contract or otherwise. The Agent shall have the right, without notice or
advertisement, to sell, lease, or otherwise dispose of all or any part of the
Collateral whether in its then condition or after further preparation or
processing, in the name of the Company or the Agent, the Lenders or a Lender,
or in the name of such other party as the Agent or the Lenders may designate,
either at public or private sale or at any broker's board, in lots or in bulk,
for cash or for credit, with or without warranties or representations, and upon
such other terms and conditions as the Agent or the Lenders in its or their
sole discretion may deem advisable, and the Agent, the Lenders or a Lenders
shall have the right to purchase at any such sale. If any Inventory and
Equipment shall require rebuilding, repairing, maintenance or preparation, the
Agent shall have the right, at its option, to do such of the
34
<PAGE> 37
aforesaid as is necessary, for the purpose of putting the Inventory and
Equipment in such saleable form as the Agent shall deem appropriate. The
Company agrees, at the request of the Agent, to assemble the Inventory and
Equipment and to make it available to the Agent at premises of the Company or
elsewhere and to make available to the Agent the premises and facilities of the
Company for the purpose of the Agent's taking possession of, removing or
putting the Inventory and Equipment in saleable form. However, if notice of
intended disposition of any Collateral is required by law (whether foreign,
federal or state), it is agreed that ten (10) days notice shall constitute
reasonable notification and full compliance with the law. The net cash
proceeds resulting from the Agent's exercise of any of the foregoing rights,
(after deducting all charges, costs and expenses, including reasonable
attorneys' fees) shall be applied by the Agent to the payment of the
Obligations, including any then outstanding Letters of Credit, whether due or
to become due, in such order as the Agent may elect, and the Company shall
remain liable to the Agent and the Lenders for any deficiencies, and the Agent
and the Lenders in turn agree to remit to the Company or its successors or
assigns, any surplus resulting therefrom. The enumeration of the foregoing
rights is not intended to be exhaustive and the exercise of any right shall not
preclude the exercise of any other rights, all of which shall be cumulative.
4. Any person dealing with the Agent or with a Company's
attorney-in-fact appointed under Section 8 above shall not be concerned to
enquire whether any event has happened upon which any of the powers,
authorities and discretion conferred by or pursuant to this Agreement are or
may be exercisable by the Agent, attorney-in-fact or otherwise as to the
propriety or regularity of any exercise thereof or of any act purporting or
intended to be an exercise thereof or whether any money remains owing under
this Agreement and the title and position of such person shall not be
impeachable by reference to any of those matters.
SECTION 10. TERMINATION
Except as otherwise permitted herein, the Lenders may terminate this
Agreement and the Line of Credit only as of the third or any subsequent
Anniversary Date and then only by giving the Company at least sixty (60) days
prior written notice of termination. Notwithstanding the foregoing the Agent
may terminate this Agreement immediately upon the occurrence of an Event of
Default, provided, however, that if the Event of Default is an event listed in
paragraph 1(c) or 1(d) of Section 9 of this Agreement, the Agent may regard
this Agreement as terminated and notice to that effect is not required. This
Agreement, unless terminated as herein provided, shall automatically continue
from Anniversary Date to Anniversary Date. The Company may terminate this
Agreement, the Line of Credit, and the CAPEX Term Loan Line of Credit at any
time upon sixty (60) days prior written notice to the Agent. If such
termination is before the third Anniversary Date, the Company shall pay to the
Agent for the account of the Lenders an Early Termination Fee. All Obligations
shall become due and payable as of any termination hereunder or under Section 9
hereof and, pending a final accounting, the Agent may withhold any balances in
the Company's account (unless supplied with an indemnity satisfactory to the
Agent) to cover all of the Company's Obligations, whether absolute or
contingent, including any then outstanding Letters of Credit. All of the
Agent's and Lenders' rights, liens and security interests shall continue after
any termination until all Obligations have been paid and satisfied in full.
SECTION 11. AGENCY
1. Each Lender hereby irrevocably designates and appoints CITBC as
the Agent for the Lenders under this Agreement and any ancillary loan documents
and irrevocably authorizes CITBC as Agent for such Lender, to take such action
on its behalf under the provisions of this Agreement and all ancillary
documents and to exercise such powers and perform such duties as are expressly
delegated to the Agent by the terms of this Agreement and all ancillary
documents together with such other powers as are reasonably incidental thereto.
35
<PAGE> 38
Notwithstanding any provision to the contrary elsewhere in this Agreement, the
Agent shall not have any duties or responsibilities, except those expressly set
forth herein, or any fiduciary relationship with any Lender and no implied
covenants, functions, responsibilities, duties, obligations or liabilities
shall be read into this Agreement and the ancillary documents or otherwise
exist against the Agent.
2. The Agent may execute any of its duties under this Agreement and
all ancillary documents by or through agents or attorneys-in-fact and shall be
entitled to the advice of counsel concerning all matters pertaining to such
duties.
3. Neither the Agent nor any of its officers, directors, employees,
agents, or attorneys-in-fact shall be (i) liable to any Lender for any action
lawfully taken or omitted to be taken by it or such person under or in
connection with this Agreement and all ancillary documents (except for its or
such person's own gross negligence or willful misconduct), or (ii) responsible
in any manner to any of the Lenders for any recitals, statements,
representations or warranties made by the Company or any officer thereof
contained in this Agreement and all ancillary documents or in any certificate,
report, statement or other document referred to or provided for in, or received
by the Agent under or in connection with, this Agreement and all ancillary
documents or for the value, validity, effectiveness, genuineness,
enforceability or sufficiency of this Agreement and all ancillary documents or
for any failure of the Company to perform its obligations thereunder. The
Agent shall not be under any obligation to any Lender to ascertain or to
inquire as to the observance or performance of any of the agreements contained
in, or conditions of, this Agreement and all ancillary documents or to inspect
the properties, books or records of the Company.
4. The Agent shall be entitled to rely, and shall be fully protected
in relying, upon any note, writing, resolution, notice, consent, certificate,
affidavit, letter, cablegram, telegram, telecopy, facsimile, message,
statement, order or other document or conversation believed by it to be genuine
and correct and to have been signed, sent or made by the proper person or
persons and upon advice and statements of legal counsel (including, without
limitation, counsel to the Company), independent accountants and other experts
selected by the Agent. The Agent shall be fully justified in failing or
refusing to take any action under this Agreement and all ancillary documents
unless it shall first receive such advice or concurrence of the Required
Lenders, as it deems appropriate or it shall first be indemnified to its
satisfaction by the Lenders against any and all liability and expense which may
be incurred by it by reason of taking or continuing to take any such action.
The Agent shall in all cases be fully protected in acting, or in refraining
from acting, under this Agreement and all ancillary documents in accordance
with a request of the Required Lenders, and such request and any action taken
or failure to act pursuant thereto shall be binding upon all the Lenders.
5. The Agent shall not be deemed to have knowledge or notice of the
occurrence of any Default or Event of Default hereunder unless the Agent has
received notice from a Lender or the Company describing such Default or Event
of Default. In the event that the Agent receives such a notice, the Agent
shall promptly give notice thereof to the Lenders. The Agent shall take such
action with respect to such Default or Event of Default as shall be reasonably
directed by the Required Lenders; provided that unless and until the Agent
shall have received such direction, the Agent may in the interim (but shall not
be obligated to) take such action, or refrain from taking such action, with
respect to such Default or Event of Default as it shall deem advisable and in
the best interests of the Lenders.
6. Each Lender expressly acknowledges that neither the Agent nor any
of its officers, directors, employees, agents or attorneys-in- fact has made
any representations or warranties to it and that no act by the Agent
hereinafter taken, including any review of the affairs of the Company shall be
deemed to constitute any representation or warranty by the Agent to any Lender.
Each Lender represents to the Agent that it has,
36
<PAGE> 39
independently and without reliance upon the Agent or any other Lender and based
on such documents and information as it has deemed appropriate, made its own
appraisal of and investigation into the business, operations, property,
financial and other condition and creditworthiness of the Company and made its
own decision to enter into this Agreement. Each Lender also represents that it
will, independently and without reliance upon the 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 analysis, appraisals and decisions in
taking or not taking action under this Agreement and to make such investigation
as it deems necessary to inform itself as to the business, operations,
property, financial and other condition or creditworthiness of the Company.
The Agent, however, shall provide the Lenders with copies of all financial
statements, projections and business plans which come into the possession of
the Agent or any of its officers, employees, agents or attorneys-in-fact.
7. The Lenders agree to indemnify the Agent in its capacity as such
(to the extent not reimbursed by the Company and without limiting the joint and
several obligation of the Company to do so), from and against any and all
liabilities, obligations, losses, damages, penalties, actions, judgments,
suits, costs, expenses or disbursements of any kind whatsoever which may at any
time be imposed on, incurred by or asserted against the Agent in any way
relating to or arising out of this Agreement on any ancillary documents or any
documents contemplated by or referred to herein or the transactions
contemplated hereby or any action taken or omitted by the Agent under or in
connection with any of the foregoing; provided that no Lender shall be liable
for the payment of any portion of such liabilities, obligations, losses,
damages, penalties, actions, judgments, suits, costs, expenses or disbursements
resulting solely from the Agent's gross negligence or willful misconduct. The
agreements in this paragraph shall survive the payment of the Obligations.
8. The Agent may make loans to, and generally engage in any kind of
business with the Company as though the Agent were not the Agent hereunder.
With respect to its loans made or renewed by it or loan obligations hereunder
as Lender, the Agent shall have the same rights and powers, duties and
liabilities under this Agreement as any Lender and may exercise the same as
though it were not the Agent and the terms "Lender" and "Lenders" shall include
the Agent in its individual capacity.
9. The Agent may resign as Agent upon 30 days' notice to the Lenders
and such resignation shall be effective upon the appointment of a successor
Agent. If the Agent shall resign as Agent, then the Lenders shall appoint a
successor agent for the Lenders whereupon such successor agent shall succeed to
the rights, powers and duties of the Agent and the term "Agent" shall mean such
successor agent effective upon its appointment, and the former Agent's rights,
powers and duties as Agent shall be terminated, without any other or further
act or deed on the part of such former Agent or any of the parties to this
Agreement, provided, however, that the Lenders shall: a) notify the Company of
the successor Agent and b) request the consent of the Company to such successor
Agent, which consent shall not be unreasonably withheld. The Company shall be
deemed to have consented to the successor Agent if the Lenders do not receive
from the Company, within ten (10) days of the Lenders' notice to the Company, a
written statement of the Company's objection to the successor Agent. Should
the Company not consent and no acceptable successor Agent is agreed upon within
thirty (30) days of the date the Company advised the Lenders of its objection
to the successor Agent, then the Lenders may appoint (without the Company's
consent) another successor Agent. After any retiring Agent's resignation
hereunder as Agent the provisions of this Section 11 shall inure to its benefit
as to any actions taken or omitted to be taken by it while it was Agent.
10. Notwithstanding anything contained in this Agreement to the
contrary, the Agent will not, without the prior written consent of all of the
Lenders: a) amend this Agreement to t) change the terms of the CAPEX Term Loan
Line of Credit, u) change the advance rates provided for with respect to the
Revolving Loans, v)
37
<PAGE> 40
increase the Line of Credit w) reduce the interest rate x) reduce or waive i)
any fees or ii) the repayment of any Obligations due the Lenders; y) alter or
amend 1) this paragraph 10 or 2) the definition of Eligible Domestic Accounts
Receivable and/or Eligible Foreign Accounts Receivable and the Agent's criteria
for determining compliance therewith; or b) release collateral in bulk without
a corresponding reduction in the Obligations to the Lenders. Except as
otherwise hereinabove provided, the Agent will not, without the prior written
consent of the Required Lenders: a) amend this Agreement; or b) waive any
Event of Default under this Agreement. In all other respects the Agent is
authorized to take such actions or fail to take such actions if the Agent, in
its reasonable discretion, deems such to be advisable and in the best interest
of the Lenders, including, but not limited to, the making of an overadvance up
to 10% of the Line of Credit or the termination of this Agreement upon the
occurrence of an Event of Default unless it is specifically instructed to the
contrary by the Required Lenders.
SECTION 12. AGREEMENT BETWEEN THE LENDERS
1. a) The Agent, for the account of the Lenders, shall disburse all
loans and advances to the Company and shall handle all collections of
Collateral and repayment of Obligations. It is understood that for purposes of
advances to the Company and for purposes of this Section 12 the Agent is using
the funds of CITBC.
b) Unless the Agent shall have been notified in writing by any
Lender prior to any advance to the Company that such Lender will not make the
amount which would constitute its share of the borrowing on such date available
to the Agent, the Agent may assume that such Lender shall make such amount
available to the Agent on a Settlement Date, and the Agent may, in reliance
upon such assumption, make available to the Company a corresponding amount. A
certificate of the Agent submitted to any Lender with respect to any amount
owing under this subsection shall be conclusive, absent manifest error. If
such Lender's share of such borrowing is not in fact made available to the
Agent by such Lender on the Settlement Date, the Agent shall be entitled to
recover such amount with interest thereon at the rate per annum applicable to
Revolving Loans hereunder, on demand, from the Company without prejudice to any
rights which the Agent may have against such Lender hereunder. Nothing
contained in this subsection shall relieve any Lender which has failed to make
available its ratable portion of any borrowing hereunder from its obligation to
do so in accordance with the terms hereof. Nothing contained herein shall be
deemed to obligate the Agent to make available to the Company the full amount
of a requested advance when the Agent has any notice (written or otherwise)
that any of the Lenders will not advance its ratable portion thereof.
2. On the Settlement Date, the Agent and the Lenders shall each remit
to the other, in immediately available funds, all amounts necessary so as to
ensure that, as of the Settlement Date, the Lenders shall have their
proportionate share portion of all outstanding Obligations.
3. The Agent shall forward to each Lender, at the end of each month,
a copy of the account statement rendered by the Agent to the Company.
4. The Agent shall, after receipt of any interest and fees earned
under this Agreement, remit to the Lenders: a) their pro rata portion of all
fees, provided, however, that the Lenders (other than CITBC in its role as
Agent) shall not share in the Collateral Management Fee or the fees provided
for in paragraph 5 of Section 7; and b) interest computed at the rate and as
provided for in the assignment and assumption letter entered into between CITBC
and such Lender.
5. (a) The Company acknowledges that the Lenders may sell
participations in the loans and extensions of
38
<PAGE> 41
credit made and to be made to the Company hereunder. The Company further
acknowledges that in doing so, the Lenders may grant to such participants
certain rights which would require the participant's consent to certain
waivers, amendments and other actions with respect to the provisions of this
Agreement.
(b) The Company authorizes each Lender to disclose to any participant
or purchasing lender (each, a "Transferee") and any prospective Transferee any
and all financial information in such Lender's possession concerning the
Company and their affiliates which has been delivered to such Lender by or on
behalf of the Company pursuant to this Agreement or which has been delivered to
such Lender by or on behalf of the Company in connection with such Lender's
credit evaluation of any Company and its affiliates prior to entering into this
Agreement. The Company has made and will, from time to time, make available to
the Agent and the Lenders certain financial and other business information (the
"Confidential Information") relating to its business. The Agent and the
Lenders agree to maintain the confidentiality of all Confidential Information,
and to disclose such information only (a) to officers, directors or employees
or to legal or financial advisors, in each case to the extent necessary to
carry out this Agreement and the other loan documents; b) to The CIT Group
Holdings, Inc., The CIT Group, Inc., The Chase Manhattan Bank, its holding
company, Dai-Ichi Kanygo Bank, or such other Lenders' parent companies as is
reasonably necessary or required for internal reporting purposes; (c) to any
other recipient to the extent the disclosure of such information to such
recipient is required in connection with the examination of such Lender's or
Transferee's records by appropriate authorities, pursuant to court order,
subpoena or other legal process or otherwise as required by law or regulation;
and (d) to a Transferee. In each instance, the applicable Lender shall advise
the recipient or Transferee to maintain the confidentiality of the Confidential
Information and with respect to a Transferee, provided such Transferee signs a
confidentiality agreement substantially similar to the provisions of this
paragraph 5 (b). No Lender, Transferee or recipient shall be required to
maintain the confidentiality of any portion of the Confidential Information
which (a) becomes generally available to the public other than by such
Lender's, Transferee's or recipient's unauthorized disclosure, (b) is known by
such recipient, Lender or Transferee or its agents, advisors or representatives
prior to disclosure by the Company or (c) becomes available from a source other
than the Company, provided that the disclosure of Confidential Information to
such recipient, Lender or Transferee by such source does not violate a
confidentiality agreement or duty imposed on such source of which such
recipient, Lender or Transferee has actual knowledge.
6. The Company hereby agrees that each Lender is solely responsible
for its portion of the Line of Credit and that neither the Agent nor any Lender
shall be responsible for, nor assume any obligations for the failure of any
Lender to make available its portion of the Line of Credit. Further, should
any Lender refuse to make available its portion of the Line of Credit, then the
other Lender may, but without obligation to do so, increase, unilaterally, its
portion of the Line of Credit in which event the Company is so obligated to
that other Lender.
7. In the event that the Agent, the Lenders or any one of them is
sued or threatened with suit by the Company or any one of them, or by any
receiver, trustee, creditor or any committee of creditors on account of any
preference, voidable transfer or lender liability issue, alleged to have
occurred or been received as a result of, or during the transactions
contemplated under this Agreement, then in such event any money paid in
satisfaction or compromise of such suit, action, claim or demand and any
expenses, costs and attorneys' paid or incurred in connection therewith,
whether by the Agent, the Lenders or any one of them, shall be shared
proportionately by the Lenders. In addition, any costs, expenses, fees or
disbursements incurred by outside agencies or attorneys retained by the Agent
to effect collection or enforcement of any rights in the Collateral, including
enforcing, preserving or maintaining rights under this Agreement shall be
shared proportionately between the Lenders to the extent not reimbursed by the
Company or from the proceeds of
39
<PAGE> 42
Collateral. The provisions of this paragraph shall not apply to any suits,
actions, proceedings or claims that x) predate the date of this Agreement or y)
are based on transactions, actions or omissions that predate the date of this
Agreement.
8. The Lenders each agree with each other that any money or assets of
any Company held or received by either Lender, no matter how or when received,
shall be applied to the reduction of the Obligations after x) the occurrence of
an Event of Default and y) the election by the Required Lenders to accelerate
the Obligations. In addition, the Company authorizes, and the Lenders shall
have the right, without notice, upon any amount becoming due and payable
hereunder, to set-off and apply any and all property held by, or in the
possession of the Lenders against the Obligations due the Lenders.
9. Except as otherwise set forth below in this paragraph, any Lender,
with the prior approval of the Agent, shall have the right at any time to
assign to one or more commercial banks, commercial finance lenders or other
financial institutions all or a portion of its rights and obligations under
this Agreement (including, without limitation, its obligations under the Line
of Credit, the Revolving Loans, the CAPEX Term Loan Line of Credit, the CAPEX
Term Loans, and its rights and obligations with respect to Letters of Credit).
Upon such assignment with the approval of the Agent, and provided such assignee
assumes its portion of the assigning Lender's obligations hereunder and pays to
the Agent a non-refundable assignment fee of $5,000.00, (i) the assignee
thereunder shall be a party hereto and, to the extent that rights and
obligations hereunder have been assigned to it pursuant to such assignment,
have the rights and obligations of a Lender hereunder and (ii) the assigning
Lender, with the approval of the Agent, shall, to the extent that rights and
obligations hereunder have been assigned by it pursuant to such assignment,
relinquish its rights and be released from its obligations under this
Agreement. The Company shall, if necessary, execute any documents reasonably
required to effectuate the assignments. The foregoing notwithstanding: (A)
CITBC, as a Lender, or any affiliate of or successor to CITBC that is an
assignee of CITBC as a Lender, (y) at all times shall retain for its own
account an aggregate portion of the combined Line of Credit and CAPEX Term Loan
Line of Credit of not less than the lower of (A) $5,000,000, and (B) fifty
percent (50%) of the combined Line of Credit and CAPEX Term Loan Line of
Credit, and (z) at no time shall hold for its own account less, in the
aggregate, of the Line of Credit and the CAPEX Term Loan Line of Credit, than
any other Lender; and (B) no Lender shall, without the prior written consent of
the Company and the Agent, assign to any other person or entity less than
$5,000,000.00 of its aggregate position with respect to the Line of Credit and
the CAPEX Term Loan Line of Credit, unless such Lender's entire position
aggregates less than $5,000,000.00 and such Lender is assigning its entire
position.
SECTION 13. MISCELLANEOUS
1. The Company hereby waives diligence, demand, presentment and
protest and any notices thereof as well as notice of nonpayment. No delay or
omission of the Agent or the Lenders or the Company to exercise any right or
remedy hereunder, whether before or after the happening of any Event of
Default, shall impair any such right or shall operate as a waiver thereof or as
a waiver of any such Event of Default. No single or partial exercise by the
Agent or the Lenders of any right or remedy precludes any other or further
exercise thereof, or precludes any other right or remedy.
2. This Agreement and the documents executed and delivered in
connection therewith constitute the entire agreement between the Company and
the Agent and the Lenders; supersede any prior agreements; subject to the
provisions of paragraph 10 of Section 11 of this Agreement, can be changed only
by a writing signed by all of the Company, the Agent and the Required Lenders;
and shall bind and benefit the Company and the Agent and the Lenders and their
respective successors and assigns.
40
<PAGE> 43
3. In no event shall the Company, upon demand by the Agent for
payment of any indebtedness relating hereto, by acceleration of the maturity
thereof, or otherwise, be obligated to pay interest and fees in excess of the
amount permitted by law. Regardless of any provision herein or in any
agreement made in connection herewith, the Lenders shall never be entitled to
receive, charge or apply, as interest on any indebtedness relating hereto, any
amount in excess of the maximum amount of interest permissible under applicable
law. If the Agent or the Lenders ever receives, collects or applies any such
excess, it shall be deemed a partial repayment of principal and treated as
such; and if principal is paid in full, any remaining excess shall be refunded
to the Company. This paragraph shall control every other provision hereof and
of any other agreement made in connection herewith.
4. If any provision hereof or of any other agreement made in
connection herewith is held to be illegal or unenforceable, such provision
shall be fully severable, and the remaining provisions of the applicable
agreement shall remain in full force and effect and shall not be affected by
such provision's severance. Furthermore, in lieu of any such provision, there
shall be added automatically as a part of the applicable agreement a legal and
enforceable provision as similar in terms to the severed provision as may be
possible.
5. THE COMPANY, THE AGENT AND EACH LENDER EACH HEREBY WAIVE ANY RIGHT
TO A TRIAL BY JURY IN ANY ACTION OR PROCEEDING ARISING OUT OF THIS AGREEMENT.
THE COMPANY HEREBY IRREVOCABLY WAIVES PERSONAL SERVICE OF PROCESS AND CONSENTS
TO SERVICE OF PROCESS BY CERTIFIED OR REGISTERED MAIL, RETURN RECEIPT
REQUESTED.
6. Except as otherwise herein provided, any notice or other
communication required hereunder shall be in writing, and shall be deemed to
have been validly served, given or delivered when hand delivered or sent by
telegram or facsimile, upon delivery when delivered by reputable overnight
courier, or three days after deposit in the United State mails, with proper
first class postage prepaid and addressed to the party to be notified as
follows:
(A) if to CITBC or the Agent, at:
The CIT Group/Business Credit, Inc.
300 South Grand Avenue
Los Angeles, CA 90071
Fax No. (213) 613-2588
Attn: Regional Manager
(B) if to the Lenders (other than CITBC) at such addresses as the
Agent or such Lenders may give the Company:
(C) if to the Company at:
JTS Corporation
166 Baypointe Parkway
San Jose, CA 95134
Fax No. (408) 468-1722
Attn: Chief Financial Officer
41
<PAGE> 44
with copy to:
Cooley Godward LLP
3000 El Camino Real
5 Palo Alto Square
Palo Alto, CA 94306
Fax No. (415) 857-0663
Attn: Pamela J. Martinson, Esq.
or to such other address as any party may designate for itself by like notice,
provided, however, that the failure to send any notice to Cooley Godward LLP
shall not invalidate any notice given to the Company and shall not give the
Company any rights or causes of action against CITBC.
7. THE VALIDITY, INTERPRETATION AND ENFORCEMENT OF THIS AGREEMENT
SHALL BE GOVERNED BY THE LAWS OF THE STATE OF CALIFORNIA.
8. Any legal proceedings with respect to this Agreement against the
Company or any of its assets may be brought in the courts of California or in
the courts of the United States located in California. The Company hereby
irrevocably and unconditionally accepts for itself and in respect of its
assets, the nonexclusive jurisdiction of the aforesaid courts and waives any
objection it may have to the laying of venue of any such proceedings in any of
the said courts and any claim it may have that any such proceedings have been
brought in any inconvenient forum or are being brought before another court.
9. This Agreement may be executed in one or more counterparts, each
of which shall be deemed an original but all of which together shall constitute
one and the same instrument.
42
<PAGE> 45
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to
be executed and delivered by their proper and duly authorized officers as of
the date set forth above. This Agreement shall take effect as of the date set
forth above after being accepted below.
Very truly yours,
THE CIT GROUP/BUSINESS CREDIT, INC. (AGENT)
By ________________________________________
Assistant Vice President
THE CIT GROUP/BUSINESS CREDIT, INC. (LENDER)
By ________________________________________
Assistant Vice President
Read and Agreed to:
JTS CORPORATION
By _____________________________ _______________________________ (Seal)
David T. Mitchell W. Virginia Walker
Title: President and Chief Financial Officer and Secretary
Chief Executive Officer
Executed and Accepted at
Palo Alto, California
THE CIT GROUP/BUSINESS CREDIT, INC. (AGENT)
By ________________________________________
Assistant Vice President
THE CIT GROUP/BUSINESS CREDIT, INC. (LENDER)
By ________________________________________
Assistant Vice President
S-1
<PAGE> 46
SCHEDULE P-1
To Financing Agreement between
THE CIT GROUP/BUSINESS CREDIT, INC., AS AGENT and
JTS CORPORATION
Outstanding Letters of Credit
As of April 30, 1997
<TABLE>
<CAPTION>
====================================================================================================
Beneficiary Amount Expiration
- ----------------------------------------------------------------------------------------------------
<S> <C> <C>
SGI Thompson $ 375,000 8/14/97
- --------------------------------------------------------------------------------------------------
Hitachi $ 150,000 8/15/97
- ----------------------------------------------------------------------------------------------------
NMB Techknowledgey $ 150,000 4/30/97
- ----------------------------------------------------------------------------------------------------
NMB Techknowledgey $ 150,000 5/30/97
- ----------------------------------------------------------------------------------------------------
NMB Techknowledgey $ 150,000 6/30/97
- ----------------------------------------------------------------------------------------------------
NMB Techknowledgey $ 550,000 7/30/97
- ----------------------------------------------------------------------------------------------------
Total $1,525,000
====================================================================================================
</TABLE>
<PAGE> 47
SCHEDULE S-1
To Financing Agreement between
THE CIT GROUP/BUSINESS CREDIT, INC., AS AGENT and
JTS CORPORATION
Certain Liens Affecting Subsidiaries of the Company
As of April 30, 1997
[to be provided by the Company]
<PAGE> 48
SCHEDULE 6.10
To Financing Agreement between
THE CIT GROUP/BUSINESS CREDIT, INC., AS AGENT and
JTS CORPORATION
Certain Permitted Flooring Contracts
As of April 30, 1997
[specific description to be provided by the Company]
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> FEB-01-1998
<PERIOD-START> FEB-03-1997
<PERIOD-END> MAY-04-1997
<CASH> 13,396
<SECURITIES> 0
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<PP&E> 35,819
<DEPRECIATION> (4,420)
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<CURRENT-LIABILITIES> 87,688
<BONDS> 42,354
0
0
<COMMON> 107
<OTHER-SE> 96
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<SALES> 73,413
<TOTAL-REVENUES> 73,413
<CGS> 70,220
<TOTAL-COSTS> 70,220
<OTHER-EXPENSES> 13,482
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 1,666
<INCOME-PRETAX> (12,280)
<INCOME-TAX> 0
<INCOME-CONTINUING> (12,280)
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<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (12,280)
<EPS-PRIMARY> (0.116)
<EPS-DILUTED> 0
</TABLE>
