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U. S. SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
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FORM 10-KSB
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(Mark One)
[x] Annual report under Section 13 or 15(d) of the Securities Exchange Act of
1934. For the fiscal year ended June 30, 1997.
[ ] Transition report under Section 13 or 15(d) of the Securities Exchange
Act of 1934. For the period from to .
Commission File Number: 0-20753
SONICS & MATERIALS, INC.
(Name of Small Business Issuer in Its Charter)
Delaware 060854713
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
4 West Kenosia Avenue, Danbury, CT 06810
(Address of Principal Executive Offices) (Zip Code)
Issuer's Telephone Number, Including Area Code: (203) 744-4400
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act:
Common Stock, par value $.03 per share
(Title of class)
Warrants to Purchase Common Stock
(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days:
Yes [x] No [ ]
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained in this form, and no disclosure will be contained, to
the best of the registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-KSB or any
amendment to this Form 10-KSB. [ ]
The issuer's revenues for the most recent fiscal year were: $10,827,525.
The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based upon the closing sale price of the Company's Common Stock on
September 24, 1997, as reported on the Nasdaq National Market System, was
approximately $2,802,250. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.
As of September 22, 1997, the issuer had outstanding 3,590,100 shares of Common
Stock, par value $.03 per share, and 1,805,000 Warrants to purchase shares of
Common Stock.
Transitional Small Business Disclosure Format (check one): Yes [ ] No [x]
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Proxy Statement relating to the 1997 Annual Meeting of
Stockholders are incorporated by reference in Part III.
<PAGE>
PART I
Item 1. DESCRIPTION OF BUSINESS
-----------------------
Sonics & Materials, Inc. (the "Company" or "Sonics") designs,
manufactures and sells (i) ultrasonic bonding equipment for the welding, joining
and fastening of thermoplastic components, textiles and other synthetic
materials, and (ii) ultrasonic liquid processors for dispersing, blending,
cleaning, degassing, atomizing and reducing particles as well as expediting
chemical reactions. To further address the needs of its customers, the Company
introduced two new product lines in fiscal 1996, the spin welder and the
vibration welder, both of which are used for the bonding of thermoplastic
components.
The Company was incorporated in New Jersey in April 1969, and was
reincorporated in Delaware in October 1978. Robert S. Soloff, its chairman,
president and founder, invented the ultrasonic plastic welding process early in
his career. He has been granted nine patents in the field of power ultrasonics
and is considered to be a pioneer in the application of ultrasonic technology to
industrial processes. Howard Deans, general manager of the Company's Ultra Sonic
Seal division, has also invented ultrasonic devices and processes covered by
patents primarily for packaging and sealing. The patents granted to Messrs.
Soloff and Deans have expired and the technology related to them is now in the
public domain and is used in part in the development and manufacture of the
Company's products.
On July 25, 1997, the Company acquired Tooltex, Inc., an Ohio
corporation ("Tooltex"), through a merger transaction (the "Merger"). Tooltex is
a manufacturer of automated systems used in the plastics industry. Pursuant to
an Agreement and Plan of Merger, dated July 25, 1997 (the "Plan of Merger"),
among Sonics, SM Sub, Inc., an Ohio corporation and a wholly owned subsidiary of
Sonics ("Sonics Sub"), Tooltex, and the shareholders of Tooltex, Tooltex was
merged with and into Sonics Sub. Sonics Sub then changed its name to Tooltex,
Inc. (the "Surviving Corporation"). Under the Plan of Merger the shareholders of
Tooltex received, in exchange for 100% of the stock of Tooltex, (i) an aggregate
of 70,000 shares of Sonics Common Stock, par value $.03 per share (the "Common
Stock"), (ii) $70,000 and (iii) options to purchase 10,000 shares of Sonics
Common Stock.
In connection with the Merger, the former two shareholders of Tooltex,
who had also been the President and Vice President of Tooltex, entered into
employment agreements with the Surviving Corporation and non-competition
agreements and confidentiality agreements with the Surviving Corporation and
Sonics.
The Company has also formed a wholly owned subsidiary, Vibra-Surge
Corporation, for the manufacture and sale of its ultrasonic surgical device. See
"Products" below.
Products
The Company manufactures equipment in the following categories:
Ultrasonic Welders -- Manufactured by the Company since its founding,
this line of ultrasonic devices welds, bonds, fastens, sews and rivets
thermoplastic components and other synthetic materials. As new applications were
requested by industrial customers, the line has expanded over the years. Plastic
welders and related devices are used in a wide variety of industries and
applications. These include the automotive, computer, electronics, packaging,
toy, home entertainment, medical device, textile and garment, and home appliance
industries.
There are certain advantages to ultrasonic bonding in comparison to
more traditional welding techniques. Uniform production is often accomplished
due to the consistency, speed and focusing of the energy applied to the welded
part. The bond created between the components is generally strong and clean.
Because no solvents, adhesives or external heat are involved, adverse
environmental factors are minimized. Materials which may not be easily assembled
or welded by other technologies can be effectively bonded ultrasonically.
Moreover, ultrasonic bonding is generally faster and requires less skilled labor
or training than many other methods.
<PAGE>
Liquid Processors -- Liquid processors, which are sold under the
Company's trade name "Vibra-Cell" or under private label, are ultrasonic devices
that disperse, break up, emulsify, atomize, mix and blend substances in a liquid
or semi-liquid media. Substances affected by liquid processing include
molecules, cells, tissues, fluids, chemicals and particles. These devices are
available in different power configurations for low, medium and high volume
applications with various capacities, features and accessories. Operating
similarly to ultrasonic bonding systems and composed of many of the same
components, liquid processors produce a different result because they are
utilized in liquid, semi-liquid and powdered media.
Liquid processors are utilized in biotechnology by scientists,
biologists, chemists and pharmacologists, primarily in laboratories for research
and testing purposes. The Company has extended the applications for its liquid
processors from the research laboratories to industrial settings. The liquid
processor also functions to process and test materials and substances on the
production line and in vats and tanks. In the manufacture of pharmaceuticals and
in the processing of petroleum products and certain specialty chemicals, they
reduce particle size and facilitate mixing; in the preparation of paint and
dyes, they blend and homogenize materials. In the ink industry, processors
disperse black carbon. In the beverage and other industries, they are used to
de-gas carbonated soda, wine, beer, spirits and solvents. The Company's liquid
processors are also used as high-intensity cleaners. These ultrasonic cleaning
devices are effective in spot cleaning and removing various contaminants, such
as radioactive particles, proteins, rust, blood, and oil from laboratory
equipment.
The Company also manufactures a liquid processor with a spray nozzle
that atomizes fluids by producing ultra-fine sprays in precisely measured dosage
or at extremely low flow rates. Utilized in laboratories and plants, ultrasonic
atomizers can coat, moisten, or deposit micro-droplets of liquid on glass,
fabric, paper, semiconductors, pharmaceuticals, ceramics or tubes. They are also
used to apply silicone and Teflon, disinfect surfaces and lubricate small parts.
Vibration Welder -- Vibration welders are generally used to weld larger
plastic components together, and have the ability to weld a wider variety of
plastics. In this technology, a non-vibrating part is hydraulically lifted from
below to meet a horizontally-vibrating part. The vibrations cause friction and
heat, melting the plastic, and a bond is effectuated between the plastic parts.
The vibration welder that has been designed and is currently being manufactured
by the Company is computer-controlled and has a power supply, digital display
and other features similar to the Company's ultrasonic welder.
Spin Welder -- The Company has developed and currently manufactures
spin welders based on a non-ultrasonic process known as rotary friction welding.
Rotary friction welding is a bonding technology generally used only when
assembling cylindrical or round-shaped thermoplastic parts. It is also better
suited for plastics of a semi-crystalline nature and assemblies requiring
significant tooling relief. In spin welding, one plastic component is spun
against a mating plastic part that is held stationary in a nesting fixture.
Friction generated by the spinning action produces heat which melts the plastic
and fuses the two parts together.
The spin welding system offered by Sonics features, among other things,
a multi-function programmable controller, RPM display, and a two horsepower
electronic drive motor that spins the plastic part. The spin welder is composed
of a steel frame and column with a control box. Other components of the system
include a pneumatic head, an automotive spindle bearing, an air brake and clutch
system, and steel plates.
Ultrasonic Surgical Instrument -- The Company has designed and developed
an ultrasonic medical device, the Vibra-Surge (TM) System Model VS 2120
("Vibra-Surge"), for the removal of soft tissue in general and reconstructive
and plastic surgery. Sonics filed a patent application and a preliminary patent
application covering Vibra-Surge (TM) with the U.S. Patent and Trademark Office
on May 1, 1997. It is not certain whether patents for this application will be
issued or, if issued, that such patents will offer adequate protection or will
not be challenged by the holders of prior or other patents issued or to be
issued for similar purposes. The device received 510(k) clearance from the Food
and Drug Administration (the "FDA") on July 25, 1997 which permits Sonics to
market the device. In September 1997, Sonics created a wholly owned subsidiary,
Vibra-Surge Corporation, which signed an exclusive distribution agreement with
Sonimedix, Inc. ("Sonimedix") on September, 19, 1997. Under the distribution
agreement, Sonimedix serves as the exclusive worldwide distributor of
Vibra-Surge (TM). On September 25, 1997, Sonics transferred to Vibra-Surge
Corporation all of its rights and obligations under the 510(k) FDA clearance and
patent applications and all of the technology related to Vibra-Surge (TM).
<PAGE>
Industry Background
Management believes that in recent years the market for ultrasonic
bonding systems has undergone steady and consistent growth. It appears that more
companies are seeking to replace metal components with thermoplastics in order
to reduce the weight of products or to capitalize on other special properties of
synthetic substances. Consequently, ultrasonic bonding systems and related
welding devices have been more extensively utilized in industrial processing and
in new assembly applications. In contrast, management believes that the market
for liquid processors in the past has experienced inconsistent growth and
occasional contractions. One of the major reasons for this inconsistent growth
appears to be the decrease in Federal government spending on research and
development. These budget cutbacks have adversely affected expenditures for new
testing equipment, including liquid processors, by university, and medical and
industrial laboratories. To a certain extent, the past decline in sales of
liquid processors in the research laboratory area has been offset by new and
more extensive applications of such technology in other industries, such as the
paint, chemical, petroleum and beverage industries, and medical industries. The
market for liquid processors has only recently stabilized and appears to have
resumed its growth.
Manufacturing and Supply
Sonics' manufacturing operations, conducted at its facilities located
in Danbury, Connecticut, Aston, Pennsylvania, and Grove City, Ohio, are run on a
batch basis in which a series of products move irregularly from station to
station. The Company manufactures its products pursuant to historical and
projected sales data as well as specific customer orders.
Most supplies and materials required in the manufacture of the
Company's products are available from many sources. Many of its suppliers are
based in the same general locality as the Company's manufacturing operations. To
date, Sonics has experienced few shortages and delays regarding supplies and
materials. However, it is not certain that such shortages or delays may not have
an adverse impact on Sonics' operations in the future. No one supplier accounted
for more than 5% of its total purchases for inventory made in fiscal years 1996
or 1997. Although management believes that in all cases alternate sources of
supplies can be located, a certain amount of time would inevitably be required
to find substitutes. During any such interruption in supplies, the Company may
have to curtail the production and sale of its devices and systems for an
indefinite period.
Sonics is not a party to any formal written contract regarding the
delivery of its supplies and materials. It generally purchases such items
pursuant to written purchase orders of both the individual and blanket
varieties. Blanket purchase orders usually entail the purchase of larger amounts
of items at fixed prices for delivery and payment on specific dates ranging from
two months to one year.
Sonics has qualified its Connecticut facility to meet the quality
management and assurance standards of an international rating organization (ISO
9001). ISO 9001 certification indicates that the Company has successfully
implemented a quality assurance system that satisfies this standard. Sonics has
also obtained CE approvals, which are now necessary for sales in Europe, for
many models of its ultrasonic welder and liquid processor. It is working towards
CE approvals for its other product lines.
Maintenance and Service
The Company offers warranties on all its products, including parts and
labor, that range from one year to three years depending upon the type of
product concerned. For the fiscal years ended June 30, 1996 and 1997, expenses
attributable to warranties were approximately $63,000 and $77,000, respectively.
Sonics performs repair services on all of its products sold domestically either
at its Connecticut or Pennsylvania facilities or at customer locations.
Servicing of foreign sales is usually handled by distributors abroad or in the
Company's Swiss branch office regarding its devices sold in Europe. These
services are performed upon specific order without contracts at various rates.
The Company usually charges for the time that its employees expend on the task
and the cost of the materials or parts involved in the repair. For the fiscal
years ended June 30, 1996 and 1997, the Company had income of approximately
$358,000 and $398,000, respectively, for out-of-warranty services performed.
Company devices generally have a long operating life, and Sonics has repaired
machines manufactured by it that are more than 26 years old.
<PAGE>
Sales and Marketing
Sonics generally markets and sells its products in the United States
and abroad through a network of sales representatives and distributors to end
users and original equipment manufacturers ("OEMs"). In the United States, the
Company and its Ultra Sonic Seal division ("USS") utilize approximately 50 sales
representatives in 48 states throughout the country. The Company's wholly owned
subsidiary, Tooltex, utilizes two sales representatives throughout the Midwest.
In the overseas market, it relies on approximately 66 distributors and several
sales representatives to distribute its products in 49 countries. The areas
covered by these third parties include North and South America, the Middle and
Far East, Europe and Australia.
Sales Representatives
The Company's relationship with its sales representatives is usually
governed by a written contract which is generally terminable by either party on
30 days prior notice. The contract provides for exclusive territorial and
product representation and commissions payable to them on their sales depending
on whether basic units or accessories are involved and typically covers
ultrasonic bonding systems and liquid processors. OEM sales made by the Company
are excluded from the commission arrangements. Generally, the sales
representatives do not purchase for their own account, but merely sell Sonics'
products on the Company's behalf. They also may represent other manufacturers
but generally not those competitive with the Company's products. Except for
Tooltex, which accounted for 10.1% and 6.0% in fiscal 1996 and fiscal 1997,
respectively, no one sales representative accounted for more than 5% of Sonics'
sales in either fiscal year 1996 or 1997. Tooltex was acquired by the Company on
July 25, 1997. The loss of such representatives representing in the aggregate
significant sales may have a material adverse impact on the Company's business.
USS sells its plastic welder under its division name. USS maintains a
network of sales representatives in the United States different from those for
Sonics' main product lines. The terms of these arrangements with its sales
representatives are similar to the terms Sonics negotiates with its own sales
representatives.
The Company's wholly owned subsidiary, Tooltex sells its automated
systems under its corporate name, Tooltex, Inc. Tooltex's sales organization
consists of two direct sales personnel, as well as two sales representatives.
Distributors
Sales of Sonics' products to distributors are also generally made
pursuant to written contracts. Under such contracts, distributors provide repair
service and are prevented from selling devices competitive to the Company's
products. Generally, payments must be made in U.S. dollars within 30 days of
delivery of the product. Distribution arrangements are either exclusive or
non-exclusive and are cancelable upon 30 days notice. The contracts generally
exclude private label sales made by Sonics in the distributor's territory even
if the relationship is of an exclusive type and typically covers sales of both
ultrasonic bonding systems and liquid processor lines. The Company now also
offers both its spin welder and vibration welder to its sales representatives
and distributors. The Company also sells these products directly to end-users or
under private label. The Company usually grants discounts to distributors,
depending on the product and quantity sold. No one distributor accounted for
more than 5% of Sonics' sales in either fiscal year 1996 or 1997. The loss of
such distributors in substantial numbers or at key locations could have a
material adverse effect on the Company's business. USS maintains separate but
similar arrangements with at least three foreign distributors abroad.
The Company promotes the sale of its products through direct mailings,
trade shows, product literature, press releases, advertising in trade magazines
and listings in catalogs. The Company occasionally engages in cooperative
advertising with some of its distributors.
Sonics' wholly owned subsidiary, Vibra-Surge Corporation, will sell its
ultrasonic surgical device through its exclusive distributor of the product,
Sonimedix. Under the distribution contract, Sonimedix is prevented from selling
devices competitive to the ultrasonic surgical instrument. Payment must be made
within 60 days of receipt of the product by the end user. The contract may be
canceled by either party if certain terms and conditions are not satisfied.
<PAGE>
Customers
Sonics sells its products, directly or indirectly, to numerous
customers, ranging in size from small companies to large Fortune 100
corporations. Its customers are end-users, original equipment manufacturers,
system integrators and resellers as well as distributors. Many of its customers
are repeat purchasers. None of its customers represented more than 5% of Sonics'
sales for fiscal 1996 or 1997.
International Operations
The Company's international activities are an important portion of its
business. Approximately 33% and 37% of its sales for fiscal years 1996 and 1997,
respectively, are attributable to sales of its products outside the United
States. The Company also operates a branch office in Gland, Switzerland where it
sells and services its ultrasonic devices for the European market except for the
United Kingdom.
Internationally, the Company sells its ultrasonic products under its
own label to end users and distributors or under the trade name of the
distributor. In most cases, Sonics' devices are shipped to foreign distributors
and end users as completed units. However, in certain situations, especially
with regard to distributors of ultrasonic welders located in Asia and South
America, the Company's systems are made available in kit form and assembled
there. Kits frequently contain all components for devices but in some instances
only a portion of the requisite components is provided. For some foreign sales,
no written distribution arrangement exists.
Competition
The Company competes in each of its markets against a variety of other
concerns, many of which are larger and have greater financial, technical,
marketing, distribution and other resources than Sonics. It competes on the
bases of service, performance, reliability, price and delivery.
Prior to making a sale, the Company will expend time and resources
exploring whether it can profitably handle a new application for potential and
existing customers. Generally, the Company receives no compensation for this
pre-sale activity except when special tooling is required and payment for such
services only occurs when and if product sales are consummated. Like nearly all
manufacturers in this industry, the Company invests heavily in this pre-sale
examination of new applications. Such examination represents another area in
which such manufacturers compete, and those with greater resources and manpower
may possess a competitive advantage.
With respect to its ultrasonic bonding equipment, the Company
encounters competition from Branson Ultrasonics Co.
("Branson"), a subsidiary of Emerson Electric Co., Dukane Corp. ("Dukane"),
Herrmann Ultrasonics, Inc., Forward
Technology Industries, Inc. and other smaller manufacturers. The two dominant
companies in this area are Branson and
Dukane. Some of these competitors also offer spin and vibration devices as
well as ultrasonic ones.
In the ultrasonic liquid processor market, the Company's principal
competitors are Branson and Misonix Inc. Management believes that in this market
Sonics has the largest market share.
The Company's ultrasonic surgical instrument has three main
competitors, Mentor Corporation, Lysonix Inc., and Wells-Johnson Corporation. No
one company dominates this market. However, the Company's three major
competitors have entered the market place prior to Sonics.
Backlog
As of June 30, 1997, the Company's backlog was approximately $1,195,000
as compared with a backlog of $1,466,000 as of June 30, 1996. No one customer
accounted for more than 10% of such backlog at June 30, 1997.
Substantially all of the Company's backlog figures are based on written
purchase orders executed by the customer and involve product deliveries and not
engineering services. All orders are subject to cancellation.
<PAGE>
Research and Development
The Company maintains an engineering staff responsible for the
improvement of existing products, modification of products to meet customer
needs and the engineering, research and development of new products and
applications. Engineering and research and development expenses were
approximately $372,000 for fiscal 1996, and $418,000 for fiscal 1997.
Intellectual Property
Proprietary information and know-how are important to the Company's
success. Sonics holds no active patents but has trademark protection for its
"Vibra-Cell" trade name and its "Vibra-Surge" trade name. There can be no
assurance that others have not developed, or will not develop, independently the
same or similar information or obtain and use proprietary information of the
Company. Sonics has obtained written assurances from its employees, sales
representatives and distributors under confidentiality agreements regarding its
proprietary information.
On February 23, 1996, the Company filed a patent application with the
U.S. Patent and Trademark office for one of its bonding machines. On May 1,
1997, the Company filed a patent application and a preliminary patent
application with the U.S. Patent and Trademark Office covering its new
ultrasonic surgical instrument. The Company cannot predict whether patents will
be granted or the extent of protection which would be offered by a patent, if
granted.
On September 25, 1997, Sonics transferred to its wholly owned
subsidiary, Vibra-Surge Corporation, the "Vibra-Surge" trade name, and its
rights and obligations under the Vibra-Surge patent application and preliminary
patent application. See "Products" above.
Government Regulation
Sonics' bonding and liquid processor lines generally are not governed
by specific legal rules and laws. The Company's ultrasonic surgical instrument,
however, is subject to a variety of FDA regulations relating to its manufacture
and sale in the United States. The FDA has rules which govern the design,
manufacture, distribution, approval and promotion of medical devices in the
United States.
Various states and foreign countries in which Sonics' products are, or
may be, sold may impose additional regulatory requirements, such as the Medical
Device Directive in the European Common Market.
On May 1, 1997, Sonics filed a patent application and a preliminary
patent application for its ultrasonic surgical instrument, Vibra-Surge. The
Company has obtained 510(k) clearance from the FDA which permits the Company to
market the device for aiding the removal of soft tissue in general surgery and
plastic and reconstructive surgery. Vibra-Surge has signed an exclusive
distribution agreement with Sonimedix for the sale and marketing of its
ultrasonic surgical instrument.
Sonics' sales abroad may make it subject to other U.S. and foreign
laws. The Company and its agents are also governed by the restrictions of the
Foreign Corrupt Practices Act of 1977, as amended (the "FCPA"). The FCPA
prohibits the promise or payments of any money, remuneration or other items of
value to foreign government officials, public office holders, political parties
and others with regard to obtaining or preserving commercial contracts or
orders. Sonics has urged its foreign distributors to comply with the
requirements of the FCPA. All these restrictions may hamper the Company in its
marketing efforts abroad.
In addition, other federal, state and local agencies, including those
in the environmental, fire hazard control, and working conditions areas could
have a material adverse affect upon the Company's ability to do business. Sonics
is not involved in any pending or threatened proceedings which would require
curtailment of, or otherwise restrict, its operations because of such
regulations and compliance with applicable environmental or other regulations.
None of these laws has had a material effect upon its capital expenditures,
financial condition or results of operations.
<PAGE>
Employees
As of September 22, 1997, the Company, including its subsidiaries, had
118 full-time employees including its officers, of whom 69 were engaged in
manufacturing, three in repair services, eight in administration and financial
control, 16 in engineering and research and development, and 22 in marketing and
sales.
None of Sonics' employees is covered by a collective bargaining
agreement or represented by a labor union. Sonics considers its relationship
with its employees to be good.
The design and manufacture of the Company's equipment requires
substantial technical capabilities in many disparate disciplines, from mechanics
and computer science to electronics and mathematics. While management believes
that the capability and experience of its technical employees compares favorably
with other similar manufacturers, there can be no assurance that it can retain
existing employees or attract and hire the highly capable technical employees
necessary in the future on favorable terms, if at all.
Any statements in this Annual Report that are not statements of
historical fact are forward-looking statements that are subject to a number of
important risks and uncertainties that could cause actual results to differ
materially. Specifically, any forward looking statements in this Annual Report
related to the Company's objectives of future growth, profitability and
financial returns are subject to a number of risks and uncertainties, including,
but not limited to, risks related to a growing market demand for Sonics'
existing and new products, continued growth in sales and market share of Sonics
and its USS products, pricing, market acceptance of existing and new products, a
fluctuation in the sales product mix, general economic conditions, competitive
products, and product and technology development. There can be no assurance that
such objectives will be achieved. The Company's objectives of future growth,
profitability and financial returns are also subject to the uncertainty of
Vibra-Surge Corporation being able to successfully market its ultrasonic
surgical device. It is also uncertain whether a patent will be granted for the
Company's ultrasonic surgical device, or whether any related patent litigation
may hinder the Company's ability to market the device. In addition, the
Company's objectives of future growth, profitability, and financial returns are
also subject to the uncertainty of the growth and profitability of its wholly
owned subsidiary, Tooltex.
Item 2. Description of Property
-----------------------
The Company's primary manufacturing and office facility is located in
Danbury, Connecticut in four separate steel and cinder block buildings, three of
which are on the same parcel of land. These facilities are considered adequate
for its current needs, but Sonics has determined that the facilities are not
suitable for Sonics' anticipated requirements. As a result, on September 19,
1997, Sonics purchased a 63,000 square foot cement and cinder block building
located at 55A Church Hill Road, Newtown, Connecticut (the "Newtown Property")
for $1,265,000. The Company plans to renovate the building and consolidate its
four Connecticut facilities in the Newtown Property which will serve as the
Company's primary manufacturing facility and corporate headquarters. The Company
anticipates that the cost of the improvements to the property will be
approximately $1.2 million. The Company intends to move into the Newtown
Property by May 1, 1998. Sonics may lease 12,000 square feet in the Newtown
Property to an unrelated third party. Although no party has yet been identified,
the Company believes it will be able to find a lessee, if it chooses to lease
the property because there is minimal competition in Newtown for similar space.
The Newtown Property is presently insured against fire and other casualty in an
amount the Company believes to be adequate.
The Newtown Property is encumbered by a first mortgage lien in favor of
a bank (the "Bank"), which secures three credit facilities, each dated September
19, 1997: (i) a bridge loan in the original principal amount of $1,600,000 (the
"Bridge Loan"); (ii) a revolving line of credit facility in the original
principal amount of up to $1,500,000 (the "Line of Credit"); and (iii) a term
loan in the original principal amount of $427,000 (the "Term Loan").
The Bridge Loan bears interest at the Bank's base lending rate plus
one-half percent. The principal balance of the Bridge Loan, which at September
25, 1997 was $1,600,000, will mature and be due and payable upon the earliest to
occur of (i) the written demand of the Bank, (ii) the consummation of the IRB
Loan (as hereafter defined), or (iii) December 31, 1997. Subject to certain
terms and conditions, the Bank has agreed to make a tax-exempt industrial
development loan (the "IRB Loan") in the aggregate principal amount of up to
$2,945,000 to be issued through the Connecticut Development Authority,
<PAGE>
the
proceeds of which will be used to refinance the Bridge Loan, pay any remaining
costs of preparing the Newtown Property for Sonics' use and occupancy and for
purchasing or manufacturing equipment. Sonics expects to close the IRB Loan on
or before December 31, 1997. The principal of the Bridge Loan may be prepaid in
whole or in part, without premium or penalty, at any time.
The Company does not intend to use the proceeds from the Line of Credit
or the Term Loan to acquire or improve the Newtown Property. For information
about such borrowings, see "Management's Discussion and Analysis or Plan of
Operations-Liquidity and Capital Resources."
The following table lists the Company's offices by location as of
September 25, 1997, all of which are leased, and certain other information:
<TABLE>
<S> <C> <C> <C>
Approximate Total Approximate Current
Area Leased in Expiration Date of Lease Annual Rent (1)
Square Footage
------------------- --------------------------- ----------------------
Kenosia Ave., Danbury, Connecticut 23,000 April 30, 1998 $156,500
Shelter Rock Road, Danbury, Connecticut 10,000 April 30, 1998 45,000
Aston, Pennsylvania 4,900 September 30, 2002 40,300
Naperville, Illinois 2,000 December 31, 1997 14,400
Gland, Switzerland 3,000 January 31. 1998 (2) 13,800
Grove City, Ohio(3) 13,600 July 26, 2002(2) 77,900
- ---------------------------
</TABLE>
(1) Includes proportionate cost of utilities, repairs, cleaning, snow removal,
taxes and insurance.
(2) Contains renewal option as listed below:
Gland Switzerland...........................1 year
Grove City, Ohio ...........................5 years
(3) Lease is with BPT, Limited, the sole partners of which are the former
shareholders and current President and Vice President of Tooltex.
The Company believes that it has adequate insurance coverage for all of
its leased properties. The Company also leases certain automobiles and
equipment.
Item 3. Legal Proceedings
-----------------
There is no pending or threatened material litigation or proceeding
against the Company.
<PAGE>
Item 4. Submission of Matters to a Vote of Security-Holders
---------------------------------------------------
Not applicable.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
--------------------------------------------------------
Since February 27, 1996, the Common Stock and Warrants to purchase
Common Stock of the Company have been traded and quoted through the National
Association of Securities Dealers Inc. National Market System ("NASDAQ") under
the symbols "SIMA" and "SIMAW", respectively. The following table sets forth the
range of high and low bids for the Company's Common Stock and Warrants for the
periods indicated as reported by NASDAQ.
<TABLE>
<S> <C> <C> <C> <C>
Stock Warrants
------------------------------------- -------------------------------------
Quarter Ended High Low High Low
---------------- ---------------- ---------------- -----------------
March 31, 1996 11 1/4 6 3/4 5 3/4
June 30, 1996 13 11 7/8 6 5/8 4
September 30, 1996 14 1/2 10 13/16 7 1/4 4 1/4
December 31, 1996 13 1/2 3 3/4 6 1/4 1/2
March 31, 1997 8 1/2 4 2 1/2 11/16
June 30, 1997 6 1/4 2 7/8 1 11/16 3/8
</TABLE>
The prices presented in the table are bid prices, which represent
prices between broker-dealers and do not include retail mark-ups and mark-downs
or any commission to the dealer. The prices presented may not reflect actual
transactions.
On September 22, 1997, the closing price of the Common Stock of the
Company, as reported by NASDAQ, was $2 3/4 per share, and the closing price of
the Warrants, as reported by NASDAQ was $5/8 per Warrant. On September 22, 1996,
the Company had 28 stockholders of record and 13 Warrant holders of record. The
Company has been informed by its registrar and transfer agent that these are
holders in nominee name. The Company believes that the number of beneficial
holders is greater.
The Company intends to follow a policy of retaining any earnings to
finance the development and growth of its business. Accordingly, it does not
anticipate other payments of cash dividends in the foreseeable future. The
payment of dividends, if any, rests within the discretion of the Board of
Directors and will depend upon, among other things, the Company's earnings, its
capital requirements and its overall financial condition.
In connection with the Company's initial public offering, on June 20,
1996 the Company filed with the Securities and Exchange Commission (the "SEC") a
Form SR reporting the use of proceeds from such offering. Additional Forms SR
were subsequently filed by the Company. There have been no changes to the
information filed in the most recent Form SR.
Item 6. Management's Discussion and Analysis or Plan of Operation
---------------------------------------------------------
The following discussion and analysis provides information which the
Company's management believes is relevant to an assessment and understanding of
the Company's results of operations and financial condition. All references to
full years are to the applicable fiscal year of the Company. This discussion
should be read in conjunction with the financial statements and notes thereto
included elsewhere herein.
<PAGE>
Results of Operations
Year Ended June 30, 1997 Compared to Year Ended June 30, 1996
Net Sales. Net sales for the year ended June 30, 1997 increased
$1,451,000, or 15.5% over the prior year. This is primarily the result of
increased sales volume for the vibration welder product line. The Company also
experienced increased volume for the ultrasonic welder product line. In March
1997, the Company implemented a slight price increase of between three and five
percent in the ultrasonic welder line in March, 1997 and in the liquid processor
product line in April, 1997
Cost of Sales. Cost of sales increased approximately $1,319,000 or
25.9% over the prior year. As a percentage of sales, cost of sales increased
from 54.3% to 59.2%. This increase in cost of sales is primarily attributable to
increased costs associated with the vibration welder in the first year of
production. Initial costs associated with the startup of the vibration welder
line caused the cost of these products, as a percentage of their net sales
during this period, to be higher than the Company has experienced with other
product lines. The Company was not able to pass these increased costs on to the
customer. The impact of the vibration welder upon cost of sales was most
significant in the fourth quarter. If the Company had not made any sales of
vibration welders during the 1997 fiscal year, cost of sales would be only 55.6%
of sales, only slightly higher than the prior year.
Selling Expenses. Selling expenses for the year ended June 30, 1997
increased by approximately $325,000 or 11.5% over fiscal 1996. This increase is
primarily attributable to the increase in sales. As a percentage of sales,
selling expense decreased slightly from 30.2% in fiscal 1996 to 29.2% in fiscal
1997.
General and Administrative Expenses. General and administrative
expenses for the year ended June 30, 1997 increased by approximately $235,000 or
39.9% from the prior year. This increase can be primarily attributed to
increased expenses associated with being a publicly traded company, such as
professional fees, investor relations, printing, and directors' and officers'
insurance expenses.
Research and Development Expenses. Research and development expenses
increased by approximately $46,000 in fiscal 1997. This represents an increase
of approximately 12.5%. The primary factor that contributed to this increase was
the planned addition of one research and development engineer, as part of the
expansion of research and development efforts.
Interest Expense. Total interest expense for fiscal 1997 decreased
$20,000 or 20.4%. This is, in large part, due to decreased borrowings on the
Company's line of credit with its bank. In fiscal 1996, the average daily
balance under this line of credit was approximately $661,000, compared to
approximately $355,000 in fiscal 1997. In the second quarter of fiscal 1997, the
Company reduced borrowings on its line of credit by utilizing a portion of the
proceeds from its initial public offering.
Income Taxes. Income taxes increased by $27,000 or 342.1% due to the
Company recording an income tax benefit of $91,000 in fiscal 1996. This tax
benefit resulted from the recognition of a Federal deferred tax asset upon
conversion of the Company from an S-corporation to a C-corporation due to the
completion of the initial public offering. This resulted in an increase in
fiscal 1997 that was offset by lower taxes resulting from lower earnings in the
current fiscal year.
Year Ended June 30, 1996 Compared to Year Ended June 30, 1995
Net Sales. Net sales for the year ended June 30, 1996 increased
$801,000 or 9.3% over the prior year. This is primarily the result of increased
sales volume for the liquid processor product line, as well as increased sales
volume generated by the Company's ultrasonic bonding product line. In addition,
the Company implemented a limited price increase for some of its products during
the current fiscal year.
Cost of Sales. Cost of sales for the period increased from $4,228,000
in fiscal 1995 to $5,092,000 in fiscal 1996. This represents an increase of
approximately 20.4%. As a percentage of sales, cost of sales increased from
49.3% in fiscal 1995 to 54.3% in fiscal 1996. A substantial portion of this
increase is attributable to increased sales. The remaining increase is primarily
attributable to the introduction of two new product lines as well as the
introduction of the new generation of ultrasonic welders, in fiscal 1996.
Initial costs associated with the startup of the Spin Welder line and the
Vibration Welder line caused the cost of these products, as a percentage of
their net sales during the start-up period, to be higher than the Company has
experienced with other product lines. The Company was not able to pass these
increased costs on to the customer. A fluctuation in the sales product mix also
contributed to the increase. Since not all products have the same markup due to
market considerations, the cost of sales may fluctuate depending on the actual
sales mix for the period.
Selling Expenses. Selling expenses for the year ended June 30, 1996
increased $382,000 or 15.6% over the prior year. A substantial portion of the
increase is attributable to increased sales. The primary factor contributing to
the remaining portion of the increase is the costs associated with two new
product lines, the vibration welder and the spin welder. These costs of
approximately $141,000 include the design and printing of product literature, as
well as associated personnel expenses. The Company also incurred an additional
expense relating to the design and printing of a new brochure for its ultrasonic
welders. The increase is also attributable to $56,000 of increased travel
expenses, including travel associated with the Company's international sales
meeting held in November of 1995, and expenses related to the Company's liaison
to the Korean marketplace.
General and Administrative Expenses. General and administrative
expenses for the year ended June 30, 1996 decreased by approximately $87,000 or
12.9% from the prior year. In fiscal 1995, the Company paid its shareholder
approximately $160,000 to cover his personal tax liability resulting from the
Company's sub-chapter S status. No such payments were made in fiscal year 1996.
Offsetting the elimination of the bonus was an increase of approximately $80,000
in professional fees. This increase is primarily attributable to legal fees
associated with the litigation related to the Company's dispute with Sonique and
Mentor which has been settled.
Research and Development Expenses. Research and development expenses
increased by approximately $23,000 in fiscal 1996. This represents an increase
of approximately 6.6%. The increase is primarily attributable to expenses of
approximately $46,000 incurred in fiscal year 1996 relating to CE testing of
Sonics' existing ultrasonic equipment. CE approval is required for all equipment
shipped into countries belonging to the European Community. The increase
resulting from the CE testing was partially offset by a decrease in research and
development materials.
Total Operating Expenses. Total operating expenses for fiscal 1996
increased $211,000 or 5.9% over fiscal 1995. This increase is a result of the
factors discussed above offset by a one-time charge to compensation expense in
fiscal 1995 resulting from the repurchase and cancellation of stock options
formerly held by two officers of the Company.
Interest Expense. Total interest expense for fiscal 1996 increased
$87,000 or 680%. This is due to increased borrowings on the Company's line of
credit with its bank. In fiscal 1995, the average daily balance under this line
of credit was approximately $141,000, compared to approximately $661,000 in
fiscal 1996.
Income Taxes. Income taxes decreased by $53,000 or 117.8% due to the
Company recording an income tax benefit of $91,000 for the recognition of
Federal deferred tax asset upon conversion of the Company from an S-corporation
to a C-corporation due to the completion of the initial public offering. This
amount has been offset by an income tax provision of $50,000 based on the income
earned by the Company from the date of the offering.
Liquidity and Capital Resources
As of June 30, 1997, the Company's working capital decreased to
$5,942,000 from $6,010,000 at the end of fiscal 1996. This represents a decrease
of approximately 1%.
In fiscal 1997, the Company generated approximately $1,363,000 in
proceeds from the sale of certain short term investments. During fiscal 1997,
the Company converted a $500,000 demand note payable to the bank to a five year
term note payable. It made principal payments of approximately $369,000. The
Company used approximately $774,000 in operating activities. An additional
$204,000 was invested in new equipment.
On September 19, 1997, the Company entered into three facilities with a
bank (the "Bank"), each of which is secured by a first mortgage lien on the
Newtown Property (see "Description of Property"): (i) a Bridge Loan in the
original
<PAGE>
principal amount of $1,600,000; (ii) a Line of Credit in the original principal
amount of up to $1,500,000; and (iii) a Term Loan in the original principal
amount of $427,000.
The Bridge Loan bears interest at the Bank's base lending rate plus
one-half percent. The principal balance of the Bridge Loan, which at September
25, 1997 was $1,600,000, will mature and be due and payable upon the earliest to
occur of (i) the written demand of the Bank, (ii) the consummation of the IRB
Loan, or (iii) December 31, 1997. Subject to certain terms and conditions, the
Bank has agreed to make an IRB Loan in the aggregate principal amount of up to
$2,945,000 to be issued through the Connecticut Development Authority, the
proceeds of which will be used to refinance the Bridge Loan, pay any remaining
costs of preparing the Newtown Property for Sonics' use and occupancy and for
purchasing or manufacturing equipment. Sonics expect to close the IRB Loan on or
before December 31, 1997. The principal of the Bridge Loan may be prepaid in
whole or in part, without premium or penalty, at any time.
The Line of Credit is used by the Company for working capital. The Line
of Credit bears interest, at Sonics' option, at the Bank's base lending rate or
LIBOR plus 2.5%. Advances under the Line of Credit are at the Bank's sole
discretion. The entire principal balance of the Line of Credit, which at
September 25, 1997 was $992,000, will mature and be due and payable upon the
demand of the Bank. The borrowings under the Line of Credit have been used to
repay a line of credit with another bank in the amount of $1,005,101. The line
of credit with the other bank bore interest at such bank's loan pricing rate of
interest plus one-half percent. The principal of the Line of Credit may be
prepaid in whole or in part, without premium or penalty, at any time. In the
event of the prepayment of any portion of the Line of Credit during any period
in which the Line of Credit bears interest at a LIBOR rate, Sonics will be
obligated to pay the Bank a breakage fee relating to the LIBOR interest
component. The Line of Credit is also secured by all of the Company's assets.
The proceeds of the Term Loan were used to pay in full a term loan with
another bank with interest and principal totaling $427,000. The term loan with
the other bank bore interest at such bank's loan pricing rate of interest plus
one-half percent. The current outstanding principal amount of the Term Loan is
$427,000, which bears interest, at Sonics' option, at the Bank's base lending
rate or LIBOR plus 2.5%. The principal of the Term Loan must be paid in 36 equal
monthly installments of $11,861.11, commencing on November 1, 1997, and the
entire remaining principal balance will mature and be due and payable on October
1, 2000. The terms and conditions under which Sonics may prepay all or any
portion of the Term Loan are the same as for the Line of Credit discussed above.
The Term Loan is also secured by all of the Company's assets.
Impact of Inflation
The Company does not believe that inflation significantly affected its
results of operations for the 1997 fiscal year.
Item 7. Financial Statements
--------------------
The response to this item is submitted in this report under the heading
"Financial Statements" and is incorporated herein by reference.
Item 8. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure
---------------------------------------------------------------
Not applicable.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act
-------------------------------------------------------------
Information required by this Item 9 is incorporated herein by reference
from the definitive proxy statement of Sonics to be filed with the Securities
and Exchange Commission ("SEC") within 120 days following the end of Sonics'
fiscal year ended June 30, 1997, or October 28, 1997, relating to its 1997
Annual Meeting of Stockholders.
<PAGE>
Item 10. Executive Compensation
----------------------
Information required by this Item 10 is incorporated herein by
reference from the definitive proxy statement of Sonics to be filed with the SEC
within 120 days following the end of Sonics' fiscal year ended June 30, 1997, or
October 28, 1997, relating to its 1997 Annual Meeting of Stockholders.
Item 11. Security Ownership of Certain Beneficial Owners and Management
--------------------------------------------------------------
Information required by this Item 11 is incorporated herein by
reference from the definitive proxy statement of Sonics to be filed with the SEC
within 120 days following the end of Sonics' fiscal year ended June 30, 1997, or
October 28, 1997, relating to its 1997 Annual Meeting of Stockholders.
Item 12. Certain Relationships and Related Transactions
----------------------------------------------
Information required by this Item 12 is incorporated herein by
reference from the definitive proxy statement of Sonics to be filed with the SEC
within 120 days following the end of Sonics' fiscal year ended June 30, 1997, or
October 28, 1997, relating to its 1997 Annual Meeting of Stockholders.
Item 13. Exhibits and Reports on Form 8-K
--------------------------------
(a) Exhibits.
3(i) Certificate of Incorporation of the Registrant, as amended
(incorporated by reference from Exhibit 3.1
of Amendment No. 3 to Registration Statement No. 33-96414).
3(ii) Amended By-laws of the Registrant (incorporated by reference
from Exhibit 3.2 of Registration
Statement No. 33-96414).
10(i) Form of Employment Agreement between the Registrant and
Robert S. Soloff (incorporated by reference
from Exhibit 10.1 of Registration Statement No. 33-96414).
10(ii) 1995 Incentive Stock Option Plan and form of Stock Option
Agreement (incorporated by reference from
Exhibit 10.3 of Registration Statement No. 33-96414).
10(iii) Original Office Lease and Amendments between the Registrant
and Nicholas R. DiNapoli, Jr. DBA DiNapoli Holding Co.
(Danbury, CT) (incorporated by reference from Exhibit 10.4
of Registration Statement No.
33-96414).
10(iv) Lease between Registrant and Aston Investment Associates
(Aston, PA) (incorporated by reference from
Exhibit 10.5 of Registration Statement No. 33-96414).
10(v) Amended lease between Registrant and Robert Lenert
(Naperville, IL) (incorporated by reference from
Exhibit 10.6 of Amendment No. 4 to Registration Statement
No. 33-96414).
10(vi) Lease between Registrant and Janine Berger (Gland,
Switzerland) (incorporated by reference from
Exhibit 10.7 of Registration Statement No. 33-96414).
10(vii) Form of Sales Representation Agreement (incorporated by
reference from Exhibit 10.8 of Registration
Statement No. 33-96414).
10(viii) Form of Sales Distribution Agreement (incorporated by
reference from Exhibit 10.9 of Registration
Statement No. 33-96414).
10(ix) Consulting Agreement dated October 17, 1995 between the
Registrant and Alan Broadwin (incorporated by
reference from Exhibit 10.10 of Amendment No. 3 of
Registration Statement No. 33-96414).
10(x) Agreement and Plan of Merger, dated as of July 25, 1997,
among the Registrant, SM Sub, Inc., Tooltex, Inc., and the
persons designated as the shareholders thereon (excluding
schedules and annexes). A list of omitted schedules and
annexes appears on pages iv and v of the Agreement and Plan
of Merger. The Registrant hereby undertakes to furnish
supplementally a copy of any omitted schedule and annex to
the Commission upon request. (incorporated by reference from
Exhibit 2(a) of the Registrant's Form 8-K dated July 25,
1997).
10(xi) Agreement of Merger, dated as of July 25, 1997, among the
Registrant, SM Sub, Inc. and Tooltex, Inc.
(incorporated by reference from Exhibit 2(b) of the
Registrant's Form 8-K dated July 25, 1997).
10(xii) Credit Agreement, dated September 19, 1997, between Brown
Brothers Harriman & Co. and Registrant
(filed herewith).
<PAGE>
10(xiii) Term Loan Note of Registrant, dated September 19, 1997,
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $427,000 (filed herewith).
10(xiv) Line of Credit Note of Registrant, dated September 19, 1997,
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $1,500,000 (filed herewith).
10(xv) Bridge Loan Note of Registrant, dated September 19, 1997,
payable to the order of Brown Brothers
Harriman & Co. in the original principal amount of
$1,600,000 (filed herewith).
10(xvi) Open-End Mortgage Deed from Registrant to Brown Brothers
Harriman & Co. dated September 19, 1997
(filed herewith).
10(xvii) General Security Agreement from Registrant to Brown Brothers
Harriman & Co. dated September 19, 1997
(filed herewith).
21 Subsidiaries of the Registrant (filed herewith).
27 Financial Data Schedule (filed herewith).
(b) The Company filed a Form 8-K on April 30, 1997, reporting the issuance of a
press release that announced the execution of a letter of intent with respect to
the acquisition of Tooltex.
<PAGE>
INDEX TO FINANCIAL STATEMENTS
Page
Report of Independent Certified Public Accountants F-2
Financial Statements
Balance Sheets F-3
Statements of Income F-4
Statement of Stockholders' Equity F-5
Statements of Cash Flows F-6
Notes to Financial Statements F-7 - F-23
<PAGE>
REPORT OF INDEPENDENT CERTIFIED
PUBLIC ACCOUNTANTS
Board of Directors and Stockholders
Sonics & Materials, Inc.
We have audited the accompanying balance sheets of Sonics & Materials, Inc. as
of June 30, 1996 and 1997, and the related statements of income, stockholders'
equity and cash flows for the years then ended. These financial statements are
the responsibility of the Company's management. Our responsibility is to express
an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Sonics & Materials, Inc. as of
June 30, 1996 and 1997, and the results of its operations and its cash flows for
the years then ended, in conformity with generally accepted accounting
principles.
GRANT THORNTON LLP
/s/GRANT THORNTON LLP
New York, New York
August 28, 1997
<PAGE>
<TABLE>
Sonics & Materials, Inc.
BALANCE SHEETS
June 30,
<S> <C> <C>
ASSETS 1996 1997
----------- -------
CURRENT ASSETS
Cash and cash equivalents $ 73,129 $ 271,593
Short-term investments 3,028,032 1,665,470
Accounts receivable, net of allowance for doubtful
accounts of $45,000 in 1996 and 1997 1,953,941 1,854,118
Inventories 3,248,782 3,718,250
Prepaid income taxes 30,465 150,061
Deferred income taxes 80,000 80,000
Other current assets 111,327 137,562
------------ ----------
Total current assets 8,525,676 7,877,054
PROPERTY AND EQUIPMENT - NET 301,706 364,354
OTHER ASSETS - NET 353,124 917,709
---------- ----------
$9,180,506 $9,159,117
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 832,813 $ 500,000
Demand note payable 500,000
Current maturities of long-term debt 116,600
Accounts payable 767,620 804,653
Commissions payable 160,081 235,203
Other accrued expenses and sundry liabilities 254,677 278,310
---------- ----------
Total current liabilities 2,515,191 1,934,766
LONG-TERM DEBT 406,911
COMMITMENTS
STOCKHOLDERS' EQUITY
Common stock - par value $.03 per share; authorized, 10,000,000 shares;
issued and outstanding, 3,500,100 shares at June 30, 1996
and 3,520,100 at June 30, 1997 105,003 105,603
Additional paid-in capital 6,417,126 6,539,597
Retained earnings 143,186 172,240
---------- ----------
6,665,315 6,817,440
--------- ---------
$9,180,506 $9,159,117
========= =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Sonics & Materials, Inc.
STATEMENTS OF INCOME
Year ended June 30,
<S> <C> <C>
1996 1997
------------- ---------
Net sales $9,376,170 $10,827,525
Cost of sales 5,091,789 6,410,584
--------- -----------
Gross profit 4,284,381 4,416,941
Operating expenses
Selling 2,832,251 3,157,193
General and administrative 588,923 823,767
Research and development 372,087 418,465
---------- ----------
Total operating expenses 3,793,261 4,399,425
Other income (expense)
Interest expense (100,011) (79,565)
Other 45,201 110,471
----------- ------------
(54,810) 30,906
Income before income taxes 436,310 48,422
Provision for income taxes (8,000) 19,368
------------ -------------
NET INCOME $ 444,310 $ 29,054
========== =============
Pro forma data
Historical income before taxes $ 436,310
Provision for income taxes 174,524
NET INCOME $ 261,786
==========
Primary income per share
Net income per share $.09 $.01
=== ===
Weighted average common shares outstanding 3,409,303 4,247,104
Fully diluted income per share
Net income per share $.08 $.01
=== ===
Weighted average common shares outstanding 3,440,770 4,247,104
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Sonics & Materials, Inc.
STATEMENT OF STOCKHOLDERS' EQUITY
Years ended June 30, 1996 and 1997
<S> <C> <C> <C> <C> <C>
Common stock Additional
Par paid-in Retained Stockholders'
Shares value capital earnings equity
Balance - June 30, 1995 1,350,000 $ 40,500 $ 139,237 $ 2,704,030 $2,883,767
1.85-for-1 stock split 1,150,000 34,500 (34,500)
Distribution to stockholder (495,730) (495,730)
Capital contribution from
S-corporation earnings 2,509,424 (2,509,424)
Issuance of common stock 1,000,100 30,003 3,802,965 3,832,968
Net income 444,310 444,310
--------------- ------------- --------------- ----------- ----------
Balance - June 30, 1996 3,500,100 105,003 6,417,126 143,186 6,665,315
Exercise of warrants for stock 20,000 600 97,471 98,071
Exercise of options for
warrants 25,000 25,000
Net income 29,054 29,054
--------------- ------------- --------------- ------------ -----------
Balance - June 30, 1997 3,520,100 $105,603 $6,539,597 $ 172,240 $6,817,440
========= ======= ========= =========== =========
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
<TABLE>
Sonics & Materials, Inc.
STATEMENTS OF CASH FLOWS
Year ended June 30,
<S> <C> <C>
1996 1997
----------- -------
Cash flows from operating activities
Net income $ 444,310 $ 29,054
Adjustments to reconcile net income to net cash used in
operating activities
Depreciation of equipment and leasehold improvements 236,105 141,308
Deferred income taxes (80,000)
Gain on sale of equipment (2,500)
Increase (decrease) in cash flows from changes in
operating assets and liabilities
Accounts receivable (3,983) 99,823
Inventory (1,190,475) (469,468)
Prepaid income taxes (30,465) (119,596)
Other assets (43,901) (590,820)
Accounts payable and accrued liabilities 244,354 135,788
----------- ----------
Net cash used in operating activities (426,555) (773,911)
----------- ----------
Cash flows from investing activities
Capital expenditures on equipment and leasehold
improvements (149,512) (125,632)
Proceeds from sale of equipment 2,500
Short-term investments (3,028,032) 1,362,562
---------- ---------
Net cash (used in) provided by investing activities (3,175,044) 1,236,930
---------- ---------
Cash flows from financing activities
Distribution to stockholder (495,730)
Payment of capital lease obligation (18,504)
Proceeds from note payable, net 150,000 130,878
Payment of demand note payable (500,000)
Proceeds from issuance of options and warrants 3,832,968 123,071
---------- ----------
Net cash provided by (used in) financing activities 3,487,238 (264,555)
---------- ----------
NET (DECREASE) INCREASE IN CASH
AND CASH EQUIVALENTS (114,361) 198,464
Cash and cash equivalents at beginning of year 187,490 73,129
----------- -----------
Cash and cash equivalents at end of year $ 73,129 $ 271,593
============ ==========
Supplemental disclosures of cash flow information:
Cash paid during the year for
Interest $ 94,000 $ 122,000
============ ==========
Income taxes $ 150,000 $ 149,000
=========== ==========
For the year ended June 30, 1997, a capital lease obligation of $78,324 was
incurred when the Company entered into a lease for new equipment.
The accompanying notes are an integral part of these statements.
</TABLE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS
June 30, 1996 and 1997
NOTE A - BUSINESS
Sonics & Materials, Inc.'s (the "Company") primary business is the
manufacturing and distribution of ultrasonic assembly and liquid processing
machinery and equipment. Sales are made throughout the United States,
Europe, Asia, South America and Australia. The Company's primary location
of operations is Danbury, Connecticut.
NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
1. Inventories
Inventories are stated at the lower of cost, determined on a first-in,
first-out basis, or market.
2. Equipment and Leasehold Improvements
Equipment and leasehold improvements are carried at cost less
accumulated depreciation and amortization. Depreciation using both the
declining-balance and straight-line methods is designed to amortize the
cost of various classes of assets over their estimated useful lives,
which range from five to seven years. Leasehold improvements are
amortized over the shorter of the life of the related asset or the term
of the lease. Expenditures for replacements are capitalized and the
replaced items are retired. Maintenance and repairs are expensed as
incurred.
3. Taxes
In 1989, the Company elected to be treated as an S Corporation for
Federal income tax reporting. An S Corporation is generally treated
like a partnership, and is exempt from Federal income taxes with
certain exceptions. Accordingly, no provision or liability for Federal
income taxes was reflected in the accompanying statements during the
period the Company was treated as an S Corporation. Instead, the
stockholder reported his pro rata share of corporate taxable income or
loss on his respective individual income tax returns. A provision for
state income taxes was made for those states not recognizing S
Corporation status.
On February 26, 1996, the Company's S Corporation status terminated
with the completion of the Offering as described in Note J. Upon
termination of its S Corporation status, the Company
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE B (continued)
uses the liability method for both Federal and state income tax
purposes. The effect of the change in status is reflected in income
from continuing operations. Such change in status resulted in an
increase in deferred tax assets at February 26, 1996 by approximately
$91,000 and earnings by the same amount.
4. Cash Equivalents
For purposes of the statement of cash flows, the Company considers all
highly liquid investments purchased with an original maturity of three
months or less to be cash equivalents.
5. Revenue Recognition
Revenue is recognized upon the shipment of finished merchandise to
customers. Allowances for sales returns are recorded as a component of
net sales in the periods in which the related sales are recognized.
6. Other Assets
Demonstration equipment is carried at cost less accumulated
depreciation. Depreciation is provided for using the declining-balance
method over the estimated useful life of seven years. The net book
value is used to calculate any gain or loss on sale of the related
demonstration equipment.
At June 30, 1996 and 1997, the major components of other assets were:
<TABLE>
<S> <C> <C>
June 30, June 30,
1996 1997
Demonstration equipment - net of accumulated
depreciation of $196,973 and $242,525 for
1996 and 1997, respectively $270,863 $338,024
Other accounts receivable 254,185
Security deposits 142,298
Other 82,261 183,202
-------- -------
$353,124 $917,709
======= =======
</TABLE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE B (continued)
7. Other Accrued Expenses and Sundry Liabilities
At June 30, 1996 and 1997, the major components of other accrued
expenses and sundry liabilities were:
<TABLE>
<S> <C> <C>
June 30, June 30,
1996 1997
Accrued Compensation $135,597 $143,975
Professional fees 43,088 63,637
Other 75,992 70,698
-------- --------
$254,677 $278,310
======= =======
</TABLE>
8. Use of Estimates
In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements, as well as the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
9. Fair Value of Financial Instruments
Based on borrowing rates currently available to the Company for bank
loans with similar terms and maturities, the fair value of the
Company's debt approximates the carrying value. Furthermore, the
carrying values of all other financial instruments potentially subject
to valuation risk (principally consisting of cash, accounts receivable
and accounts payable) also approximate fair value.
10. Net Income Per Share
Net income per share is based on the weighted average number of common
and common equivalent shares (warrants and options) outstanding during
the period, calculated using the
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE B (continued)
modified treasury stock method in fiscal 1996 and the treasury stock
method in fiscal 1997 (see Note P). The modified treasury stock method
limits the assumed purchase of treasury shares to 20% of the
outstanding common shares.
In connection with the initial public offering (see Note J), the
Company paid down $670,000 of outstanding debt. If this transaction had
occurred as of July 1, 1995, the net income per share would have been
the same as the reported net income per share for the year ended June
30, 1996.
11. Advertising Costs
All costs related to advertising are expensed in the period incurred.
Advertising costs were approximately $220,000 and $217,000 for the
years ended June 30, 1996 and 1997, respectively.
NOTE C - SHORT-TERM INVESTMENT
The Company has a short-term investment comprised of a U.S. Government
agency issue. This investment is classified as available-for-sale and is
reported at fair value on the Company's balance sheet. Quoted market prices
have been used in determining the fair value of this investment.
NOTE D - INVENTORIES
Inventories consist of the following:
<TABLE>
<S> <C> <C>
June 30, June 30,
1996 1997
Raw materials $ 975,332 $ 956,073
Work-in-process 1,501,716 1,909,256
Finished goods 771,734 852,921
---------- ----------
$3,248,782 $3,718,250
========= =========
</TABLE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
<TABLE>
NOTE E - PROPERTY AND EQUIPMENT
A summary of equipment and leasehold improvements follows:
<S> <C> <C>
June 30, June 30,
1996 1997
Trade show booth $ 50,494 $ 50,494
Machinery and equipment 586,063 675,409
Tooling 103,762 105,453
Office furniture and equipment 143,235 152,830
Leasehold improvements 174,081 186,851
Automobiles 32,408 32,408
Data processing equipment 365,240 455,794
---------- ----------
1,455,283 1,659,239
Less accumulated depreciation 1,153,577 1,294,885
--------- ---------
$ 301,706 $ 364,354
========== ==========
</TABLE>
NOTE F - NOTES PAYABLE
a. Bank Line of Credit
The loan agreement with the Village Bank & Trust Company provides for a
$1,000,000 collateralized line of credit at one half percent (1/2%)
above the prime rate (9% at June 30, 1997). The agreement ends on March
5, 1999. Notes payable under the loan agreement are collateralized by a
security interest in all of the Company's tangible and intangible
assets. The Company must also meet certain covenants to comply with the
loan agreement, the most important of which are: (a) the Company must
maintain its stockholders' equity at a sum at least equal to 75% of the
outstanding principal balance of the note, and (b) the
President/shareholder must be continuously and actively engaged in the
Company business.
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE F (continued)
b. Note Payable to President/Shareholder
In connection with the initial public offering (see Note J), the
Company paid $45,730 in cash and issued a $450,000 noninterest-bearing
note payable to the President and major shareholder as a dividend for
the amount of taxes due by him personally for the earnings of the
Company from January 1, 1995 through February 26, 1996, a period
through which the Company was an S Corporation (see Note B-3). As of
June 30, 1996, a balance of $32,813 was due. The amount was paid in
full during the year ended June 30, 1997.
NOTE G - LONG-TERM DEBT
a. Term Loan
On December 3, 1996, the Company entered into a $500,000 term loan
agreement with Village Bank & Trust Company at one-half percent (1/2%)
above the prime rate (9% at June 30, 1997). The loan is unsecured and
is due in equal annual installments through December 3, 2001.
b. Capital Lease Obligations
During the year ended June 30, 1997, the Company entered into two
five-year lease agreements for new equipment.
The aggregate maturities of long-term debt are as follows:
<TABLE>
<S> <C>
Year ending June 30,
1998 $116,600
1999 118,384
2000 117,930
2001 112,266
2002 58,331
--------
$523,511
</TABLE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE H - DEMAND NOTE PAYABLE
The Company had a demand note payable from Village Bank & Trust Company
bearing interest at one-half percent (1/2%) above the prime rate (8.25% at
June 30, 1996). The note was converted to a long-term note in December 1996
(see Note G).
NOTE I - COMMITMENTS
Leases
The Company leases certain facilities and automobiles under lease
agreements that are classified as operating leases and expire in various
years through 2002.
The following is a schedule of future minimum lease payments for operating
leases as of June 30, 1997:
<TABLE>
<S> <C>
Year ending June 30,
1998 $194,700
1999 32,800
2000 33,800
2001 35,000
2002 36,200
Subsequent to 2002 9,100
---------
$341,600
</TABLE>
Rental expense for operating leases totaled approximately $229,000 and
$279,000 for the years ended June 30, 1996 and 1997, respectively.
NOTE J - STOCKHOLDERS' EQUITY
1. Initial Public Offering
On February 26, 1996, the Company successfully completed an initial
public offering of 1,000,100 shares of common stock of the Company at
an initial offering price of $5.00 per share, and 1,725,000 warrants to
purchase 1,725,000 shares of common stock at an exercise price of
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE J (continued)
$6.00 per share with an offering price of $.15 per warrant. The
proceeds from the offering were approximately $3,833,000, net of
$1,426,000 of costs associated with the offering. For the year ended
June 30, 1997, 20,000 warrants were exercised.
In connection with the offering, the Company granted to the underwriter
an option to purchase 100,000 shares of common stock at an exercise
price of $8.25 per share and an option to purchase 100,000 warrants to
purchase 100,000 shares of common stock at an exercise price of $6.00
at a price of $.25 per warrant over a period of four years commencing
on February 26, 1997. On March 20, 1997, the underwriter exercised its
option to purchase the 100,000 warrants. Proceeds to the Company
totaled $25,000.
At June 30, 1997, a total of 1,805,000 warrants at an exercise price of
$6.00 were issued and outstanding.
2. Stock Splits
In February 1996, the Company's Board of Directors approved a
1.85-for-1 split of the Company's common stock. A total of 1,150,000
shares of common stock were issued in connection with the split. The
stated par value of each share remained at $.03. A total of $34,500 was
reclassified from the Company's additional paid-in capital account to
the Company's common stock account.
All share and per share amounts in the financial statements have been
restated to retroactively reflect the above stock split.
3. Distribution to Stockholder
During the period from July 1, 1995, through the termination of the S
Corporation status, the Company distributed approximately $496,000,
including an adjustable note payable to the stockholder of $450,000, to
cover estimated taxes on S Corporation income (see Note F).
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE J (continued)
4. Capital Contribution
As of February 26, 1996, undistributed S Corporation retained earnings
of approximately $2,509,000 have been reclassified as additional
paid-in capital as if the earnings had been distributed to the
stockholder and then contributed to the Company.
5. Employee Stock Options
a. Incentive Stock Option Plan
Under the Company's Incentive Stock Option Plan (the "Plan"),
options to purchase a maximum of 250,000 shares of its common
stock may be granted to officers, directors and other key
employees of Sonics. Options granted under the Plan are intended
to qualify as incentive stock options as defined in the Internal
Revenue Code of 1986, as amended.
The Plan is administered by the Board of Directors and a Committee
presently consisting of two members of the Board that determine
which persons are to receive options, the number of options
granted and their exercise prices. In the event an optionee
voluntarily terminates their employment with the Company, the
optionee has the right to exercise their accrued options within
thirty (30) days of such termination. However, the Company may
redeem any accrued option held by each optionee by paying them the
difference between the option exercise price and the then fair
market value.
On February 11, 1996, the Board of Directors approved a plan to
grant options for 80,000 shares of common stock of the Company at
the initial offering price of $5.00 per share. These options will
expire on February 11, 2001. Subsequently, the approval to grant
options to acquire 10,500 shares of the common stock was rescinded
by the Board of Directors. On May 5, 1997, 2,000 options were
granted at an exercise price of $3.50 per share, which will expire
on May 5, 2002. As of June 30, 1997, options to purchase 71,500
shares of common stock were granted to 26 officers, directors and
key employees of the Company.
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE J (continued)
b. Nonqualified Stock Options
The Company has also granted a nonqualified stock option for
10,976 shares of common stock to an officer at an option price of
$.31 per share. In January 1994, the Company granted a
nonqualified stock option for 274,390 shares of common stock to an
officer at an option price of $1.03 per share. These options
expire on January 1, 2004.
c. Summary Information
The Company has adopted the disclosure-only provisions of SFAS No.
123, "Accounting for Stock Based Compensation." Accordingly, no
compensation cost has been recognized for the stock options
granted to employees and directors. Had compensation cost been
determined based on the fair value at the grant date for the stock
options awards in fiscal 1996 consistent with the provisions of
SFAS No. 123, the Company's net income would have been decreased
by approximately $10,000 and earnings per share would have
remained unchanged. In fiscal 1997, net income would have
decreased by approximately $29,000 and earnings per share would
have been reduced by $.01 per share. During the initial phase-in
period of SFAS No. 123, such compensation may not be
representative of the future effects of applying this statement.
The weighted average fair value at date of grant for options
granted was $1.41 per option. The fair value of each option at
date of grant was estimated using the Black-Scholes option pricing
model with the following weighted average assumptions:
<TABLE>
<S> <C>
Expected stock price volatility 17%
Expected life of options 5 years
Risk-free interest rate 5.55%
Expected dividend yield 0%
</TABLE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE J (continued)
For the two years ended June 30, 1997, employee option activity
was as follows:
<TABLE>
<S> <C> <C> <C> <C>
Incentive options Nonqualified options
Weighted- Weighted-
average average
Number exercise Number exercise
of shares price of shares price
Outstanding at June 30, 1995
Granted 69,500 $5.00 285,366 $1.00
Exercised
Canceled
Outstanding at June 30,
1996 69,500 $5.00 285,366 $1.00
====== =======
Granted 2,000 $3.50
Exercised
Canceled
Outstanding at June 30,
1997 71,500 $4.96 285,366 $1.00
====== =======
</TABLE>
<TABLE>
The following table summarizes information about stock options
outstanding at June 30, 1997:
<S> <C> <C> <C> <C> <C>
Weighted-
average Weighted- Weighted-
remaining average average
Range of Number contractual exercise Number exercise
exercise prices outstanding life price exercisable price
$0.31 10,976 6.5 years $0.31 10,976 $0.31
1.03 274,390 6.5 years 1.03 274,390 1.03
3.50 - 5.00 71,500 3.7 years 4.96 21,667 5.00
-------- --------
356,866 307,033
======= =======
</TABLE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE K - 401(k) AND PROFIT SHARING PLANS
The Company has a 401(k) plan for eligible employees. The 401(k) plan
provides for eligible employees to elect to contribute to the plan up to
15% of their annual compensation. In addition, the 401(k) plan provides for
the Company to make additional contributions at its discretion up to 4% of
the participant's annual compensation. Expenses under the 401(k) plan were
approximately $21,000 and $30,000 for the years ended June 30, 1996 and
1997, respectively.
The Company also has a nonqualified profit sharing plan. Under this plan,
the Company distributes to eligible employees 10% of its pretax profits,
based on a three-month moving average. Expenses under the profit sharing
plan were approximately $65,000 and $42,000 for the years ended June 30,
1996 and 1997, respectively.
NOTE L - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of accounts receivable.
Credit risk on receivables is minimized as a result of the diverse nature
of the Company's worldwide customer base. The Company generally requires no
collateral from its customers.
Net sales by geographic area for the periods ended are as follows:
<TABLE>
<S> <C> <C>
Year ended June 30,
1996 1997
United States $6,320,000 $ 6,826,000
Europe 1,376,000 1,408,000
Asia/Pacific Rim 967,000 1,869,000
Canada and Mexico 396,000 509,000
Other 317,000 216,000
---------- ------------
$9,376,000 $10,828,000
========= ==========
</TABLE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE M - INCOME TAXES
Prior to the completion of the initial public offering, the Company had,
since 1989, elected to be treated as an S Corporation for Federal income
tax reporting purposes. An S Corporation is generally treated like a
partnership, and is exempt from Federal income taxes with certain
exceptions. The S Corporation stockholder reported his pro rata share of
corporate taxable income or loss on his individual income tax returns. A
provision for state income taxes was made for those states not recognizing
S Corporation status. The Company's S Corporation status terminated with
the completion of the initial public offering described in Note J-1.
Subsequent to the initial public offering, the Company accounts for income
taxes using the liability method under Statement of Financial Accounting
Standards No. 109, "Accounting for Income Taxes."
The components of the provision for taxes on income are as follows:
<TABLE>
<S> <C> <C>
Year ended June 30,
1996 1997
U.S. Federal
Current tax provision $ 50,000 $16,463
Deferred tax benefit (68,000)
------- ------
(18,000) 16,463
------- ------
State
Current tax provision 22,000 2,905
Deferred tax benefit (12,000)
------- ------
10,000 2,905
------- -------
Total income tax provision (benefit) $ (8,000) $19,368
======== ======
</TABLE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE M (continued)
The tax effect of temporary differences which give rise to deferred tax
assets and liabilities at June 30, 1996 and 1997 are as follows:
<TABLE>
<S> <C> <C>
1996 1997
----------- -------
Accrued expenses $22,000 $22,000
Allowance for doubtful accounts 17,000 17,000
Inventory 41,000 41,000
------ ------
Net deferred tax asset $80,000 $80,000
====== ======
</TABLE>
The following is a reconciliation of the statutory Federal income tax rate
to the effective rate reported in the financial statements:
<TABLE>
<S> <C> <C> <C> <C>
Year ended June 30,
1996 1997
Percent of Percent of
Amount income Amount income
Provision for Federal income
taxes at the statutory rate $148,000 34.0% $16,000 34.0%
State and local taxes, net of
Federal income tax benefit 15,000 3.4 2,000 4.0
Tax effect of S Corporation
earnings during the year (99,000) (22.8)
Deferred tax benefit from
the effect of conversion to
C Corporation status (91,000) (20.9)
Nondeductible expenses 7,000 1.6
Other 12,000 2.8 1,368 2.0
-------- ------ ------- -----
Actual provision (benefit) for
income taxes $ (8,000) (1.9)% $19,368 40.0%
========= ====== ====== ====
</TABLE>
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE N - EMPLOYMENT AGREEMENT
Effective July 1, 1995, the Company entered into an employment agreement
with its President for an initial term expiring in three years at an
initial annual base salary of $180,000, $198,000 and $218,000 in each of
the three years, respectively. Such base salary may be increased at the
discretion of the Board of Directors as follows: (i) any bonus arrangement
provided by the Company in its discretion and (ii) other compensation or
employee benefit plans and arrangements, if any, provided to other officers
and key employees of the Company.
NOTE O - RELATED PARTY TRANSACTIONS
The Company paid $73,959 to a member of the Board of Directors for
consulting services during the year ended June 30, 1997.
NOTE P - PRO FORMA INFORMATION
a. Pro Forma Income Taxes
As discussed in Note B-3, the Company elected to be taxed as an S
Corporation pursuant to the Internal Revenue Code. In connection with
the Offering, the Company terminated its S election and became subject
to Federal and additional state and local income tax. The pro forma
provision for income taxes represents the income tax provisions that
would have been reported had the Company been subject to Federal and
additional state and local income taxes for the year ended June 30,
1996.
The pro forma income tax provision has been prepared in accordance with
SFAS No. 109. The pro forma provision for income taxes for the year
ended June 30, 1996 after giving effect to the Federal statutory rate
of 34% and state and local taxes, a net effective rate of 6%, consists
of the following:
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE P (continued)
Federal $135,256
State and local 39,268
--------
$174,524
========
b. Pro Forma Net Income
Represents the historical amounts after the pro forma adjustment
discussed above.
c. Pro Forma Net Income Per Share
Represents net income per share including the weighted average number
of shares outstanding immediately prior to the closing of the offering,
after giving effect to a stock split of 1.85-for-1 and shares issued in
the Offering (see Note J). The calculations also reflect the dilutive
effect of shares issuable for common stock equivalents.
NOTE Q - FUTURE EFFECT OF RECENTLY ISSUED ACCOUNTING
PRONOUNCEMENTS
In February 1997, the Financial Accounting Standards Board has issued
Statement of Financial Accounting Standards No. 128, "Earnings Per Share,"
which is effective for financial statements for both interim and annual
periods ending after December 1997. Early adoption of the new standard is
not permitted. The new standard eliminates primary and fully diluted
earnings per share and requires presentation of basic and diluted earnings
per share together with disclosure of how the per share amounts were
computed. The pro forma effect of adopting the new standard would be basic
earnings per share of $.09 and $.01 and diluted earnings per share of $.08
and $.01 for the years ended June 30, 1996 and 1997, respectively.
<PAGE>
Sonics & Materials, Inc.
NOTES TO FINANCIAL STATEMENTS (continued)
June 30, 1996 and 1997
NOTE R - SUBSEQUENT EVENT
On July 25, 1997, the Company acquired, through a newly formed wholly-owned
subsidiary, 100% of the stock of Tooltex, Inc. ("Tooltex"). Tooltex is a
manufacturer of automated systems used in the plastics industry. The
shareholders received, in exchange for 100% of the stock of Tooltex, (i) an
aggregate of 70,000 shares of the Company's common stock, par value of $.03
per share, (ii) $70,000 and (iii) options to purchase 10,000 shares of the
Company's common stock. For the year ended June 30, 1997, the Company had
sales to Tooltex of approximately $83,000 and at June 30, 1997 a receivable
balance of approximately $254,000 from Tooltex. Unaudited financial
information of Tooltex at June 30, 1997 and for the year then ended is as
follows:
Total Assets $ 726,000
Revenues 1,944,000
Net Loss 321,000
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), the registrant caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized.
Date: September 25, 1997
SONICS & MATERIALS, INC.
By: /s/ ROBERT S. SOLOFF
--------------------
Robert S. Soloff
Chairman and President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<S> <C> <C>
Signature Title Date
/s/ ROBERT S. SOLOFF Chairman, President, Treasurer, Chief September 25, 1997
....................................
(Robert S. Soloff) Executive and Chief Financial Officer
/s/ LAUREN H. SOLOFF Secretary and Director September 25, 1997
....................................
(Lauren H. Soloff)
/s/ CAROLE. SOLOFF Director September 25, 1997
....................................
(Carole Soloff)
/s/ JACK T. TYRANSKY Director September 25, 1997
....................................
(Jack T. Tyransky)
/s/ ALAN BROADWIN Director September 25, 1997
....................................
(Alan Broadwin)
/s/ STEPHEN DRESCHER Director September 25, 1997
....................................
(Stephen Drescher)
/s/ CHRISTOPHER S. ANDRADE Accounting Manager September 25, 1997
....................................
(Christopher S. Andrade) Principal Accounting Officer
</TABLE>
<PAGE>
<TABLE>
<S> <C> <C>
Exhibit Index
Exhibit Location of Exhibit in
No. Description Sequential Numbering System
___ ___________ ___________________________
3(i) Certificate of Incorporation of the Registrant, as amended. Previously filed as Exhibit 3.1 of Amendment
No. 3 to Registration Statement No. 33-96414
3(ii) Amended By-laws of the Registrant. Previously filed Exhibit 3.2 of Registration
Statement No. 33-96414
10(i) Form of Employment Agreement between the Registrant and Previously filed Exhibit 10.1 of Registration
Robert S. Soloff. Statement No. 33-96414
10(ii) 1995 Incentive Stock Option Plan and form of Stock Option Previously filed as Exhibit 10.3 of
Agreement. Registration Statement No. 33-96414
10(iii) Original Office Lease and Amendments between the Registrant Previously filed as Exhibit 10.4 of
and Nicholas R. DiNapoli, Jr. DBA DiNapoli Holding Co. Registration Statement No. 33-96414
(Danbury, CT).
10(iv) Lease between Registrant and Aston Investment Associates Previously filed as Exhibit 10.5 of
(Aston, PA). Registration Statement No. 33-96414
10(v) Amended lease between Registrant and Robert Lenert Previously filed as Exhibit 10.6 of Amendment
(Naperville, IL). No. 4 to Registration Statement No. 33-96414
10(vi) Lease between Registrant and Janine Berger (Gland, Previously filed as Exhibit 10.7 of
Switzerland). Registration Statement No. 33-96414
10(vii) Form of Sales Representation Agreement. Previously filed as Exhibit 10.8 of
Registration Statement No. 33-96414
10(viii) Form of Sales Distribution Agreement. Previously filed as Exhibit 10.9 of
Registration Statement No. 33-96414
10(ix) Consulting Agreement dated October 17, 1995 between the Previously filed as Exhibit 10.10 of Amendment
Registrant and Alan Broadwin. No. 3 of Registration Statement No. 33-96414
10(x) Agreement and Plan of Merger, dated as of July 25, 1997, Previously filed as Exhibit 2(a) of
among the Registrant, SM Sub, Inc., Tooltex, Inc., and the Registrant's Form 8-K dated July 25, 1997
persons designated as the shareholders thereon (excluding
schedules and annexes). A list of omitted schedules and
annexes appears on pages iv and v of the Agreement and Plan
of Merger. The Registrant hereby undertakes to furnish
supplementally a copy of any omitted schedule and annex to
the Commission upon request. .
10(xi) Agreement of Merger, dated as of July 25, 1997, among the Previously filed as Exhibit 2(b) of the
Registrant, SM Sub, Inc. and Tooltex, Inc. Registrant's Form 8-K dated July 25, 1997).
10(xii) Credit Agreement, dated September 19, 1997, between Brown Filed Herewith
Brothers Harriman & Co. and Registrant
10(xiii) Term)Loan Note of Registrant, dated September 19, 1997, Filed Herewith
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $427,000.
10(xiv) Line of Credit Note of Registrant, dated September 19, 1997, Filed Herewith
payable to the order of Brown Brothers Harriman & Co.
in the original principal amount of $1,500,000.
10(xv) Bridge Loan Note of Registrant, dated September 19, 1997, Filed Herewith
payable to the order of Brown Brothers Harriman & Co. in the
original principal amount of $1,600,000.
10(xvi) Open-End Mortgage Deed from Registrant to Brown Brothers Filed Herewith
Harriman & Co. dated September 19, 1997.
10(xvii) General Security Agreement from Registrant to Brown Brothers Filed Herewith
Harriman & Co. dated September 19, 1997.
<PAGE>
21 Subsidiaries of the Registrant (filed herewith). Filed Herewith
27 Financial Data Schedule. Filed Herewith
</TABLE>
CREDIT AGREEMENT dated September __, 1997, between BROWN BROTHERS
HARRIMAN & CO. ("Bank") and SONICS & MATERIALS, INC. ("Borrower").
W I T N E S S E T H:
The Bank and the Borrower, in consideration of the mutual agreements
herein contained, and for other good and valuable consideration, hereby agree as
follows:
ARTICLE 1
DEFINITIONS AND ACCOUNTING TERMS
SECTION 1.1. Certain Defined Terms. As used in this Agreement, the
following terms shall have the following meanings (such meanings to be equally
applicable to both the singular and plural forms of the terms defined):
"Base Rate" means the rate determined by the Bank from time to
time as its "base rate."
"Bridge Loan" is defined in Section 2.1(a) hereof.
"Bridge Loan Note" means the Note described in Section 2.2(a).
"Business Day" means a day other than a Saturday, Sunday or other
day on which banks are authorized or required to close under the laws of
the State of New York.
"Change of Control" is deemed to occur if: (i) a Person (other than
Robert Soloff or any member of his immediately family or any corporation,
partnership or trust, limited liability company or other entity controlled
by or established for the benefit of Robert Soloff or any member of his
immediate family) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Securities Exchange Act of 1934, except that a person
shall be deemed to be the "beneficial owner" of all securities that such
person has the right to acquire, whether such right is exercisable
immediately or only after the passage of time), directly or indirectly, of
more than 50% of the total voting power of all outstanding shares of
capital stock having ordinary power to vote in the election of directors
of the Borrower; or (ii) there is a change in the board of directors of
the Borrower such that the individuals who constituted the board of
directors of the Borrower at the beginning of the two-year period
immediately preceding such change, together with any directors whose
election by the board of directors of the Borrower or whose nomination for
election by the stockholders of the Borrower during such two-year period
was approved by a vote of a majority of the directors then in office
(either who were directors at the beginning of such period or whose
election or nomination for election was previously so approved), cease for
any reason to constitute a majority of the directors then in office.
"Collateral" is defined in Section 3.1(e) hereof.
"Construction Project" is defined in Section 2.1(a) hereof.
"Disclosure Schedule" means the disclosure schedule prepared and
signed by the Borrower and attached hereto as Exhibit "E" setting forth
certain information with respect to the Borrower.
"EBITDA" means, for any period, the sum of the amounts for such
period of (A) Net Income, (B) provision for federal, state and local taxes
based on income, (C) Interest Expense, and (D) charges for depreciation
and amortization and other non-cash charges, all for the Borrower, and all
determined in accordance with GAAP.
"Eligible Inventory" means, as at any date of determination thereof,
the value (determined at the lower of cost or market on a first-in,
first-out basis) of all finished inventory or raw materials (other than
packaging materials and supplies) (i) which are owned by the Borrower,
(ii) which is located in a jurisdiction in the United States of America,
(iii) as to which appropriate Uniform Commercial Code financing statements
have been filed naming the Borrower as "debtor" and Bank as "secured
party" and as to which Bank has a first, perfected security interest, (iv)
which is in good condition and is not obsolete or worn out, (v) which is
either currently useable or currently saleable in the normal course of the
Borrower's business, and (vi) conforms in all respects to the applicable
representations and warranties set forth in the Security Agreement.
"Eligible Receivables" means, as at any date of determination
thereof, the aggregate of all accounts receivable of the Borrower from the
sale of goods or the provision of services in the ordinary course of
business ("receivables") at said date due the Borrower, except for any
such receivable which is: (a) not payable in U.S. Dollars; (b) payable by
its terms more than 90 days after the earlier of the date of shipment of
the related inventory or the date of issuance of the invoice therefor; (c)
due from any affiliate of the Borrower; (d) due from an account debtor
whose principal place of business is located outside of the United States
of America (unless such account is secured by a letter of credit from a
financial institution reasonably satisfactory to the Bank or otherwise
agreed in writing by the Bank); (e) due from an account debtor which the
Bank has notified the Borrower does not have a satisfactory credit
standing (as determined in the reasonable discretion of Bank); (f) unpaid
for more than 90 days from earlier of the date of shipment of the related
inventory or the date of issuance of the invoice therefor; (g) from any
account debtor if more than 25% of the aggregate amount of receivables of
such account debtor have at the time remained unpaid for more than 90 days
after the earlier of the date of shipment of the related inventory or the
date of issuance of the invoice therefor; (h) subject to any unresolved
dispute with the respective account debtor; (i) not subject to a valid and
perfected first priority security interest in favor of the Bank; (j) owing
from an account debtor which is an agency, department or instrumentality
of the United States or any state thereof; (k) an obligation for goods
sold on consignment, or approval or on a sale-or-return basis or subject
to any other repurchase or return arrangement; or (l) owing from a
supplier to or creditor of the Borrower.
"Eligible Securities" means those marketable securities of the
Borrower from time to time in the custody of the Bank which the Bank, in
its reasonable discretion, shall determine to be "Eligible Securities."
The amount of any Eligible Securities shall be determined by reference to
their market value at the time of any determination hereunder.
"Event of Default" has the meaning given to such term in Section
6.1.
"Fiscal Year" of the Borrower means each twelve month period ending
June 30.
"Fixed Charge Coverage Ratio" means, for any period, the ratio of
(i) EBITDA plus payments made by the Borrower under any lease, to (ii)
required principal and interest payments for all indebtedness of the
Borrower plus payments made by the Borrower under any lease plus capital
expenditures (determined in accordance with GAAP) of the Borrower for such
period up to $25,000.
"GAAP" means generally accepted accounting principles and practices
applied on a consistent basis.
"Intangibles" means, at a particular date, all assets of the
Borrower that would be classified as intangible assets in accordance with
GAAP.
"Interest Calculation Date" means the first day of each Interest
Period, whether or not a Business Day.
"Interest Expense" means, for any period, the aggregate amount of
interest accrued (whether or not paid) by the Borrower during such period.
"Interest Payment Date" means the last day of each month, commencing
October 31, 1997.
"IRB Loan" is defined in Section 2.1 hereof.
"LIBOR" means the London inter-bank offered rate for the applicable
LIBOR Term, determined by the Bank by reference to market reporting
services available to the Bank and other banks and financial institutions.
"LIBOR Term" means each period of one month, two months or three
months, as designated by the Borrower by notice to Bank in connection with
the making of any LIBOR-based Loan hereunder. Each LIBOR Term shall end on
the Interest Payment Date most closely approximating the end of the period
designated by the Borrower.
"Line of Credit" is defined in Section 2.1 hereof.
"Line of Credit Note" means the Note described in Section 2.4(a)
"Loan" is defined in Section 2.1. hereof.
"Mortgage" means the Open-End Mortgage Deed dated September __, 1997
from the Borrower, as mortgagor, to the Bank, as mortgagee.
"Mortgaged Property" means the real property of the Borrower which
is subject to the lien of the Mortgage.
"Net Income" means, for any period, the net income (or net loss) of
the Borrower and its Subsidiaries on a consolidated basis for such period
excluding extraordinary items, determined in accordance with GAAP.
"Notes" means the Term Loan Note, the Bridge Loan Note and the
Line of Credit Note.
"Permitted Corporate Transaction" means: (a) any merger or
consolidation of Borrower with another corporation, partnership, trust or other
entity; (b) the purchase by the Borrower of assets other than in the ordinary
course of business; or (c) the acquisition by the Borrower of an interest in any
corporation, partnership, trust or other entity, in each case only if (i) the
business or assets acquired are in the same or a substantially similar line of
business as the Borrower; and (ii) the value of the consideration paid (whether
by cash, securities or other assets and including consideration by reason of the
assumption of any indebtedness or in respect of any noncompetition or other
collateral agreement) in connection therewith, together with the consideration
paid in respect of all other prior Permitted Corporate Transactions in the same
Fiscal Year, does not exceed $250,000; and (iii) immediately after the
completion of such transaction, no condition or event would exist which with the
lapse of time or the giving of notice or both would constitute an Event of
Default hereunder; and (iv) in the case of any merger or consolidation, the
Borrower shall be the surviving entity; and (v) the Bank shall have been
notified of such Permitted Corporate Transaction, and provided with all such
information with respect thereto as the Bank shall reasonably request, at least
30 days prior to its effectiveness.
"Restricted Payment" means any dividend, distribution, stock
repurchase, other payment on account of the Borrower's outstanding stock,
payment in respect of any indebtedness subordinated to the debt of the
Borrower to the Bank, and any payment in respect of any non-competition
agreement.
"Security Agreement" means the General Security Agreement dated
September __, 1997, from the Borrower to the Bank.
"Tangible Net Worth" means, as of the date of determination, the
Borrower's net worth less Intangibles, all as determined in accordance
with GAAP.
"Term Loan" is defined in Section 2.1 hereof.
"Term Loan Note" means the Note described in Section 2.3(a)
hereof.
"Total Liabilities" means, as of the date of determination, all
liabilities of the Borrower that would, in accordance with GAAP, be
classified as liabilities of the Borrower.
SECTION 1.2. Accounting Terms. All accounting terms not specifically
defined herein shall be construed, and all financial data submitted pursuant to
this Agreement shall be prepared, in accordance with GAAP applied in a manner
consistent with the application of GAAP in the preparation of the financial
statements mentioned in Section 4.4.
ARTICLE 2
THE LOANS
SECTION 2.1. The Loans. Subject to the terms and conditions
hereinafter provided, Bank agrees to make loans to Borrower in the aggregate
amount of $4,945,000 (collectively, the "Loans"), as follows:
(a) a loan (the "Bridge Loan") in the maximum principal amount of
$1,600,000, which shall be advanced to the Borrower for the purpose of
financing the acquisition and construction of a manufacturing facility in
Newtown, Connecticut, to include land, building and equipment
(collectively, the "Construction Project");
(b) a loan (the "Term Loan") in the amount of $427,000, which shall
be advanced to the Borrower to refinance all of the amounts due in respect
of the Borrower's outstanding note payable to Village Bank and Trust
Company;
(c) a line of credit (the "Line of Credit") in the maximum amount of
$1,500,000 which shall be advanced to the Borrower from time to time to
provide working capital to the Borrower; and
(d) a tax-exempt industrial development loan (the "IRB Loan") in the
aggregate amount of $2,945,000 to be issued through the Connecticut
Development Authority and applied to (a) refinance on a permanent basis
amounts due under the Bridge Loan, and (b) pay all or a portion of the
remaining costs of the Construction Project.
SECTION 2.2. Bridge Loan.
(a) Bridge Loan Note. The Bank shall lend to the Borrower pursuant to the
Bridge Loan from time to time, in accordance with the provisions hereof, up to a
maximum amount of $1,600,000 to pay initial costs of the Construction Project.
The Indebtedness of the Borrower in respect of such advances shall be evidenced
by the Bridge Loan Note executed by the Borrower in favor of the Bank in the
form attached hereto as Exhibit A.
(b) Advances under Bridge Loan. The Bank shall advance amounts in respect
of the Bridge Loan to pay costs of the Construction Project upon the written
request of the Borrower, which request shall be accompanied by such additional
detail (including copies of invoices, construction draw requests or other
supporting information) as the Bank shall reasonably require; provided, however,
that (1) each advance shall be in an amount equal to $50,000 or any integral
multiple of $25,000 in excess thereof, and (2) nothing herein shall obligate
Bank to advance any monies under the Bridge Loan (A) more frequently than twice
per month, or (B) so long as any Event of Default (or any event which, with the
passage of time or the giving of notice or both would constitute an Event of
Default) shall have occurred and be continuing, or (C) at any time after
December 31, 1997.
(c) Interest. The outstanding principal amount of the Bridge Loan Note
shall bear interest at the Base Rate plus one-half of one percent (0.50%).
(d) Maturity. The entire principal balance of the Bridge Loan Note shall
be mature and be due and payable upon the earliest to occur of: (1) the written
demand of Bank; (2) the consummation of the IRB Loan; or (3) December 31, 1997.
(e) Prepayments. The principal of the Bridge Loan Note may be prepaid in
whole or in part (but if in part only in amounts of $50,000 or integral
multiples of $25,000 in excess thereof) at any time, without premium or penalty,
by the Borrower upon three Business Days' written notice to Bank.
SECTION 2.3. Term Loan.
(a) Term Loan Note. On the date hereof, the Bank shall lend to the
Borrower pursuant to the Term Loan the aggregate sum of $500,000, which amount
shall be applied by the Borrower on the date hereof to refinance the outstanding
indebtedness of the Borrower to Village Bank and Trust Company. The indebtedness
of the Borrower in respect of the Term Loan shall be evidenced by the Term Loan
Note executed by the Borrower in favor of Bank in the form attached hereto as
Exhibit B.
(b) Interest. The outstanding principal amount of the Term Loan Note
shall bear interest, at the Borrower's option, at:
(i) the Base Rate; or
(ii) LIBOR plus 2.25%.
Borrower shall provide the Bank with telephonic notice prior to the initial
advance of the Term Loan and, if applicable, not less than 2 Business Days prior
to the last day of each LIBOR Term, of the Borrower's selection of a rate option
and term, which telephonic notice shall be promptly confirmed in writing. In the
absence of such notice, the interest rate on the Term Loan Note shall be the
Base Rate.
(c) Maturity. The principal of the Term Loan Note shall be paid in 36
equal monthly installments of $11,861.11, commencing on November 1, 1997, and
the entire remaining principal balance of the Term Loan Note shall be mature and
be due and payable on October 1, 2000.
(d) Prepayments. The principal of the Term Loan Note may be prepaid in
whole or in part (but if in part only in amounts of $50,000 or integral
multiples of $25,000 in excess thereof) at any time, without premium or penalty,
by the Borrower upon three Business Days' written notice to Bank. No partial
prepayment shall reduce the Borrower's obligation to make principal payments
next becoming due under the Term Loan Note, but shall reduce such principal
payment obligations in reverse order of due date. In the event of the prepayment
of any portion of the Term Loan Note during any period in which the Term Loan
Note shall bear interest at a LIBOR-based interest rate prior to the end of the
applicable LIBOR Term, the Borrower shall pay to Bank, concurrently therewith, a
"breakage fee" equal to the excess, if any, of (i) the amount of interest which
otherwise would have accrued on the principal amount so repaid for the period
from the date of such repayment to the last day of the LIBOR Term for such
amount at the applicable rate of interest for such amount provided for herein
over (ii) the interest component of the amount such Lender would have bid in the
London interbank market for Dollar deposits of leading lenders and amounts
comparable to such principal amount and with maturities comparable to such
period (it being conclusively presumed for such purpose that Bank shall have
purchased funds at the applicable LIBOR corresponding to such principal for the
applicable LIBOR Term).
SECTION 2.4. Line of Credit Loans.
(a) Line of Credit Advances. The Bank shall, from time to time in its sole
discretion, make advances (each an "Advance") under the Line of Credit to the
Borrower for the purpose of funding operating or capital costs of the Borrower;
provided, however, that the aggregate outstanding amount of all Advances
hereunder shall not exceed the lesser of (i) $1,500,000, or (ii) an amount,
determined by reference to the borrowing base reports delivered by the Borrower
in accordance with Section 5.1(c) hereof, equal to:
(1) 90% of Eligible Securities; plus
(2) 80% of Eligible Receivables; plus
(3) 50% of Eligible Inventory; less
(4) $427,000 (which amount shall be reduced by all
principal reductions under the Term Loan); less
(5) $589,000 (which amount shall be reduced by all
principal reductions under the IRB Loan).
Subject to such limitation, the Borrower may borrow under this Section, repay or
prepay any Advances (subject to subsection (d) below), and reborrow hereunder.
Each Advance shall be made by the Bank hereunder upon the written request of the
Borrower in such form and upon compliance with such procedures as the Bank may
from time to time reasonably require.
The Indebtedness of the Borrower in respect of such advances shall be
evidenced by the Line of Credit Note executed by the Borrower in favor of Bank
in the form attached hereto as Exhibit C.
(b) Interest. The outstanding principal amount of each Advance under the
Line of Credit shall bear interest in each Interest Period, at the Borrower's
option, at:
(i) the Base Rate; or
(ii) LIBOR plus 2.25%.
Borrower shall provide Bank with telephonic notice at least 2 Business Days
prior to the making of each Advance, and, if applicable, at least 2 Business
Days prior to the end of any LIBOR Term, of the Borrower's selection of a rate
option and term, which telephonic notice shall be promptly confirmed in writing.
In the absence of such notice, the interest rate on the Line of Credit Note (or
each applicable Advance outstanding thereunder) shall be the Base Rate.
(c) Maturity. The entire principal balance of the Line of Credit Note
shall be mature and be due and payable upon the written demand of Bank, and
thereafter the Bank shall have no further obligation to make any Advance.
(d) Prepayments.
(i) The principal amount of the Advances outstanding under the Line
of Credit Note shall be prepaid by the Borrower upon written notice from
the Bank to the extent of any portion thereof exceeding the maximum
permitted Advances as reflected on the Borrower's borrowing base reports
delivered to the Bank in accordance with Section 5.1(c) hereof.
(ii) All or any portion of the principal amount of Advances
outstanding under the Line of Credit Note may be prepaid by the Borrower
in whole or in part (but if in part only in amounts of $50,000 or integral
multiples of $25,000 in excess thereof) at any time, provided, however,
that, in the event of the optional prepayment of all or any portion of an
Advance under the Line of Credit Note bearing interest at a LIBOR-based
interest rate prior to the end of any applicable LIBOR Term, the Borrower
shall pay to Bank, concurrently therewith, a "breakage fee" equal to the
excess, if any, of (i) the amount of interest which otherwise would have
accrued on the principal amount so repaid for the period from the date of
such repayment to the last day of the LIBOR Term for such amount at the
applicable rate of interest for such amount provided for herein over (ii)
the interest component of the amount such Lender would have bid in the
London interbank market for Dollar deposits of leading lenders and amounts
comparable to such principal amount and with maturities comparable to such
period (it being conclusively presumed for such purpose that Bank shall
have purchased funds at the applicable LIBOR corresponding to such
principal for the applicable LIBOR Term).
SECTION 2.5. IRB Loan. The Bank shall make the IRB Loan upon the terms,
and subject in all respects to the conditions, set forth in the Bank's financing
commitment dated July 18, 1997.
SECTION 2.6. Other Provisions.
(a) Interest on each of the Notes shall be calculated based upon a 360-day
year for the actual number of days elapsed.
(b) Whenever any payment to be made hereunder or under the Note shall be
stated to be due on a day that is not a Business Day, such payment may be made
on the next succeeding Business Day, and such extension of time shall in such
case be included in the computation of payment of interest hereunder or under
the Note, as the case may be.
ARTICLE 3
CONDITIONS OF LOANS
SECTION 3.1. Conditions Precedent to Loans. The obligation of Bank to make
any part of the Loans is subject to the conditions precedent that the Bank shall
have received on or before the date hereof, all of the following, in form and
substance satisfactory to the Bank:
(a) A copy, certified in writing by the Secretary or an Assistant
Secretary of the Borrower, of (1) resolutions of the Board of Directors of
the Borrower evidencing approval of this Agreement, the Notes, the
Mortgage, the Security Agreement, and other matters contemplated hereby
and, (2) each document evidencing any other necessary corporate action and
any required approvals from governmental authorities with respect to this
Agreement, the Note, the Mortgage, the Security Agreement, and other
matters contemplated hereby.
(b) An opinion or opinions of counsel for the Borrower in form
and substance satisfactory to the Bank.
(c) A written certificate by the Secretary or an Assistant Secretary
of the Borrower as to the names and signatures of the officers of the
Borrower authorized to sign this Agreement, the Note, the Mortgage, the
Security Agreement, and the other documents or certificates of the
Borrower to be executed and delivered pursuant hereto. The Bank may
conclusively rely on, and be protected in acting upon, such certificate
until it shall receive a further certificate by the Secretary or an
Assistant Secretary of the Borrower amending the prior certificate.
(d) The Notes.
(e) The Security Agreement granting to the Bank a security interest
in substantially all of the accounts, inventory, general intangibles,
equipment, investment property and financial assets of the Borrower,
whether existing or hereafter acquired, and all proceeds thereof
(collectively, the "Collateral").
(f) Financing statements of the Borrower covering the
Collateral.
(g) The Mortgage, together with a title report with respect to the
Mortgaged Property in form and substance satisfactory to the Bank.
(h) Evidence of the Borrower's insurance coverage as required by
Section 5.4 hereof and by the provisions of the Security Agreement and the
Mortgage.
(i) Such other certificates, instruments or agreements as the
Bank may reasonably require.
SECTION 3.2. Additional Conditions Precedent. The obligation of the
Bank to make any Loan, including any Advance, is subject to the further
conditions precedent that:
(a) The representations and warranties contained in Article IV
hereof shall be accurate on and as of the date of disbursement as though
made on and as of such date;
(b) No Event of Default shall have occurred and be continuing or
will result from the making of the Loan, and no event shall have occurred
and be continuing that with notice or lapse of time or both would, if
unremedied, be an Event of Default; and
(c) No material adverse change, as determined by the Bank in its
reasonable discretion, shall have occurred since the date of this
Agreement in the financial condition, results of operation or business
prospects of the Borrower.
The request for, and acceptance of, any Loan, including any Advance, by the
Borrower shall be deemed a representation and warranty by the Borrower that each
of the conditions specified in this subsection has been satisfied.
ARTICLE 4
REPRESENTATIONS AND WARRANTIES
Borrower represents and warrants to Bank as follows:
SECTION 4.1. Existence. The Borrower is a corporation duly incorporated,
validly existing and in good standing under the laws of the State of Delaware
and is qualified to do business as a foreign corporation in the State of
Connecticut. The Borrower has all requisite power and authority, corporate and
otherwise, to conduct its business and to own its properties and is duly
qualified as a foreign corporation in good standing in all jurisdictions in
which its failure so to qualify could have a material adverse effect on its
financial condition or business.
SECTION 4.2. Authorization. The execution, delivery and performance by the
Borrower of this Agreement, the Note, and the Security Agreement have been duly
authorized by all necessary corporate action, and do not and will not violate
any current provision of any government regulation or statute material to the
on-going operation of the Borrower's business or of the charter or by-laws of
the Borrower or result in a breach of or constitute a default under any
indenture, instrument or other material agreement to which the Borrower is a
party or by which it or its properties may be bound or affected.
SECTION 4.3. Validity of Agreement, Note, and Security Agreement. This
Agreement constitutes, and the Note and Security Agreement when duly executed
and delivered will constitute, valid and legally binding obligations of the
Borrower, enforceable in accordance with their respective terms, except as such
enforceability may be limited by bankruptcy, insolvency or other similar laws
affecting the enforcement of creditors' rights generally.
SECTION 4.4. Financial Information. There has been no material
adverse change in the financial condition of the Borrower from that shown in
its most recent financial statements furnished to the Bank.
SECTION 4.5. Litigation. There are no actions, suits or proceedings
pending or, to the knowledge of the Borrower, threatened against the Borrower or
any of its properties before any court or governmental department, commission,
board, bureau, agency or instrumentality (domestic or foreign) that, if
determined adversely to the Borrower, would have a material adverse effect on
the financial condition, operations or business prospects of the Borrower.
SECTION 4.6. Contingent Liabilities. Except as set forth on the Disclosure
Schedule, there are no suretyship agreements, guarantees or, to the best of the
Borrower's knowledge and belief, other contingent liabilities of the Borrower
that are not disclosed on the financial statements mentioned in Section 4.4 or
as otherwise disclosed in writing to the Bank.
SECTION 4.7. Investment Company Act4.7. Investment Company Act. The
Borrower is not an "investment company", or a company "controlled" by an
"investment company", within the meaning of the Investment Company Act of
1940, as amended.
SECTION 4.8. Federal Reserve Regulations4.8. Federal Reserve Regulations.
No indebtedness that is required to be, or will be, reduced or retired from the
proceeds of the Loans was incurred for the purpose of purchasing or carrying any
"margin stock" within the meaning of Regulation U of the Board of Governors of
the Federal Reserve System (12 C.F.R. 221, as amended), and the Borrower does
not own or have any present intention to acquire any such margin stock.
SECTION 4.9. Taxes. The Borrower has filed all tax returns and reports
required to be filed before the date of this Agreement and, except as set forth
on the Disclosure Schedule, has paid all taxes, assessments and charges imposed
upon it or its property, or that it is required to withhold and pay over, to the
extent that they were required to be paid before the date of this Agreement.
SECTION 4.10. Encumbrances. The Collateral is not subject to any
lien, encumbrance or security interest except in favor of Bank under the
Security Agreement.
SECTION 4.11. Consents. No authorization, consent, approval, license,
exemption by or filing or registration with any court or governmental
department, commission, board (including the Board of Governors of the Federal
Reserve System), bureau, agency or instrumentality is or will be necessary for
the valid execution, delivery or performance by the Borrower of this Agreement,
the Note, or the Security Agreement.
SECTION 4.12. Compliance with Laws. The Borrower is in compliance
with all laws and regulations applicable to it that are material to the
operation of its business.
ARTICLE 5
COVENANTS OF BORROWER
So long as any amount due Bank hereunder remains unpaid, unless Bank shall
otherwise consent in writing:
SECTION 5.1. Books and Records; Financial Statements and Other
Information. The Borrower covenants that it shall keep proper books of record
and account in which full, true and correct entries will be made of all dealings
or transactions of or in relation to the business and financial affairs of the
Borrower, in accordance with generally accepted accounting principles,
consistently applied. The Borrower shall furnish to Bank the following:
(a) within 90 days after the last day of each fiscal year of the
Borrower, (i) a copy of the annual consolidated and consolidating
financial statements of the Borrower prepared in accordance with GAAP,
which shall be accompanied by an unqualified audit report of the
Borrower's certified public accountants, who shall be reasonably
acceptable to Bank, and (ii) a letter of the Vice President, Legal
Affairs-Investor Relations of the Borrower to the effect that to the best
of his or her knowledge, no event has occurred which constitutes or would,
with the passage of time or the giving of notice or both, constitute an
Event of Default hereunder, or otherwise describing any such event known
to such officer, which letter shall include, in reasonable detail, the
calculations demonstrating the compliance or non-compliance by the
Borrower, on a consolidated basis, as of the end of such fiscal year, with
each applicable financial covenant set forth in Section 5.12 hereof;
(b) within 45 days of the end of each quarter, (i) a copy of the
Borrower's unaudited consolidated financial statements for such quarter
and for the fiscal year to date, including a balance sheet, income
statement and statement of cash flows, and (ii) a letter of the Vice
President, Legal Affairs-Investor Relations of the Borrower to the effect
that, in the opinion of such officer (A) such unaudited financial
statements have been prepared in accordance with GAAP and reflect all
eliminations and adjustments (consisting only of normal recurring
adjustments, except as noted in such letter) necessary for a fair
presentation of the Borrower's financial position and results of operation
of the Borrower, on a consolidated basis, for such quarter and the year to
date, and (B) no event has occurred which constitutes or would, with the
passage of time or the giving of notice or both, constitute an Event of
Default hereunder, or otherwise describing any such event known to such
officer, which letter shall include, in reasonable detail, the
calculations demonstrating the compliance or non-compliance by the
Borrower, as of the end of such quarter, with each applicable financial
covenant set forth in Section 5.12 hereof;
(c) within fifteen (15) days of the end of each month, a borrowing
base report demonstrating the amount of availability under the Line of
Credit in accordance with Section 2.4(a) above, in the form attached as
Exhibit D hereto.
(d) as soon as practicable, but in any event within ten (10) days of
such occurrence, notice of any material adverse change in the business or
financial condition of the Borrower;
(e) as soon as practicable, but in any event within ten (10) days of
the time the Borrower becomes aware thereof (or should have become so
aware with the exercise of reasonable diligence), notice of the
institution of, or of any material adverse development with respect to,
any suit or proceeding, against the Borrower in which the amount of
damages which is sought, or which in the Borrower's reasonable opinion may
be at controversy, shall exceed $100,000;
(f) as soon as possible, but in any event within ten (10) days after
the Borrower becomes aware thereof (or should have become so aware with
the exercise of reasonable diligence), notice of the occurrence of any
Event of Default or of any act, omission, thing or condition which upon
the giving of notice or lapse of time, or both, would or might constitute
an Event of Default, which notice shall describe the Event of Default or
other act, omission, thing or condition in question and shall set forth in
detail what action the Borrower proposes to take with respect thereto;
(g) as soon as possible, but in any event within ten (10) days after
the Borrower becomes aware thereof (or should have become so aware with
the exercise of reasonable diligence), notice of the occurrence of any
"reportable event" or "prohibited transaction" (as each is defined in
ERISA) with respect to any employee benefit plan;
(h) upon request, or within a reasonable time thereafter, such other
information concerning the Borrower and its operations and financial
condition and results as the Bank may reasonably request; and
(i) as soon as possible, but in any event within ten (10) days after
the Borrower becomes aware thereof (or should have become so aware with
the exercise of reasonable diligence), notice of the occurrence of any
event or condition with respect to the Mortgaged Premises (as defined in
the Mortgage) described in Section 11 of the Mortgage.
SECTION 5.2. ERISA. Each employee benefit plan as to which the Borrower
may have any liability complies in all material respects with all applicable
provisions of ERISA, including minimum funding requirements, and (i) no
Prohibited Transaction (as defined under ERISA) has occurred with respect to any
such plan, (ii) no Reportable Event (as defined under Section 4043 of ERISA) has
occurred with respect to any such plan which would cause the Pension Benefit
Guaranty Corporation to institute proceedings under Section 4042 of ERISA, (iii)
the Borrower has not withdrawn from any such plan or initiated steps to do so,
and (iv) no steps have been taken to terminate any such plan.
SECTION 5.3. Payment of Taxes and Claims5.3. Payment of Taxes and Claims.
The Borrower will pay all taxes, assessments and other governmental charges
imposed upon it or any of its properties or assets or in respect of any of its
franchises, business, income or profits before any penalty or interest accrues
thereon, and all claims (including, without limitation, claims for labor,
services, materials and supplies) for sums which have become due and payable and
which by law have or might become a lien upon any of its properties or assets,
provided that no such charge or claim need be paid if being contested in good
faith by appropriate proceedings promptly initiated and diligently conducted and
if such reserve or other appropriate provision, if any, as shall be required by
GAAP shall have been made therefor and, if the filing of a bond or other
indemnity is necessary to avoid the creation of a lien against any of the assets
of the Borrower, such bond shall have been filed or indemnity provided.
SECTION 5.4. Insurance5.4. Insurance. The Borrower will maintain or cause
to be maintained with financially sound and reputable insurers acceptable to the
Bank, insurance with respect to the properties and business of the Borrower
against loss or damage of the kinds customarily insured against by entities of
established reputation engaged in the same or similar businesses and similarly
situated, of such types and in such amounts as are customarily carried under
similar circumstances by other such persons and otherwise as is prudent for
persons engaged in conducting business similar in character and size to the
business of the Borrower. Annually (and from time to time upon request of the
Bank), the Borrower will promptly furnish or cause to be furnished to the Bank
evidence, in form and substance satisfactory to the Bank, of the maintenance of
all insurance, indemnities or bonds required by this Section or by any permit,
license, or other agreement to be maintained, including copies thereof and proof
of premium payments.
The provisions of this Section shall be in addition to any similar
requirements set forth in the Security Agreement and the Mortgage.
SECTION 5.5. Maintenance of Properties5.5. Maintenance of Properties. The
Borrower will maintain or cause to be maintained its properties in good repair,
working order and condition and make or cause to be made all appropriate and
proper repairs, renewals, replacements, additions and improvements thereto, and
keep all systems and equipment which may now or in the future be subject to
compliance with any material standards or rules imposed by any governmental
agency or authority. The Borrower shall install and maintain its equipment and
systems in compliance in all material respects with any material requirement
imposed under an governmental regulations, permits, or licenses or under
agreements affecting the Borrower. The Borrower shall maintain, preserve and
protect, and, when necessary, renew, all franchises and all service marks,
trademarks and tradenames held by any of them and all agreements to which any of
them are parties which are necessary or useful to conduct its business, except
where the failure to do any of the foregoing could not have a material adverse
effect, individually or in the aggregate, upon the financial condition, results
of operation or business prospects of the Borrower.
SECTION 5.6. Maintenance of Records5.6. Maintenance of Records. The
Borrower will keep at all times books of record and account in which full, true
and correct entries will be made of all dealings or transactions in relation to
its respective business and affairs.
SECTION 5.7. Inspection5.7. Inspection. Upon reasonable notice the
Borrower will allow any representative of the Bank to visit and inspect any of
their properties, to examine the books of account and other records and files of
the Borrower (including, without limitation, the financial statements (audited
and unaudited, to the extent prepared) and information with respect to the
Borrower), to make copies thereof and to discuss the affairs, business, finances
and accounts of the Borrower with its personnel and accountants, all at such
reasonable times (and to the extent feasible, during ordinary business hours)
and as often the Bank may reasonably request.
SECTION 5.8. Change in Organizational Documents5.8. Change in
Organizational Documents. The Borrower will not amend, or consent to, any
amendment or supplement to, its articles or certificate of incorporation, bylaws
or other organization document without the prior written consent of the Bank,
which consent shall not be unreasonably withheld.
SECTION 5.9. Subsidiaries5.9. Subsidiaries. The Borrower will not
form or acquire any subsidiary without the written consent of the Bank, which
consent shall not be unreasonably withheld.
SECTION 5.10. Compliance with Federal Reserve Regulations5.10. Compliance
with Federal Reserve Regulations. No proceeds of the Loans shall be used by the
Borrower, directly or indirectly to purchase or carry any margin stock or to
extend credit to others for the purpose of purchasing or carrying any margin
stock. The Borrower will not, directly or indirectly, otherwise take or permit
to be taken any action which would result in the Loans or the carrying out of
any of the other transactions contemplated by this Agreement, being violative of
such Regulation U or of Regulation T (12 C.F.R. 220, as amended) or of
Regulation X (12 C.F.R. 224, as amended) or any other regulation of the Board of
Governors of the Federal Reserve System.
SECTION 5.11. Additional Negative Covenants. So long as any part of the
Loans remains unpaid, the Borrower shall not, without the written consent of
Bank which consent shall not be unreasonably withheld:
(a) Corporate Transactions. (1) Merge or consolidate with any other
corporation, partnership, trust or other entity, (2) sell, lease, transfer
or otherwise dispose of all or any material portion of its assets other
than in the ordinary course of business, (3) directly or through any
entity consolidated with the Borrower for financial reporting purposes,
purchase any assets other than in the ordinary course of business, or (4)
acquire any equity interest in any other corporation, partnership, trust
or other entity, except, in each case, in connection with a Permitted
Corporate Transaction.
(b) Nature of Business. Make any material change in the nature
of its business as conducted at the date hereof.
(c) Borrowings. Create, incur, assume, guarantee, endorse, or
otherwise become liable for, or permit to exist any direct or contingent
obligation for borrowed money (including obligations under capital
leases), except:
(1) obligations with respect to the Notes and this
Agreement; and
(2) any other indebtedness to the Bank (including with
respect to the IRB Loan).
(d) Guarantees. Assume, guarantee, endorse, or otherwise
become directly or contingently liable for the indebtedness of any
other Person.
(e) Encumbrances. Create, incur, assume or suffer to exist any
mortgage, lien, security interest, restriction or encumbrance with respect
to any of its property, including, but not limited to, the Collateral and
the Mortgaged Property, other than:
(1) liens and security interests granted in favor of the
Bank;
(2) utility, access or other easements and rights of way,
restrictions and exceptions which do not materially impair the
operation or value thereof;
(3) deposits under workers' compensation, unemployment and
social security or similar laws, or to secure performance of bids,
tenders, contracts (other than for the repayment of borrowed money)
or leases to secure indemnity, performance or similar bonds in the
ordinary course of business;
(4) liens imposed by law (whether or not inchoate), such as
carriers', warehousemen's, materialmen's or mechanics' liens,
incurred in good faith in the ordinary course of business, and which
are not delinquent, and liens arising out of a judgment or award
with respect to which an appeal is being prosecuted, a stay of
execution pending such appeal having been secured or applied for and
not denied or rendered ineffective;
(5) liens for taxes, assessments or governmental charges or
levies on property if the same shall not at the time be delinquent,
or are being contested in good faith and by appropriate proceedings;
and
(6) other liens and security interests on the property of
Borrower listed on the Disclosure Schedule attached hereto as
Exhibit "E"; provided that no such lien or security interest shall
be extended, replaced, modified or enlarged.
(f) Restricted Payments. Directly or indirectly, declare,
order, pay, make or set apart any sum or property for any Restricted
Payment, without the written consent of the Bank.
(g) Leasebacks. Directly or indirectly sell or otherwise transfer,
in one or more related transactions, any property (whether real, personal
or mixed) and thereafter rent or lease such transferred property or
substantially identical property.
Transactions with Shareholders and Affiliates. Directly or indirectly, engage in
any transaction with (a) any holder of 5% or more of any class of the
capital stock or ownership interest of the Borrower, or (b) any
corporation controlling, controlled by, or under common control with the
Borrower or any such holder, on terms that are less favorable to the
Borrower than those which might be obtained at the time from Persons which
are not such a holder or affiliated corporation.
(i) Fiscal Year. Change its Fiscal Year.
SECTION 5.12. Financial Covenants. So long as any part of the Loans
remains unpaid, the Borrower shall comply with each of the following financial
covenants. As used in this Section (and in each definition applicable hereto),
the term "Borrower" means the Borrower and each of its consolidated subsidiaries
on a consolidated basis.
(a) Tangible Net Worth. The Borrower shall maintain, at all times,
Tangible Net Worth in an amount which is not less than (i) $6,500,000 from the
date of this Agreement through June 30, 1998, and (ii) for each Fiscal Year
thereafter, an amount which is equal to the minimum Tangible Net Worth required
hereunder for the prior Fiscal Year, plus 50% of Net Income for such prior
Fiscal Year.
(b) Fixed Charge Coverage Ratio. The Borrower shall maintain in each
Fiscal Year a Fixed Charge Coverage Ratio of:
Minimum Fixed Charge
Period Coverage Ratio
Fiscal Year ending June 30, 1998 1.2:1
Each Fiscal Year thereafter 1.5:1
(c) Leverage Ratio. The Borrower shall maintain, at all times, a
ratio of Total Liabilities to Tangible Net Worth of not greater than 1.5 to
1.0.
ARTICLE 6
DEFAULT
SECTION 6.1. Events of Default. Each of the following shall be an
event of default ("Event of Default"):
(a) Failure to pay any interest on any Note prior to the tenth
(10th) Business Day following any Interest Payment Date; or failure to pay
any principal of any Note when due (including upon demand in the case of
the Bridge Loan Note and the Line of Credit Note); or
(b) Failure to perform or observe any other of the covenants,
agreements or conditions on its part contained in this Agreement
including, without limitation, the failure of the Borrower to observe its
covenants contained in Section 5.12 hereunder and such failure continues
(except as provided in Section 6.1(a), (d) or (e) hereof) for thirty (30)
days following written notice from Bank; or
(c) The occurrence of any default under the Security Agreement
or the Mortgage; or
(d) The Borrower or any subsidiary of the Borrower shall commence a
voluntary case or other proceeding seeking liquidation, reorganization or
other relief with respect to itself or its debts under any bankruptcy,
insolvency or other similar law now or hereafter in effect or seeking the
appointment of a trustee, receiver, liquidator, custodian or other similar
official of it or any substantial part of its property, or shall consent
to any such relief or to the appointment of or taking position by any such
official in an involuntary case or other proceeding commenced against it,
or shall make a general assignment for the benefit of creditors, or shall
fail generally to pay its debts as they become due, or shall take any
corporate action to authorize any of the foregoing; or
(e) An involuntary case or other proceeding shall be commenced
against the Borrower or any subsidiary of the Borrower seeking
liquidation, reorganization or other relief with respect to it or its
debts under any bankruptcy, insolvency or other similar law now or
hereafter in effect or seeking the appointment of a trustee, receiver,
liquidator, custodian or other similar official of it or any substantial
part of its property, and such involuntary case or other proceeding shall
remain undismissed and unstayed for a period of 60 days; or an order for
relief shall be entered against the Borrower or any subsidiary under the
Federal bankruptcy laws as now or hereafter in effect; or
(f) If any Change of Control shall occur; or
(g) If the Borrower shall fail to pay any obligation for the payment
of borrowed money or the installment purchase price of property or on
account of a lease of property (a "Credit Obligation") owing by it, or any
interest or premium thereon, when due, whether such Credit Obligation
shall become due by scheduled maturity, by required prepayment, by
acceleration, by demand or otherwise, or the Borrower shall fail to
perform any term, covenant or agreement on its part to be performed under
any agreement or instrument evidencing or securing or relating to any such
Credit Obligation when required to be performed, if the effect of such
failure is to accelerate, or to permit the holder or holders of such
Credit Obligation to accelerate, the maturity of such Credit Obligation,
whether or not such failure to perform shall be waived by the holder or
holders of such Credit Obligation, unless such waiver has the effect of
terminating the right of such holder or holders to accelerate the maturity
of such Credit Obligation as a result of such failure; or
(h) If any representation or warranty by or on behalf of the
Borrower made herein or in any report, certificate, financial statement or
other instrument delivered to the Bank shall prove to be false or
misleading in any material respect when made; or
(i) If any default shall occur with respect to any other
indebtedness of the Borrower to the Bank, subject to Borrower's right to
notice and opportunity to cure, if any, under the instruments which
evidence or secure such indebtedness.
SECTION 6.2. Acceleration. If any Event of Default shall occur and be
continuing, the Bank may, by notice to Borrower, (a) declare the entire unpaid
principal amount of the Notes, all interest accrued and unpaid thereon and all
other amounts payable hereunder to be forthwith due and payable, whereupon the
Notes, all such accrued interest and all such amounts shall become and be
forthwith due and payable, without presentment, demand, protest or further
notice of any kind, all of which are hereby expressly waived by the Borrower;
(b) exercise its rights under the Security Agreement and the Mortgage; and (c)
exercise all of the rights and remedies of a secured party under the Uniform
Commercial Code or any other applicable law or agreement with respect to all
collateral then held for the Loans.
ARTICLE 7
MISCELLANEOUS
SECTION 7.1. No Waiver; Cumulative Remedies. No failure or delay on the
part of the Bank or Borrower in exercising any right, power or remedy hereunder
shall operate as a waiver thereof; nor shall any single or partial exercise of
any such right, power or remedy preclude any other or further exercise thereof
or the exercise of any other right, power or remedy hereunder. No waiver of any
provision hereof shall be effective unless the same shall be in writing and
signed by the Bank and Borrower.
SECTION 7.2. Set-Off. The Bank shall have a right of setoff against, a
lien upon and a security interest in all property of the Borrower now or at any
time in the possession of the Bank any capacity whatever, including, but not
limited to, the Borrower's interest in any deposit account, as security for all
liabilities of the Borrower to the Bank.
SECTION 7.3. Notices. Unless this Agreement specifically provides
otherwise, all notices and other communications that this Agreement requires or
permits either party to give to the other shall be in writing and shall be given
to such party at its address or telecopy number specified on the signature pages
of this Agreement or at such other address or telecopy number as shall be
designated by such party in a notice to the other party complying with the terms
of this Section 7.3. Unless this Agreement specifically provides otherwise, all
notices and other communications will be effective (a) if given by mail, when
received, (b) if given by telecopy, when such telecopy is transmitted to the
appropriate telecopy number and the sender receives confirmation of transmission
during normal business hours, or (c) if given by any other means, when delivered
at the appropriate address, except that notices from the Borrower to the Bank
pursuant to any of the provisions of Article II hereof shall not be effective
until received by the Bank.
SECTION 7.4. Governing Law. This Agreement and the Note shall be
governed in all respects by the law of the State of New York.
SECTION 7.5. Judicial Proceedings.
(a) The Borrower consents and agrees that any judicial proceedings
relating in any way to this Agreement may be brought in any court of competent
jurisdiction in the State of New York or in the United States District Court for
the Southern District of New York. The Borrower hereby accepts, for itself and
its properties, the non-exclusive jurisdiction of such courts, agrees to be
bound by any judgments rendered by them in connection with this Agreement, and
will not move to transfer any such proceeding to any different court. The
Borrower waives the defense of forum non conveniens in any such action or
proceeding.
(b) Service of process in any proceeding arising out of or relating to
this Agreement may be made by any means permitted by the applicable rules of
court as then in force, or may be made by any form of mail requiring a signed
receipt.
(c) Nothing herein shall limit the right of the Bank to bring proceedings
against the Borrower in the courts of any other jurisdiction or be deemed to
constitute a consent to jurisdiction by any party hereto as to persons or
entities not parties to this Agreement or as to matters not relating to this
Agreement.
(d) THE BORROWER HEREBY EXPRESSLY WAIVES ANY RIGHT TO A TRIAL BY JURY IN
ANY SUCH SUIT, ACTION OR PROCEEDING. THE BORROWER FURTHER ACKNOWLEDGES AND
AGREES THAT WAIVER OF JURY TRIAL IS A SPECIFIC AND MATERIAL ASPECT OF THIS
AGREEMENT AND THAT THE BANK WOULD NOT HAVE AGREED TO MAKE ANY LOAN (INCLUDING
ANY ADVANCE) OR ACCEPT THIS AGREEMENT OR ANY NOTE WITHOUT SUCH AGREEMENT.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written.
SONICS & MATERIALS, INC. Address:
West Kenosia Avenue
Danbury, CT 06810
By:__________________________________ Telecopier: (203)798-8350
President Attention: Lauren H. Soloff, Esq.
per pro. BROWN BROTHERS HARRIMAN & CO. Address:
59 Wall Street
By:___________________________________ New York, New York
Telecopier No.: (212) 493-7280
Attention: Chief Credit Officer
EXHIBIT B
FORM OF TERM LOAN NOTE
$427,000 September __, 1997
New York, New York
SONICS & MATERIALS, INC., a Delaware corporation (the "Company"),
for value received, hereby promises to pay to the order of BROWN BROTHERS
HARRIMAN & CO. (the "Lender") the principal amount of FOUR HUNDRED TWENTY SEVEN
THOUSAND DOLLARS ($427,000) on the dates and in the principal amounts provided
in the Credit Agreement referred to below. The Company also promises to pay
interest on the unpaid principal amount hereof from time to time outstanding at
the rate and on such dates as provided in the Credit Agreement. All such
principal and interest shall be payable in lawful money of the United States of
America in same day funds at the office of the Lender.
This Note is the Term Loan Note referred to in the Credit Agreement
dated of even date hereof (the "Credit Agreement") between the Company and the
Lender, and is entitled to the benefits thereof. Capitalized terms used but not
defined herein have the meanings specified in the Credit Agreement.
The Lender is hereby authorized by the Company to endorse on the
schedule (or a continuation thereof) attached hereto, the date and amount of
each payment or prepayment of principal of such Term Loan received by the
Lender, provided that any failure by the Lender to make any such endorsement or
any error therein shall not affect the obligations of the Company under the
Credit Agreement or this Note in respect of the Term Loan evidenced hereby. This
Note is subject to prepayment and its maturity is subject to acceleration upon
the terms provided in the Credit Agreement.
The Company hereby waives presentment, demand, protect or notice of
any kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
SONICS & MATERIALS, INC.
By: ______________________________
Name:
Title:
<PAGE>
Schedule
Payments or
Prepayments of Balance Notation
Principal Outstanding Made By
<PAGE>
TERM LOAN NOTE
$427,000 September __, 1997
New York, New York
SONICS & MATERIALS, INC., a Delaware corporation (the "Company"),
for value received, hereby promises to pay to the order of BROWN BROTHERS
HARRIMAN & CO. (the "Lender") the principal amount of FOUR HUNDRED TWENTY SEVEN
THOUSAND DOLLARS ($427,000) on the dates and in the principal amounts provided
in the Credit Agreement referred to below. The Company also promises to pay
interest on the unpaid principal amount hereof from time to time outstanding at
the rate and on such dates as provided in the Credit Agreement. All such
principal and interest shall be payable in lawful money of the United States of
America in same day funds at the office of the Lender.
This Note is the Term Loan Note referred to in the Credit Agreement
dated of even date hereof (the "Credit Agreement") between the Company and the
Lender, and is entitled to the benefits thereof. Capitalized terms used but not
defined herein have the meanings specified in the Credit Agreement.
The Lender is hereby authorized by the Company to endorse on the
schedule (or a continuation thereof) attached hereto, the date and amount of
each payment or prepayment of principal of such Term Loan received by the
Lender, provided that any failure by the Lender to make any such endorsement or
any error therein shall not affect the obligations of the Company under the
Credit Agreement or this Note in respect of the Term Loan evidenced hereby. This
Note is subject to prepayment and its maturity is subject to acceleration upon
the terms provided in the Credit Agreement.
The Company hereby waives presentment, demand, protect or notice of
any kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
SONICS & MATERIALS, INC.
By: ______________________________
Name:
Title:
<PAGE>
Schedule
Payments or
Prepayments of Balance Notation
Principal Outstanding Made By
FORM OF LINE OF CREDIT NOTE
$1,500,000 September __, 1997
New York, New York
SONICS & MATERIALS, INC., a Delaware corporation (the "Company"),
for value received, hereby promise to pay to the order of BROWN BROTHERS
HARRIMAN & CO. (the "Lender") the principal amount of ONE MILLION FIVE HUNDRED
THOUSAND DOLLARS ($1,500,000) or, if less, the unpaid principal amount of the
Lender's Line of Credit outstanding under the Credit Agreement referred to below
on the dates and in the amounts provided in the Credit Agreement. The Company
also promises to pay interest on the unpaid principal amount hereof from time to
time outstanding at such rate and on such dates as are determined pursuant to
the Credit Agreement. The Company also promises to pay interest on the unpaid
principal amount hereof from time to time outstanding at such rate and on such
dates as are determined pursuant to the Credit Agreement. All such principal and
interest shall be payable in lawful money of the United States of America in
same day funds at the office of the Lender.
This Note is the Line of Credit Note referred to in the Credit
Agreement dated of even date herewith (the "Credit Agreement") between the
Company and the Lender and is entitled to the benefits thereof. Capitalized
terms used but not defined herein have the meanings specified in the Credit
Agreement.
The date and amounts of each Advance under the Line of Credit and
each repayment and prepayment of principal thereof, may be endorsed by the
Lender on the schedule attached hereto, or on a continuation of such schedule
attached to and made a part hereof. The failure to make or any error in making
any such endorsement shall not limit, extinguish or in any way modify the
Company's obligations under the Credit Agreement or this Note, including,
without limitation, the obligation of the Company to repay the Lenders's Line of
Credit, together with interest thereon, strictly in accordance with the terms of
the Credit Agreement and this Note.
This Note is subject to prepayment and its maturity is subject to
acceleration upon the terms provided in the Credit Agreement.
The Company hereby waives presentment, demand, protect or notice of
any kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
SONICS & MATERIALS, INC.
By: __________________________________-
Name:
Title:
<PAGE>
Schedule
Principal Payments or
Date Amount Prepayments of Balance Notation
of Loan of Loan Principal Outstanding Made
By
<PAGE>
LINE OF CREDIT NOTE
$1,500,000 September __, 1997
New York, New York
SONICS & MATERIALS, INC., a Delaware corporation (the "Company"),
for value received, hereby promise to pay to the order of BROWN BROTHERS
HARRIMAN & CO. (the "Lender") the principal amount of ONE MILLION FIVE HUNDRED
THOUSAND DOLLARS ($1,500,000) or, if less, the unpaid principal amount of the
Lender's Line of Credit outstanding under the Credit Agreement referred to below
on the dates and in the amounts provided in the Credit Agreement. The Company
also promises to pay interest on the unpaid principal amount hereof from time to
time outstanding at such rate and on such dates as are determined pursuant to
the Credit Agreement. The Company also promises to pay interest on the unpaid
principal amount hereof from time to time outstanding at such rate and on such
dates as are determined pursuant to the Credit Agreement. All such principal and
interest shall be payable in lawful money of the United States of America in
same day funds at the office of the Lender.
This Note is the Line of Credit Note referred to in the Credit
Agreement dated of even date herewith (the "Credit Agreement") between the
Company and the Lender and is entitled to the benefits thereof. Capitalized
terms used but not defined herein have the meanings specified in the Credit
Agreement.
The date and amounts of each Advance under the Line of Credit and
each repayment and prepayment of principal thereof, may be endorsed by the
Lender on the schedule attached hereto, or on a continuation of such schedule
attached to and made a part hereof. The failure to make or any error in making
any such endorsement shall not limit, extinguish or in any way modify the
Company's obligations under the Credit Agreement or this Note, including,
without limitation, the obligation of the Company to repay the Lenders's Line of
Credit, together with interest thereon, strictly in accordance with the terms of
the Credit Agreement and this Note.
This Note is subject to prepayment and its maturity is subject to
acceleration upon the terms provided in the Credit Agreement.
The Company hereby waives presentment, demand, protect or notice of
any kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
SONICS & MATERIALS, INC.
By: __________________________________-
Name:
Title:
<PAGE>
Schedule
Principal Payments or
Date Amount Prepayments of Balance Notation
of Loan of Loan Principal Outstanding Made
By
FORM OF BRIDGE LOAN NOTE
$1,600,000 September __, 1997
New York, New York
SONICS & MATERIALS, INC., a Delaware corporation (the "Company"),
for value received, hereby promises to pay to the order of BROWN BROTHERS
HARRIMAN & CO. (the "Lender") the principal amount of ONE MILLION SIX HUNDRED
THOUSAND DOLLARS ($1,600,000) on the dates and in the principal amounts provided
in the Credit Agreement referred to below. The Company also promises to pay
interest on the unpaid principal amount hereof from time to time outstanding at
the rate and on such dates as provided in the Credit Agreement. All such
principal and interest shall be payable in lawful money of the United States of
America in same day funds at the office of the Lender.
This Note is the Bridge Loan Note referred to in the Credit
Agreement dated of even date hereof (the "Credit Agreement") between the Company
and the Lender, and is entitled to the benefits thereof. Capitalized terms used
but not defined herein have the meanings specified in the Credit Agreement.
The Lender is hereby authorized by the Company to endorse on the
schedule (or a continuation thereof) attached hereto, the date and amount of
each payment or prepayment of principal of such Bridge Loan received by the
Lender, provided that any failure by the Lender to make any such endorsement or
any error therein shall not affect the obligations of the Company under the
Credit Agreement or this Note in respect of the Bridge Loan evidenced hereby.
This Note is subject to prepayment and its maturity is subject to acceleration
upon the terms provided in the Credit Agreement.
The Company hereby waives presentment, demand, protect or notice of
any kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
SONICS & MATERIALS, INC.
By: ______________________________
Name:
Title:
<PAGE>
Schedule
Payments or
Prepayments of Balance Notation
Principal Outstanding Made By
<PAGE>
BRIDGE LOAN NOTE
$1,600,000 September __, 1997
New York, New York
SONICS & MATERIALS, INC., a Delaware corporation (the "Company"),
for value received, hereby promises to pay to the order of BROWN BROTHERS
HARRIMAN & CO. (the "Lender") the principal amount of ONE MILLION SIX HUNDRED
THOUSAND DOLLARS ($1,600,000) on the dates and in the principal amounts provided
in the Credit Agreement referred to below. The Company also promises to pay
interest on the unpaid principal amount hereof from time to time outstanding at
the rate and on such dates as provided in the Credit Agreement. All such
principal and interest shall be payable in lawful money of the United States of
America in same day funds at the office of the Lender.
This Note is the Bridge Loan Note referred to in the Credit
Agreement dated of even date hereof (the "Credit Agreement") between the Company
and the Lender, and is entitled to the benefits thereof. Capitalized terms used
but not defined herein have the meanings specified in the Credit Agreement.
The Lender is hereby authorized by the Company to endorse on the
schedule (or a continuation thereof) attached hereto, the date and amount of
each payment or prepayment of principal of such Bridge Loan received by the
Lender, provided that any failure by the Lender to make any such endorsement or
any error therein shall not affect the obligations of the Company under the
Credit Agreement or this Note in respect of the Bridge Loan evidenced hereby.
This Note is subject to prepayment and its maturity is subject to acceleration
upon the terms provided in the Credit Agreement.
The Company hereby waives presentment, demand, protect or notice of
any kind in connection with this Note.
THIS NOTE SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE
LAWS OF THE STATE OF NEW YORK.
SONICS & MATERIALS, INC.
By: ______________________________
Name:
Title:
<PAGE>
Schedule
Payments or
Prepayments of Balance Notation
Principal Outstanding Made By
OPEN-END MORTGAGE DEED
THIS MORTGAGE SECURES FUTURE ADVANCES
THIS OPEN-END MORTGAGE DEED MADE THIS ____ day of September, 1997,
between SONICS & MATERIALS, INC., a Delaware corporation (the "Mortgagor"),
having an address at __________________________, and delivered to BROWN BROTHERS
HARRIMAN & CO., a private bank (the "Mortgagee").
W I T N E S S E T H:
Background
WHEREAS, in accordance with the provisions of a Credit Agreement
dated of even date herewith (the "Credit Agreement"), Mortgagor has executed and
delivered to Mortgagee the following (each dated as of the date hereof):
(1) its Bridge Loan Note (the "Bridge Loan Note") pursuant to which
Mortgagor has agreed to pay to Mortgagee the principal sum of One Million
Six Hundred Thousand Dollars ($1,600,000), advanced by Mortgagee to
Mortgagor, with interest thereon, all according to the terms and
conditions specified in the Bridge Loan Note, all of which
are incorporated hereby by reference;
(2) its Line of Credit Note (the "Line of Credit Note") pursuant to
which Mortgagor has agreed to pay to Mortgagee the principal sum of One
Million Five Hundred Thousand Dollars ($1,500,000), advanced by Mortgagee
to Mortgagor, with interest thereon, all according to the terms and
conditions specified in the Line of Credit Note, all of which are
incorporated hereby by reference; and
(3) its Term Loan Note (the "Term Loan Note") pursuant to which
Mortgagor has agreed to pay to Mortgagee the principal sum of Four Hundred
Twenty Seven Thousand Dollars ($427,000), advanced by Mortgagee to
Mortgagor, with interest thereon, all according to the terms and
conditions specified in the Term Note, all of which are incorporated
hereby by reference; and
WHEREAS, improvements on the Mortgaged Premises (as defined
below) are to be erected or repaired; and
WHEREAS, Mortgagee has agreed to make the loan evidenced by the
Bridge Loan Note to be paid over to Mortgagor in installments as work
progresses, the time and amount of each advancement to be at the sole discretion
and upon the estimate of Mortgagee, so that when all of the work on the
Mortgaged Premises shall have been completed to the satisfaction of Mortgagee,
said Mortgagee shall then pay over to the Mortgagor any balance necessary to
complete the full loan of $1,600,000; and
WHEREAS, Mortgagor agrees to complete the erection or repair of said
buildings to the satisfaction of Mortgagee within a reasonable time from the
date hereof or at the latest on or before December 31, 1997; and
WHEREAS, The Connecticut Development Authority expects to issue to
the Mortgagee its Industrial Development Revenue Bond (Sonics & Materials, Inc.
Project), Series of 1997 in the aggregate principal amount of $2,945,000, the
proceeds of which will be advanced to or for the benefit of Mortgagor to
refinance the Bridge Loan Note and to pay additional costs of the Construction
Project (as defined in the Credit Agreement).
NOW, THIS OPEN-END MORTGAGE DEED that Mortgagor, in consideration of
the principal indebtedness of the Mortgagor evidenced by the Bridge Loan Note,
the Line of Credit Note and the Term Loan Note (collectively, the "Notes") and
to secure the payment thereof and of all other sums due or to become due to the
Mortgagee under the Notes, the Credit Agreement, this Mortgage and the other
documents evidencing or securing the loans (collectively, the "Financing
Agreements") and the performance of all of the other provisions of the Financing
Agreements on the part of Mortgagor to be performed, has granted, bargained,
sold, aliened, released, conveyed, mortgaged and confirmed unto Mortgagee and
does hereby grant, bargain, sell, alien, release, convey, mortgage and confirm
unto Mortgagee, all of its interests in that certain real estate situated in
Newtown, Connecticut, as more particularly described on Exhibit "A" attached
hereto and made a part hereof (said real estate, together with the Improvements
and Fixtures hereinafter described, being referred to herein collectively as the
"Mortgaged Premises"); and also
TOGETHER with all and singular the buildings, streets, alleys,
passages, ways, waters, watercourses, rights, liberties, privileges,
improvements, hereditaments and appurtenances whatsoever thereunto belonging or
in any way appertaining, and the reversions and remainders and rents, issues and
profits thereof (collectively, the "Improvements"); and also
TOGETHER with all and singular the fixtures now or hereafter
installed in the aforesaid premises (the "Fixtures"); and also
TOGETHER with all right, title and interest of the Mortgagor in and
to all equipment, machinery, furniture and fixtures (together with all related
attachments, accessaries, tools and parts) located on the Mortgaged Premises,
whether now owned or hereafter acquired (collectively, the "Equipment" and,
together with the Mortgaged Premises, the "Mortgaged Property"), and all
proceeds (including insurance proceeds) and products thereof;
TO HAVE AND TO HOLD the Mortgaged Property and other property hereby
granted, or mentioned and intended so to be, with the appurtenances, unto
Mortgagee, its heirs, executors, administrators, successors and assigns
(including any Person succeeding to the rights of the Mortgagee as a transferee
of the Notes), to its or their own use forever.
PROVIDED ALWAYS, that if Mortgagor shall promptly and fully pay and
discharge all sums outstanding and becoming due under the Financing Agreements
and shall perform all the other provisions therein contained, then the estate
hereby granted shall cease, terminate and become void, but otherwise shall
remain in full force and effect.
AND MORTGAGOR HEREBY FURTHER COVENANTS AND AGREES WITH MORTGAGEE
AS FOLLOWS:
1. Warranty of Title1. Warranty of Title. The Mortgagor warrants
that: the Mortgagor has good and marketable title to an estate in fee simple
absolute in the Mortgaged Premises and the Fixtures; that the Mortgagor has or
will have good title to the Equipment; this Mortgage is a valid and enforceable
first lien on the Mortgaged Property; subject to the liens and security
interests listed on Exhibit E to the Credit Agreement; and the Mortgagee shall,
subject to the Mortgagor's rights of possession prior to any default hereunder,
quietly enjoy and possess the Mortgaged Property. The Mortgagor, at its own
expense, shall preserve such title and the validity and priority of the lien
hereof and shall forever warrant and defend the same to the Mortgagee against
the claims of all persons and parties whomsoever.
2. Covenants of Mortgagor. Mortgagor will pay to the Mortgagee all
amounts due under the Notes with respect to the principal of and interest
accrued on the Notes and all other sums due and becoming due under the Financing
Agreements, all such payments to be made as and when due. Mortgagor will observe
and perform all of the terms, conditions and provisions on the part of Mortgagor
to be observed and performed under the Financing Agreements, and Mortgagor
shall, at its own expense, preserve, protect and defend the title, validity and
priority of this Mortgage against all claims and demands whatsoever.
3. Security Agreement; Fixtures Filing. Mortgagor hereby grants to
Mortgagee a security interest in the Equipment in accordance with the Uniform
Commercial Code as in effect in the State of Connecticut (the "Uniform
Commercial Code") and for such purpose this Mortgage shall constitute a security
agreement under the Uniform Commercial Code and, further, shall be effective as
a financing statement filed as a fixture filing under the Uniform Commercial
Code with respect to the Fixtures. Mortgagor will furnish to Mortgagee from time
to time statements and schedules further identifying and describing the
Equipment and such other reports in connection with the Equipment as Mortgagee
may reasonably request, all in reasonable detail. Mortgagor shall further give,
execute, deliver and file or record in the proper governmental offices, any
instrument, paper or document, including but not limited to one or more
financing statements under the Uniform Commercial Code, satisfactory to
Mortgagee, or take any action, which Mortgagee may deem necessary or desirable
in order to create, preserve, perfect, extend, modify, terminate or otherwise
affect any security interest granted pursuant hereto, or to enable Mortgagee to
exercise or enforce any of its rights hereunder.
4. Escrows. Upon the occurrence of an Event of Default, or of an
event that would, with the passage of time or the giving of notice or both, be
such an Event of Default, under the Financing Agreements, Mortgagor shall, if
requested by Mortgagee, also pay to the Mortgagee, in monthly payments on each
Interest Payment Date, installments on account of the annual taxes and water
rents and sewer charges assessed or to be assessed against the Mortgaged
Premises, and the premiums on all policies of insurance held by Mortgagee
pursuant to the provisions of Section 6 hereof, in amounts sufficient to permit
the Mortgagee to pay said taxes, water and sewer charges and insurance premiums
as and when they become due. Such installment payments may be used by Mortgagee
for the purposes designated at such time or times as Mortgagee in its sole
discretion may determine, but may not be commingled with the general funds of
Mortgagee, and the interest payable thereon, if any, and income therefrom, if
any, shall be used by the Mortgagee for the benefit of Mortgagor.
5. Lienable Charges. Unless the same are paid into escrow with
Mortgagee pursuant to Section 4 hereof, Mortgagor shall pay before they become
delinquent, or shall procure the discharge or release of, all taxes (including
corporate taxes), water and sewer charges and other charges, claims,
assessments, liens and encumbrances now or hereafter assessed with respect to
the Mortgaged Property and the improvements thereon which shall or might have
priority in lien or payment to the indebtedness secured by this Mortgage, and
shall deliver the receipts for the same (or copies thereof) to Mortgagee upon
request of the Mortgagee.
6. Insurance; Damage by Casualty or Condemnation. Mortgagor shall
keep the Mortgaged Property insured for the benefit of Mortgagee against loss by
fire and other casualties and hazards required by Mortgagee, upon terms and in
companies and amounts satisfactory to the Mortgagee, and shall assign and
deliver all such policies of insurance to the Mortgagee as additional security,
with Mortgagee named as mortgagee and as the loss payee thereon. Mortgagee may
settle all claims under all such policies and may demand, receive and receipt
for all moneys becoming payable thereunder. Upon the occurrence of any casualty
damage or condemnation to the Mortgaged Property or any portion thereof, the
proceeds (a) under any policy of insurance or (b) from any condemnation award
(or deed in lieu thereof), shall be paid directly to the Mortgagee, and the
Mortgagee shall release the proceeds to Mortgagor as the alteration,
reconstruction, repair, restoration or replacement of the damaged and/or untaken
portion, as the case may be, of the Mortgaged Property progresses, subject to
the following conditions:
a. Borrower is not in default under the terms,
covenants, and conditions of the Financing Agreements
or any other agreements between Borrower and Bank;
b. Bank approves in writing the plans and specifications
for restoration;
c. There are sufficient funds on deposit at all times
with Bank to complete the rebuilding, as certified by
an architect approved by Bank;
d. Borrower provides suitable completion, payment and
performance bonds, and builder's all risk insurance
in form and amount acceptable to Bank;
e. Bank shall have the option of applying, at par, any
surplus insurance proceeds which remain after
rebuilding to the reduction of the outstanding
principal balance of the indebtedness secured by this
Mortgage;
f. Prior to any disbursement, an inspecting
engineer/architect of Bank's choice, whose fees shall be
paid by Borrower, shall certify completion of work in
place in accordance with approved plans and
specifications, and in accordance with all applicable
building codes, zoning ordinances, and all other local
or federal governmental regulations; and
g. Such other conditions as would customarily be
required by a local construction lender, or are
otherwise reasonable.
Mortgagor shall deliver to the Mortgagee a renewal or replacement of each such
policy not less than thirty (30) days prior to the expiration thereof, together
with evidence of the payment of all premiums due for such policy. Mortgagor
shall promptly notify Mortgagee upon the occurrence of any casualty damage or
condemnation, or threatened condemnation, affecting the Mortgaged Property.
7. Repair and Condition of Mortgaged Premises; Removal of Equipment.
Subject to the provisions of Section 6 above with respect to any loss or
casualty, Mortgagor shall keep the Mortgaged Property in good condition and
repair, and shall not remove, demolish or materially alter the Mortgaged
Premises, nor commit or suffer waste with respect thereto. Mortgagor shall
comply with all laws, rules, regulations and ordinances made or promulgated by
lawful authority which may now or hereafter become applicable to the Mortgaged
Property, and Mortgagor shall prohibit any use of the Mortgaged Property which
would permit the confiscation or seizure thereof. Mortgagor shall permit
Mortgagee's agents at any reasonable time and from time to time to enter upon
the Mortgaged Premises for the purpose of inspecting and appraising any part of
the Mortgaged Property. Mortgagor shall not take or permit any action with
respect to the Mortgaged Property which will in any manner impair the security
of this Mortgage. The Mortgagor shall not remove any of the Equipment from the
Mortgaged Premises without the prior written consent of the Mortgagee.
8. Mortgagee's Right to Cure. In the event of the failure of
Mortgagor to pay the taxes, water and sewer charges and other charges, claims,
assessments, liens, or encumbrances described in Section 5 hereof, or to furnish
and pay for the insurance as set forth in Section 6 hereof, or to keep the
Mortgaged Property in good condition and repair as provided in Section 7 hereof,
Mortgagee may, at its option, but without any obligation to do so, pay any or
all such items, together with penalties and interest thereon, and procure and
pay for such insurance and repairs; and Mortgagee may at any time and from time
to time advance such additional sum or sums as Mortgagee in its sole discretion
may deem necessary to protect the security of this Mortgage. All such sums so
paid or advanced by Mortgagee shall immediately and without demand be repaid by
Mortgagor to Mortgagee, together with interest thereon at the Mortgagee's Base
Rate plus 2% on the indebtedness evidenced thereby, and shall be added to the
principal indebtedness secured by this Mortgage. The production of a receipt by
Mortgagee shall be conclusive proof of a payment or advance authorized hereby,
and the amount and validity thereof.
9. Leases. Mortgagor shall, if requested by Mortgagee, and whether
or not there shall be any default under any of the Financing Agreements, assign
to Mortgagee, as additional security, any and all leases now existing or
hereafter created covering any part of the Mortgaged Premises. The Mortgagor
does hereby assign and pledge to the Mortgagee all of its rights in and to any
lease on the Mortgaged Premises. Mortgagor hereby assign and transfer to
Mortgagee any and all rents now or hereafter issuing from the Mortgaged
Premises, or any portion thereof, and Mortgagor agrees that, upon the occurrence
of an event of default, or an event that would, with the passage of time or the
giving of notice or both, be such an event of default, under any of the
Financing Agreements, Mortgagee may collect and apply the same to the payment of
any sum required to be paid by Mortgagor thereunder, in such order of priority
as Mortgagee in its sole discretion may determine.
10. Environmental. (a) Mortgagor represents and warrants that, to
the best of its knowledge based solely on the Environmental Reports (as defined
below), and except for the use, storage and disposal of Hazardous Substances in
the ordinary course of Mortgagor's business in compliance with all Environmental
Laws (as defined below) or as disclosed in the Environmental Reports, the
Mortgaged Premises are not now and have never been used to generate,
manufacture, refine, transport, treat, store, handle, dispose, transfer,
produce, process or in any manner deal with Hazardous Materials, and that no
Hazardous Materials have ever been installed, placed or in any manner dealt with
on the Mortgaged Premises, and that no owner of the Mortgaged Premises or any
tenant, subtenant, occupant, prior tenant, prior subtenant, prior occupant or
person (collectively, "Occupant") has received any notice or advice from any
governmental agency or any Occupant with regard to Hazardous Materials on, from
or affecting the Mortgaged Premises.
The term "Environmental Reports" as used in this Mortgage means the
following reports: (i) Phase II Environmental Site Assessment prepared by Heynen
Engineers and Associates, Inc. dated November 13, 1987 (the "1987 Phase II
Report"), (ii) Review of the 1987 Phase II Reprot prepared by Land Tech
Remedial, Inc. dated March 28, 1996, and (iii) Phase I Environmental Site
Assessmenet and Preliminary Phase II Site Assessment prepared by Land Tech
Remedial, Inc. dated August 14, 1997 (Land Tech Remedial Project #12567).
The term "Hazardous Materials" as used in this Mortgage shall
include, without limitation, gasoline, petroleum products, explosives,
radioactive materials, hazardous materials, hazardous wastes, hazardous or toxic
substances, polychlorinated biphenyls or related or similar materials, asbestos
or any material containing asbestos, or any other substance or material as may
be defined as a hazardous or toxic substance by any Federal, state or
environmental law, ordinance, rule or regulation including, without limitation,
The Comprehensive Environmental Response, Compensation, and Liability Act of
1980, as amended (42 U.S.C., Sections 9601 et seq.), The Hazardous Materials
Transportation Act, as amended (49 U.S.C., Sections 1801 et seq.), The Resource
Conservation and Recovery Act of 1976, as amended (42 U.S.C., Sections 6901 et
seq.), the Federal Water Pollution Control Act (33 U.S.C. Sections 1251 et
seq.), The Clean Air Act (42 U.S.C. Sections 7401 et seq.), Connecticut General
Statutes (Rev. 1958) Sections 22a-134, 22a-432(a) and 22a-454, and in the
regulations adopted and publications promulgated pursuant thereto.
(b) Mortgagor covenants that the Mortgaged Premises shall not be
used to generate, manufacture, refine, transport, treat, store, handle, dispose,
transfer, produce, process or in any manner deal with Hazardous Materials in an
unlawful manner, and Mortgagor shall not cause or permit, as a result of any
intentional or unintentional act or omission on the part of Mortgagor or any
present or future Occupants, any of the following to occur in an unlawful
manner: the installation or placement of Hazardous Materials in or on the
Mortgaged Premises or a release of Hazardous Materials onto the Mortgaged
Premises or onto any other property or suffer the presence of Hazardous
Materials on the Mortgaged Premises. Mortgagor shall comply with, and shall
require that all tenants, subtenants and other occupants of the Mortgaged
Premises comply with, all applicable federal, state and local laws, ordinances,
rules and regulations with respect to Hazardous Materials, and shall keep the
Mortgaged Premises free and clear of any liens imposed pursuant to such laws,
ordinances, rules and regulations. In the event that Mortgagor receive any
notice or advice from any governmental agency or any Occupant with regard to
Hazardous Materials on, from or affecting the Mortgaged Premises, Mortgagor
shall immediately notify Mortgagee. Mortgagor shall conduct and complete all
investigations, studies, sampling and testing, and all remedial, removal, and
other actions necessary to clean up and remove all Hazardous Materials on, from
or affecting the Mortgaged Premises in accordance with all applicable federal,
state, and local laws, ordinances, rules, regulations, and policies. The
obligations and liabilities of Mortgagor under this Section shall survive the
foreclosure of this Mortgage or the delivery of a deed in lieu of foreclosure.
(c) Mortgagor shall indemnify and hold Mortgagee harmless from and
against any and all liabilities, losses, damages or costs suffered or incurred
as a result of any claim, demand, cost or judgment in favor of a third party
(including any public or governmental body) arising from or out of the
generation, manufacture, refining, transportation, treatment, storage, handling,
disposal, transfer, production, processing or any manner dealing with Hazardous
Materials on or about the Mortgaged Premises by the Mortgagor or any other
Person, including all costs of removal, remediation, abatement, correction or
cleanup or any liability for personal injury to a third party arising therefrom
or in connection therewith. The indemnity set forth in this paragraph shall
survive the payment of the indebtedness secured hereby and the satisfaction of
this Mortgage.
11. Expenses of Mortgagee. Mortgagor shall reimburse Mortgagee on
demand for all reasonable costs and expenses (including the reasonable fees and
expenses of legal counsel for Mortgagee) incurred in connection with (A) the
protection, exercise or enforcement of Mortgagee's rights hereunder, including
(without limitation) Mortgagee's rights to (i) take possession of all or any
part of the Mortgaged Property, (ii) hold the Mortgaged Property, (iii) prepare
the Mortgaged Property for sale or other disposition and (iv) sell or otherwise
dispose of the Mortgaged Property and (B) the assertion, protection, exercise or
enforcement of Mortgagee's rights in any proceeding under the United States
Bankruptcy Code, including (without limitation) the preparation, filing and
prosecution of (i) proofs of claim, (ii) motions for relief from the automatic
stay, (iii) motions for adequate protection and (iv) complaints, answers and
other pleadings in adversary proceedings by or against Mortgagee or relating in
any way to any of the Mortgaged Property.
12. Events of Default; Certain Remedies. If Mortgagor shall (a) fail
to pay any sum required to be paid by Mortgagor (i) under the Notes when due or
under this Mortgage within ten (10) Business Days after the same becomes due and
payable as herein provided, (b) be in default (subject to any applicable notice
and grace periods) under any Financing Agreement, (c) fail to perform any other
provision hereof on the part of Mortgagor to be performed and such failure
continues for thirty (30) days following written notice from Mortgagee, or (d)
be declared bankrupt or insolvent and the same is not discharged within sixty
(60) days, or if proceedings under the Federal Bankruptcy Code or any similar
statute are instituted by Mortgagor or if such proceedings are instituted
against Mortgagor and are not discharged within sixty (60) days, or if a
receiver is appointed for all or any portion of the property of any Mortgagor;
then in any such event (each, an "Event of Default"), at the option of
Mortgagee: (a) the whole unpaid balance of the principal indebtedness, together
with all interest thereon and all other sums hereby secured, shall become due
and payable immediately, without notice to Mortgagor, and shall be recoverable
by Mortgagee forthwith or at any time or times thereafter, without stay of
execution or other process; (b) Mortgagee may take possession of all or any part
of the Mortgaged Property; (c) Mortgagee may apply on account of the
indebtedness hereby secured the balance of accumulated installment payments made
by Mortgagor for taxes, water and sewer charges and insurance premiums under
Section 4 hereof; and (d) Mortgagee may forthwith exercise all other rights and
remedies provided in the Financing Agreements, or which may be available to
Mortgagee by law, including the right to institute foreclosure proceedings
hereunder, and all rights with respect to the Equipment permitted under the
Uniform Commercial Code. All such rights and remedies shall be cumulative and
concurrent and may be pursued singly, successively or together, at Mortgagee's
sole discretion, and may be exercised as often as occasion therefor shall occur.
13. Operation of Mortgaged Premises. If Mortgagee shall take
possession of the Mortgaged Premises as provided in Section 12 hereof, Mortgagee
may: (a) hold, manage, operate and lease the same to Mortgagor or any other
person or persons on such terms and for such periods of time as Mortgagee may
deem proper, and the provisions of any lease made by Mortgagee pursuant hereto
shall be valid and binding upon Mortgagor's notwithstanding that Mortgagee's
right of possession may terminate or this Mortgage may be satisfied of record
prior to the expiration of the term of such lease; (b) make such alterations,
additions, improvements, renovations, repairs and replacements thereto as
Mortgagee may deem proper; (c) demolish any part or all of the improvements
situate upon the Mortgaged Premises which in the reasonable business judgment of
Mortgagee may be in unsafe condition and dangerous to life and property; (d)
remodel such improvements so as to make the same available in whole or in part
for business purposes; and (e) collect the rents, issues and profits arising
from the Mortgaged Premises, past due and thereafter becoming due, and apply the
same, in such order of priority as Mortgagee may determine, to the payment of
all charges and commissions incidental to the collection of rents and the
management of the Mortgaged Premises and all other sums or charges required to
be paid by Mortgagor hereunder. All moneys advanced by Mortgagee for the
purposes aforesaid and not repaid out of the rents collected shall immediately
and without demand be repaid by Mortgagor to Mortgagee, together with interest
thereon at the Taxable Rate, and shall be added to the principal indebtedness
hereby secured. The taking of possession and collection of rents by Mortgagee as
aforesaid shall not be construed to be an affirmation of any lease of the
Mortgaged Premises or any portion thereof, and Mortgagee or any other purchaser
at any foreclosure sale may (if otherwise entitled to do so) exercise the right
to terminate any such lease as though such taking of possession and collection
of rents had not occurred.
14. Releases and Extensions of Time. The granting of an extension or
extensions of time by Mortgagee with respect to the performance of any provision
of the Financing Agreements on the part of Mortgagor to be performed, or the
taking of any additional security, or the waiver by Mortgagee or failure by
Mortgagee to enforce any provision of the Financing Agreements or to declare a
default with respect thereto, shall not operate as a waiver of any subsequent
default or defaults or affect the right of Mortgagee to exercise all rights or
remedies stipulated herein and therein.
15. Restrictions on Transfers and Encumbrances. It is specifically
agreed and understood that Mortgagor shall not have the right to transfer the
benefit of the financing evidenced by the Financing Agreements and the interest
rate therein specified to any person acquiring title to the Mortgaged Property
from Mortgagor. Unless Mortgagee gives its prior consent in writing, it shall be
an Event of Default under this Mortgage if Mortgagor (a) transfers, or attempts
to transfer, directly or indirectly, voluntarily or by operation of law, all or
any part of the Mortgaged Property under and subject to this Mortgage, or (b)
further encumbers the Mortgaged Property, voluntarily or involuntarily,
including, without limitation, any lien junior or subordinate to the lien of
this Mortgage, and in any such event, the whole unpaid balance of the principal
indebtedness, together with all interest thereon and all other sums hereby
secured, shall, at Mortgagee's option, become due and payable immediately,
without notice.
16. Miscellaneous.
a. In the event that there is more than one party named herein
as Mortgagor, the word "Mortgagor" wherever occurring herein shall mean the
plural. The obligation of each and every party hereto, and also the authority
and powers conferred herein, shall be joint and several and shall inure to the
benefit of and bind each and every party hereto and its, his, her and their, and
each of their, respective heirs, executors, administrators, successors and
assigns.
b. Notices hereunder shall be in writing sent via registered
or certified mail, return receipt requested, or by express courier service
guarantying overnight delivery, addressed to the respective addresses
hereinabove set forth or to such other address as either party may hereafter
specify by written notice to the other.
c. This Mortgage may only be amended by an instrument in
writing signed by Mortgagor and Mortgagee.
d. This Mortgage shall be governed by and construed in
accordance with the laws of the State of Connecticut.
e. Capitalized terms used but not otherwise defined herein
shall have the meanings set forth in the Financing Agreements, unless the
context clearly otherwise requires.
f. This Mortgage shall inure to the benefit of the parties
hereto and their respective successors and assigns, including any person
succeeding to the rights of the Mortgagee as the Owner of the Notes; provided,
however, that no assignment or purported assignment of any benefit of this
Mortgage by the Mortgagor, whether by contract or by operation of law, shall
relieve the Mortgagor of its obligations hereunder.
17. Open-End Mortgage. This Mortgage is an "Open-end Mortgage" for
the purposes of section 49-2(c) of the Connecticut General Statutes, as amended.
Subject to and upon the terms and conditions set forth in the Credit Agreement,
including the conditions precedent set forth in the Credit Agreement, including
the conditions precedent set forth in Articles 2 and 3 of the Credit Agreement,
Mortgagee may make future advances to Mortgagor. Any such advancements are made
pursuant to the Credit Agreement, which is a commercial revolving loan agreement
for the purposes of section 49-2(c) of the Connecticut General Statutes, as
amended. The maximum principal amount of the indebtedness authorized under the
Credit Agreement is up to Three Million Five Hundred Twenty Seven Thousand
Dollars ($3,527,000.00 in the aggregate to be outstanding at any time. Future
advances made under the Bridge Loan Note are due and payable in full on December
31, 1997 unless sooner due and payable pursuant to the provisions of the
Financing Agreements. Future advances made under the Term Loan Note are due and
payable in full on September 30, 2000 unless sooner due and payable pursuant to
the provisions of the Financing Agreements. Future advances made under the Line
of Credit Note are due and payable in full upon written demand of Mortgagee
unless sooner due and payable pursuant to the provisions of the Financing
Agreements. Mortgagor represents that it is a Delaware corporation, organized
for profit and engaged primarily in commercial, manufacturing or industrial
pursuits and that the indebtedness evidenced by the Notes entails advances of
all or part of the loan proceeds and repayments of all or part of the
outstanding balance of the indebtedness evidenced by the Notes from time to
time.
18. Waiver of Termination Rights. Mortgagor hereby waives, for
itself and any of its permitted assigns who assume this Mortgage, any and all
rights it or they may now or hereafter have under section 49-2(c)(7) of the
Connecticut General Statutes, as amended, or otherwise, to terminate or to
record a written notice terminating the right of Mortgagee to make "optional
future advances", as defined under said statutory section, secured by this
Mortgage or limiting such advances to not more than the amount actually advanced
at the time of the recording of such notice.
19. Prejudgment Remedy Waiver. MORTGAGOR HEREBY REPRESENTS,
COVENANTS AND AGREES THAT THE PROCEEDS OF THE LOAN SHALL BE USED FOR GENERAL
COMMERCIAL PURPOSES AND THAT THE TRANSACTION OF WHICH THIS MORTGAGE IS A PART IS
A "COMMERCIAL TRANSACTION" AS DEFINED BY THE STATUTES OF THE STATE OF
CONNECTICUT. MORTGAGOR HEREBY WAIVES ALL RIGHTS TO NOTICE AND PRIOR COURT
HEARING OR COURT ORDER UNDER CHAPTER 903a OF THE CONNECTICUT GENERAL STATUTES,
SECTIONS 52-278A et seq., AS AMENDED, OR UNDER ANY OTHER STATE OR FEDERAL LAW
WITH RESPECT TO ANY AND ALL PREJUDGMENT REMEDIES MORTGAGEE MAY EMPLOY TO ENFORCE
ITS RIGHTS AND REMEDIES HEREUNDER. MORE SPECIFICALLY, MORTGAGOR ACKNOWLEDGES
THAT MORTGAGEE'S ATTORNEY MAY, PURSUANT TO CONNECTICUT GENERAL STATUTES SECTION
52-278f, ISSUE A WRIT FOR A PREJUDGMENT REMEDY WITHOUT SECURING A COURT ORDER.
MORTGAGOR ACKNOWLEDGES AND RESERVES ITS RIGHT TO NOTICE AND A HEARING SUBSEQUENT
TO THE ISSUANCE OF A WRIT FOR PREJUDGMENT REMEDY BY MORTGAGEE'S ATTORNEY, AND
MORTGAGEE ACKNOWLEDGES MORTGAGOR'S RIGHT TO SAID HEARING SUBSEQUENT TO THE
ISSUANCE OF SAID WRIT. MORTGAGOR FURTHER HEREBY WAIVES ANY REQUIREMENT OR
OBLIGATION OF MORTGAGEE TO POST A BOND OR OTHER SECURITY IN CONNECTION WITH ANY
PREJUDGMENT REMEDY OBTAINED BY MORTGAGEE AND WAIVES ANY OBJECTIONS TO ANY
PREJUDGMENT REMEDY OBTAINED BY MORTGAGEE BASED ON ANY OFFSETS, CLAIMS, DEFENSES
OR COUNTERCLAIMS OF MORTGAGOR OR ANY OTHER PARTY PRIMARILY OR SECONDARILY LIABLE
UNDER ANY OF THE OTHER LOAN DOCUMENTS TO ANY ACTION BROUGHT BY MORTGAGEE.
MORTGAGOR ACKNOWLEDGES AND AGREES THAT ALL OF THE WAIVERS CONTAINED IN THIS
PARAGRAPH HAVE BEEN MADE KNOWINGLY, VOLUNTARILY, INTENTIONALLY AND
INTELLIGENTLY, AND WITH THE ADVISE OF ITS COUNSEL.
20. Non-Merger. In the event Mortgagee shall acquire title to the
Mortgaged Property by conveyance from Mortgagor or as a result of the
foreclosure of this Mortgage, this Mortgage shall not merge in the fee estate of
the Mortgaged Property but shall remain and continue as an existing and
enforceable lien for the debt secured hereby until the same shall be released of
record by Mortgagee in writing.
IN WITNESS WHEREOF, the Mortgagor has caused these presents to be
duly executed, under seal, the day and year first above written.
Signed, Sealed and
Delivered in the
Presence of:
_______________________________________ SONICS & MATERIALS, INC.
_______________________________________ By:_______________________________
Name:
Title:
[CORPORATE SEAL]
<PAGE>
STATE OF ________________ :
:
COUNTY OF _______________ :
On this, the ___ day of September, 1997, before me, the undersigned
officer, personally appeared ________________, who acknowledged himself/herself
to be the ______________ of SONICS & MATERIALS, INC., a Delaware corporation,
and that he/she, as such officer, being authorized to do so, executed the
foregoing instrument for the purposes therein contained by signing the
respective names of such corporation, by himself/herself as such officer and as
the free act and deed of said corporation.
IN WITNESS WHEREOF, I hereunder set my hand and official seal.
[SEAL] Notary Public
My Commission Expires:
<PAGE>
PHTRANS:168951_5.WP5
EXHIBIT A
Description of Mortgaged Premises
GENERAL SECURITY AGREEMENT
GENERAL SECURITY AGREEMENT, dated as of September __, 1997, made by
SONICS & MATERIALS, INC., a Delaware corporation ("Obligor"), to BROWN BROTHERS
HARRIMAN & CO., a private bank (the "Secured Party").
SECTION 1. Grant of Security Interest. Obligor hereby grants to
Secured Party a security interest in the following property, whether now owned
or hereafter arising or acquired (collectively, the "Collateral"):
(a) all of Obligor's accounts, general intangibles,
chattel paper, and instruments (collectively, the "Receivables,");
(b) all of Obligor's inventory and documents;
(c) all of Obligor's equipment (whether or not
constituting fixtures);
(d) all of Obligor's financial assets and investment
property; and
(e) all proceeds and products of any of the foregoing,
including insurance payable by reason of loss or damage.
Obligor represents and warrants that it is the sole owner of the
Collateral and has the legal right to grant to Secured Party a security interest
therein, and that the Collateral is free and clear of all other liens, security
interests and encumbrances.
SECTION 2. Security for Liabilities. This Agreement secures the
payment and performance of all indebtedness, obligations, and liabilities of
every kind and nature (whether primary or secondary, direct or indirect,
absolute or contingent, sole, joint, or several, secured or unsecured, similar
or dissimilar, or related or unrelated), heretofore, now, or hereafter
contracted or acquired, of Obligor to Secured Party (collectively, the
"Liabilities").
SECTION 3. Obligor Remains Liable. Anything herein to the contrary
notwithstanding, (a) Obligor shall remain liable under its contracts and
agreements included in the Collateral to the extent set forth therein to perform
all of Obligor's duties and obligations thereunder to the same extent as if this
Agreement had not been executed, (b) the exercise by Secured Party of any of the
rights hereunder shall not release Obligor from any of its duties or obligations
under its contracts and agreements included in the Collateral, and (c) Secured
Party shall not have any obligation or liability under the contracts and
agreements included in the Collateral by reason of this Agreement, nor shall
Secured Party be obligated to perform any of the obligations or duties of
Obligor thereunder or to take any action to collect or enforce any claim for
payment assigned hereunder.
SECTION 4. Further Assurances. (a) Obligor agrees that from time to
time, at its expense, it will promptly execute and deliver all further
instruments and documents, and take all further action, that may be necessary or
desirable, or that Secured Party may request, in order to perfect and protect
any security interest granted or purported to be granted hereby or to enable
Secured Party to exercise and enforce its rights and remedies hereunder with
respect to any Collateral. Without limiting the generality of the foregoing,
Obligor will: (i) upon request by Secured Party, mark conspicuously each item of
chattel paper included in its Receivables and each of its records pertaining to
any of the Collateral, with a legend, in form and substance satisfactory to
Secured Party, indicating that such chattel paper or Collateral is subject to
the security interest granted hereby; (ii) if any of its Receivables shall be
evidenced by a promissory note or other instrument, deliver and pledge to
Secured Party hereunder such note or instrument duly indorsed and accompanied by
duly executed instruments of transfer or assignment, all in form and substance
satisfactory to Secured Party, and (iii) execute and file such financing or
continuation statements, or amendments thereto, and such other instruments or
notices, as may be necessary or desirable, or as Secured Party may request, in
order to perfect and preserve the security interests granted or purported to be
granted hereby.
(b) Obligor hereby authorizes Secured Party to file one or
more financing or continuation statements, and amendments thereto, relative to
all or any part of the Collateral without the signature of Obligor where
permitted by law. A carbon, photographic, or other reproduction of this
Agreement or any part thereof shall be sufficient as a financing statement where
permitted by law.
(c) Obligor will furnish to Secured Party from time to time
statements and schedules further identifying and describing the Collateral and
such other reports in connection with the Collateral as Secured Party may
request, all in reasonable detail.
SECTION 5. Insurance. Obligor shall, at its own expense, maintain
liability and casualty insurance with respect to its business and property with
responsible and reputable insurance companies or associations satisfactory to
Secured Party in such amounts and covering such risks as are acceptable to or
specified by Secured Party, taking into account, among other factors, such
amounts and risks as are usually carried by persons engaged in similar
businesses and owning similar properties in the same general areas in which
Obligor operates. Each policy for liability insurance shall provide for payment
to or on behalf of Obligor and Secured Party, as their interests may appear.
Each policy of property damage insurance shall provide for all losses to be paid
to Secured Party. Each policy of property damage insurance shall in addition (a)
name Secured Party as an insured party thereunder (without any representation or
warranty by or obligation upon Secured Party), (b) contain an agreement by the
insurer that any loss thereunder shall be payable to, or on behalf of, as the
case may be, Secured Party notwithstanding any action, inaction, or breach of
representation or warranty by the Obligor, (c) provide that there shall be no
recourse against Secured Party for payment of premiums or other amounts with
respect thereto, and (d) provide that at least 30 days' prior written notice of
cancellation or of lapse shall be given to Secured Party by the insurer. Obligor
shall, if so requested by Secured Party, deliver to Secured Party original or
duplicate policies of insurance maintained pursuant hereto and, as often as
Secured Party may reasonably request, a report of a reputable insurance broker
with respect to such insurance. Further, Obligor shall, at the request of
Secured Party, duly execute and deliver instruments or assignment of such
insurance policies to comply with the requirements of Section 5 and cause the
respective insurers to acknowledge notice of such assignments.
SECTION 6. Certain Covenants as to Inventory and Equipment.
Obligor shall:
(a) Keep its inventory and equipment in the places specified
therefor on Schedule 1 hereto (other than inventory sold or leased in the
ordinary course of business) or, upon 30 days' prior written notice to Secured
Party, at such other places as shall be identified in such notice and which are
in jurisdictions where all action required by Section 4 shall have been taken
with respect to such inventory and equipment.
(b) Cause its equipment to be maintained and preserved in the same
condition, repair, and working order as when new, ordinary wear and tear
excepted, and, in the case of any material loss or damage to any of its
equipment, as quickly as practicable after the occurrence thereof, make or cause
to be made all repairs, replacements, and other improvements in connection
therewith which are necessary or desirable to such end.
(c) Pay promptly when due all property and other taxes, assessments,
and governmental charges or levies imposed upon it, and all claims (including
claims for labor, materials and supplies) against its inventory and equipment.
(d) After the occurrence and during the existence of an Event of
Default (as hereinafter defined), receive in trust for the benefit of Secured
Party all amounts and proceeds received or collected by such Obligor in respect
of its inventory and equipment, segregate such amounts and proceeds from other
funds of such Obligor, and forthwith pay such amounts and proceeds over to
Secured Party in the same form as so received (with any necessary endorsement)
to be held as cash collateral and applied as provided in Section 14(b).
SECTION 7. Certain Covenants as to Receivables.
Obligor shall:
(a) Keep its chief place of business and chief executive office and
the offices where it keeps its records, including all computer hardware and
software, concerning its Receivables, and all originals of all chattel paper
which evidence any such Receivables at the places specified in Schedule 1 hereto
or, upon 30 days' prior written notice to Secured Party, at such other locations
as shall be identified in such notice and which are in a jurisdiction where all
action required by Section 4 shall have been taken with respect to its
Receivables. Obligor will hold and preserve such records and chattel paper and
will, upon reasonable notice, permit representatives of Secured Party at any
time during normal business hours to inspect and make abstracts from such
records and chattel paper. Obligor shall immediately endorse and deliver to
Secured Party each instrument included in the Receivables. Obligor shall
immediately notify Secured Party if any of its accounts arise out of contracts
with the United States or any agency or instrumentality thereof, and execute any
instruments and take any steps required by Secured Party in order that all
moneys due and to become due under such contracts shall be assigned to Secured
Party and notice given to the Government under the Federal Assignment of Claims
Act.
(b) From time to time upon request, Obligor shall provide Secured
Party with (i) schedules describing all accounts, (ii) additional schedules
describing other Receivables, and (iii) specific written assignments to Secured
Party of any of its Receivables. Any failure to execute or deliver any schedule
or assignment shall not, however, affect or limit any security interest or other
right of Secured Party in and to any Receivable. Upon Secured Party's request,
Obligor shall also furnish to Secured Party copies of invoices to customers and
shipping and delivery receipts or warehouse receipts relating thereto, as well
as such other documents and instruments as Secured Party may reasonably request
in connection with any Receivable.
(c) Obligor shall promptly notify Secured Party of all returns,
repossessions and recoveries of goods covered by the Receivables and of all
claims asserted with respect thereto. Each such notification shall be
accompanied by a statement describing the relevant goods and the location
thereof. Obligor shall not settle or adjust any dispute or claim, grant any
discount, credit or allowance, or accept any return of merchandise except in the
ordinary course of business. When Obligor receives collateral of any kind by
reason of transactions between itself and its customers or account debtors, it
will hold the same on Secured Party's behalf, subject to Secured Party's
instructions, as property forming part of the Receivables.
(d) Except as otherwise provided in Section 14, Obligor shall
continue to collect, at its own expense, all amounts due or to become due to
Obligor under the Receivables. In connection with such collections, Obligor may
take (and, at Secured Party's direction, shall take) such action as Obligor or
Secured Party may deem necessary or advisable to enforce collection of its
Receivables; provided, however, that Secured Party shall have the right, at any
time and from time to time, whether or not an Event of Default shall have
occurred, to notify the account debtors or obligors under any Receivables of the
assignment of such Receivables to Secured Party and to direct such account
debtors or obligors to make payment of all amounts due or to become due
thereunder directly to Secured Party and, upon such notification and at the
expense of Obligor, to enforce collection of any amount, payment, or other terms
thereof, upon terms which it considers advisable. Any amounts received or
collected by Secured Party pursuant to this subsection shall be held as cash
collateral and applied as provided in Section 14(b). After such notification,
and in any event after the occurrence and during the continuance of an Event of
Default, (i) all amounts or proceeds received or collected by Obligor in respect
of Receivables shall be received in trust for the benefit of Secured Party
hereunder, shall be segregated from other funds of Obligor, and shall be
forthwith paid over to Secured Party in the same form as so received (with any
necessary endorsement) to be held as cash collateral and applied as provided in
Section 14(b), and (ii) Obligor shall not adjust, settle, or compromise the
amount or payment of any Receivable, or release wholly or partly any account
debtor or obligor thereunder, or allow any credit or discount thereon.
(e) Secured Party shall have the right from time to time to
communicate directly with account debtors and obligors on the Receivables and to
do test verifications of the Receivables.
SECTION 8. Transfers and Other Liens. Obligor shall not:
(a) Sell, assign (by operation of law or otherwise), or
otherwise dispose of any of the Collateral except sales of inventory in the
ordinary course of business.
(b) Create or suffer to exist any lien, security interest, or
other charge or encumbrance upon or with respect to any of the Collateral, other
than existing liens set forth on Schedule 2 hereto.
SECTION 9. Secured Party Appointed Attorney-in-Fact. Obligor hereby
irrevocably appoints Secured Party as its attorney-in-fact, with full authority
in the place and stead of Obligor and in the name of Obligor, Secured Party, or
otherwise, from time to time in Secured Party's discretion to take any action
and to execute any instrument which Secured Party may deem necessary or
advisable to accomplish the purposes of this Agreement, including, without
limitation:
(a) to sign in the name and on behalf of Obligor any
financing statements or other papers required under Section 4;
(b) to obtain and adjust insurance required to be paid to
Secured Party pursuant to Section 5;
(c) to ask, demand, collect, sue for, recover, compound,
receive, and give acquittance and receipts for moneys due and to become due
under or in respect of any of the Collateral;
(d) to receive, indorse, and collect any drafts or other
instruments, documents, and chattel paper in connection with subsection (b)
or (c) above; and
(e) to file any claims or take any action or institute any
proceedings which Secured Party may deem necessary or desirable for the
collection of any of the Collateral or otherwise to enforce the rights of
Secured Party with respect to any of the Collateral.
Obligor hereby ratifies and approves all acts of Secured Party as
such attorney-in-fact. Secured Party shall not, in its capacity as such
attorney-in-fact, be liable for any acts or omissions, nor for any error in
judgment or mistake of fact or law, but only for gross negligence or willful
misconduct. This power, being coupled with an interest, is irrevocable until all
Liabilities have been fully satisfied and until Secured Party is no longer
committed to allow additional Liabilities to be incurred. Any amounts received
or collected by Secured Party in its capacity as such attorney-in-fact shall be
held as cash collateral and applied as provided in Section 14(b).
SECTION 10. Secured Party May Perform. If Obligor fails to perform
any agreement contained herein, Secured Party may itself perform, or cause
performance of, such agreement, and the expenses of Secured Party incurred in
connection therewith shall be payable by Obligor under Section 15(b).
SECTION 11. Secured Party's Duties. The powers conferred on Secured
Party hereunder are solely to protect its interest in the Collateral and shall
not impose any duty to exercise any such powers. Except for the safe custody of
any Collateral in its possession and the accounting for moneys actually received
by it hereunder, Secured Party shall not have any duty as to any Collateral or
as to the taking of any necessary steps to preserve rights against any parties
or any other rights pertaining to any Collateral.
SECTION 12. Inspection Rights. Secured Party at all times shall have
access to inspect, audit, and make extracts from all of Obligor's records,
files, and books of account relating to the Collateral, and Obligor shall
deliver any document or instrument necessary for Secured Party to obtain records
from any service bureau maintaining records for Obligor. Secured Party may also,
at all reasonable times, examine and inspect inventory and other Collateral
owned by Obligor. Obligor shall, at Secured Party's request, take all steps
necessary to facilitate such inspection.
SECTION 13. Default. "Event of Default" means nonpayment of any of
the Liabilities when due (whether at stated maturity or upon demand,
acceleration of maturity or otherwise), any other default with respect to the
Liabilities (including any Event of Default as provided in the Credit
Agreement), any failure by Obligor to perform any of its obligations under this
Agreement or any other agreement, instrument, or document evidencing or securing
any of the Liabilities, or any breach of any representation or warranty made by
Obligor in connection with the transactions contemplated by this Agreement or
any other agreement, instrument, or document evidencing or securing any of the
Liabilities; provided, however, that except for nonpayment of interest or
principal when due under promissory notes of Obligor payable to Secured Party
and except as provided in Section 6.1(d) or (e) of the Credit Agreement, no
Event of Default shall be deemed to have occurred unless such default, failure
or breach continues for thirty (30) days following written notice from Secured
Party.
SECTION 14. Remedies. If any Event of Default shall have
occurred and be continuing:
(a) Secured Party may exercise in respect of the Collateral,
in addition to other rights and remedies provided for herein or otherwise
available to it, all the rights and remedies of a secured party on default under
the Uniform Commercial Code (the "Code") and other applicable laws and
agreements, as they may be amended from time to time, and also may (i) require
Obligor to, and Obligor hereby agrees that it will at its expense and upon
request of Secured Party forthwith, assemble the tangible Collateral as directed
by Secured Party and make it available to Secured Party at a place or places to
be designated by Secured Party which are reasonably convenient to Secured Party
and Obligor and (ii) without notice except as specified below, sell the
Collateral or any part thereof in one or more parcels at public or private sale,
at any of Secured Party's offices or elsewhere, for cash, on credit, or for
future delivery, and upon such other terms as Secured Party may deem
commercially reasonable. Obligor agrees that, to the extent notice of sale shall
be required by law, at least five business days' notice to Obligor of the time
and place of any public sale or the time after which any private sale is to be
made shall constitute reasonable notification. Secured Party shall not be
obligated to make any sale of the Collateral regardless of notice of sale having
been given. Secured Party may adjourn any public or private sale from time to
time by announcement at the time and place fixed therefor, and such sale may,
without further notice, be made at the time and place to which it was so
adjourned.
(b) All cash proceeds received by Secured Party in respect of
any sale of, collection from, or other realization upon all or any part of the
Collateral may, in the discretion of Secured Party, be held by Secured Party
(without interest) as collateral for, and/or then or at any time thereafter
applied (after payment of any amounts payable to Secured Party pursuant to
Section 15) in whole or in part by Secured Party against, all or any part of the
Liabilities in such order as Secured Party shall elect. Any surplus of such cash
or cash proceeds held by Secured Party and remaining after payment in full of
all the Liabilities shall be paid over to Obligor or to whosoever may be
lawfully entitled to receive such surplus.
SECTION 15. Indemnity and Expenses. (a) Obligor agrees to indemnify
Secured Party (including any partner, officer, employee, director or agent of
the Secured Party) from and against any and all claims, losses, and liabilities
growing out of or resulting from this Agreement (including, without limitation,
enforcement of this Agreement), except claims, losses, or liabilities resulting
from Secured Party's gross negligence or willful misconduct.
(b) Obligor will upon demand pay to Secured Party the amount
of any and all reasonable expenses, including the reasonable fees and
disbursements of its counsel and of any experts and agents, which Secured Party
may incur in connection with (i) the preparation, administration and amendment
of this Agreement, (ii) the custody, preservation, use, or operation of, or the
sale of, collection from, or other realization upon, any of the Collateral,
(iii) the exercise or enforcement of any of the rights of Secured Party, or (iv)
the failure by Obligor to perform or observe any of the provisions hereof.
SECTION 16. Amendments, Indulgences, Etc. No amendment or waiver of
any provision of this Agreement nor consent to any departure by Obligor herefrom
shall in any event be effective unless the same shall be in writing and signed
by Secured Party and Obligor, and then such waiver or consent shall be effective
only in the specific instance and for the specific purpose for which given. No
failure or delay on the part of Secured Party in the exercise of any right,
power, or remedy under this Agreement shall constitute a waiver thereof, or
prevent the exercise thereof in that or any other instance.
SECTION 17. Notices. All notices, requests and demands to or upon
the respective parties hereto shall be deemed to have been given or made, (a) if
delivered by hand against receipt, on the date of such delivery, or (b) if
deposited in the mails, postage prepaid, registered or certified mail, return
receipt requested, on the third day following the date of postmark, addressed as
follows or to such other address as may be hereafter designated in writing by
the respective parties hereto:
If to Obligor:
For notices sent prior to May 1, 1998:
Sonics & Materials, Inc.
West Kenosia Avenue
Danbury, CT 06810
Attn: Robert S. Soloff, President
Attn: Lauren H. Soloff, Vice President - Legal Affairs and Investor
Relations
Facsimile: (203) 798-8350
For notices sent after to May 1, 1998:
Sonics & Materials, Inc.
55 Church Hill Road
Newtown, CT 06470
Attn: Robert S. Soloff, President
Attn: Lauren H. Soloff, Vice President - Legal Affairs and Investor
Relations
Facsimile: (203) 798-8350
If to Secured Party:
Brown Brothers Harriman & Co.
59 Wall Street
New York, New York 10005
Attn: Chief Credit Officer
Fax No: 212-493-7280
SECTION 18. Continuing Security Interest; etc. This Agreement shall
create a continuing security interest in the Collateral and shall (a) be binding
upon Obligor, its heirs, administrators, successors, and assigns and (b) inure
to the benefit of Secured Party and its successors, transferees, and assigns.
The execution and delivery of this Agreement shall in no manner impair or affect
any other security (by endorsement or otherwise) for the payment or performance
of the Liabilities and no security taken hereafter as security for payment or
performance of the Liabilities shall impair in any manner or affect this
Agreement or the security interest granted hereby, all such present and future
additional security to be considered as one general, continuing security. Any of
the Collateral may be released from this Agreement without altering, varying, or
diminishing in any way this Agreement or the security interest granted hereby as
to the Collateral not expressly released, and this Agreement and such security
interest shall continue in full force and effect as to all of the Collateral not
expressly released.
SECTION 19. Representations and Warranties. Obligor represents
and warrants to Secured Party that:
(a) Obligor has all requisite power and authority to execute and
deliver this Agreement and to carry out the transactions contemplated hereby.
The execution, delivery and performance of this Agreement by Obligor has been
duly authorized by all requisite corporate action, and this Agreement has been
duly executed and delivered by Obligor and constitutes its valid and binding
obligation, enforceable against Obligor in accordance with its terms, except as
such enforcement may be limited by bankruptcy, insolvency, moratorium,
reorganization and other similar laws relating to or affecting the enforcement
of creditors' rights generally, and except that the availability of specific
performance, injunctive relief or other equitable remedies is subject to the
discretion of the court before which any such proceeding may be brought.
(b) The execution, delivery and performance of this Agreement by
Obligor will not violate any provision of law, any rule or regulation of any
governmental authority, or any judgment, decree or order of any court binding on
Obligor, and will not conflict with or result in any breach of any of the terms,
conditions or provisions of, or constitute a default under, or, except as
expressly provided herein, result in the creation of any lien, security
interest, charge or encumbrance upon any of its properties, assets or
outstanding stock under its Articles of Incorporation or By-Laws or any
indenture, mortgage, lease, agreement or other instrument to which Obligor is a
party or by which it or any of its properties is bound.
SECTION 20. Governing Law; Consent to Jurisdiction; etc. This
Agreement shall be governed by and construed in accordance with the laws of the
State of New York. Obligor consents to the jurisdiction of the courts of New
York and of the courts of the United States sitting in New York in any
litigation concerning this Agreement, and Obligor waives any objection based on
venue or inconvenient forum. Obligor waives any right to trial by jury in any
litigation involving this Agreement. Unless otherwise defined herein, terms
defined in the Code as in effect in New York on the date hereof (including the
terms "inventory," "accounts," "general intangibles," "chattel paper,"
"instruments," "equipment," "fixtures," "proceeds," "products," "documents,"
"financial assets" and "investment property") are used herein as therein defined
as of such date. This Agreement may be executed in any number of counterparts,
all of which taken together shall constitute one and the same instrument, and
any of the parties hereto may execute this Agreement by signing any such
counterpart.
SECTION 21. Severability. The provisions of this Agreement are
independent of and separable from each other, and no such provision shall be
affected or rendered invalid or unenforceable by virtue of the fact that for any
reason any other such provision may be invalid or unenforceable in whole or in
part.
IN WITNESS WHEREOF, Obligor, intending to be legally bound, has
executed or caused the execution of this Agreement, under seal, as of the date
first above written.
SONICS & MATERIALS, INC.
By:_____________________________________
Name:
Title:
Per pro. BROWN BROTHERS HARRIMAN & CO.
By:_____________________________________
<PAGE>
PHTRANS:169334_4.WP5
SCHEDULE 1
Locations of chief place of business and executive office:
Prior to May 1, 1998: On or After May 1, 1998:
Sonics & Materials, Inc. Sonics & Materials, Inc.
West Kenosia Avenue 55 Church Hill Road
Danbury, CT 06810 Newtown, CT 06470
Locations of records concerning Receivables, financial assets, investment
property, originals of chattel paper:
Prior to May 1, 1998: On or After May 1, 1998:
Sonics & Materials, Inc. Sonics & Materials, Inc.
West Kenosia Avenue 55 Church Hill Road
Danbury, CT 06810 Newtown, CT 06470
Locations of Inventory and Equipment:
Prior to May 1, 1998: On or After May 1, 1998:
Sonics & Materials, Inc. Sonics & Materials, Inc.
West Kenosia Avenue 55 Church Hill Road
Danbury, CT 06810 Newtown, CT 06470
In addition, at all times on or after the date of this Security Agreement,
Inventory and Equipment is located at the following additional locations:
TOOLTEX ULTRA SONIC SEAL
6160 Seeds Road 368 Turner Way
Grove City, OH 43123-8603 Aston, PA 19014
SONICS & MATERIALS, INC. SONICS & MATERIALS, INC.
501 Weston Ridge Drive 22 Chemin du Vernay
Naperville, IL 60563 CH-1196 Gland
Switzerland
Exhibit 21
Subsidiaries of the Registrant
Sonics has three wholly owned subsidiaries:
1. Tooltex, Inc., an Ohio corporation
2. Vibra-Surge Corporation, a Delaware corporation
3. Sonics Realty, Inc., a Delaware corporation
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<MULTIPLIER> 1
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> JUN-30-1997
<PERIOD-END> JUN-30-1997
<CASH> 271,593
<SECURITIES> 1,665,470
<RECEIVABLES> 1,854,118
<ALLOWANCES> 0
<INVENTORY> 3,718,250
<CURRENT-ASSETS> 7,877,054
<PP&E> 364,354
<DEPRECIATION> 0
<TOTAL-ASSETS> 9,159,117
<CURRENT-LIABILITIES> 1,934,766
<BONDS> 0
0
0
<COMMON> 105,603
<OTHER-SE> 6,711,837
<TOTAL-LIABILITY-AND-EQUITY> 9,159,117
<SALES> 10,827,525
<TOTAL-REVENUES> 10,827,525
<CGS> 6,410,584
<TOTAL-COSTS> 4,399,425
<OTHER-EXPENSES> (110,471)
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<INTEREST-EXPENSE> 79,565
<INCOME-PRETAX> 48,422
<INCOME-TAX> 19,368
<INCOME-CONTINUING> 29,054
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 29,054
<EPS-PRIMARY> .01
<EPS-DILUTED> .01
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