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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
_________________
FORM 10-K
(Mark One)
[X]ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the Fiscal Year Ended December 31, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 (No Fee Required)
For the transition period from to
Commission File Number 0-27460
PERFORMANCE TECHNOLOGIES, INCORPORATED
(Exact name of registrant as specified in its charter)
-------------------
Delaware 16-1158413
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
14620
315 Science Parkway, Rochester New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (716) 256-0200
______________________
Securities registered pursuant to section 12(b) of the Act:
NONE
------------------------
Securities registered pursuant to section 12(g) of the Act:
COMMON STOCK, par value $.01 per share
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No .
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be contained,
to the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates
of the registrant as of the close of business on March 1, 1999 was approximately
$63,000,000.
The number of shares outstanding of the registrant's Common Stock, $.01
par value, was approximately 7,323,000 as of March 1, 1999.
Documents Incorporated by Reference
The information called for by Part III is incorporated by reference to
the definitive Proxy Statement for the Annual Meeting of Stockholders of the
Company to be held June 8, 1999, which will be filed with the Securities and
Exchange Commission not later than 120 days after December 31, 1998.
________________________________________________________________________________
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Performance Technologies, Incorporated
Index to Annual Report on Form 10-K
Page
PART I
Item 1 Business 1
Item 2 Properties 11
Item 3 Legal Proceedings 11
Item 4 Submission of Matters to a Vote of Security Holders 11
PART II
Item 5 Market for the Registrant's Common Equity and
Related Stockholder Matters 12
Item 6 Selected Financial Data 13
Item 7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 13
Item 7A Qualitative and Quantitative Disclosures
About Market Risk 20
Item 8 Financial Statements and Supplementary Data 20
Item 9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
EXHIBIT 10 Material Contracts
EXHIBIT 10.1 Revolving Credit Agreement
EXHIBIT 10.2 Revolving Credit Note
EXHIBIT 21 Subsidiaries of The Registrant
EXHIBIT 27 Financial Data Schedule (FDS)
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PART I
ITEM 1 - Business
Performance Technologies, Incorporated designs, manufactures and markets a wide
variety of high reliability, high performance communications products that are
in one product segment and are grouped into five product categories: Wide Area
Networking products, LAN interface products, Mass Storage Interface products and
Inter-system Connectivity products. Most recently, the Company has been
developing its second generation family of high performance Network Switches for
Local Area Networks. The Company's products are targeted toward high
performance, mission critical applications found in the telecommunications,
financial services, defense and public safety industries. Applications include
network interfaces for cellular telephone communications, fiber optic data
communications products used aboard navy vessels, communications servers used in
air traffic control centers and enterprise Ethernet network switching products.
Since its inception in 1981, the Company has consistently produced innovative
networking solutions for a wide variety of computer architectures and has a
history of being able to adapt its products to a continually changing technology
driven marketplace. The Company has focused its efforts on providing high
performance, unique application solutions where hardware and software
reliability are a key concern to the end user. This strategy has enabled the
Company to increase both sales and income over the last five years.
As the Company enters 1999, management is focusing on the development and
delivery of new products for two distinct communications markets: Wide Area
Networking communications and Local Area Network Switching.
Industry Overview
The need to collect, store, analyze and distribute information in a secure,
timely and efficient manner has become an integral part of the global economy.
The acceleration of developments in both computer technology and telephony
technology is driving the convergence of these two areas and opening up
substantial opportunities to supply infrastructure related products that address
these evolving technologies. Despite the recent rapid changes in the information
revolution, there has been a clear distinction between the traditional computer
systems and the telephone communications networks that connect to the computer.
Another distinction is between the network in which computers are connected
within a business office, Local Area Network (LAN) and the communications link
to outside the business office, Wide Area Network (WAN). Recently, computer
systems used for information processing and the telephone communication networks
are rapidly converging into one unified, but often geographically distributed,
architecture where the boundaries between the two traditional systems are
blurred. As a result, there have been many new hardware and software
opportunities emerging that are directly related to implementing this
convergence. There is little doubt that computer technology, integrated with
communication technology, is a convincing example of the "sum of the two being
greater than the whole."
Over the past decade, the computer systems used in many enterprises evolved from
large and expensive mainframes connected to numerous unintelligent terminals, to
a client/server computing model. This contemporary model replaces the mainframe
with one or more powerful servers interconnected to intelligent desktop
computers through high bandwidth local area networks. The growing paradigm of
Client/Server computer systems has been an ideal model to foster convergence of
data communications and telecommunications. The integration of computers into
the telecommunication systems has already provided enhanced services such as
800/900 numbers, call waiting, caller ID, greater cellular coverage, reduced
cell and long distance rates, and faster, more expansive Internet access.
Similarly, data communication systems have benefited from integration with
telecommunication systems as individual computers located throughout the world
are connected to vast communication facilities with enormous information access
capability.
As a result of this rapid convergence, the market opportunity for networking and
communication products is rapidly expanding. According to a recent industry
study, the Ethernet LAN switching market is forecasted to reach over $15 billion
in 1999 and has been growing at over 35% per year. The Wide Area Network
communication arena is expected to grow from $750 million in 1998 to over $4.0
billion by the year 2003. These impressive growth estimates, combined with other
market trends, are expected to cause the computer networking equipment industry
to experience a substantial increase in demand as they enter the next
millennium. The next rapidly growing phase of this convergence is likely to
center around the use of data communication networks to also carry real-time
voice and video traffic, in many instances bypassing the older voice centric
telecommunications infrastructure. The Company's WAN Communications and Local
Area Network Switching products address product segments of these larger
markets.
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Strategy
The Company's strategies are directed at ensuring its products and services are
correctly positioned to take advantage of the many opportunities presented by
the changing technologies and convergence phenomena. Major elements of the
Company's operational strategy include:
Focus on High Performance Mission Critical Solutions. The Company continues to
focus its development efforts on addressing specific needs for high performance
Wide Area and Local Area Networking. The Company's products provide unique
mission critical solutions where reliability and performance are the primary
concerns of the user. Typical applications that demonstrate this mission
critical focus include network interfaces for cellular telephone transmitter
sites, fault-tolerant Fiber Digital Data Interface (FDDI) adapter products used
aboard Navy vessels and terrestrial military vehicles, network adapters used in
the control and billing systems of traditional telecommunications networks and
communications servers used in both rail and air traffic control. To a large
degree, the Company has avoided networking and communication products that would
be sold into the commodity desktop office or home environment, often
characterized by low price, large volumes and fierce competition.
Exploit Technological Competencies. Since its inception, the Company has
pioneered many innovations in networking and computer technologies including the
VME64 industry standard, proprietary ASICs and innovative "hot swap" and
"failover" techniques to enhance equipment availability and reliability.
Building on a strong base of technological competency has allowed the Company to
develop innovative products that improve data communications performance and
reliability. Management intends to continue to leverage its competencies to
position the Company as a technological leader in high performance and high
availability WAN and LAN hardware and software products.
Continue to Develop Advanced Networking Products. The Company recognizes the
need to continually upgrade the performance of its existing products and to
develop new products which address the changing requirements of WAN and LAN
applications. Over the past 12 months, the Company has introduced a variety of
WAN and LAN products designed for the PCIBus and the new "industrialized" PCI
standard called CompactPCI (cPCI) which is being embraced by the
telecommunications and defense industries for next generation equipment. Several
of these products have been early and unique entrants into the growth oriented
PCIBus and cPCI arena aimed at supporting complex communications protocols and
network requirements associated with such applications as air traffic control
radar systems, Signaling System #7 (SS7) network control systems and channelized
T1/E1 high speed network interfaces. These new products have been responsible
for a variety of potentially significant OEM and partnering relationships. The
Company has also developed a family of switching products for Ethernet LANs
directed at specific applications requiring high availability. Delivery of these
LAN products began in 1998 with a unique fault tolerant model due for shipment
in 1999.
Expand International Markets. The data communication markets served by the
Company are international in scope. Global demand for network products is driven
by the increasing need of all societies to be able to successfully implement
advanced networking and communications infrastructures. Outside of North
America, the Company markets its products primarily in Western Europe and the
Asia Pacific. In an ongoing effort to increase international revenue, the
Company has been investing in the expansion of its marketing, sales and support
operations in these specific geographic areas. In 1998, the Company reorganized
its direct sales and support in the European Economic Community (E.E.C). The
Company now operates a sales and support office in the United Kingdom providing
coverage to the Western European markets. In addition to the direct Company
presence in the E.E.C., the Company continues to employ a variety of third party
organizations to assist in establishing both OEM and distribution accounts in
Europe and the Asia Pacific regions. In 1998, international revenue increased
substantially over the previous year and represented 23% of annual sales. This
growth was directly attributable to several successful OEM relationships in
Europe. As corporate revenue grows in the Pacific Asia area, the Company would
anticipate opening a direct sales and service center in this area of the world.
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Leverage Software Expertise. The Company has a growing competency in
communications, networking and high availability software expertise. The Company
has significantly expanded its ability for offering communication protocols for
Wide Area Networks by combining its east and west coast software engineering
organizations. In addition, the Company has invested substantially in developing
fault tolerant and hardened software implementations used in both WAN and LAN
products. Management believes focusing on increasing software content in
products emphasizing high availability and reliability features is an important
element of the Company's future product strategy.
Capitalize on Internal Manufacturing Expertise. Unlike many of its industry
competitors, the Company does not rely upon third party manufacturing
subcontractors for assembly, test and quality control of its products. Instead,
the Company operates a state-of-the-art manufacturing facility that gives the
Company the flexibility to meet customer requirements, produce high quality
products and make timely shipments. The Company's manufacturing facility
operates under an integrated MRP system that significantly reduces lead-time and
inventory investment and facilitates effective demand forecasting. This in-house
manufacturing capability provides the Company with the means to quickly
manufacture new products without the delays normally associated with the use of
manufacturing subcontractors. During 1998, additional surface mount equipment
was installed to assure continued high quality assembly with sufficient capacity
to meet expected delivery requirements for the Company's expanding customer
base. The Company's manufacturing process is certified under the ISO 9002
quality program.
Products
The Company's products include a wide variety of fault-tolerant, high
performance solutions for WAN communications, LAN connectivity and mass
storage/retrieval applications. The Company historically has addressed the needs
of the client/server computing environment with a family of hardware and
software products which operate on a number of open standards and allow ease of
use with a variety of popular high performance computer platforms. The Company's
products have traditionally been grouped into five categories: WAN
Communications products, LAN Interface Adapter products, Network Systems
products, Mass Storage Interface products and Inter-system Connectivity
products. The Company has also been developing its second generation of network
switches for Local Area Networks. As the Company enters 1999, management is
focusing on the development and delivery of new products for two distinct
communications markets: Wide Area Networking communications and Local Area
Network Switching.
WAN Communications Products. The Company's WAN Communications products provide
customers with hardware and software solutions which support a variety of open
system platforms. These open systems include VMEbus, SBus, PCIBus, CompactPCIbus
(cPCI) and PMCbus. The Company offers software support for its products across a
variety of commonly used operating systems including Microsoft's WindowsNTJ, Sun
Microsystems' SolarisJ, Wind River's VxWorks, and QNX. In addition to the
advanced hardware network interface products, the Company offers an extensive
suite of advanced communication software such as X.25, Frame Relay, High Level
Data Link Control (HDLC) variants, Signaling System #7 (SS7), and a variety of
protocols to facilitate high and low speed communications. The communications
software content is further expanded by the Company's channelized support for
T1/E1 data rates and software protocol tool kits for specialized customer
development. The growth in the Wide Area Networking (WAN) communications market
is being driven by the expansion of the Internet, cellular communications and
the convergence occurring between data communications and telecommunications.
WAN Communications product customers include Lucent Technologies, Compaq/Digital
Equipment Corporation, QualComm Inc., Alcatel Inc., Motorola Corporation and ADC
NewNet. Product applications cover a variety of uses including: High speed
Internet connections for server products, T1/E1 products used for SS7 products
and communications for rail and subway signaling.
During 1998, the Company released three new Wide Area Network interface adapters
for the cPCIbus architecture. These products were designed specifically with
features that are required in advanced telecommunications applications,
including the necessary capability for "hot swap replacement." Management
believes that the Company's cPCI products are some of the first products
available to cPCI users for high speed WAN communications. All of the Company's
WAN Communications products are designed for applications that require high
performance and high speed communications capability. To support these
applications, the Company's products are "intelligent," containing their own
microprocessors and memory. This architecture allows these network interface
products to perform many of the lower-level communications tasks that would
typically be performed by the host platform, greatly improving overall system
performance and capability. During 1998, the Company also expanded its family of
WAN software protocol products with emphasis on enhancing speed and reliability.
WAN product sales represented 58% of total sales for 1998, compared to 47% for
1997 and has been the highest growth product area for the Company over the past
three years .
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Local Area Network Switching. The Company has been developing a second
generation family of high performance 100Mbit/Gigabit Network Switches for Local
Area Networks which offer a variety of unique technical features. During 1998,
the Company completed development of its new Nebula (TM) 4000 workgroup switch
and its new Nebula 6000 high density departmental switch. The centerpiece of the
Company's Local Area Network switch strategy is the Nebula 8000 Fault Tolerant
Backbone Switch. This 100/1000 Ethernet switch is the first network switch to
offer true fault tolerance at an affordable price. The Nebula 8000's redundant
switch fabric has been engineered for maximum availability and its innovative
design ensures that no single point of failure will shutdown a network.
The market demands for fault tolerant computing and networking are rising
rapidly. Server manufacturers including Compaq Computer Corp. and Tandem
Computers have developed server clusters to meet their customers' fault tolerant
server requirements. Networking companies, including Novell, are actively
promoting and selling networking solutions for mission critical applications.
Management believes that deployment of its fault tolerant technologies in the
new Nebula 8000 Backbone Switch differentiates PTI from the other vendors in the
network switching marketplace. This new product is being positioned for Ethernet
based business and mission critical applications in enterprises where
"round-the-clock" operations demand highly resilient network infrastructures.
Prospective customers in the banking, brokerage, medical imaging and defense
industries are expressing serious interest in this product.
As of March 1999, the Nebula 8000 was operating in a number of early beta sites,
including the Company's communications network. Additional beta sites have been
selected and units are expected to be installed in these locations in April and
May. Shipments to customers are expected to commence in the second quarter 1999.
LAN Interface Adapter Products. The Company's LAN Interface Adapter products
consist primarily of products often referred to as Network Interface Controllers
(NICs) for a variety of LANs and computer platforms. These products represented
20% of sales in 1998 and 1997. These products currently operate on the PCIBus,
SBus and VMEbus computer platforms and include connections for a popular range
of Ethernet and FDDI standards and a unique FDDI concentrator product that
operates on the VMEbus. Applications for the Company's Ethernet and FDDI network
adapter products include a convenient interface between computer platforms and
LANs used in commercial, educational or industrial organizations and a shipboard
FDDI LAN used by the U.S. Department of Defense to integrate tactical
workstations onboard Navy vessels. All of these NICs permit easy integration of
SBus, PCIBus or VMEbus computer systems to an FDDI or Ethernet LAN. The FDDI
adapters support the Company's alternate path FDDI topology, ensuring the
highest available levels of resiliency and data integrity for fault-tolerant and
mission critical markets. The Company actively supports software supplied with
its newest PCI-based FDDI adapters to be compatible with computer platforms
utilizing both the Sun Microsystems' Solaris and WindowsNT operating systems. It
is management's belief that the FDDI technology as a LAN technology is not
growing and the Company's FDDI products are in the harvest phase of their
product life cycle and a decline can be predicted over the next 18-24 months.
Network Systems Products. The Company's Network Systems products consist of
system level equipment used in the construction and deployment of computer
networks. These products represented 6% of sales in 1998, compared to 9% in
1997. The engineering staff supporting this product group was reassigned at the
beginning of 1998 to develop software for WAN Communications products.
Traditionally this group has included:
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Communications Servers. Communications servers are multipurpose LAN-to-WAN
bridging systems supported by software from the Company's San Diego based
communication protocol engineering center. The products in this category include
a low cost, limited server solution for installations requiring from one to six
WAN connections and up to two Ethernet LAN connections. Using unique software,
the communications servers can be configured to provide a variety of protocol
packages and supporting protocols including bisynchronous, asynchronous
communications financial market feeds and radar receivers. The communication
server products from the Company can be found in data collection applications
including NASA's deep space network, in air traffic control centers for
retrieving radar data from remote radar antenna sites and in the US Weather
Service infrastructure for retrieving weather satellite and radar images.
Management believes this product offering will see continued growth in 1999.
Since communications servers are directly aligned with the Company's Wide Area
Network communications products, these products will be reported in that
grouping in 1999.
Communications Subsystems. The Company's "front-end" I/O communications
subsystem product supports multiple disk storage controllers or communication
interface modules. This product was co-developed by the Company and a large OEM
customer and is used as a communications nexus for high powered workstations.
Since this is a very specialized product offering with a limited customer base,
management expects revenue from this product to decline in 1999.
Mass Storage Interface Products. The Company's Mass Storage Interface products
consist of adapters and software that connect various external disk storage
systems, such as Redundant Array of Inexpensive Disks (RAIDs) to computer
servers using the SCSI, UltraSCSI and Fibre Channel technologies. During 1998,
the Company introduced new products designed to operate on the PCIBus standard
using Fibre Channel. As the technologies have changed in this market, the
products have increasingly become "commoditized" thereby reducing the Company's
ability to achieve value-added pricing. While the Company is supporting the
current customer base in their transition from older technologies, it expects
revenue to decline in 1999 and beyond. This product group represented 9% of
sales in 1998, compared to 14% in 1997.
Inter-system Connectivity Products. The Company's Inter-system Connectivity
products permit dissimilar computer standards to be connected. These products
are typically used by OEMs and systems integrators for custom applications and
allow their customer's to maintain their investment in existing installed
equipment. These products represented 7% of sales in 1998, compared to 10% in
1997. Management does not believe these products are strategic to the Company's
future growth and is not investing in this business segment. Management believes
there will be further declines in this revenue during 1999.
Sales, Marketing and Distribution
The Company markets its products worldwide to a broad spectrum of customers
through various channels including OEMs, VARs, distributors and systems
integrators. Greater than 85% of the Company's North American business is sold
through the Company's direct sales force to OEMs and systems integrators. The
remainder is sold to end users through distributors and VARs.
Due to the technical nature of the Company's products sold to OEMs, it is
essential that the Company's salespeople are technically oriented and are
knowledgeable in the network and communications fields.
In North America, the Company operates four direct sales offices located in San
Diego California, Rochester New York, Old Saybrook Connecticut, and Houston
Texas. The Company also maintains its European sales and support office in
London. Currently, 22 sales, marketing and support personnel sell the Company's
products. In addition, independent sales representatives covering selected
geographic areas, and distributors or integrators handling selected products
supplement the Company's direct sales team on a worldwide basis.
The Company also sells products, including mass storage interface products and
certain LAN interface products, to distributors. In addition, a small, highly
focused group of distributors, VARs and integrators are involved in selling the
Company's network and fault tolerant switching products. The "vertical market"
business focus of these VARs and integrators is targeted toward specific
applications which are considered mission critical such as "7 day by 24 hour"
operations in the following industries: airline, trading floor applications for
the financial industry and medical systems in hospitals. Distributors, VARs and
integrators who sell the Company's products are managed by the Company's direct
sales force. Several marketing strategies are used to support these third party
organizations including advertising in trade publications, sponsoring customer
training sessions and participating in trade shows throughout North America,
Western Europe and the Pacific Rim.
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OEM customers typically provide the Company with a rolling forecast for orders
placed two to three months in advance of shipment. VARs, integrators and
distributors typically provide the Company with orders placed 30 days in advance
of shipment. Sales of the Company's products to OEM customers are subject to a
number of factors outside the Company's control, including pricing, availability
and acceptance of these products by the OEM's customers and potential customers.
The Company executes various ongoing marketing strategies designed to attract
new OEM customers and to stimulate additional purchases from existing customers.
These strategies include direct mail campaigns and catalogue distribution,
direct telemarketing, special pricing programs, active participation in
technical standards groups, participation in national and regional trade shows
and selected trade press advertisements and technical articles and an active
campaign to direct potential customers to the corporate web site.
International sales represented 23% of the Company's net sales in 1998 (as
compared to 10% and 11% for 1997 and 1996, respectively). While 1998
international revenue represents a substantial increase over previous years, the
Company continues to believe that the international markets represent important
untapped opportunities for its products. Management believes that it can develop
expanded sales channels and marketing alliances with respect to new and existing
international markets and is actively pursuing these relationships. The
Company's products are currently sold by approximately 25 international
distributors throughout the major industrialized countries in Europe and the
Asia Pacific. The Company also operates a sales and marketing office in the
United Kingdom to better support its Western European customers. In addition,
the Company continues to engage two international marketing organizations to
assist in more aggressive development of the Pacific Rim and other territories
across all of its product offerings. Use of these third party organizations is
primarily viewed as an interim step that will to lead to additional direct sales
offices in Europe and the Pacific Rim, assuming the Asian economic climate
improves. International sales are subject to import and export controls,
transportation delays and interruptions, foreign currency exchange rates, and
foreign governmental regulations. All payments for shipments outside the United
States are made in U.S. dollars.
Customers
The Company has over 300 active customers worldwide, including major OEMs, Value
Added Resellers, systems integrators, and educational/research organizations.
Many of the Company's major customers are Fortune 500 companies. In 1998, the
largest single customer represented 13% of sales (Compaq Computer Corp.), and
the top five customers accounted for 39% of 1998 revenue.
Generally, the Company's customers can be grouped into two categories. The first
category includes customers that are technically oriented and assemble a product
or system for a specific end use, using components and subassemblies supplied by
vendors such as the Company. These products or systems are typically sold on
either a repetitive basis or on a lower volume, purpose-built basis. End use
equipment or systems sold by OEMs on a repetitive basis incorporating the
Company's products often include applications such as sophisticated enterprise
servers with high speed WAN interconnections to the Internet or private
communication facilitates specialized Signaling System #7 server clusters
installed worldwide by many telecommunications organizations for 800 and 900
number implementations. Examples of lower volume purpose-built end use equipment
incorporating the Company's products include FDDI networks used by the United
States Navy for shipboard use, communication servers for deep space network used
by space research organizations and data collection network systems for air
traffic control and radar installations.
The second category are customers requiring products to be self-installing and
require limited knowledge of the products' internal operation. These products
are often referred to as "plug n' play" or "shrink wrapped," implying a
readiness to simply install the end application without the need to have
extensive technical knowledge. The Company's products that fit into this
category are the SBus and PCIBus Mass Storage Interface, the SBus and PCIBus LAN
products (Ethernet and FDDI Niches) and selected WAN Interface products
operating on the SBus and PCIBus standards.
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Backlog
At March 7, 1999, the backlog of scheduled orders was $7.7 million, compared to
$4.7 million at March 2, 1998. Although orders are subject to cancellation in
the normal course of business, historically the Company has filled most of its
firm orders. (See Management's Discussion & Analysis included elsewhere in this
report).
Seasonality
The Company's business is generally not considered to have large seasonal
swings, but some of the business (primarily LAN Interface products and Network
Systems products) is project-related, driven by customer demand, which can cause
quarterly fluctuations in revenues.
Environmental Matters
The Company does not believe that compliance with federal, state or local laws
or regulations relating to the protection of the environment has any material
effect on its capital expenditures, earnings or competitive position.
Competition
The market for communications, networking and mass storage interface products is
intensely competitive and characterized by rapid technological innovations,
resulting in new product introductions and frequent advances in
price/performance ratios. Competitive factors in this industry include product
performance and functionality, product quality and reliability, customer service
and support, marketing capability, corporate reputation and brand recognition,
and increases in relative price/performance ratios. In the WAN communications
market, the Company's products compete with products from SBE Incorporated, Adax
Incorporated and Digi International Incorporated. In the emerging cPCI arena,
the Company's competition is less well-defined, although early entrants include
Force Computers, a division of Solectron Corporation, and SBS Technologies, Inc.
In the LAN Interface product market, the Company competes with Network
Peripherals Inc., Osicom Technologies, Incorporated and Interphase Corporation.
In the Mass Storage Interface product market, the Company competes with such
companies as Interphase Corporation, MacroLink Incorporated, Sun Microsystems,
Emulex Corporation, Qlogic Corporation and Adpatec, Incorporated.
In the Local Area Network Switching market, the Company is focusing on a niche
application, fault tolerance. However, many of the companies in this market
focus on broad applications products and have greater technical and capital
resources, more marketing experience, larger research and development staffs and
better production facilities than the Company. In recent years the local network
switching market has become increasingly concentrated as a result of
consolidations in the industry. Cisco Systems Inc., the industry routing leader,
has acquired companies that have historically competed with the Company. These
consolidations are likely to permit Cisco and other of the Company's competitors
such as Cabletron Systems, 3Com Corp and Xylan Corp, to devote significantly
greater resources to the development and marketing of new competitive networking
products and the marketing of existing products through their larger
distribution networks to their larger installed customer bases. The Company
expects that competition will increase substantially as a result of these and
other industry consolidations, as well as the emergence of new competitors and
new technologies. Increased competition could result in price reductions,
reduced margins and loss of market share, all of which would materially and
adversely affect the Company's business, operating results and financial
condition.
Research and Development
The Company's research and development expenses, plus costs attributable to the
development of software, for 1998, 1997 and 1996 were approximately $4.2
million, $3.7 million and $3.0 million, respectively. These expenses consist
primarily of employee costs and material consumed in developing and designing
new products. To a lesser degree, there have been limited expenses devoted to
technology acquisition, software license/tools and contract product development.
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The Company has, as a result of prior research and development expenditures,
developed significant core competencies applicable to high speed fiber-optic
local area networking, wide area networking, and fault tolerant switching. The
Company expects that research and development funding will continue to increase
significantly in 1999. This funding will be directed at further leveraging these
competencies and carrying out additional product development in the areas of
communications and network switching. In carrying out this focused effort, the
Company has increased its internal capability to design and implement ASICs and
has invested substantially in integrating and expanding its communication and
networking software competency. These competencies will be an important
cornerstone for continued future enhancements of WAN network products and high
performance fault tolerant switching architectures to support the emerging
Gigabit Ethernet LAN technology.
Proprietary Technology
The Company's success depends upon the Company's proprietary technology. To
date, the Company has relied principally upon trademark, copyright and trade
secret laws to protect its proprietary technology. The Company generally enters
into confidentiality or license agreements with its distributors, customers and
potential customers and limits access to and distribution of the source code to
its software and other proprietary information. The Company's employees are
subject to the Company's employment policy regarding confidentiality. The
Company's software products and accessories are provided to customers under
license, generally in the form of object code, which provides a high degree of
confidentiality with respect to the intellectual property value. Much of the
Company's proprietary technology is found in the Company's source code which is
embedded in silicon chips, making it extremely difficult to misappropriate or
reverse engineer. Such methods may not afford complete protection and there can
be no assurance that the confidentiality agreements will not be breached, or
that such agreements will be enforceable, or that the Company will have adequate
remedies for any breach, or that the Company's trade secrets will not otherwise
become known to or independently developed by competitors. If patent
applications are filed by the Company in the future, there can be no assurance
that any patents can be granted, or that, if granted, such patents would provide
the Company with meaningful protection from competition. The Company currently
has an outstanding patent application pending for a variety of aspects
associated with its fault tolerant network switching products. Management
expects the U.S. Patent office to render a ruling on this application in 1999.
There can be no assurance that third parties will not assert intellectual
property infringement claims against the Company. Although no written claims or
litigation relating to any such matters are currently pending against the
Company, the Company has not conducted any searches or obtained an opinion of
counsel with respect to its proprietary rights. Accordingly, there can be no
assurance that no claims will be initiated, that the Company would prevail in
any such litigation seeking damages or an injunction against the sale of the
Company's products, or if necessary, that the Company would be able to obtain
any necessary licenses on reasonable terms or at all. Any such litigation could
be protracted and costly and could have a material adverse affect on the
Company's results of operations regardless of the outcome of the litigation.
Suppliers
Certain components used in the Company's products, such as specific single
source microprocessors, custom ASICs, FDDI interface components and highly
integrated PCIBus and VMEbus interface components, are only currently available
to the Company from limited sources. Technology oriented markets are especially
subject to rapid change. As a result, over the course of short periods,
components utilized by the Company face ongoing "End of Life" risks. To date,
the Company has generally been able to obtain adequate supplies of components or
has redesigned specific products when adequate components are not available. The
Company obtains components on a purchase order basis and does not generally have
long-term contracts with any of these suppliers. In addition, shortages of raw
materials could negatively affect the Company's ability to meet its production
obligations and result in increased prices to the Company for affected parts.
The Company's inability in the future to obtain sufficient limited-source
components, or to develop alternative sources, could result in delays in product
introductions or shipments, premature End of Life of the Company's products,
and/or increased component prices could negatively affect gross margins, any of
which could have a material adverse effect on the Company's results of
operations. The Company would also be negatively affected if it does not
maintain adequate capital resources to fund component purchases.
8
<PAGE>
Manufacturing
The Company maintains a state-of-the-art product assembly and manufacturing
facility in Rochester, New York. This facility operates under an integrated MRP
system that significantly reduces lead-time and inventory investments and
facilitates effective demand forecast. In December 1997, the Company received
ISO 9002 certification of its manufacturing facilities and quality management
systems. By maintaining an in-house manufacturing capability, management
believes that the Company has, to a certain extent, insulated itself from the
risks inherent in dealing with independent subcontractors. These risks include
timing delays that often result when subcontractors are unable to meet the
manufacturing requirements of their customers. In addition, through its in-house
manufacturing capability, the Company is able to oversee directly its quality
control process and the timeliness of product delivery. The Company has limited
alternative capabilities through third parties, however, to perform such
manufacturing activities. In the event of an interruption of production at its
manufacturing facility, the Company's ability to deliver products in a timely
fashion would be compromised, which would have a material adverse effect on the
Company's results of operations.
Employees
As of March 1, 1999, the Company had 140 full-time employees, 10 part time and
contract employees and 3 Engineering Cooperative employees. Management believes
its relations with its employees are good. The Company's employees are not
subject to collective bargaining agreements.
These employees work in the following areas:
Research and Development 53
Marketing and Sales 22
Manufacturing 59
General and Administrative 19
Competition for technical personnel in the Company's marketplace is intense.
Management believes that the Company's future success will depend on its ability
to continue to attract and retain qualified personnel.
Risk Factors
Technological Change and New Product Introductions. The market for the Company's
products is characterized by rapid technological change and frequent
introduction of products based on new technologies. As these products are
introduced, the standards of the industry change. Additionally, the overall
computer networking industry is volatile as the effects of new technologies, new
standards, new products and short life cycles contribute to changes in the
industry and the performance of industry participants. The Company's future
revenue will depend upon the Company's ability to anticipate technological
change and to develop and introduce enhanced products of its own on a timely
basis that meet or exceed new industry standards. New product introductions
could contribute to quarterly fluctuations in operating results as orders for
new products commence and orders for existing products decline. Moreover,
significant delays can occur between a product's introduction and commencement
of volume production. The inability to develop and manufacture new products in a
timely manner, the existence of reliability, quality or availability problems in
the products or their component parts, or the failure to achieve market
acceptance would have a material adverse effect on the Company's revenue and
operating results.
Competition. The computer communications, networking and mass storage interface
business is extremely competitive and the Company faces competition from a
number of established and emerging computer communications and inter-networking
device companies. Many of the Company's principal competitors have established
brand name recognition and market positions and have substantially greater
experience and financial resources to spend for promotion, advertising, research
and product development than the Company. Several of these competitors have
recently introduced or announced their intentions to introduce new competitive
products. In addition, as the Company broadens its product offerings, it may
face competition from new competitors. Companies in related markets could offer
products with functionality similar or superior to that offered by the Company's
products. Increased competition could result in price reductions, reduced
margins and loss of market share, all of which would materially and adversely
affect the Company's revenue and operating results. Several of the Company's
competitors have recently been acquired by major networking companies. These
acquisitions are likely to permit the Company's competition to devote
significantly greater resources to the development and marketing of new
competitive products and the marketing of existing competitive products to their
larger installed bases. The Company expects that competition will increase
substantially as a result of these and other industry consolidations and
alliances, as well as the emergence of new competitors. There can be no
assurance that the Company will be able to compete successfully with its
existing or new competitors or that competitive pressures faced by the Company
will not have a material adverse effect on the Company's revenue and operating
results.
9
<PAGE>
Dependence on Key Customers. There can be no assurance that the Company's
principal customers will continue to purchase products from the Company at
current levels. Customers typically do not enter into long-term volume purchase
contracts with the Company and customers have certain rights to extend or delay
the shipment of their orders. The loss of one or more of the Company's major
customers, and the reduction, delay or cancellation of orders or a delay in
shipment of the Company's products to such customers would have a material
adverse effect on the Company's revenue and operating results. (See Management's
Discussion & Analysis included elsewhere in this report).
Potential Fluctuations in Annual and Quarterly Results. The Company's annual and
quarterly operating results may in the future vary significantly depending on
factors such as the timing and shipment of significant orders, new product
introductions by the Company and its competitors, market acceptance of new and
enhanced versions of the Company's products, changes in pricing policies by the
Company and its competitors, the mix of distribution channels through which the
Company's products are sold, inability to obtain sufficient supplies of sole or
limited source components for the Company's products, seasonal and general
economic conditions. The Company's expense levels are based, in part, on the
Company's expectations as to future revenue. Since a substantial portion of the
Company's revenue in each quarter result from orders shipped in the final month
of that quarter, revenue levels are extremely difficult to predict. If revenue
levels are below expectations, revenue and operating results will be adversely
affected. Net income would be disproportionately affected by a reduction in
revenue because only a small portion of the Company's net expenses varies with
its revenue. (See Management's Discussion and Analysis included elsewhere in
this report).
Dependence on Third Party Component Suppliers. Certain components used in the
Company's products are currently available to the Company from one or a limited
number of sources. Although to date, the Company has generally been able to
obtain adequate supplies of these components, there can be no assurance that
future supplies will be adequate for the Company's needs or will be available on
prices and terms acceptable to the Company. The Company's inability in the
future to obtain sufficient limited-source components, or to develop alternative
sources, could result in delays in product introduction or shipments, and
increased component prices could negatively affect the Company's gross margins,
either of which will have a material adverse effect on the Company's revenue and
operating results.
Dependence on Internal Manufacturing. In order to avoid relying on outside
contract manufacturers, the Company manufactures all of its products at its
Rochester, New York facility. The Company does not have alternative
manufacturing capabilities, either internally or through third parties, to
perform those manufacturing functions. Even if the Company were able to identify
alternative third-party contract manufacturers, there can be no assurance that
the Company would be able to retain their services on terms and conditions
acceptable to the Company. In the event of an interruption in production, the
Company may not be able to deliver products on a timely basis, which will have a
material adverse effect on the Company's revenue and operating results. Although
the Company currently has business interruption insurance, no assurances can be
given that such insurance will adequately cover the Company's lost business as a
result of such an interruption.
Dependence on Proprietary Technology. The Company's success depends upon the
Company's proprietary technologies. To date, the Company has relied principally
upon trademark, copyright and trade secret laws to protect its proprietary
technologies. The Company generally enters into confidentiality or license
agreements with its distributors, customers and potential customers and limits
access to and distribution of the source code to its software and other
proprietary information. The Company's employees are subject to the Company's
employment policy regarding confidentiality. There can be no assurance that the
steps taken by the Company in this regard will be adequate to prevent
misappropriation of its technologies or to provide an effective remedy in the
event of a misappropriation by others. The Company holds no patents but
currently has a patent review pending. There can be no assurance that any
patents will be granted, or that, if granted, such patents would provide the
Company with meaningful protection from competition.
10
<PAGE>
Although management believes that the Company's products do not infringe on the
proprietary rights of third parties, there can be no assurance that infringement
claims will not be asserted, resulting in costly litigation in which the Company
may not ultimately prevail. Adverse determinations in such litigation could
result in the loss of the Company's proprietary rights, subject the Company to
significant liabilities, require the Company to seek licenses from third parties
or prevent the Company from manufacturing or selling its products, any of which
will have a material adverse effect on the Company's revenue and operating
results.
Because of the existence of a large number of patents in the computer networking
industry and the rapid rate of issuance of new patents or new standards or to
obtain important new technology, it may be necessary for the Company to enter
into technology licenses from others. There can be no assurance that these third
party technology licenses will be available to the Company on commercially
reasonable terms. The loss of or inability to obtain any of these technology
licenses could result in delays or reductions in product shipments. Any such
delays or reductions in product shipments will have a material adverse effect on
the Company's revenue and operating results.
Dependence on Personnel. The Company's success depends on the continued
contributions of its personnel, many of whom would be difficult to replace. It
will also depend on its ability to attract and retain skilled employees.
Although the Company's employees are subject to the Company's employment policy
regarding confidentiality and ownership of inventions, employees are not
otherwise subject to employment agreements or non-competition covenants. Changes
in personnel could adversely affect the Company's operating results.
ITEM 2 - Properties
The Company's principal executive offices, manufacturing and the majority of its
research and development personnel are located in a 30,000 square foot building
in Rochester, New York. The lease for this facility expires in the year 2001.
The Company has an option to renew the lease for two successive five-year terms.
There is currently no excess office capacity at this facility. Management
believes additional office space will be needed to accommodate the Company's
growth in the near term and that adequate office space is available in and
around the Rochester area. The Company also leases approximately 6,800 square
feet of office space in San Diego, California pursuant to a lease which expires
in November 1999. This facility houses part of the Company's software
engineering and sales operations. The Company also leases sales offices at three
other locations.
ITEM 3 - Legal Proceedings
In the normal course of business, the Company is involved in litigation relating
to claims arising out of its operations. The Company is not a party to any such
legal proceedings, the adverse outcome of which, individually or in the
aggregate, would have a material adverse effect on the Company's results of
operations, financial condition or cash flows.
ITEM 4 - Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the year ended December 31, 1998.
11
<PAGE>
PART II
ITEM 5 - Market for the Registrant's Common Equity and Related Stockholder
Matters
The Company's Common Stock trades on The NASDAQ Stock Market under the trading
symbol "PTIX". The following table sets forth the high and the low quarterly
closing prices of the Common Stock during the two most recent years, as reported
on the NASDAQ Stock Market. These prices represent quotations among securities
dealers without adjustments for retail markups, markdowns or commissions and may
not represent actual transactions.
<TABLE>
<CAPTION>
1998 High Low
--------------- ------- -------
<S> <C> <C>
First Quarter $ 19.25 $ 13.13
Second Quarter 15.25 10.25
Third Quarter 11.63 9.00
Fourth Quarter $ 13.50 $ 9.00
1997 High Low
--------------- ------- -------
First Quarter $ 8.67 $ 6.83
Second Quarter 10.33 7.00
Third Quarter 19.38 10.00
Fourth Quarter $ 21.75 $ 13.50
</TABLE>
As of March 1, 1999, there were 188 stockholders of record of the Company's
Common Stock.
To date, the Company has not paid cash dividends on its Common Stock and there
can be no assurances that the Company will do so at any time in the future.
The following table summarizes the proceeds from the sale of securities and use
of proceeds therefrom in connection with the Registrant's Initial Public
Offering on January 24, 1996. Amounts reported represent an estimate of the
amount of these expenditures. As of December 31, 1998, offering proceeds have
been used in full.
<TABLE>
<CAPTION>
Proceeds from the sale of securities:
<S> <C>
Gross proceeds $ 12,800,000
Less: Underwriter's commission 896,000
Finder's fees 0
Underwriter's expenses 27,000
Payments to Directors, Officers, General Partners 0
Other 461,000
------------
Net proceeds $ 11,416,000
============
Use of Proceeds:
Construction of facilities $ 0
Purchase of machinery 1,976,000
Purchase of real estate 0
Acquisition of other business(es) 0
Repayment of debt 0
General working capital purposes 0
Temporary investments 0
Inventory for new products 1,265,000
Software development 1,575,000
Product development 6,600,000
------------
Total use of proceeds $ 11,416,000
============
</TABLE>
12
<PAGE>
ITEM 6 - Selected Financial Data
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended December 31: 1998 1997 1996 1995 1994
- ------------------------------- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Sales $30,202 $30,336 $24,843 $17,891 $12,562
Income from continuing operations 5,783 5,131 3,734 2,393 1,618
Loss from discontinued operations (19) (1,133)
Basic earnings per share:
Income from continuing operations $ .80 $ .71 $ .53 $ .52 $ .36
Weighted average common shares 7,274 7,231 7,020 4,590 4,549
Diluted earnings per share:
Income from continuing operations $ .76 $ .68 $ .52 $ .52 $ .34
Weighted average common and common
equivalent shares 7,568 7,522 7,248 4,623 4,705
At December 31: 1998 1997 1996 1995 1994
- ------------------------------- ----- ----- ----- ----- -----
Working capital $31,790 $26,584 $20,965 $ 6,215 $ 4,369
Total assets 37,835 31,626 26,089 10,523 9,312
Long-term debt, less current portion $ 6 $ 18 $ 30 $ 57 $ 622
</TABLE>
ITEM 7 - Management's Discussion and Analysis of Financial Condition and Results
of Operations
The Company's annual operating performance is subject to various risks and
uncertainties. The following discussion should be read in conjunction with the
Consolidated Financial Statements and related notes included elsewhere herein as
well as the section appearing in Item 1 of this Form 10-K under the heading
"Risk Factors." The Company's future operating results may be affected by
various trends and factors which are beyond the Company's control. These
include, among other factors, general business and economic conditions, rapid or
unexpected changes in technologies, cancellation or delay of customer orders,
changes in the product or customer mix of sales, delays in new product
development, customer acceptance of new products and customer delays in
qualification of products.
Matters discussed in Management's Discussion and Analysis of Financial Condition
and Results of Operations and elsewhere in this Form 10-K include forward
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Act of 1934, as amended, and
are subject to the safe harbor provisions of those sections. The Company's
actual results could differ materially from those discussed in the forward
looking statements.
Overview
The Company achieved record earnings for the fifth consecutive year in 1998 and
the third consecutive year as a publicly traded company. Net income in 1998
amounted to $5.8 million, 19% of sales, compared to $5.1 million in 1997.
Revenue was $30.2 million in 1998, compared to $30.3 million in 1997. The
Company did not meet management's revenue expectations in 1998 primarily because
the award of a follow-on Department of Defense contract was delayed until
September 1998 and because completion of the Nebula 8000 fault tolerant network
switch has been delayed until the second quarter of 1999. The Company's
financial performance improved significantly during the second half of 1998:
Sales during the second half of the year were 25% higher than in the first half
and diluted earnings per share were $.46, compared to $.29, 58% higher. At
year-end 1998, the Company had $25.6 million in cash and cash equivalents
($3.38/per share) and virtually no debt. For 1998, the Company generated income
from operations, excluding depreciation and amortization (EBITDA) of $8.6
million and cash from operating activities amounted to $6.5 million, compared to
$5.8 million for 1997. Return on equity for 1998 was 19% and return on assets
was 17%. During 1998, international sales increased to $7.2 million, or 23% of
sales, compared to $3.0 million, or 10% of sales in 1997.
13
<PAGE>
As the Company enters 1999, management is focusing on the development and
delivery of new products for two distinct communications markets: Wide Area
Networking communications and Local Area Network Switching.
Wide Area Networking: The Company's overall Wide Area Networking strategy is to
provide customers with hardware and software product solutions which support a
variety of open system platforms and operating systems. The growth in the Wide
Area Networking (WAN) communications market is being driven by the expansion of
the Internet, cellular communications and the convergence occurring between data
communications and telecommunications. At the same time, the technologies for
Wide Area Networking products are changing dramatically. Server, workstation,
and telecommunications providers are migrating their platforms and applications
from older bus standards such as VMEbus and SBus, to the newer standard hardware
bus architectures; PCIBus and CompactPCI. These technology changes offer a
significant opportunity for the Company. PTI began developing WAN communications
products for the PCIBus market in 1995. In 1996, PCIBus products represented
less than 7% of the Company's WAN revenue. Through a combination of internal
development, licensing and strategic partnering, the Company created a
comprehensive group of Wide Area Networking communications products for this
market. During 1997 and 1998, PTI WAN product revenue increased by 90% and
PCIBus products represented 48% of the Company's WAN revenue in 1998. The next
emerging WAN market the Company is addressing is CompactPCI (cPCI). cPCI is a
new standard hardware bus architecture that combines the attributes of the
VMEbus and PCIBus into a ruggedized industrial hardware system for the embedded
OEM marketplace. The telecommunications and defense industries are expressing
great interest in the cPCI system architecture for meeting their application
requirements. Currently, the Company's cPCI WAN products are being evaluated for
numerous potential integration opportunities and we expect shipments of cPCI
products in the second half of 1999.
To complement the Company's hardware development, communication software
protocols have been developed for the PCIBus and cPCI product lines including:
Frame Relay, Signaling System #7 (SS7), X.25, High-Level Data Link Control
(HDLC) and a variety of protocols to facilitate high and low speed
communications.
The markets and applications for Wide Area Network products are expanding
rapidly. In order to gain broader market penetration, the Company established
strategic partnering relationships with a number of major server, workstation
and telecommunications equipment suppliers including Sun Microsystems, Compaq
Computers, Nortel Networks and ADC NewNet, as well as several leading CompactPCI
platform manufacturers.
Local Area Network Switching: The Company has been developing its second
generation family of high performance 100Mbit/Gigabit Network Switches for Local
Area Networks. During 1998, the Company completed development of its new
Nebula(TM) 4000 workgroup switch and its new Nebula 6000 high density
departmental switch. The centerpiece of the Company's Local Area Network switch
strategy is the Nebula 8000 Fault Tolerant Backbone Switch. This 100/1000
Ethernet switch is the first network switch to offer true fault tolerance at an
affordable price. The Nebula 8000's redundant switch fabric has been engineered
for maximum availability and its innovative design ensures that no single point
of failure will shutdown a network.
The market demands for fault tolerant computing and networking are rising
rapidly. Server manufacturers including Compaq Computers and Tandem Computers
have developed server clusters to meet their customers' fault tolerant server
requirements. Networking companies including Novell are actively promoting and
selling networking solutions for mission critical applications. Management
believes that deployment of its fault tolerant technologies in the new Nebula
8000 Backbone Switch differentiates PTI from the other vendors in the network
switching marketplace. This new product is being positioned for Ethernet based
business and mission critical applications in enterprises where
"round-the-clock" operations demand highly resilient network infrastructures.
Prospective customers in the banking, brokerage, medical imaging and defense
industries are expressing serious interest in this product.
As of March 1999, the Nebula 8000 was operating in a number of early beta sites,
including the Company's communications network. Additional beta sites have been
selected and units are expected to be installed in these locations in April and
May. Shipments to customers are expected to commence in the second quarter.
14
<PAGE>
Results of Operations
The following table sets forth, for the years indicated, certain consolidated
financial data expressed as a percentage of sales and is included as an aid to
understanding the Company's results and should be read in conjunction with the
selected financial data and Consolidated Financial Statements (including the
notes thereto) appearing elsewhere in this report:
<TABLE>
<CAPTION>
Year Ended December 31,
1998 1997 1996
----- ----- -----
<S> <C> <C> <C>
Sales .............................................. 100.0% 100.0% 100.0%
Cost of goods sold ................................. 40.9 41.8 43.7
----- ----- -----
Gross profit ....................................... 59.1 58.2 56.3
----- ----- -----
Operating expenses:
Selling and marketing ........................... 13.3 13.1 12.9
Research and development ........................ 13.8 12.3 11.9
General and administrative ...................... 6.7 8.9 11.0
----- ----- -----
Total operating expenses .................. 33.8 34.3 35.8
----- ----- -----
Income from operations ............................. 25.3 23.9 20.5
Other income, net .................................. 4.2 3.4 3.0
----- ----- -----
Income before income taxes and minority interest ... 29.5 27.3 23.5
Provision for income taxes ......................... 10.4 10.4 8.4
Minority interest .................................. 0.0 0.0 (0.1)
----- ----- -----
Net income ...................................... 19.1% 16.9% 15.0%
===== ===== =====
</TABLE>
Year Ended December 31, 1998, compared with the Year Ended December 31, 1997
Sales. Sales for 1998 were $30,202,000, compared to $30,336,000 in 1997. The
Company's sales are in one product segment and are grouped into five product
categories: WAN communications products, LAN interface products, Network Systems
products, Mass Storage Interface products and Inter-system Connectivity
products. Beginning in 1999, sales will be grouped into four product categories:
WAN communications products, LAN interface products, Network Switching and Other
(combining Network Systems products, Mass Storage Interface products and
Inter-system Connectivity products).
Shipments of WAN communications products represented 58% of sales during 1998,
compared to 47% in 1997. The increase in WAN sales is primarily attributable to
the development of several new PCIBus products being sold to customers including
Sun Microsystems, Compaq Computers and ADC NewNet. During 1998, the Company
experienced a decline in VMEbus and SBus revenue as customers moved to newer
technologies. The Company has developed several new WAN products for the
CompactPCI market and these products are in evaluation by numerous
telecommunications and defense suppliers. Management expects PCIBus and
CompactPCI revenue to increase in 1999 while the VMEbus and SBus revenue
declines as these technologies become less prevalent.
Shipments of LAN interface products amounted to 20% of sales in 1998 and 1997.
The largest share of the Company's LAN interface product business is generated
from Commercial Off-the-Shelf (COTS) Department of Defense projects. Defense
project revenue declined in 1998 by 13% because the award of a significant
multi-year contract was delayed until mid-September and interim orders were not
received during the delay period. Also in the third quarter of 1998, a
significant contract was received from a new OEM customer for PCIBus LAN
products. PCIBus products represented almost 13% of LAN revenue in 1998, versus
0% in 1997. Revenue from this OEM customer could approach $1.0 million in 1999.
Shipments of Network Systems products represented 6% of sales in 1998, compared
to 9% in 1997. Network Systems are primarily comprised of shipments of I/O
subsystems to an OEM customer and sales of specialized communication server
hardware and protocol software for specialty WAN applications. As anticipated,
shipments to the OEM customer declined by approximately $1 million in 1998 and
sales of specialized communication servers also declined in 1998. The
engineering staff supporting the server business was reassigned at the beginning
of 1998 to develop software for WAN communications products. A further decline
in Network Systems product revenue is expected in 1999 and beyond.
15
<PAGE>
Shipments of Mass Storage Interface products for 1998 amounted to 9% of sales,
compared to 14% in 1997. The technologies used in this market are moving from
SBus to PCIBus and from SCSI to Fibre Channel. The PCIBus market has become a
commodity market with greater competition and lower pricing. While this market
was also moving to the Fibre Channel technology, there were delays in the
adoption of standards. As a result of these factors, the Company's PCIBus and
Fibre Channel products do not effectively compete in today's market. A further
decline in mass storage product revenue is forecasted in 1999 and beyond.
Shipments of Inter-system Connectivity products represented 7% of sales in 1998
compared to 10% of sales in 1997. The Company is not investing in this group of
products and a declining trend for this revenue is expected.
Gross Profit. Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs. Gross profit in 1998 increased by $222,000 to $17,863,000, from
$17,641,000 in 1997. Gross margin improved to 59% of sales in 1998, from 58% in
1997. While gross margin for the Company's WAN, LAN interface and Other products
is expected to average 59% or 60% in 1999, the gross margin on the new network
switching products is forecasted to average approximately 45% for the year
because the Company intends to aggressively price these products in the market.
Total Operating Expenses. Total operating expenses remained relatively constant
at 34% of sales in 1998 and 1997. The Company increased its investment in
research and development during 1998, while controlling selling and marketing
expenses and reducing its general and administrative expenses.
Selling and marketing expenses increased to $4,023,000 in 1998, from $3,988,000
in 1997, 13% of sales in 1998 and 1997. During 1998, the Company delayed certain
planned marketing and promotional activities associated with the Nebula 8000 in
order to coordinate spending with the product's availability. During the second
half of 1998, the sales and marketing staff for the network switch group was
increased in order to have a greater impact on sales in 1999. Management intends
to market its new products aggressively in 1999 and expects sales and marketing
expenses to increase as a percentage of sales.
Research and development expenses increased by 12.0% to $4,165,000, or 14% of
sales in 1998, compared to $3,720,000, or 12% of sales in 1997. Recruiting and
hiring engineers continues to be one of the Company's greatest challenges. While
a number of engineers were hired during 1998, the Company continues to actively
recruit to fill open positions and has engaged outside engineering consultants
to assist on new product development projects. The increase in research and
development expenses in 1998 was primarily the result of new engineers hired,
outside engineering consultants, and higher development costs for new products.
Management believes research and development expenses can fluctuate quarterly
during 1999 but will only increase modestly as a percentage of sales for the
year.
General and administrative expenses decreased to $2,035,000, or 7% of sales in
1998, compared to $2,711,000, or 9% of sales in 1997. While the Company
maintains tight control over its general and administrative expenses, more than
one-half of the 1998 expense reduction was associated with the Company not
achieving the internal growth goals and objectives established in the Company's
1998 annual incentive plan. Management believes general and administrative
expenses should decline as a percentage of sales in 1999.
Other income, net. Other income consists primarily of interest income from cash
equivalents and marketable securities. The funds are primarily invested in high
quality Municipal and U.S. Treasury securities with maturities of less than one
year.
Income Taxes. The provision for income taxes for 1998 is based upon the combined
federal and state effective tax rate of 35%, compared to 38% in 1997.
16
<PAGE>
Year Ended December 31, 1997, compared with the Year Ended December 31, 1996
Sales. Sales for 1997 increased by $5,493,000 (22%) to $30,336,000, from
$24,843,000 for 1996. The Company's products are grouped into five categories:
WAN Interface Adapter products, LAN Interface Adapter products, Network Systems
products, Mass Storage Interface products and Inter-system Connectivity
products.
Shipments of WAN Interface Adapter products amounted to 47% of sales during
1997, compared to 42% for 1996. This increase is attributable to introductions
over the last twelve to eighteen months of several new WAN products and several
new OEM customers integrating these products into their product applications.
Shipments of LAN Interface Adapter products for 1997 amounted to 20% of sales,
compared to 21% for 1996. The largest share of the Company's LAN business is
generated from Commercial Off-the-Shelf (COTS) Defense applications which is
project-oriented and is difficult to predict on a quarterly basis. Combined WAN
and LAN sales grew by 30% in 1997 and represented 77% of the Company's business
in the fourth quarter of 1997.
Shipments of Network Systems products represented 9% of total sales in 1997 and
11% for 1996. Network Systems are primarily comprised of shipments of I/O
subsystems to a major OEM customer and specialty protocol software business sold
by the Company's subsidiary, UconX Corporation. During the first nine months of
1997, shipments of the I/O subsystem to this customer represented $1.6 million
of revenue. Due to what appears to be a slowdown in orders for the customer's
product that incorporates the Company's I/O subsystem product, this customer
requested delays of its fourth quarter deliveries and has not placed any orders
for product deliveries for the first half of 1998. The specialty software
protocol business is typically project-oriented which can result in
fluctuations. The volume of this business in 1997 was less than originally
forecasted and at the end of 1997, the Company integrated the UconX organization
into its corporate structure. The products and services of UconX will continue
to be sold but future engineering efforts will be more focused on PTI's WAN
projects.
Shipments of Mass Storage Interface products for 1997 amounted to 14% of sales,
compared to 16% in 1996. The decrease in sales volume is believed to be
attributable to a slow down in the RAID/disk drive market primarily associated
with the Pacific Rim economic issues in the fourth quarter and technology
changes occurring in this market. These changes include customers transitioning
from SBus to PCIBus applications and from the slower SCSI adapters to faster
Fibre Channel adapters. The Company has been transitioning its products and
customers into these new technologies; however, the decline in the SBus business
has been greater than the increase in the PCI business.
Shipments of Inter-system Connectivity products represented 10% of sales 1997
and 10% of total sales 1996. The Company is not investing in this group of
products and a declining trend in these revenues is expected.
Gross Profit. Gross profit consists of sales, less cost of goods sold including
materials costs, manufacturing expenses and amortization of software development
costs. Gross profit for 1997 increased by $3,647,000 to $17,641,000, from
$13,994,000 for 1996 due to increased sales volumes. Gross margin percentage
improved to 58.2% of sales for 1997, from 56.3% in 1996. The improved margin is
attributable to favorable product mix along with manufacturing efficiencies
associated with higher sales volumes.
Total Operating Expenses. Total operating expenses increased to $10,419,000 for
1997, from $8,907,000 for 1996, but declined as a percentage of sales from 35.8%
in 1996 to 34.3% in 1997. The Company made significant investments in sales,
marketing, research and development during 1997 while reducing its general and
administrative expenses as a percentage of sales.
Selling and marketing expenses increased by 24.2% to $3,988,000, or 13.1% of
sales for 1997, from $3,210,000, or 12.9% of sales for 1996. The Company added
staff to the sales and marketing departments resulting in an increase of
compensation-related expenses in an effort to promote the Company's products
more extensively and increase market penetration. Spending for marketing and
promotion increased in 1997 as compared to 1996, primarily due to the costs
incurred to introduce the new switching products and to improve the Company's
presence in the marketplace.
17
<PAGE>
Research and development expenses increased by 25.7% to $3,720,000, or 12.3% of
sales for 1997, compared to $2,960,000, or 11.9% of sales for 1996. Research and
development expenses consist primarily of employee salaries and benefits costs,
cost of materials consumed in developing and designing new products and, to a
lesser extent, contract development. Certain engineering expenses associated
with the development of software are capitalized and amortized to cost of goods
sold. The increase in research and development expenses in 1997 was primarily
attributable to the hiring of eight additional engineers and the development of
the new ASIC for the new switching products. The Company needs to continually
invest in new product development to stay abreast of technological changes in
its markets.
General and administrative expenses decreased to 8.9% of sales for 1997, or
$2,711,000, compared to $2,737,000, or 11.0% of sales for 1996. The decrease as
a percentage of sales is primarily attributable to maintaining control of
administrative expenses.
Other income, net. Other income consists primarily of interest income from cash
equivalents and marketable securities. The funds are primarily invested in money
market funds, high quality short term commercial paper and U.S. Treasury
securities maturing in less than 12 months.
Income Taxes. The provision for income taxes for 1997 is based upon the combined
federal and state effective tax rate of 38%, compared to 35.6% in 1996. The
primary reasons for the increase in the combined tax rate are the higher
research and development tax credits generated in 1996 and a lower benefit of
state income taxes in 1997.
Liquidity and Capital Resources
At December 31, 1998, the Company's primary source of liquidity included cash
and cash equivalents of $25,627,000 and available borrowings of $5,000,000 under
a revolving credit facility with a bank. No amounts were outstanding under this
credit facility as of December 31, 1998. The Company had working capital of
$31,790,000 at December 31, 1998, compared to $26,584,000 at December 31, 1997.
Cash generated by operating activities was $6,503,000, $5,821,000 and $3,642,000
in 1998, 1997 and 1996, respectively. The increase in cash generated from
operating activities in 1998 is attributable to greater net income and non-cash
adjustments offset by a net increase in operating assets and liabilities.
Cash provided by investing activities was $10,960,000 in 1998 and cash used in
investing activities was $7,093,000 and $7,469,000 in 1997 and 1996,
respectively. During 1998, investing activities included the purchase of
marketable securities of $6,000,000, the maturity of marketable securities of
$18,010,000, and capital equipment purchases of $429,000. Capital equipment
purchases consist primarily of manufacturing equipment, office equipment and
computer and related equipment used in engineering. In addition, the Company
capitalizes certain software development costs. Amounts capitalized were
$621,000, $704,000 and $380,000 in 1998, 1997 and 1996, respectively.
In March 1998, the Board of Directors authorized the repurchase of up to $5.0
million of the Company's Common Stock. As of December 31, 1998, the Company had
repurchased a total of 78,437 shares at total cost of $736,000. The program
authorized in 1998 is still in effect. Cash provided by financing activities of
$67,000 and $78,000 for 1998 and 1997, respectively, was principally the result
of the exercise of stock options. During 1996, cash provided by financing
activities was principally the result of the Company's initial public offering
of its Common Stock in January 1996.
18
<PAGE>
Impact of the Year 2000 Issue
Many companies are facing a potential issue regarding the ability of information
systems to accommodate the coming year 2000. The Year 2000 issue is the result
of computer programs using only the last two digits to indicate the year. If
uncorrected, such computer programs will be unable to interpret dates beyond the
year 1999, which could cause computer system failure or other computer errors
disrupting operations. The Company recognizes the importance of the Year 2000
issue and has been giving it high priority. The Company created a corporate-wide
Year 2000 project team and the team's objective is to ensure an uninterrupted
transition into the Year 2000. The scope of the Year 2000 readiness effort
includes (i) information technology ("IT") such as software and hardware; (ii)
non-IT systems or embedded technology; and (iii) readiness of key third parties,
including suppliers and customers. If needed modifications and conversions are
not made on a timely basis, the Year 2000 issue could have a material adverse
effect on the Company's results of operations or financial condition.
The Company has completed phase I of its readiness plan for its IT systems and
non-IT systems. This phase consisted of evaluating its systems and equipment
based on the current status and normal scheduled upgrade and replacement of such
system components. The Company is in the process of completing Phase II which
consists of testing IT system and non-IT system components whose Year 2000
status cannot be determined by research and has begun certain parts of Phase
III, upgrading its IT system. The remaining parts of Phase III are planned
during the third quarter 1999, and will consist of upgrading and/or replacement
of non-IT system components specifically required for Year 2000 readiness. Phase
IV, planned during the fourth quarter of 1999, will consist of finalizing
contingency plans for temporary operation should unexpected difficulties with IT
systems and non-IT systems occur. The development of these contingency plans
began in conjunction with upgrading its IT system.
In addition to internal Year 2000 IT and non-IT remediation activities, the
Company has contacted key suppliers to assure no interruption in the
relationship between the Company and these important third parties from the Year
2000 issue. The Company is waiting for responses from these suppliers to assess
if such third parties have any known Year 2000 issues. If third parties do not
convert their systems in a timely manner and in a way that is compatible with
the Company's systems, the Year 2000 issue could have a material adverse effect
on Company operations. The Company believes that its diligent actions with key
suppliers will minimize these risks.
The vast majority of the Company's products are not date sensitive. The Company
has of summarized information on its products and this information has been
available to customers since November 1998.
While the Company expects its internal IT and non-IT systems to be Year 2000
compliant by the dates specified within its internal plan, the Company is
working on a contingency plan specifying what the Company will do if it or
important third parties are not Year 2000 compliant by the required dates. The
Company expects to have such a contingency plan finalized by the second half of
1999.
Through December 1998, the Company has not incurred significant incremental
costs related to the Year 2000 issue. The total projected incremental cost is
estimated to be $150,000. The Company is expensing as incurred all costs related
to the assessment and remediation of the Year 2000 issue unless the nature of
the item is an upgrade or replacement of a system with a useful life that meets
the capitalization policy of the Company. These costs are being funded through
operating cash flows. The Company's total cost for the Year 2000 issue includes
estimated costs and time associated with interfacing with third parties' Year
2000 issues. These estimates are based on current information.
The Company's current estimates of the amount of time and costs necessary to
remediate and test its computer systems are based on the facts and circumstances
existing at this time. The estimates were made using assumptions of future
events including the continued availability of certain resources, Year 2000
modification plans, implementation success by key third-parties, and other
factors. New developments may occur that could affect the Company's estimates of
the amount of time and costs necessary to modify and test its IT and non-IT
systems for Year 2000 compliance. These developments include, but are not
limited to: (i) the availability and cost of personnel trained in this area;
(ii) the ability to locate and correct all relevant computer codes and
equipment, and (iii) the planning and Year 2000 compliance success that key
customers and suppliers attain.
19
<PAGE>
Year 2000 compliance is an issue for virtually all businesses, whose computer
systems and applications may require significant hardware and software upgrades
or modifications. Companies owning and operating such systems may plan to devote
a substantial portion of their information systems' spending to fund such
upgrades and modifications. It is the Company's intention to fulfill its plan
and become Year 2000 compliant; however, uncertainties exist about the
thoroughness of how other companies, vendors, customers and other service
providers, that the Company does business with will be successful at also
becoming Year 2000 compliant. These other companies, regardless of the dollar
volume transacted with the Company, may significantly affect either directly or
indirectly the operations of the Company. Where practicable, the Company will
attempt to mitigate its risks with respect to the failure of suppliers to be
Year 2000 compliant. In the event that suppliers are not Year 2000 compliant,
the Company will seek alternative sources of supplies. However, such failures
remain a possibility and could have an adverse impact on the Company's results
of operations or financial condition.
ITEM 7A - Quantitative and Qualitative Disclosures About Market Risk
The Company is exposed to various market risks in the normal course of business,
primarily interest rate risk and changes in the market value of its investments,
and believes its exposure to such risk is minimal. The Company's investments are
made in accordance with the Company's investment policy and primarily consists
of U.S. Treasury securities, municipal securities and corporate obligations. The
Company does not participate in the investment of derivative financial
instruments.
ITEM 8 - Financial Statements and Supplementary Data
Index to Financial Statements: ..................................... Page
Report of Independent Accountants ............................... 21
Consolidated Balance Sheets at December 31, 1998 and 1997 ....... 22
Consolidated Statements of Income for the Three Years
Ended December 31, 1998 ...................................... 23
Consolidated Statements of Changes in Stockholders' Equity
for the Three Years Ended December 31, 1998 .................. 24
Consolidated Statements of Cash Flows for the Three Years
Ended December 31, 1998 ...................................... 25
Notes to Consolidated Financial Statements ...................... 26
Index to Financial Statement Schedules:
All schedules have been omitted because they are not applicable or the required
information is shown in the financial statements or notes thereto.
20
<PAGE>
Report of Independent Accountants
February 12, 1999
To the Board of Directors and Stockholders of
Performance Technologies, Incorporated
In our opinion, the consolidated financial statements listed in the accompanying
index present fairly, in all material respects, the financial position of
Performance Technologies, Incorporated and its subsidiaries at December 31, 1998
and 1997, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 1998, in conformity with
generally accepted accounting principles. 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 of these statements in accordance with generally accepted auditing
standards which 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, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed above.
/s/PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP
Rochester, New York
21
<PAGE>
<TABLE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
ASSETS
December 31,
1998 1997
------ ------
<S> <C> <C>
Current assets:
Cash and cash equivalents ............... $25,627,000 $ 8,833,000
Marketable securities ................... 12,010,000
Accounts receivable, net ................ 4,799,000 4,956,000
Inventories, net ........................ 4,425,000 3,329,000
Prepaid expenses and other .............. 679,000 346,000
Deferred taxes .......................... 549,000 466,000
----------- -----------
Total current assets .............. 36,079,000 29,940,000
Equipment and improvements, net ............ 934,000 982,000
Software development, net .................. 822,000 579,000
Other assets ............................... 125,000
----------- -----------
Total assets ...................... $37,835,000 $31,626,000
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Current portion of long term debt ......... $ 12,000 $ 12,000
Accounts payable .......................... 1,932,000 824,000
Income taxes payable ...................... 507,000 255,000
Accrued expenses .......................... 1,838,000 2,265,000
----------- -----------
Total current liabilities ........... 4,289,000 3,356,000
Long term debt, less current portion ......... 6,000 18,000
Deferred taxes ............................... 288,000 220,000
----------- -----------
Total liabilities ................... 4,583,000 3,594,000
----------- -----------
Commitments
Stockholders' equity:
Preferred stock - $.01 par value: 1,000,000
shares authorized; none issued
Common stock - $.01 par value; 15,000,000 shares
authorized; 7,466,412 and 7,414,732 shares issued
at December 31, 1998 and 1997, respectively .. 75,000 74,000
Additional paid-in capital ..................... 13,250,000 13,055,000
Retained earnings .............................. 20,844,000 15,061,000
Treasury stock - at cost, 226,919 and 147,282
shares held at December 31, 1998 and 1997,
respectively .................................. (917,000) (158,000)
----------- -----------
Total stockholders' equity ................ 33,252,000 28,032,000
----------- -----------
Total liabilities and stockholders' equity $37,835,000 $31,626,000
=========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
22
<PAGE>
<TABLE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<CAPTION>
Year Ended December 31,
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Sales ........................... $ 30,202,000 $ 30,336,000 $ 24,843,000
Cost of goods sold .............. 12,339,000 12,695,000 10,849,000
------------ ------------ ------------
Gross profit .................... 17,863,000 17,641,000 13,994,000
------------ ------------ ------------
Operating expenses:
Selling and marketing ........ 4,023,000 3,988,000 3,210,000
Research and development ..... 4,165,000 3,720,000 2,960,000
General and administrative ... 2,035,000 2,711,000 2,737,000
------------ ------------ ------------
Total operating expenses 10,223,000 10,419,000 8,907,000
------------ ------------ ------------
Income from operations .......... 7,640,000 7,222,000 5,087,000
Other income, net ............... 1,289,000 1,051,000 750,000
------------ ------------ ------------
Income before income taxes and
minority interest .............. 8,929,000 8,273,000 5,837,000
Provision for income taxes ...... 3,146,000 3,142,000 2,079,000
------------ ------------ ------------
Income before minority interest . 5,783,000 5,131,000 3,758,000
Minority interest ............... (24,000)
Net income ...................... $ 5,783,000 $ 5,131,000 $ 3,734,000
============ ============ ============
Basic earnings per share ........ $ .80 $ .71 $ .53
============ ============ ============
Diluted earnings per share ...... $ .76 $ .68 $ .52
============ ============ ============
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
23
<PAGE>
<TABLE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<CAPTION>
Additional
Common Stock Paid-In Treasury Retained
Shares Amount Capital Stock Earnings Total
----------------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Balance -
January 1,
1996 3,263,598 $33,000 $ 1,414,000 $ (156,000)$ 6,196,000 $ 7,487,000
1996 Net income 3,734,000 3,734,000
Exercise of
options/warrants 35,820 74,000 74,000
Tax benefit -
warrant and
option plans 25,000 25,000
Purchase of
treasury stock -
37 shares (1,000) (1,000)
Initial public
offering stock
proceeds 1,600,000 16,000 11,372,000 11,388,000
--------- ------- ----------- ---------- ----------- -----------
Balance -
December 31,
1996 4,899,418 49,000 12,885,000 (157,000) 9,930,000 22,707,000
1997 Net income 5,131,000 5,131,000
Exercise of
options 51,325 1,000 104,000 105,000
Tax benefit -
option plan 90,000 90,000
Three-for-two
stock split 2,463,989 24,000 (24,000)
Purchase of
treasury stock -
71 shares (1,000) (1,000)
--------- ------- ----------- ---------- ----------- -----------
Balance -
December 31,
1997 7,414,732 74,000 13,055,000 (158,000) 15,061,000 28,032,000
1998 Net income 5,783,000 5,783,000
Exercise of
options 51,680 1,000 101,000 102,000
Tax benefit -
option plan 94,000 94,000
Purchase of
treasury stock -
79,637 shares (759,000) (759,000)
--------- ------- ----------- ---------- ----------- -----------
Balance -
December 31,
1998 7,466,412 $75,000 $13,250,000 $ (917,000)$20,844,000 $33,252,000
========= ======= =========== ========== =========== ===========
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
24
<PAGE>
<TABLE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<CAPTION>
Year Ended December 31,
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Cash flows from operating activities
Net income $ 5,783,000 $ 5,131,000 $ 3,734,000
Non-cash adjustments:
Depreciation and amortization 975,000 1,490,000 831,000
Reserve for inventory obsolescence 802,000 262,000 609,000
Deferred income taxes (15,000) (46,000) (119,000)
Other 23,000 21,000 (113,000)
Changes in operating assets
and liabilities:
Accounts receivable 137,000 (1,743,000) (895,000)
Inventories (1,898,000) 441,000 (1,229,000)
Prepaid expenses and other (331,000) (62,000) 25,000
Accounts payable and
accrued expenses 681,000 5,000 418,000
Income taxes payable 346,000 322,000 381,000
------------ ------------ ------------
Net cash provided by
operating activities 6,503,000 5,821,000 3,642,000
------------ ------------ ------------
Cash flows from investing activities
Purchase of equipment
and improvements, net (429,000) (481,000) (719,000)
Capitalized software development (621,000) (704,000) (380,000)
Purchase of marketable securities (6,000,000) (13,008,000) (6,102,000)
Maturities of marketable securities 18,010,000 7,100,000
Purchase of remaining shares
in subsidiary (268,000)
------------ ------------ ------------
Net cash provided (used)
by investing activities 10,960,000 (7,093,000) (7,469,000)
------------ ------------ ------------
Cash flows from financing activities
Repayment of long-term debt (12,000) (26,000) (74,000)
Exercise of stock options and
warrants 79,000 104,000 74,000
Purchase of treasury stock (736,000)
Net proceeds from issuance of
common stock 11,388,000
------------ ------------ ------------
Net cash (used) provided
by financing activities (669,000) 78,000 11,388,000
------------ ------------ ------------
Net increase (decrease) in
cash and cash equivalents 16,794,000 (1,194,000) 7,561,000
Cash and cash equivalents
at beginning of year 8,833,000 10,027,000 2,466,000
------------ ------------ ------------
Cash and cash equivalents
at end of year $ 25,627,000 $ 8,833,000 $ 10,027,000
============ ============ ============
Supplemental disclosure of cash flow information:
Interest paid $ 4,000 $ 4,000 $ 13,000
Income taxes paid $ 2,827,000 $ 2,865,000 $ 1,853,000
Non-cash financing activity
Exercise of stock options using
1,200 shares of common stock $ 23,000
<FN>
The accompanying notes are an integral part of these financial statements.
</FN>
</TABLE>
25
<PAGE>
PERFORMANCE TECHNOLOGIES, INCORPORATED AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note A - Nature of Business and Summary of Significant Accounting Policies
The Company: Performance Technologies, Incorporated was formed in 1981 under the
laws of the State of Delaware and maintains its corporate offices in Rochester,
New York. The Company designs, develops, manufactures and markets high
reliability, and high availability network switching and other communications
solutions.
Segment Data, Geographic Information and Significant Customers: The Company
operates in one industry segment. Export sales to customers outside the United
States represent 23%, 10% and 11% of the Company's sales for the years ended
December 31, 1998, 1997 and 1996, respectively. For 1998, 1997 and 1996, four
customers accounted for approximately 35%, 28% and 30%, respectively, of the
Company's sales, with no single customer representing greater than 13%, 8% and
12%, respectively, of the Company's sales.
Principles of Consolidation: The consolidated financial statements include the
accounts of the Company and its wholly-owned subsidiaries. All significant
intercompany transactions have been eliminated (Note E).
Use of Estimates: The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at year-end and the reported
amounts of revenue and expenses during the reporting period. Actual results
could differ from those estimates.
Concentration of Credit Risk: Financial instruments which potentially expose the
Company to significant concentrations of credit risk consist principally of bank
deposits, marketable securities and accounts receivable. Marketable securities
consist of high quality short-term interest bearing financial instruments. The
Company performs ongoing credit evaluations of its customers' financial
condition and the Company maintains an allowance for uncollectible accounts
receivable based upon the expected collectibility of all accounts receivable.
Fair Value of Financial Instruments: The carrying amounts of the Company's
financial instruments, including cash and cash equivalents, accounts receivable,
accounts payable, accrued expenses and loans approximate fair value at December
31, 1998, as the maturity of these instruments are generally short term. Due to
differences in the interest rates on the long term debt compared to prevailing
rates, the fair value of these instruments does vary from their carrying
amounts, however, such differences are immaterial.
Cash Equivalents: The Company considers all highly liquid investments purchased
with an original maturity of three months or less to be cash equivalents.
Marketable Securities: The Company has classified all of its marketable debt
securities as held to maturity and has accounted for these investments at
amortized cost. Accordingly, no adjustment for unrealized holding gains or
losses has been reflected in the Company's financial statements. Marketable
securities classified as held to maturity are high credit quality securities in
accordance with the Company's investment policy.
Inventories: Inventories are valued at the lower of cost or market using the
first-in, first-out method.
Revenue Recognition: Revenue from hardware sales is recognized upon product
shipment.
26
<PAGE>
Note A - Nature of Business and Summary of Significant Accounting Policies
(continued)
Equipment and Improvements: Equipment and improvement purchases are recorded at
cost. Depreciation is computed using the straight-line method over the following
useful lives:
Machinery and equipment 3-10 years
Office furniture and equipment 3-5 years
Leasehold improvements The lesser of 10 years or the lease term
Upon retirement or disposal of an asset, the asset and the related accumulated
depreciation are eliminated from the accounts with gains or losses recorded in
the Consolidated Statements of Income.
Research and Development: Research and development costs are expensed as
incurred.
Software Development Costs: Software development costs incurred subsequent to
the establishment of technological feasibility and prior to general release of
the product are capitalized and amortized on a product-by-product basis over
their estimated remaining economic life, generally three years, or using the
ratio of current revenues to current and anticipated revenues from such
software, whichever provides greater amortization.
Income Taxes: The Company accounts for income taxes using the asset and
liability approach which requires recognition of deferred tax liabilities and
assets for the expected future tax consequences of temporary differences between
the carrying amounts and the tax basis of such assets and liabilities. This
method utilizes enacted statutory tax rates in effect for the year in which the
temporary differences are expected to reverse and gives immediate effect to
changes in income tax rates upon enactment. Deferred tax assets are recognized,
net of any valuation allowance, for deductible temporary differences and tax
credit carryforwards. Deferred income tax expense (benefit) represents the
change in net deferred tax asset and liability balances.
Note B - Accounts Receivable
Accounts receivable consisted of the following:
<TABLE>
<CAPTION>
At December 31,
1998 1997
------ ------
<S> <C> <C>
Accounts receivable $ 4,992,000 $ 5,148,000
Less: allowance for doubtful accounts (193,000) (192,000)
----------- -----------
Net $ 4,799,000 $ 4,956,000
=========== ===========
</TABLE>
Note C - Inventories
Inventories consisted of the following:
<TABLE>
<CAPTION>
At December 31,
1998 1997
------ ------
<S> <C> <C>
Purchased parts and components $ 1,905,000 $ 954,000
Work in process 3,011,000 2,580,000
Finished goods 130,000 333,000
----------- -----------
5,046,000 3,867,000
Less: reserve for inventory obsolescence (621,000) (538,000)
----------- -----------
Net $ 4,425,000 $ 3,329,000
=========== ===========
</TABLE>
27
<PAGE>
Note D - Equipment and Improvements
Equipment and improvements consisted of the following:
<TABLE>
<CAPTION>
At December 31,
1998 1997
------ ------
<S> <C> <C>
Engineering equipment and software $ 1,442,000 $ 1,294,000
Manufacturing equipment 1,269,000 1,140,000
Furniture and equipment 874,000 785,000
Leasehold improvements 134,000 130,000
----------- -----------
3,719,000 3,349,000
Less: accumulated depreciation and amortization (2,785,000) (2,367,000)
----------- -----------
Net $ 934,000 $ 982,000
=========== ===========
</TABLE>
Total depreciation and amortization expense for equipment and improvements for
1998, 1997 and 1996 was $418,000, $426,000 and $417,000, respectively.
Note E - Other Assets
Effective January 1, 1998, the Company integrated the operations and assets of
its San Diego based subsidiary, Uconx Corporation, into its corporate
operations. The Company recorded a charge to operating expenses for the
remaining amount of unamortized goodwill during 1998 as its value had
significantly decreased as a result of declining revenue of this subsidiary.
Amortization expense for goodwill was $123,000, $50,000 and $45,000 for the
years ended December 31, 1998, 1997 and 1996, respectively.
Note F - Accrued Expenses
Accrued expenses consisted of the following:
<TABLE>
<CAPTION>
At December 31,
1998 1997
------ ------
<S> <C> <C>
Accrued compensation $ 844,000 $1,500,000
Other accrued expenses 994,000 765,000
---------- ----------
Total $1,838,000 $2,265,000
========== ==========
</TABLE>
Note G - Long Term Debt and Credit Agreement
During 1998, the Company signed a new two-year revolving credit loan agreement
with a bank increasing the available borrowing capacity to $5 million.
Borrowings bear interest ranging between the bank's prime rate or one month
LIBOR plus applicable basis points as outlined in the agreement. Borrowings are
collateralized by trade accounts receivable, inventory, equipment, contract
rights and intangibles. The agreement requires the Company to meet certain
financial and non-financial covenants. The Company was in compliance with such
covenants at December 31, 1998. There were no balances outstanding under this
agreement at December 31, 1998 and 1997.
In June 1993, the Company borrowed $80,000 from the City of Rochester to
purchase equipment. The seven year loan bears interest at 2%. The loan is fully
collateralized by an irrevocable letter of credit. This agreement contains a
covenant requiring the Company to maintain substantially all of its operations
located within the boundaries of the municipality. The amount outstanding at
December 31, 1998 and 1997 was $18,000 and $30,000, respectively, and the long
term amount outstanding at December 31, 1998 and 1997 was $6,000 and $18,000,
respectively. As of December 31, 1998, the aggregate maturities of the loan
payable for the years ending December 31, 1999 and 2000 are $12,000 and $6,000,
respectively.
28
<PAGE>
Note H - Commitments
The Company leases facilities and equipment under operating leases. Under the
terms of the facility lease for its primary operations which expires in the year
2001, the Company agrees to pay an annual rental of $270,000 with an adjustment
each year based upon the Consumer Price Index. The Company is also required to
pay their pro rata share of the real property taxes and assessments, expenses
and other charges associated with this facility. The Company has the option to
renew the lease for two successive periods of five years each at an annual
rental in accordance with the provisions of the lease agreement.
Future minimum lease payments for all operating leases having a remaining term
in excess of one year at December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Operating
Leases
<S> <C>
1999 $ 512,000
2000 431,000
2001 236,000
2002 81,000
-----------
Total minimum lease payments $ 1,260,000
===========
</TABLE>
Rental expense amounted to $471,000, $557,000 and $500,000 for 1998, 1997 and
1996, respectively.
Note I - Stockholders' Equity
In March 1998, the Board of Directors authorized the repurchase of up to $5.0
million of the Company's Common Stock. During 1998, the Company repurchased a
total of 78,437 shares at a total cost of $736,000.
On July 31, 1997, the Board of Directors declared a three-for-two stock split of
the Company's common stock effected in the form of a stock dividend paid on
September 15, 1997. All agreements concerning stock options and other
commitments payable in shares of the Company's common stock provided for the
issuance of additional shares due to the declaration of the stock split. An
amount equal to the par value of the common shares issued was transferred from
capital in excess of par value to the common stock account. All references to
number of shares and to per share information in the consolidated financial
statements, except shares authorized and 1996 common shares, have been adjusted
to reflect the stock split on a retroactive basis.
On January 24, 1996, the Company completed the issuance of an additional 1.6
million shares of its common stock through an initial public offering, resulting
in net proceeds of $11.4 million.
Under the Incentive Stock Option Plan established in 1986, 1.8 million common
shares were reserved for grant by the Board of Directors. Options may be granted
to any officer, director or employee at not less than the fair market values at
the date of grant (not less than 110% of the fair market value in the case of
holders of more than 10% of the Company's common stock). Options granted under
the plan generally expire five years from the date of grant and generally vest
20% after one year, 50% after two years and 100% after three years.
With respect to non-qualified options, the Company recognizes a tax benefit upon
exercise in an amount equal to the tax effect of the difference between the
option price and the fair market value of the common stock. Tax benefits related
to such non-qualified stock options are credited to additional paid-in capital.
29
<PAGE>
The following table summarizes stock option activity under this plan:
<TABLE>
<CAPTION>
Weighted-Average Option
Number of Shares Exercise Price Price Range
---------------- ---------------- -----------
<S> <C> <C> <C>
Outstanding at January 1, 1996 199,986 $1.57 $1.22-$ 2.01
Granted 348,000 $7.66 $6.67-$ 9.83
Exercised (48,510) $1.39 $1.22-$ 1.83
Expired (1,282) $1.69 $1.52-$ 1.83
------- ------ ------------
Outstanding at December 31, 1996 498,194 $5.84 $1.22-$ 9.84
Granted 143,250 $8.13 $7.25-$13.00
Exercised (65,618) $1.60 $1.21-$ 7.83
Expired (2,325) $4.93 $1.21-$ 7.83
------- ------ ------------
Outstanding at December 31, 1997 573,501 $6.90 $1.33-$13.00
Granted 152,250 $13.84 $9.25-$14.63
Exercised (51,680) $1.97 $1.33-$ 7.58
Expired (1,000) $13.00 $13.00
------- ------ ------------
Outstanding at December 31, 1998 673,071 $8.84 $1.52-$14.63
======= ===== ============
</TABLE>
At December 31, 1998, 430,267 options were vested and 704,687 options were
available for future grant under the stock option plan. At December 31, 1998,
75,000 warrants are held by two of the Company's directors at an exercise price
of $1.83 per share and expire in the year 2000. During 1996, 3,750 warrants were
exercised by an outside director and a consultant.
The Company has adopted the disclosure only provisions of Statement of Financial
Accounting Standards No. 123, "Accounting for Stock-Based Compensation."
Accordingly, no compensation cost has been recognized for the stock option plan.
Had compensation cost for the Company's stock option plan been determined based
on the fair value at the grant date for awards in 1998 and 1997 consistent with
the provisions of SFAS No. 123, the Company's net income would have been reduced
to the pro forma amounts of $4,617,000 and $4,371,000, respectively. Basic
earnings per share would have been reduced to the pro forma amounts of $.63 and
$.60, respectively. Diluted earnings per share would have been reduced to the
pro forma amounts of $.61 and $.58, respectively.
The assumption regarding the stock options issued in 1998 and 1997 was that 33%
of such options vested annually. The fair value of each option grant is
estimated on the date of grant using the Black-Scholes option-pricing model with
the following weighted-average assumptions used for grants in 1998 and 1997:
dividend yield of 0%; expected volatility of 62% and 61%; risk-free interest
rate of 5.5% and 6.5%; and expected lives of five years.
Note J - Income Taxes
The provisions for income taxes were as follows:
<TABLE>
<CAPTION>
Current income taxes 1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal $ 2,711,000 $ 2,814,000 $ 1,852,000
State 450,000 374,000 346,000
----------- ----------- -----------
3,161,000 3,188,000 2,198,000
Deferred benefit (15,000) (46,000) (119,000)
----------- ----------- -----------
Total provision $ 3,146,000 $ 3,142,000 $ 2,079,000
=========== =========== ===========
</TABLE>
30
<PAGE>
The provision for income taxes from differ from those computed using the federal
tax rate of 34% due to the following:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Federal income tax at statutory rate 34.0% 34.0% 34.0%
Research and development tax credits (0.5) (2.0) (2.7)
State tax provision, net of federal benefit 3.3 2.9 3.9
Other (1.6) 3.1 0.4
------ ------ ------
Effective tax rate 35.2% 38.0% 35.6%
====== ====== ======
</TABLE>
The Company's net deferred income tax balance consists of the following:
<TABLE>
<CAPTION>
At December 31,
Deferred tax liabilities 1998 1997
- ------------------------ ------ ------
<S> <C> <C>
Capitalized software development cost, net $ 288,000 $ 220,000
----------- -----------
Deferred tax assets
- -------------------
Accrued vacation, payroll
and other accrued expenses (199,000) (101,000)
Inventory obsolescence reserve and
other inventory related items (188,000) (205,000)
Bad debt reserve (68,000) (73,000)
Research tax credits (27,000) (31,000)
Other (67,000) (56,000)
----------- -----------
Total deferred tax assets (549,000) (466,000)
----------- -----------
Net deferred tax asset $ (261,000) $ (246,000)
=========== ===========
</TABLE>
The carryforward research credits begin to expire in 2006.
Note K - Research and Software Development Costs
The Corporation incurred research and software development costs relating to the
development of new products as follows:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Gross expenditures for engineering
and software development $ 4,842,000 $ 4,764,000 $ 3,460,000
Less: amounts capitalized (677,000) (1,044,000) (500,000)
----------- ----------- -----------
Net charged to operating expenses $ 4,165,000 $ 3,720,000 $ 2,960,000
=========== =========== ===========
</TABLE>
Software Development costs consisted of the following:
<TABLE>
<CAPTION>
At December 31,
1998 1997
------ ------
<S> <C> <C>
Capitalized software development costs $ 2,216,000 $ 1,723,000
Less: accumulated amortization (1,394,000) (1,144,000)
----------- -----------
Net $ 822,000 $ 579,000
=========== ===========
</TABLE>
Amortization of software development costs included in cost of goods sold was
$434,000, $1,014,000 and $369,000 for 1998, 1997 and 1996, respectively.
31
<PAGE>
Note L - Earnings Per Share
Basic earnings per share (EPS) is computed by dividing net income available to
common stockholders by the weighted average number of common shares outstanding
for the period. Diluted EPS is computed giving effect to all dilutive potential
common shares that were outstanding during the period. Dilutive potential common
equivalent shares consist of the incremental common shares issuable upon
exercise of stock options and warrants. The following table illustrates the
calculation of both basic and diluted EPS:
<TABLE>
<CAPTION>
1998 1997 1996
------ ------ ------
<S> <C> <C> <C>
Net income available
to common stockholders $5,783,000 $5,131,000 $3,734,000
---------- ---------- ----------
Weighted average common shares 7,274,110 7,230,902 7,019,746
---------- ---------- ----------
Basic earnings per share $ .80 $ .71 $ .53
========== ========== ==========
Diluted earnings per share
Net income available
to common stockholders $5,783,000 $5,131,000 $3,734,000
---------- ---------- ----------
Weighted average common shares 7,274,110 7,230,902 7,019,746
Common equivalent shares 293,396 291,016 228,631
---------- ---------- ----------
Weighted average common and
common equivalent shares 7,567,506 7,521,918 7,248,377
---------- ---------- ----------
Diluted earnings per share $ .76 $ .68 $ .52
========== ========== ==========
</TABLE>
Note M - Employee Benefit Plans
The Company's Retirement Savings Plan qualifies under Section 401(k) of the
Internal Revenue Code. The Company's discretionary matching contributions to the
plan were $86,000, $92,000 and $126,000 for 1998, 1997, and 1996, respectively.
In conjunction with the Company's Flexible Benefits plan, the Company made
additional discretionary qualified contributions to employee accounts which vest
immediately amounting to $128,000, $108,000 and zero for 1998, 1997 and 1996.
Note N - Transactions with Related Parties
The Company leases its primary facility from an entity controlled by two
directors of the Company, one of whom is an officer. During 1998, 1997, and
1996, the Company paid rent of $319,000, $318,000 and $307,000, respectively.
(Note H)
32
<PAGE>
Note O - Quarterly Results (unaudited)
<TABLE>
<CAPTION>
1998
(in thousands, except per share data)
Mar. 31 Jun. 30 Sept. 30 Dec. 31
------- ------- -------- -------
<S> <C> <C> <C> <C>
Sales $7,411 $6,051 $7,857 $8,883
Gross profit 4,548 3,569 4,910 4,836
Income from operations 1,906 1,021 2,017 2,696
Net income $1,419 $ 861 $1,530 $1,973
Basic earnings per share $ 0.20 $ 0.12 $ 0.21 $ 0.27
====== ====== ====== ======
Diluted earnings per share $ 0.18 $ 0.11 $ 0.20 $ 0.26
====== ====== ====== ======
1997
(in thousands, except per share data)
Mar. 31 Jun. 30 Sept. 30 Dec. 31
------- ------- -------- -------
Sales $7,434 $7,539 $7,606 $7,757
Gross profit 4,102 4,514 4,343 4,682
Income from operations 1,563 1,700 1,996 1,963
Net income $1,112 $1,200 $1,402 $1,417
Basic earnings per share $ 0.15 $ 0.17 $ 0.19 $ 0.20
====== ====== ====== ======
Diluted earnings per share $ 0.15 $ 0.16 $ 0.18 $ 0.18
====== ====== ====== ======
</TABLE>
ITEM 9 - Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
Not Applicable
33
<PAGE>
PART III
The information required by Part III and each of the following items is omitted
from this Report and presented in the Company's definitive proxy statement to be
filed, pursuant to Regulation 14A not later than 120 days after the end of the
fiscal year covered by this Report, in connection with the Company's Annual
Meeting of Stockholders to be held on June 8, 1999, which information included
therein is incorporated herein by reference.
ITEM 10 - Directors and Executive Officers of the Registrant
The section entitled "Election of Directors" appearing in the Company's proxy
statement for the Annual Meeting of Stockholders to be held on June 8, 1999,
sets forth certain information with respect to the directors of the Company and
is incorporated herein by reference.
ITEM 11 - Executive Compensation
The section entitled "Executive Compensation" appearing in the Company's proxy
statement for the Annual Meeting of Stockholders to be held on June 8, 1999,
sets forth certain information with respect to the compensation of management of
the Company and is incorporated herein by reference.
ITEM 12 - Security Ownership of Certain Beneficial Owners and Management
The section entitled "Security Ownership of Certain Beneficial Owners and
Management" appearing in the Company's proxy statement for the Annual Meeting of
Stockholders to be held on June 8, 1999, set forth certain information with
respect to the ownership of the Company's Common Stock and is incorporated
herein by reference.
ITEM 13 - Certain Relationships and Related Transactions
The section entitled "Certain Transactions" appearing in the Company's proxy
statement for the Annual Meeting of Stockholders to be held on June 8, 1999,
sets forth certain information with respect to certain business relationships
and transactions between the Company and its directors and officers and is
incorporated herein by reference.
34
<PAGE>
PART IV
ITEM 14 - Exhibits, Financial Statement Schedules, Reports on Form 8-K
(1) Financial Statements
The financial statements filed as part of this report are included in
the response to Item 8 of Part III of this 10-K report.
(2) Financial Statement Schedules
There were no financial statement schedules required to be filed because
they are not applicable or the required information is shown in the Consolidated
Financial Statements or notes thereto.
(3) Exhibits
Exhibit Ref.
Number Number Description
3.1 (1) Restated Certificate of Incorporation
3.2 (1) Amended By-laws
4.1 (1) Form of Common Stock Certificate
4.2 (2) Amended and Restated Stock Option Plan
10 (1) Material Contracts
10.1 (--)* Revolving Credit Agreement dated as of December 30,
1998 between the Registrant and The Chase
Manhattan Bank, N.A.
10.2 (--)* Revolving Credit Note in the amount of $5,000,000
dated December 30, 1998 given by the
Registrant to The Chase Manhattan Bank, N.A.
10.3 (1) Security Agreements granted by the Registrant to
The Chase Manhattan Bank, N.A. dated as of
April 13, 1985, April 13, 1993 and as of
June 17, 1993, and with respect to
Performance Computer Corporation only, the
Security Agreement dated as of June 17, 1993
granted to The Chase Manhattan Bank, N.A. by
Performance Computer Corporation and certain
other Affiliates of the Registrant (which
other Affiliates have been released) and all
amendments and modifications thereto
10.4 (1) Letter of Intent from the City of Rochester to the
Registrant dated May 4, 1993
10.5 (1) Irrevocable Standby Letter of Credit from The Chase
Manhattan Bank, N.A. dated June 4, 1993
10.6 (1) Promissory Note in the amount of $80,000 dated June
8, 1993 given by the Registrant to the City
of Rochester
10.7 (1) Letter of Credit and Reimbursement Agreement
between C & J Enterprises and Chase Lincoln
First Bank, N.A. dated September 1, 1990
10.8 (1) Corporation Guaranty Agreement granted by the
Registrant, PTI Acquisition Corporation to
Chase Lincoln First Bank, N.A. dated as of
September 1, 1990
10.9 (1) Guaranty Agreement dated August 31, 1995 between
the Registrant and the City of Rochester
10.10 (1) Sublease Agreement between the Registrant and C & J
Enterprises dated as of September 1, 1990
10.11 (1) Master Equipment Lease between the Registrant and
Fleet Credit Corporation dated as of March
30, 1992
10.12 (1) Master Equipment Lease between the Registrant and M
& M Associates dated February 1, 1993
10.13 (1) Master Equipment Lease between the Registrant and M
& M Associates dated November 1, 1993
10.14 (1) Agreement between the Registrant and Loral Test &
Information Systems dated November 2, 1995
35
<PAGE>
Exhibit Ref.
Number Number Description
10.15 (1) License Agreement between the Registrant and
Willemijn Houdstermaatschappij BV dated as
of January 1, 1994
10.16 (1) License Agreement between the Registrant and Spider
Systems Limited dated March 18, 1992
10.28 (1) Adoption Agreement between the Registrant and
Principal Mutual Life Insurance Company
dated September 20, 1993
10.29 (1) The Principal Financial Group Prototype Basic
Savings Plan dated May 7, 1990
10.30 (1) Form of Stock Option Agreement
10.31 (1) Form of Warrant Agreement
21 (--)* Subsidiaries
- --------------------------------------------------------------------------------
(1) Incorporated by reference to the Registrant's Registration Statement on Form
S-1 filed November 22, 1995.
(2) Incorporated by reference to the Registrant
Statement on Form S-8 filed July 30, 1997.
* Filed with this Form 10-K
(4) Reports on Form 8-K
None
36
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Act of 1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
PERFORMANCE TECHNOLOGIES, INCORPORATED
Date: March 22, 1999 By:/s/DONALD L. TURRELL
-----------------------
Donald L. Turrell
President and
Chief Executive Officer
/s/DORRANCE W. LAMB
-----------------------
Dorrance W. Lamb
Chief Financial Officer and
Vice President of Finance
Pursuant to the requirements of the Securities Act of 1934, this report
has been signed by the following persons on behalf of the registrant and in the
capacities and on the dates indicated.
Signature Title Date
/s/CHARLES E. MAGINNESS Chairman of the Board March 22, 1999
- -----------------------
Charles E. Maginness and Director
S/DONALD L. TURRELL President, Chief Executive March 22, 1999
- -----------------------
Donald L. Turrell Officer and Director
/s/DORRANCE W. LAMB Chief Financial Officer, and March 22, 1999
- -----------------------
Dorrance W. Lamb Vice President of Finance
/s/BERNARD KOZEL Director March 22, 1999
- -----------------------
Bernard Kozel
/s/JOHN E. MOONEY Director March 22, 1999
- -----------------------
John E. Mooney
/s/JOHN M. SLUSSER Director March 22, 1999
- -----------------------
John M. Slusser
/S/PAUL L. SMITH Director March 22, 1999
- -----------------------
Paul L. Smith
37
- --------------------------------------------------------------------------------
CREDIT AGREEMENT
Dated as of December 30, 1998
PERFORMANCE TECHNOLOGIES, INCORPORATED
and
THE CHASE MANHATTAN BANK
- --------------------------------------------------------------------------------
TABLE OF CONTENTS
Page
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS------------------------------------ 1
Section 1.01. Definitions----------------------------------------- 1
Section 1.02. Accounting Terms------------------------------------ 8
Section 1.03. Subsidiaries---------------------------------------- 8
ARTICLE 2. THE CREDIT 11---------------------------------------------------- 9
Section 2.01. Loans----------------------------------------------- 9
Section 2.02. Purpose--------------------------------------------- 9
Section 2.03. Changes of Commitment------------------------------- 9
Section 2.04. Extension of Revolving Credit Termination Date------ 9
Section 2.05. Letters of Credit----------------------------------- 10
Section 2.06. Facility Fee---------------------------------------- 10
ARTICLE 3. REPAYMENTS; INTEREST; LATE FEES, PREPAYMENTS--------------------- 10
Section 3.01. Repayment of Loans---------------------------------- 10
Section 3.02. Interest-------------------------------------------- 10
Section 3.03. Late Fees------------------------------------------- 10
Section 3.04. Prepayments----------------------------------------- 11
ARTICLE 4. PAYMENTS; COMPUTATIONS------------------------------------------- 11
Section 4.01. Payments-------------------------------------------- 11
Section 4.02. Computations---------------------------------------- 11
Section 4.03. Certain Notices------------------------------------- 11
Section 4.04. Minimum Amounts------------------------------------- 12
ARTICLE 5. YIELD PROTECTION AND ILLEGALITY---------------------------------- 12
Section 5.01. Additional Costs------------------------------------ 12
Section 5.02. Limitation on Types of Loans------------------------ 13
Section 5.03. Illegality------------------------------------------ 13
Section 5.04. Certain Conversions Pursuant to
ss.ss. 5.01 and 5.03------------------------------ 13
Section 5.05. Compensation---------------------------------------- 14
Section 5.06. Survival-------------------------------------------- 14
ARTICLE 6. CONDITIONS PRECEDENT--------------------------------------------- 14
Section 6.01. Initial Conditions---------------------------------- 14
Section 6.02. Additional Conditions Precedent--------------------- 14
ARTICLE 7. REPRESENTATIONS AND WARRANTIES----------------------------------- 15
Section 7.01. Incorporation, Good Standing and Due Qualification-- 15
Section 7.02. Corporate Power and Authority; No Conflicts--------- 15
Section 7.03. Legally Enforceable Agreements---------------------- 15
Section 7.04. Litigation------------------------------------------ 15
Section 7.05. Financial Statements-------------------------------- 15
Section 7.06. ERISA----------------------------------------------- 16
Section 7.07. Subsidiaries and Ownership of Stock----------------- 16
Section 7.08. Existing Credit Arrangements and Existing Liens----- 16
Section 7.09. Regulation U---------------------------------------- 16
Section 7.10. Compliance with Laws-------------------------------- 16
Section 7.11. Operation of Business------------------------------- 16
<PAGE>
Section 7.12. Hazardous Materials--------------------------------- 16
Section 7.13. No Default on Outstanding Judgments or Orders------- 17
Section 7.14. No Defaults on Other Agreements--------------------- 17
Section 7.15. Labor Disbutes and Acts of God---------------------- 17
Section 7.16. Governmental Regulation----------------------------- 17
Section 7.17. Partnerships---------------------------------------- 17
Section 7.18. No Forfeiture--------------------------------------- 17
Section 7.19. Solvency-------------------------------------------- 17
Section 7.20 Year 2000------------------------------------------- 18
ARTICLE 8. AFFIRMATIVE COVENANTS-------------------------------------------- 18
Section 8.01. Maintenance of Existence---------------------------- 18
Section 8.02. Conduct of Business--------------------------------- 18
Section 8.03. Maintenance of Insurance---------------------------- 18
Section 8.04. Compliance with Laws-------------------------------- 19
Section 8.05. Right of Inspection--------------------------------- 19
Section 8.06. Reporting Requirements------------------------------ 19
Section 8.07. Audits---------------------------------------------- 21
Section 8.08. Lease Financings------------------------------------ 22
ARTICLE 9. NEGATIVE COVENANTS----------------------------------------------- 22
Section 9.01. Debt------------------------------------------------ 22
Section 9.02. Guarantees, etc.------------------------------------ 22
Section 9.03. Liens----------------------------------------------- 22
Section 9.04. Investments----------------------------------------- 22
Section 9.05. Sale of Assets-------------------------------------- 22
Section 9.06. Mergers, etc.--------------------------------------- 23
Section 9.07. Acquisitions---------------------------------------- 23
Section 9.08. No Activities Leading to Forfeiture----------------- 23
Section 9.09. Creation of Subsidiaries---------------------------- 23
Section 9.10. No Material Change---------------------------------- 23
ARTICLE 10. FINANCIAL COVENANTS--------------------------------------------- 23
Section 10.01. Leverage Ratio------------------------------------- 23
Section 10.02. Cash Flow Coverage Ratio--------------------------- 23
Section 10.03. Income or Loss------------------------------------- 24
Section 10.04. Current Ratio-------------------------------------- 24
ARTICLE 11. EVENTS OF DEFAULT----------------------------------------------- 24
Section 11.01. Events of Default---------------------------------- 24
Section 11.02. Remedies------------------------------------------- 26
ARTICLE 12. MISCELLANEOUS--------------------------------------------------- 26
Section 12.01. Amendments and Waivers----------------------------- 26
Section 12.02. Survival------------------------------------------- 26
Section 12.03. Usury---------------------------------------------- 26
Section 12.04. Expenses------------------------------------------- 26
Section 12.05. Assignment; Participations------------------------- 26
Section 12.06. Notices-------------------------------------------- 27
Section 12.07. Set-Off-------------------------------------------- 27
Section 12.08. Jurisdiction; Immunities--------------------------- 27
Section 12.09. Captions------------------------------------------- 27
Section 12.10. Severability--------------------------------------- 27
Section 12.11. Counterparts--------------------------------------- 28
Section 12.12. Governing Law-------------------------------------- 28
EXHIBIT A - Revolving Credit Note
EXHIBIT B - Annual Compliance Certificate
EXHIBIT C - Quarterly Compliance Certificate
SCHEDULE 1 - Schedule of Subsidiaries and Investments in Subsidiaries (ss. 7.07)
SCHEDULE 2 - Existing Credit Arrangements and Liens (ss. 7.08)
SCHEDULE 3 - Schedule of Hazardous Materials (ss. 7.12)
SCHEDULE 4 - Schedule of Partnerships and Joint Ventures (ss. 7.17)
<PAGE>
CREDIT AGREEMENT dated as of December 30, 1998, between PERFORMANCE
TECHNOLOGIES, INCORPORATED, a corporation organized under the laws of Delaware
(the "Borrower") and THE CHASE MANHATTAN BANK, a banking corporation organized
under the laws of the State of New York (the "Bank").
The Borrower desires that the Bank extend credit as provided herein,
and the Bank is prepared to extend such credit upon the terms hereof. This
Credit Agreement amends, restates and replaces the Credit Agreement dated as of
October 31, 1996 between the Borrower and the Bank. Accordingly, the Borrower
and the Bank hereby agree as follows:
ARTICLE 1. DEFINITIONS; ACCOUNTING TERMS.
Section 1.01. Definitions. As used in this Agreement the following
terms have the following meanings (terms defined in the singular to have the
same meaning when used in the plural and vice versa):
"Acquisition" means any transaction pursuant to which the Borrower or
any of its Subsidiaries (a) acquires equity securities (or warrants, options or
other rights to acquire such securities) of any Person other than the Borrower
or any Person which is not then a Subsidiary of the Borrower, pursuant to a
solicitation of tenders therefor, or in one or more negotiated block, market or
other transactions not involving a tender offer, or a combination of any of the
foregoing, or (b) makes any Person a Subsidiary of the Borrower, or causes any
such Person to be merged into the Borrower or any of its Subsidiaries, in any
case pursuant to a merger, purchase of assets or any reorganization providing
for the delivery or issuance to the holders of such Person's then outstanding
securities, in exchange for such securities, of cash or securities of the
Borrower or any of its Subsidiaries, or a combination thereof, or (c) purchases
all or substantially all of the business or assets of any Person.
"Affiliate" means any Person: (a) which directly or indirectly
controls, or is controlled by, or is under common control with, the Borrower or
any of its Subsidiaries; (b) which directly or indirectly beneficially owns or
holds 5% or more of any class of voting stock of the Borrower or any Subsidiary
thereof; (c) 5% or more of the voting stock of which is directly or indirectly
beneficially owned or held by the Borrower or Subsidiary thereof; or (d) which
is a partnership in which the Borrower or any Subsidiary thereof is a general
partner. The term "control" means the possession, directly or indirectly, of the
power to direct or cause the direction of the management and policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise.
"Agreement" means this Credit Agreement, as amended or supplemented
from time to time. References to Articles, Sections, Exhibits, Schedules and the
like refer to the Articles, Sections, Exhibits, Schedules and the like of this
Agreement unless otherwise indicated.
"Annual Date" means October 31, 1999 and each October 31 thereafter.
"Applicable Libor Margin" means a rate of interest per year (expressed
in basis points), equal to seventy-five (75) basis points for the Initial Margin
Period; thereafter the Applicable Libor Margin shall be the basis points number
set forth below which corresponds to the Funded Debt/EBITDA Ratio of the
Borrower at the end of the fiscal quarter preceding the commencement of the
Margin Period:
Applicable Libor
Funded Debt/EBITDA Ratio Margin in Basis Points per Year
Greater than 2.50 150
Greater than 2.25
but less than or equal to 2.50 125
Greater than 2.00
but less than or equal to 2.25 112.5
Greater than 1.75
but less than or equal to 2.00 100
Greater than 1.50
but less than or equal to 1.75 87.5
Less than or equal to 1.50 75
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To the extent that a Margin Period commences during the pendency of an Interest
Period for an existing Libor Loan, the Applicable Libor Margin shall remain the
same for the remainder of the Interest Period for such existing Libor Loan.
If the Borrower at any time shall fail to deliver such financial reports to the
Bank within the time required pursuant to ss.8.06 of this Agreement, then the
Applicable Libor Margin for the next Margin Period shall be one hundred fifty
(150) basis points until such financial reports shall have been delivered and
the Applicable Libor Margin can be determined.
"Applicable Margin" means, with respect to each Loan, (a) 0% per year
on Prime Loans, or (b) the Applicable Libor Margin per year on Libor Loans.
"Banking Day" means any day on which commercial banks are not
authorized or required to close in Rochester, New York.
"Borrowed Money Obligation" means and includes any obligation for the
payment of borrowed cash, including any sale and lease-back or similar financing
device or scheme by a Person in respect of assets owned by such Person prior to
such financing, but excluding any obligation for payment under any lease,
installment purchase or other title retention agreement by which a Person
acquires the ownership or right to use property not previously included in such
Person's assets in accordance with GAAP.
"Capital Expenditures" means for any period the Dollar amount of gross
expenditures (including obligations under Capital Leases) made for fixed assets,
real property, plant and equipment, and all renewals, improvements and
replacements thereto (but not repairs thereof) which are deemed to be capital
expenditures in accordance with GAAP and which are incurred during such period.
"Capitalized Lease" means any lease the obligation for Rentals with
respect to which is required to be capitalized on a consolidated or combined
balance sheet of the lessee and its subsidiaries or related entities in
accordance with GAAP.
"Capitalized Rentals" of any Person shall mean as of the date of any
determination thereof the amount at which the aggregate present value of future
Rentals due and to become due under all Capitalized Leases under which such
Person is a lessee would be reflected as a liability on a consolidated or
combined balance sheet of such Person.
"Closing Date" means the date this Agreement has been executed by both
the Borrower and the Bank.
"Code" means the Internal Revenue Code of 1986, as amended from time to
time.
"Commitment" means the obligation of the Bank to make the Loans and
extend Letters of Credit under this Agreement in an aggregate principal amount
up to $5,000,000, as such amount may be reduced or otherwise modified from time
to time.
"Consolidated Income" means, for any fiscal period, the income (or
loss) of the Borrower and its Subsidiaries on a consolidated after-tax basis
computed in accordance with GAAP and as reported on the Borrower's statements of
income and retained earnings (or similar statements).
"Consolidated Subsidiary" means, in respect of any Person, any
Subsidiary the accounts of which are or are required to be consolidated with the
accounts of such Person in accordance with GAAP.
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"Consolidated Tangible Net Worth" means, as at any date, the sum of the
following items in respect of the Borrower and its Consolidated Subsidiaries
(determined on a consolidated basis in accordance with GAAP):
a. the amount of capital stock, plus
b. the amount of surplus and retained earnings (or, in the case of a
surplus or retained earnings deficit, minus the amount of such deficit), minus
c. the sum of the following: cost of treasury shares and the book value
of all assets which should be classified as intangibles (without duplication of
deductions in respect of items already deducted in arriving at surplus and
retained earnings) but in any event including goodwill, minority interests,
research and development costs, trademarks, trade names, copyrights, patents and
franchises, unamortized debt discount and expense, all reserves and any write-up
in the book value of assets resulting from a revaluation thereof subsequent to
December 31, 1995, and minus
d. the amount of all retained earnings subsequent to December 31, 1995
derived from unusual items, including without limitation all sales of assets
other than inventory.
"Current Termination Date" means the Revolving Credit Termination Date
as in effect from time to time under this Agreement.
"Debt" means, with respect to any Person: (a) indebtedness of such
Person for borrowed money; (b) indebtedness for the deferred purchase price of
property or services (except trade payables in the ordinary course of business);
(c) Unfunded Vested Liabilities of such Person (if such Person is not the
Borrower, determined in a manner analogous to that of determining Unfunded
Vested Liabilities of the Borrower); (d) the face amount of any outstanding
letters of credit issued for the account of such Person; (e) obligations arising
under acceptance facilities; (f) guaranties, endorsements (other than for
collection in the ordinary course of business) and other contingent obligations
to purchase, to provide funds for payment, to supply funds to invest in any
Person, or otherwise to assure a creditor against loss; (g) obligations secured
by any Lien on property of such Person; and (h) obligations of such Person as
lessee under Capital Leases.
"Default" means any event which with the giving of notice or lapse of
time, or both, would become an Event of Default.
"Default Rate" means, with respect to the principal of any Loan and, to
the extent permitted by law, any other amount payable by the Borrower under this
Agreement or the Note, a rate per annum equal to 4% above the Prime Rate as in
effect from time.
"Dollars" and the sign "$" mean lawful money of the United States of
America.
"EBITDA" means for any period and in respect of any Person the sum of
(i) the net income of such Person for such period computed in accordance with
GAAP, plus (ii) the interest expense of such Person for such period, plus (iii)
the income tax expense of such Person for such period, plus (iv) the amount
reported as the depreciation of the assets of such Person for such period
computed in accordance with GAAP, plus (v) the amount reported as the
amortization of intangibles assets of such Person for such period computed in
accordance with GAAP, and as such item is used in the computation of such
Person's net income for such period, plus (vi) any one time, non-recurring cash
or non-cash losses minus (vii) any one-time, non-recurring licensing or royalty
fees received by the Person or one-time, non-recurring cash or non-cash gains.
"EBITDA/Interest Ratio" means, in respect of the Borrower and its
Consolidated Subsidiaries on a consolidated basis, the ratio of the following,
computed at each Fiscal Quarter end for the four quarter period then ended,
taken together as one accounting period: (1) EBITDA, to (2) the interest expense
for such fiscal period.
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"Environmental Laws" means any and all federal, state, local and
foreign statutes, laws, regulations, ordinances and rules relating to the
environment or to emissions, discharges, releases or threatened releases of
pollutants, contaminants, chemicals, or industrial, toxic or hazardous
substances or wastes into the environment including, without limitation, ambient
air, surface water, ground water, or land, or otherwise relating to the
manufacture, processing distribution, use, treatment, storage, disposal,
transport, or handling of pollutants, contaminants, chemicals, or industrial,
toxic or hazardous substances or wastes.
"ERISA" means the Employee Retirement Income Security Act of 1974, as
amended from time to time, including any rules and regulations promulgated
thereunder.
"ERISA Affiliate" means any corporation or trade or business which is a
member of any group of organizations (i) described in Section 414(b) or (c) of
the Code of which the Borrower is a member, or (ii) solely for purposes of
potential liability under Section 302(c)(11) of ERISA and Section 412(c)(11) of
the Code and the lien created under Section 302(f) of ERISA and Section 412(n)
of the Code, described in Section 414(m) or (o) of the Code of which the
Borrower is a member.
"Event of Default" has the meaning given such term in ss. 11.01.
"Existing Liens" means all Liens against the property or assets of the
Borrower and all Subsidiaries on the date of this Agreement and as set forth on
Schedule 2 hereto.
"Facility Documents" means this Agreement, the Note, the Guaranties and
the Security Agreements.
"Fixed Charge Coverage Ratio" means, in respect of the Borrower and its
Consolidated Subsidiaries on a consolidated basis, the ratio of the following,
computed at each Fiscal Quarter end for the four quarter period then ended,
taken together as one accounting period: (1) EBITDA, to (2) the sum of (i)
one-fifth of the outstanding principal balance under this Agreement on the last
day of the Fiscal Quarter, plus (ii) the interest expense for such fiscal
period, plus (iii) the income tax expense for such fiscal period plus (iv) cash
dividends paid by Borrower in the fiscal period.
"Forfeiture Proceeding" means any action, proceeding or investigation
affecting the Borrower or any of its Subsidiaries or Affiliates before any
court, governmental department, commission, board, bureau, agency or
instrumentality, domestic or foreign, or the receipt of notice by any such party
that any of them is a suspect in or a target of any governmental inquiry or
investigation, which could reasonably be expected to have a Material Adverse
Effect.
"Funded Debt" means, in respect of any Person, (i) all Long Term
Indebtedness of such Person, (ii) all payments in respect of item (i) above that
were required to be made within one year prior to the date of any determination
of Funded Debt, if the obligation to make such payments shall constitute a
current liability of the obligor under GAAP (nothing herein shall be construed
to include accounts payable), (iii) all Capitalized Rentals of such Person, and
(iv) interest bearing Indebtedness for borrowed money (other than Long Term
Indebtedness) having a maturity of less than one year.
"Funded Debt/EBITDA Ratio" means, in respect of the Borrower and its
Consolidated Subsidiaries on a consolidated basis, the ratio of the following
computed at each Fiscal Quarter end for the four quarter period then ended,
taken together as one accounting period: (i) Funded Debt, to (ii) EBITDA.
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"GAAP" means generally accepted accounting principles in the United
States of America as in effect from time to time, applied on a basis consistent
with those used in the preparation of the financial statements referred to in
ss. 7.05 (except for changes concurred in by the Borrower's independent public
accountants).
"Guarantor" means any Person who hereafter guaranties payment or
collection of the Loans or any part thereof.
"Guaranties" means all guaranty agreements hereafter granted to the
Bank by any Person whereby such Person guaranties payment or collection of the
Loans or any part thereof.
"Indebtedness" of any Person means and includes all obligations of such
Person which in accordance with GAAP shall be classified upon a balance sheet of
such Person as liabilities of such Person, and in any event shall include all
(i) obligations of such Person for borrowed money or which has been incurred in
connection with the acquisition of property or assets, (ii) obligations secured
by any Lien upon property or assets owned by such Person, even though such
Person has not assumed or become liable for the payment of such obligations,
(iii) obligations created or arising under any conditional sale or other title
retention agreement with respect to property acquired by such Person,
notwithstanding the fact that the rights and remedies of the seller, lender or
lessor under such agreement in the event of default are limited to repossession
or sale of property, (iv) Capitalized Rentals and (v) Guaranties of obligations
of others of the character referred to in this definition.
"Interest Period" shall mean with respect to any Libor Loan, the period
commencing on the date such Loan is made and ending on the numerically
corresponding day in the first, second or third calendar month thereafter, as
the Borrower may select as provided in ss. 4.03 hereof, except that each such
Interest Period which commences on the last Banking Day of a calendar month (or
on any day for which there is no numerically corresponding day in the
appropriate subsequent calendar month) shall end on the last Banking Day of such
first, second or third calendar month. Notwithstanding the foregoing, each
Interest Period which would otherwise end on a day which is not a Banking Day
shall end on the next succeeding Banking Day or if such next succeeding Banking
Day falls in the next succeeding calendar month, on the next preceding Banking
Day.
"Initial Margin Period" means the period from the date of this
Agreement through the earliest to occur of (a) delivery to the Bank of the
financial statements pursuant to ss.8.06(a) of this Agreement for the Fiscal
Year ending December 31, 1998 or (b) the last date on which such financial
statements for the Fiscal Year ending December 31, 1998 could have been
delivered in compliance with ss. 8.06.
"Lending Office" means the office of the Bank designated as such
underneath the signature of the officer of the Bank executing this Agreement.
"Letters of Credit" means all letters of credit or banker's acceptances
now existing or hereafter issued by Chase for the Borrower as the account party
from time to time.
"Letter of Credit Exposure" means the maximum amount available to be
drawn under all outstanding Letters of Credit (converted to U.S. Dollars based
on the exchange rate in effect at the time the Letter of Credit Exposure is
determined).
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"Libor Base Rate" means, with respect to each Libor Loan, the rate
appearing on Page 3750 of the Telerate Service (or on any successor or
substitute page of such Service, or any successor to or substitute for such
Service, providing rate quotations comparable to those currently provided on
such page of such Service, as determined by the Bank from time to time for
purposes of providing quotations of interest rates applicable to dollar deposits
in the London interbank market) at approximately 11:00 a.m., London time, two
Business Days prior to the commencement of such Interest Period, as the rate for
dollar deposits with a maturity comparable to such Interest Period. In the event
that such rate is not available at such time for any reason, then the "Libor
Base Rate" with respect to such Borrowing for such Interest Period shall be the
rate at which dollar deposits of $5,000,000 and for a maturity comparable to
such Interest Period are offered by the principal London office of the Reference
Bank in immediately available funds in the London interbank market at
approximately 11:00 a.m., London time, two Business Days prior to the
commencement of such Interest Period.
"Libor Loans" means Loans the interest rates on which are determined on
the basis of the Libor Base Rate.
"Lien" means any lien (statutory or otherwise), security interest,
mortgage, deed of trust, priority, pledge, charge, conditional sale, title
retention agreement, financing lease or other encumbrance or similar right of
others, or any agreement to give any of the foregoing.
"Loans" means the revolving credit loans made by the Bank to the
Borrower pursuant to ss. 2.01 hereof, and shall be deemed to include any
Reimbursement Obligation, and "Loan" shall mean any of the Loans.
"Long Term Indebtedness" means all Indebtedness of such Person for
borrowed money or which has been incurred in connection with the acquisition of
assets (excluding leases defined as "operating leases" under GAAP), in each case
having a final maturity of one or more than one year from the date of origin
thereof (or which is renewable or extendible at the option of the obligor for a
period or periods more than one year from the date of origin).
"Margin Period" means each quarterly period beginning on the earliest
to occur of (i) the day the financial statements of Borrower are delivered to
Bank pursuant to ss. 8.06 for the respective fiscal quarter or (ii) the last
date on which such financial statements could have been delivered in compliance
with ss. 8.06, and ending on the earliest to occur of (a) the day on which the
financial statements for the next subsequent fiscal quarter are delivered
pursuant to ss. 8.06 or (b) the last date on which such financial statements for
the next subsequent fiscal quarter could have been delivered in compliance with
ss. 8.06.
"Material Adverse Effect" means a material adverse effect on the
financial condition of the Borrower and its Subsidiaries taken as a whole in a
Dollar amount which equals or exceeds 5% of the Borrower's Consolidated Tangible
Net Worth without regard to whether such Dollar amount is reported on the
Borrower's consolidated financial statements in accordance with GAAP, or any
change in the nature of the business of the Borrower and Subsidiaries taken as a
whole.
"Multiemployer Plan" means a Plan defined as such in Section 3(37) of
ERISA to which contributions have been made by the Borrower or any ERISA
Affiliate and which is covered by Title IV of ERISA.
"Note" means the Revolving Credit Note in the form of Exhibit A annexed
hereto.
"Payment Office" means the office of the Bank designated as such
underneath the signature of the officer of the Bank executing this Agreement.
"PBGC" means the Pension Benefit Guaranty Corporation and any entity
succeeding to any or all of its functions under ERISA.
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"Permitted Encumbrances" means and includes with respect to the
Borrower and its Subsidiaries:
(i) in the case of real properties, easements, restrictions,
exceptions, reservations or defects which, in the aggregate,
do not interfere materially with the continued use of such
properties for the purposes for which they are used and do not
affect materially the value thereof;
(ii) liens, if contested in good faith by appropriate proceedings;
(iii) pledges or deposits to secure obligations under workmen's
compensation laws or similar legislation or to secure
performance in connection with bids, tenders and contracts
(other than contracts for the payment of borrowed money) to
which the Borrower or any Subsidiary of the Borrower is a
party;
(iv) deposits to secure public or statutory obligations of the
Borrower and any Subsidiary of the Borrower;
(v) materialmen's mechanics', carriers', workmen's or other like
liens arising in the ordinary course of business, or deposits
of cash or United States obligations to obtain the release of
such liens;
(vi) deposits to secure surety or appeal bonds in proceedings to
which the Borrower or any Subsidiary of the Borrower is a
party;
(vii) existing leases by the Borrower or the Borrower of real and
personal property; and
(viii) purchase money security interests for Debt not exceeding
$1,000,000 in the aggregate principal amount incurred during
any fiscal year of the Borrower; and
(ix) Liens on inventory or equipment securing Subordinated Debt,
provided that such Liens are subordinated to the Bank's Liens
under a subordination agreement in form and substance
reasonably satisfactory to the Bank which provides for no
foreclosure on other realization of such subordinated Liens
prior to the Bank's foreclosure or other realization of its
Liens.
"Person" means an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture,
governmental authority or other entity of whatever nature.
"Plan" means any employee benefit or other plan established or
maintained, or to which contributions have been made, by the Borrower or any
ERISA Affiliate and which is covered by Title IV of ERISA, other than a
Multiemployer Plan.
"Prime Loans" means Loans the interest rates on which are determined on
the basis of the Prime Rate.
"Prime Rate" means that rate of interest from time to time announced by
the Bank at its Principal Office as its prime commercial lending rate.
"Principal Office" means the principal office of the Bank, presently
located at 270 Park Avenue, New York, New York 10017.
"Prohibited Transaction" means any transaction set forth in Section 406
of ERISA or Section 4975 of the Code.
"Property" shall mean any interest in any kind of property or asset,
whether real, personal or mixed, or tangible or intangible, other than an
interest as lessee under a true lease.
"Reference Bank" shall mean the principal London office of The Chase
Manhattan Bank.
"Regulation U" means Regulation U of the Board of Governors of the
Federal Reserve System as the same may be amended or supplemented from time to
time.
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"Regulatory Change" means any change after the date of this Agreement
in United States federal, state, municipal or foreign laws or regulations
(including without limitation Regulation D) or the adoption or making after such
date of any interpretations or directives applying to a class of banks including
the Bank of or under any United States, federal, state, municipal or foreign
laws or regulations by any court of competent jurisdiction or governmental or
monetary authority charged with the interpretation or administration thereof.
"Reportable Event" means any of the events set forth in Section 4043(b)
of ERISA as to which events the PBGC by regulation has not waived the
requirement of Section 4043(a) of ERISA that it be notified within 30 days of
the occurrence of such event, provided that a failure to meet the minimum
funding standard of Section 412 of the Code or Section 302 of ERISA shall be a
Reportable Event regardless of any waivers given under Section 412(d) of the
Code.
"Reimbursement Obligation" means any obligation of the Borrower to
reimburse the Bank as an issuer of a Letter of Credit for any amount paid by
Bank from time to time pursuant to and under any Letter of Credit.
"Revolving Credit Termination Date" means October 31, 2000 or such
later date to which the Revolving Credit Termination Date then in effect shall
be extended in accordance with the provisions of ss. 2.04 hereof; provided that
if such date is not a Banking Day, the Revolving Credit Termination Date shall
be the next succeeding Banking Day.
"Security Agreements" means and includes, collectively, the Security
Agreements granted by the Borrower to the Bank dated as of April 3, 1985, April
13, 1993, June 17, 1993 and of even date herewith, all amendments and
modifications thereto, and all further security agreements which may hereafter
be granted by any Person to the Bank as security for payment of the Loans or any
part thereof.
"Subordinated Debt" means Debt which is unsecured or which is secured
only by a Permitted Encumbrance and which shall be subordinated in right of
payment to all Debt of the Borrower and the Guarantors to the Bank (the "Senior
Debt") under a subordination agreement in form and substance satisfactory to the
Bank which permits scheduled payments of principal and interest on the
Subordinated Debt so long as any Senior Debt is outstanding and permits such
scheduled payments of principal and interest only if no default under the Senior
Debt shall have occurred or shall be created by such payment.
"Subsidiary" means, with respect to any Person, any corporation or
other Person of which at least one-half of the securities or other ownership
interests having ordinary voting power (absolutely or contingently) for the
election of directors or other persons performing similar functions are at the
time owned directly or indirectly by such Person.
"Total Liabilities" means, in respect of any Person, the total
liabilities of such Person computed in accordance with GAAP and as such item is
reported from time to time on such Person's balance sheets.
"Unfunded Vested Liabilities" means, with respect to any Plan, the
amount (if any) by which the present value of all benefit liabilities (within
the meaning of Section 4001(a)(16) of ERISA) under the Plan exceeds the fair
market value of all Plan assets allocable to such benefit liabilities, as
determined on the most recent valuation date of the Plan and in accordance with
the provisions of ERISA for calculating the potential liability of the Borrower
or any ERISA Affiliate under Title IV of ERISA.
Section 1.02. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP, and all financial
data required to be delivered hereunder shall be prepared in accordance with
GAAP.
Section 1.03. Subsidiaries. All references to Subsidiaries or
Consolidated Subsidiaries shall be deemed to mean if any shall exist. For so
long as Borrower has no Subsidiary, all definitions and covenants referring to
Borrower and its Subsidiaries or Consolidated Subsidiaries on a consolidated
basis and all references to consolidated and consolidating financial statements
shall be deemed to refer to Borrower alone and to Borrower's financial
statements alone, respectively, but shall remain applicable in all other
respects.
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ARTICLE 2. THE CREDIT.
Section 2.01. Loans. The Bank agrees, on the terms of this Agreement,
to make one or more revolving credit loans and issue Letters of Credit to the
Borrower during the period from and including the date hereof to and including
the Revolving Credit Termination Date in amounts which, when added to the
aggregate amount of all Letter of Credit Exposure and the principal amount of
all Loans outstanding hereunder shall not exceed the amount of the Bank's
Commitment as then in effect. Subject to the terms of this Agreement, during
such period the Borrower may borrow, repay and reborrow up to the amount of the
Commitment. The Loans may be Prime Loans or Libor Loans (each a "type" of Loan).
The Borrower shall give the Bank notice of each borrowing to be made under this
ss. 2.01 (other than Loans created as a Reimbursement Obligation) as provided in
ss. 4.03 hereof. The Loans made by the Bank (including Loans created as
Reimbursement Obligations) shall be evidenced by the promissory note of the
Borrower in substantially the form of Exhibit A hereto, dated as of the Closing
Date, payable to the order of the Bank in a principal amount of $5,000,000, and
otherwise duly completed. The amount, type and date of each Loan made by the
Bank, and all payments made on account of the principal thereof, shall be
recorded by the Bank on its books and, prior to any transfer of the Note,
endorsed by the Bank on the schedule attached to the Note or any continuation
thereof, provided, however, that the failure of the Bank to endorse the schedule
shall not affect or impair the Borrower's obligation to repay Loans and any
interest thereon or other amounts due hereunder. The proceeds of the Loans to be
made by the Bank (other than Loans created as Reimbursement Obligations) shall,
subject to the terms and conditions of this Agreement, be made available to the
Borrower by depositing such amount, in immediately available funds, in an
account of the Borrower maintained with the Bank.
Section 2.02. Purpose. The Borrower will use the proceeds of the Loans
as working capital for its general corporate purposes and the acquisition of
assets in the ordinary course of the Borrower's business.
Section 2.03. Changes of Commitment. The Borrower shall have the right
to terminate or reduce the amount of the Commitment at any time or from time to
time upon not less than 30 days' prior notice to the Bank of each such
termination or reduction, which notice shall specify the effective date thereof
(which shall be a Banking Day) and the amount of any such reduction and shall be
irrevocable and effective only upon receipt by the Bank. The Commitment once
terminated or reduced may not be reinstated.
Section 2.04. Extension of Revolving Credit Termination Date. The
Borrower may, by written request to the Bank not less than 60 and not more than
90 days prior to the Current Termination Date, request that the Revolving Credit
Termination Date be extended to the Annual Date next subsequent to such Current
Termination Date. Within 30 days following receipt of such request the Bank will
advise the Borrower in writing whether it agrees to or denies such extension,
provided that if the Bank shall fail to so advise the Borrower it will be deemed
to have denied such request. If the Bank shall agree thereto, such extension
shall become effective as of such Current Termination Date only upon
satisfaction of the following conditions as of such Current Termination Date, in
form and substance satisfactory to the Bank, unless expressly waived by the
Bank: (a) no Default shall have occurred and be continuing; (b) the
representations and warranties made by the Borrower in ss. 7 hereof shall be
true on and as of such date with the same force and effect as if made on and as
of such date; (c) the Bank and the Borrower shall have executed an extension
agreement; and (d) the Borrower shall have furnished to the Bank such corporate
documents and/or opinions of counsel with respect to such extension, as the Bank
may reasonably request. Each extension request by the Borrower under this ss.
2.04 shall constitute a certification by the Borrower to the effect set forth in
clauses (a) and (b) of the preceding sentence (both as of the date of such
notice and, unless the Borrower otherwise notifies the Bank prior to the Current
Termination Date, as of the Current Termination Date).
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Section 2.05. Letters of Credit. Subject to the terms and conditions of
this Agreement, Bank shall, upon the request of the Borrower and payment of the
Bank's customary fees and expenses in connection therewith, issue Letters of
Credit from time to time from and including the date hereof to but excluding the
Revolving Credit Termination Date up to but not exceeding the lesser of (i) the
aggregate unused amount of the Commitment (after subtracting the Letter of
Credit Exposure), or (ii) the difference between $1,000,000 and the amount of
the Letter of Credit Exposure which exists immediately prior to the issuance of
such Letter of Credit. The Borrower agrees that each Reimbursement Obligation
shall, immediately upon its creation, be and become a Prime Loan hereunder.
Section 2.06. Facility Fee. Borrower shall pay to Bank in advance on
each Annual Date a yearly Facility Fee of $7,500 if the Facility is to remain in
effect, in whole, subsequent to such Annual Date; provided however that if the
Facility shall be modified or restructured prior to the occurrence of a Default
or an Event of Default and if the Bank remains the lender under such modified or
restructured credit facility, the Bank shall refund to the Borrower a pro rata
portion of the facility fee which the Borrower has paid in advance pursuant to
this ss. 2.06 for the following year based upon the remaining portion of such
year for which the Facility shall not remain in effect. Nothing in this ss. 2.06
shall be deemed to prevent the Bank from charging a fee which is similar to the
Facility Fee and which is mutually agreed to in writing by the Borrower under
any modified or restructured credit facility.
ARTICLE 3. REPAYMENTS; INTEREST; LATE FEES, PREPAYMENTS.
Section 3.01. Repayment of Loans. All Loans shall be due and payable in
full, principal and interest, on the Revolving Credit Termination Date. In
addition, at the end of each Interest Period, the Borrower will either (i) pay
to the Bank the principal of each Loan which is a Libor Loan, or (ii) convert
the principal amount of such Libor Loan to another Loan hereunder as continuing
and subsisting indebtedness.
Section 3.02. Interest. The Borrower will pay to the Bank interest on
the unpaid principal amount of each Loan made by the Bank for the period
commencing on the date of such Loan to but excluding the date such Loan shall be
paid in full, at the following rates per annum:
(a) During such periods such Loan is a Prime Loan, the Prime Rate plus
the Applicable Margin; and
(b) During such periods such Loan is a Libor Loan, for each Interest
Period relating thereto, the Libor Rate plus the Applicable Margin.
Notwithstanding the foregoing, after an Event of Default and upon written demand
by the Bank, the Borrower will pay to the Bank interest at the applicable
Default Rate on any principal of any Loan made by the Bank, and (to the fullest
extent permitted by law) on any other amount (other than interest) payable to
the Bank by the Borrower hereunder or under the Note, which shall not be paid in
full when due (whether at stated maturity, by acceleration or otherwise), for
the period commencing on the date of such written demand, until the same is paid
in full. Accrued interest on each Loan shall be payable monthly on the first day
of each month and upon the payment or prepayment thereof (but only on the
principal so paid or prepaid), except that interest payable at the Default Rate
shall be payable from time to time when due on demand of the Bank. Promptly
after the determination of any interest rate provided for herein or any change
therein, the Bank shall notify the Borrower thereof.
Section 3.03. Late Fees. If any payment of principal or interest on any
Loan is not received by the Bank within five days after the due date thereof, a
late fee shall be imposed on such payment. The amount of the late fee shall be
(i) in respect of payments of interest, 1% of the amount of the payment which
was due, and (ii) in respect of payments of principal, 4% of the amount of the
payment which was due, provided further that in either case such late fee shall
not be less than $25 nor more than $100.
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Section 3.04. Prepayments.
(a) The Borrower shall prepay upon demand by the Bank that portion of
the outstanding principal balance of the Loans, if any, which exceeds the
Commitment.
(b) The Borrower shall have the right to prepay Loans, without penalty,
at any time or from time to time, provided that: (i) the Borrower shall give the
Bank notice of each such prepayment as provided in ss. 4.03 hereof; and (ii) no
Libor Loan may be prepaid on any day other than the last day of an Interest
Period for such Libor Loan except upon payment of a penalty computed in
accordance with ss. 5.05 hereof.
ARTICLE 4. PAYMENTS; COMPUTATIONS.
Section 4.01. Payments. Except to the extent otherwise provided herein,
all payments of principal, interest and other amounts to be made by the Borrower
under this Agreement and the Note shall be made in Dollars, in immediately
available funds, to the Bank at the Payment Office for account of the Lending
Office, not later than 2:30 p.m. New York time on the date on which such payment
shall become due (each such payment made after such time on such due date to be
deemed to have been made on the next succeeding Banking Day). The Borrower
shall, at the time of making each payment under this Agreement or the Note,
specify to the Bank the Loans or other amounts payable by the Borrower hereunder
to which such payment is to be applied, and if the Borrower fails to so specify
or if an Event of Default has occurred and is continuing, the Bank may apply
such payment in such manner as it may determine to be appropriate, provided that
the Bank shall apply such payments first to the principal of Prime Rate loans,
then to the principal of any other Loans and then to interest on any Loans. If
the due date of any payment under this Agreement or the Note would otherwise
fall on a day which is not a Banking Day, such date shall be extended to the
next succeeding Banking Day and interest shall be payable for any principal so
extended for the period of such extension.
Section 4.02. Computations. Interest on Libor Loans shall be computed
on the basis of a year of 360 days and actual days elapsed (including the first
day but excluding the last day) occurring in the period for which payable, and
interest on Prime Loans shall be computed on the basis of a year of 365 or 366
days, as the case may be, and actual days elapsed (including the first day but
excluding the last day) occurring in the period for which payable. Changes in
interest rate on Prime Loans resulting from changes in the Prime Rate shall be
effective for the full day which constitutes the effective date for such change
in the Prime Rate.
Section 4.03. Certain Notices. Notices by the Borrower to the Bank of
the termination or reduction of the Commitment, and of borrowings and
prepayments of Loans shall be irrevocable and shall be effective only if
received by the Bank not later than 12:00 noon New York time on the date, or the
number of days prior to the date, of the relevant termination, reduction,
borrowing or prepayment or the first day of such Interest Period specified
below:
-------------------------------------- -------------------------------------
Type of Notice Date or Number of Days Prior
-------------------------------------- -------------------------------------
Termination or reduction 30 days
of Commitment
-------------------------------------- -------------------------------------
-------------------------------------- -------------------------------------
Borrowing or prepayment of Same Banking Day
Prime Loans
-------------------------------------- -------------------------------------
-------------------------------------- -------------------------------------
Borrowing or prepayment of 3 Banking Days
Libor Loans
-------------------------------------- -------------------------------------
Each such notice of termination or reduction shall specify the amount of the
Commitment to be terminated or reduced. Each such notice of borrowing or
prepayment shall specify the Loans to be borrowed or prepaid and the amount
(subject to ss. 4.04 hereof) and type of the Loans to be borrowed or prepaid,
the date of borrowing or prepayment (which shall be a Banking Day), and the
duration of the Interest Period. Each notice required hereunder shall be in
writing, except that a notice of borrowing may be given orally on the telephone
provided it is confirmed in writing within two Banking Days. In the event that
the Borrower fails to notify the Bank in a timely manner as set forth above of
any Libor Loan borrowing to replace any Libor Loan having an expiring Interest
Period, such Libor Loan will be automatically converted into a Prime Loan on the
last day of the then current Interest Period for such Libor Loan.
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Section 4.04. Minimum Amounts. Except conversions or prepayments made
pursuant to ss. 5 hereof, each borrowing of principal of Loans shall be in an
amount at least equal to $25,000, and each prepayment of principal of Loans
shall be in an amount at least equal to $25,000 (borrowings or prepayments in
the case of Libor Loans having different Interest Periods outstanding at the
same time hereunder to be deemed separate borrowings and prepayments for
purposes of the foregoing, one for each distinct Interest Period). Anything in
this Agreement to the contrary notwithstanding, the aggregate principal amount
of Libor Loans of each type having the same Interest Period shall be at least
equal to $300,000 and, if any Libor Loans would otherwise be in a lesser
principal amount for any period, such Libor Loans shall be Prime Loans during
such period.
ARTICLE 5. YIELD PROTECTION AND ILLEGALITY.
Section 5.01. Additional Costs.
(a) The Borrower shall pay directly to the Bank from time to time such
amounts as the Bank may reasonably determine to be necessary to compensate it
for any costs which the Bank determines are attributable to its making or
maintaining of any Libor Loans or its obligation to make any Libor Loans, or any
reduction in any amount receivable by the Bank hereunder in respect of any Libor
Loans or such obligation (such increases in costs and reductions in amounts
receivable being herein called "Additional Costs"), resulting from any
Regulatory Change which: (i) changes the basis of taxation of any amounts
payable to the Bank under this Agreement or the Note in respect of any Libor
Loans (other than taxes imposed on the overall net income of the Bank or of its
Lending Office for any Libor Loans by the jurisdiction in which the Bank has its
principal office or such Lending Office); or (ii) imposes or modifies any
reserve, special deposit or similar requirements relating to any extensions of
credit or other assets of, or any deposits with or other liabilities of, the
Bank (including any of such Loans or any deposits referred to in the definition
of "Libor Base Rate" in ss. 1.01 hereof, but excluding any reserve requirement
or deposit insurance assessment already included in the calculation of the Libor
Rate); or (iii) imposes any other condition affecting this Agreement or the Note
(or any of such extensions of credit or liabilities) other than such portion of
the Agreement and the Note which pertains to Prime Loans. If the Bank requests
compensation from the Borrower under this ss. 5.01(a), the Borrower may, by
notice to the Bank, require that the Loans of the type with respect to which
such compensation is requested be converted into Prime Loans in accordance with
the provisions of ss. 5.04 hereof.
(b) Without limiting the effect of the provisions of ss. 5.01(a)
hereof, in the event that, by reason of any Regulatory Change, the Bank either
(i) incurs Additional Costs based on or measured by the excess above a specified
level of the amount of a category of deposits or other liabilities of the Bank
which includes deposits by reference to which the interest rate on Libor Loans
is determined as provided in this Agreement or a category of extensions of
credit or other assets of the Bank which includes Libor Loans or (ii) becomes
subject to restrictions on the amount of such a category of liabilities or
assets which it may hold, then, if the Bank so elects by notice to the Borrower,
the obligation of the Bank to make further Libor Loans shall be suspended until
such Regulatory Change ceases to be in effect.
(c) Without limiting the effect of the foregoing provisions of this ss.
5.01 (but without duplication), the Borrower shall pay directly to the Bank from
time to time on request such amounts as the Bank may reasonably determine to be
necessary to compensate the Bank for any costs which it determines are
attributable to the maintenance by the Bank (or any Lending Office) pursuant to
any law or regulation or any interpretation, directive or request (whether or
not having the force of law) of any court or governmental or monetary authority
following any Regulatory Change, of capital in respect of its Commitment or
Loans (such compensation to include, without limitation, an amount equal to any
reduction of the rate of return on assets or equity of the Bank (or any Lending
Office) which the Bank could have achieved but for such law, regulation,
interpretation, directive or request).
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(d) The Bank will notify the Borrower of any event occurring after the
date of this Agreement that will entitle the Bank to compensation under
paragraph (a) or (c) of this ss. 5.01 or to convert Loans under ss. 5.04 as
promptly as practicable, but in any event within 30 days after the Bank obtains
actual knowledge thereof; provided, however, that if the Bank fails to give such
notice within 30 days after it obtains actual knowledge of such an event, the
Bank shall, with respect to compensation payable pursuant to this ss. 5.01 in
respect of any costs resulting from such event, only be entitled to payment
under this ss. 5.01 or ss. 5.04 for costs incurred from and after the date that
the Bank does give such notice; and provided further, that the Bank will
designate a different Lending Office for the Loans of the Bank affected by such
event if such designation will avoid the need for, or reduce the amount of, such
compensation and will not, in the sole opinion of the Bank, be disadvantageous
to the Bank, except that the Bank shall have no obligation to designate a
Lending Office located in the United States of America. The Bank will furnish to
the Borrower a certificate setting forth the basis and amount of each request by
the Bank for compensation under paragraph (a) or (c) of this ss. 5.01, which
amount will be determined in good faith on an equitable basis such as, if
appropriate, an allocation measured by the principal amount of Loans to the
Borrower, or commitments to make Loans to the Borrower, then outstanding in
relation to the total amount of loans, or commitments to make loans, made by the
Bank of the type or character which has given rise to the Additional Costs.
Determinations and allocations by the Bank for purposes of this ss. 5.01 of the
effect of any Regulatory Change pursuant to ss. 5.01(a) or (b) hereof, or of the
effect of capital maintained pursuant to ss. 5.01(c) hereof, on its costs or
rate of return of maintaining Loans or its obligation to make Loans, or on
amounts receivable by it in respect of Loans, and of the amounts required to
compensate the Bank under this ss. 5.01, shall be conclusive, provided that such
determinations and allocations are made on a reasonable basis.
Section 5.02. Limitation on Types of Loans. Anything herein to the
contrary notwithstanding, if the Bank reasonably determines (which determination
shall be conclusive) that interest rates for the relevant deposits referred to
in the definition of "Libor Base Rate" in ss. 1.01 hereof are not being provided
in the relevant amounts or for the relevant maturities for purposes of
determining rates of interest for Libor Loans as provided herein, then the Bank
shall give the Borrower prompt notice thereof, and so long as such condition
remains in effect the Bank shall be under no obligation to make further Libor
Loans.
Section 5.03. Illegality. Notwithstanding any other provision of this
Agreement, in the event that it becomes unlawful for the Bank or its Lending
Office to honor its obligation to make or maintain Libor Loans hereunder, then
the Bank shall promptly notify the Borrower thereof and the Bank's obligation to
make Libor Loans shall be suspended until such time as the Bank may again make
and maintain Libor Loans and the Bank's outstanding Libor Loans shall be
converted into Prime Loans in accordance with ss. 5.04 hereof.
Section 5.04. Certain Conversions Pursuant to ss.ss. 5.01 and 5.03. If
the Loans of the Bank of a particular type (Loans of such type being herein
called "Affected Loans" and such type being herein called the "Affected Type")
are to be converted pursuant to ss. 5.01 or 5.03 hereof, the Affected Loans
shall be automatically converted into Prime Loans on the last day(s) of the then
current Interest Period(s) for the Affected Loans (or, in the case of a
conversion required by ss. 5.01(b) or 5.03 hereof, on such earlier date as the
Bank may specify to the Borrower) and, unless and until the Bank gives notice as
provided below that the circumstances specified in ss. 5.01 or 5.03 hereof which
gave rise to such conversion no longer exist: (a) to the extent that the Bank's
Affected Loans have been so converted, all payments and prepayments of principal
which would otherwise be applied to such Affected Loans shall be applied instead
to its Prime Loans; and (b) all Loans which would otherwise be made by the Bank
as Loans of the Affected Type shall be made instead as Prime Loans. No
conversion pursuant to this ss. 5.04 shall be deemed to be a prepayment in
respect of which any prepayment premium or penalty shall be due, other than
compensation which may be payable under ss.ss. 5.01 and 5.05 (without
duplication of compensation).
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Section 5.05. Compensation. The Borrower shall pay to the Bank upon
request such amount or amounts as shall be sufficient (in the reasonable opinion
of the Bank) to compensate it for any loss, cost or expense which the Bank
determines are attributable to:
(a) any payment or prepayment of a Libor Loan made by the Bank, or
conversion of a Libor Loan pursuant to ss. 5.04, on a date other than the last
day of the Interest Period for such Loan; or
(b) any failure by the Borrower to borrow a Libor Loan from the Bank on
the date for such borrowing specified in the relevant notice of borrowing given
pursuant to ss. 4.03 hereof.
Without limiting the effect of the preceding sentence, such compensation shall
include an amount equal to the excess, if any, of (i) the amount of interest
which otherwise would have accrued on the principal amount so paid, prepaid or
converted or not borrowed for the period from the date of such payment,
prepayment, conversion or failure to borrow to the last day of the Interest
Period for such Loan (or, in the case of a failure to borrow, the Interest
Period for such Loan which would have commenced on the date specified for such
borrowing) at the applicable rate of interest for such Loan provided for herein
over (ii) the interest component of the amount the Bank would have bid in the
London interbank market for Dollar deposits of leading banks in amounts
comparable to such principal amount and with maturities comparable to such
period (as reasonably determined by the Bank). A determination of the Bank as to
the amounts payable pursuant to this ss. 5.05 shall be conclusive absent
manifest error.
Section 5.06. Survival. The obligations of the Borrower under this
Article 5 shall survive the repayment of the Loans.
ARTICLE 6. CONDITIONS PRECEDENT.
Section 6.01. Initial Conditions. The obligation of the Bank to make
the initial Loan is subject to the condition precedent that the Bank shall have
received on or before the date of such Loan each of the following, in form and
substance satisfactory to the Bank and its counsel:
(a) Facility Documents. The Facility Documents duly executed by the
parties thereto (other than the Bank);
(b) Corporate Supporting Documents. All such secretarial and officer
certificates of the Borrower pertaining to corporate action, incumbency, and
organizational documents as the Bank may reasonably require;
(c) Opinion of Counsel for Borrower and Subsidiaries. A favorable
opinion of counsel for the Borrower and its Subsidiaries, dated the Closing Date
in form and substance satisfactory to the Bank and its counsel;
(d) Insurance. A certificate of insurance evidencing coverage against
loss in respect of the Borrower's inventory in form and substance satisfactory
to the Bank and naming the Bank as loss payee; and
(e) Other Documents. The Borrower shall have furnished to the Bank such
other documents, certificates, statements, opinions of counsel and information
with respect to the transactions contemplated by this Agreement as the Bank or
its counsel may reasonably request.
Section 6.02. Additional Conditions Precedent. The obligation of the
Bank to make the Loans shall be subject to the further conditions precedent that
on the date of each Loan the following statements shall be true: (i) the
representations and warranties contained in Article 7 of this Agreement are true
and correct, in all material respects, on and as of the date of such Loan as
though made on and as of such date; and (ii) no Default or Event of Default has
occurred and is continuing, or would result from such Loan.
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ARTICLE 7. REPRESENTATIONS AND WARRANTIES.
The Borrower hereby represents and warrants that:
Section 7.01. Incorporation, Good Standing and Due Qualification. The
Borrower is a corporation duly incorporated, validly existing and in good
standing under the laws of the jurisdiction of its incorporation, has the
corporate power and authority to own its assets and to transact the business in
which it is now engaged or proposed to be engaged, and is duly qualified as a
foreign corporation and in good standing under the laws of each other
jurisdiction where failure to qualify could have a Material Adverse Effect.
Section 7.02. Corporate Power and Authority; No Conflicts. The
execution, delivery and performance by the Borrower of the Facility Documents
have been duly authorized by all necessary corporate action and do not and will
not: (a) require any consent or approval of its stockholders; (b) contravene its
charter or by-laws; (c) violate any provision of, or require any filing,
registration, consent or approval under, any law, rule, regulation (including,
without limitation, Regulation U), order, writ, judgment, injunction, decree,
determination or award presently in effect having applicability to the Borrower;
(d) result in a breach of or constitute a default or require any consent under
any indenture or loan or credit agreement or any other agreement, lease or
instrument to which the Borrower is a party or by which it or its properties may
be bound or affected; (e) result in, or require, the creation or imposition of
any Lien upon or with respect to any of the properties now owned or hereafter
acquired by the Borrower; or (f) cause the Borrower to be in default under any
such law, rule, regulation, order, writ, judgment, injunction, decree,
determination or award or any such indenture, agreement, lease or instrument.
Section 7.03. Legally Enforceable Agreements. Each Facility Document
is, or when delivered under this Agreement will be, a legal, valid and binding
obligation of the Borrower or the Guarantor, as the case may be, enforceable
against the Borrower or the Guarantor in accordance with its terms, except to
the extent that such enforcement may be limited by applicable bankruptcy,
insolvency and other similar laws affecting creditors' rights generally.
Section 7.04. Litigation. Except as disclosed to the Bank, there are,
as of the Closing Date, no actions, suits or proceedings pending or, to the
knowledge of any officer of the Borrower, threatened, against or affecting the
Borrower directly before any court, governmental agency or arbitrator, which
have a reasonable likelihood that they may, in any one case or in the aggregate,
have a Material Adverse Effect or materially impair the ability of the Borrower
to perform its obligations under the Facility Documents.
Section 7.05. Financial Statements. The consolidated balance sheets of
the Borrower and its Consolidated Subsidiaries as at December 31, 1997 for the
fiscal year then ended and as at September 30, 1998 for the nine month period
then ended, copies of which have been furnished to the Bank, are complete and
correct and fairly present the financial condition of the Borrower and its
Consolidated Subsidiaries as at such dates and the results of the operations of
the Borrower and its Consolidated Subsidiaries for the periods covered by such
statements, all in accordance with GAAP consistently applied (subject to year
end adjustments in the case of the interim financial statements). There are no
liabilities of the Borrower or any of its Consolidated Subsidiaries, fixed or
contingent, which are material as to the Borrower and its Subsidiaries taken as
a whole but are not reflected in the financial statements or in the notes
thereto, other than liabilities arising in the ordinary course of business since
September 30, 1998 to the Closing Date. No information, exhibit or report
furnished by the Borrower to the Bank in connection with the negotiation of this
Agreement contained any material misstatement of fact or omitted to state a
material fact or any fact necessary to make the statement contained therein not
materially misleading. Since September 30, 1998 to the Closing Date, there has
been no material adverse change in the condition (financial or otherwise),
business or operations of the Borrower and its Subsidiaries taken as a whole.
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Section 7.06. ERISA. Each of the Borrower and the ERISA Affiliates has
fulfilled its obligations under the minimum funding standards of ERISA and the
Code with respect to each Plan and is in compliance in all material respects
with the presently applicable provisions of ERISA and the Code, has not incurred
any liability to the PBGC or any Plan aggregating in excess of $100,000 which it
has failed to pay when due, and does not have Unfunded Vested Liabilities in
excess of $100,000.
Section 7.07. Subsidiaries and Ownership of Stock. Schedule 1 is as of
the Closing Date a complete and accurate list of the Subsidiaries of the
Borrower, showing the jurisdiction of incorporation of each and showing the
percentage of the Borrower's ownership of the outstanding stock of each such
Subsidiary, together with all other investments, loans, advances, guaranties or
other liabilities undertaken by the Borrower in respect of such Subsidiary. All
of the outstanding capital stock of each such Subsidiary has been validly
issued, is fully paid and nonassessable and is owned by the Borrower free and
clear of all Liens.
Section 7.08. Existing Credit Arrangements and Existing Liens. Schedule
2 is as of the Closing Date a complete and correct list of all credit
agreements, indentures, guaranties and other investments, agreements and
arrangements presently in effect providing for or relating to extensions of
credit in respect of which the Borrower or any of its Subsidiaries is or may be
in any manner directly or contingently obligated; and the maximum principal or
face amounts of the credit in question, outstanding and which can be
outstanding, are correctly stated, and all Liens of any nature given or agreed
to be given as security therefor are correctly described or indicated in such
Schedule. Schedule 2 is also a complete list as of the Closing Date of all Liens
pertaining to any and all property or assets of the Borrower and its
Subsidiaries.
Section 7.09. Regulation U. The Borrower warrants as of the date of
this Agreement that it does not own, directly or indirectly any "margin stock"
(as defined in Regulation U of the Board of Governors of the Federal Reserve
System), as supplemented from time to time, and the Borrower warrants as of the
date of each Loan that it does not own "margin stock" as of the date of such
Loan having an aggregate fair market value equal to or greater than 25% of the
fair market value of all of the Borrower's assets, unless the Borrower shall
have executed a Form FR U-1 (OMB No. 7100-1115) prior to obtaining the proceeds
of the Loan and, in such case, the Borrower further warrants that the proceeds
of such Loan are not used for the purpose, whether immediate, incidental or
ultimate, of buying or carrying any "margin stock".
Section 7.10. Compliance With Laws. Each of the Borrower and its
Subsidiaries have complied in all respects with all applicable laws, rules,
regulations, and orders, including without limitation, compliance with all laws
related to the disposal or handling of toxic waste, and paying before the same
became delinquent all taxes, assessments and governmental charges imposed upon
it or its property, except (a) in the case of taxes, where contested in good
faith and by proper proceedings if appropriate reserves are maintained with
respect thereto, or (b) where the failure to comply with a law (including the
failure to pay taxes, assessments and governmental charges) would not have a
Material Adverse Effect.
Section 7.11. Operation of Business. Each of the Borrower and its
Subsidiaries possesses all licenses, permits, franchises, patents, copyrights,
trademarks and trade names, or rights thereto (collectively, "Permits"), to
conduct its business substantially as now conducted and as presently proposed to
be conducted, except where the absence of any Permit would not have a Material
Adverse Effect and, to the best of Borrower's knowledge, neither the Borrower
nor any of its Subsidiaries is in violation of any valid rights of others with
respect to any of the foregoing.
Section 7.12. Hazardous Materials. Except as set forth on Schedule 3
hereto:
(a) Borrower is in substantial compliance with all Environmental Laws
applicable to Borrower and has not received any written notice from any
government alleging that Borrower is not so in compliance, except where
noncompliance would not have a Material Adverse Effect;
(b) Borrower possesses all licenses, permits, registrations and
authorizations required by applicable Environmental Laws for the current
operation of Borrower's business and is in substantial compliance therewith,
except where the failure to possess same or to comply therewith would not have a
Material Adverse Effect; and
(c) To the best of Borrower's knowledge, the Borrower's assets do not
contain asbestos containing materials, polychlorinated biphenyls, urea
formaldehyde, underground storage tanks, or hazardous materials, as defined by
any Environmental Law, which have been discarded or otherwise released by
Borrower in a quantity and manner requiring that notice thereof be given by
Borrower to any government, except where such notice has been given.
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Section 7.13. No Default on Outstanding Judgments or Orders. Each of
the Borrower and its Subsidiaries has satisfied all judgments and neither the
Borrower nor any of its Subsidiaries is in default with respect to any judgment,
writ, injunction, decree, or order of any court, arbitrator or federal, state,
municipal or other governmental authority, commission, board, bureau, agency or
instrumentality, domestic or foreign, except where such non-satisfaction or
default is not likely to have a Material Adverse Effect.
Section 7.14. No Defaults on Other Agreements. Neither the Borrower nor
any of its Subsidiaries is in default in any respect in the performance,
observance or fulfillment of any of the obligations, covenants or conditions
contained in any agreement or instrument material to its business to which it is
a party, except where such default is not likely to have a Material Adverse
Effect.
Section 7.15. Labor Disputes and Acts of God. Neither the business nor
the properties of the Borrower or of any of its Subsidiaries, has been affected
during the previous two years by any strike, lockout or other labor dispute,
materially and adversely affecting such business or properties or the operation
of the Borrower or such Subsidiary.
Section 7.16. Governmental Regulation. Neither the Borrower nor any of
its Subsidiaries is subject to regulation under the Public Utility Holding
Company Act of 1935, the Investment Company Act of 1940, the Interstate Commerce
Act, the Federal Power Act or any other statute or regulation limiting its
ability to incur indebtedness for money borrowed as contemplated hereby.
Section 7.17. Partnerships. Except as disclosed on Schedule 4 hereto,
neither the Borrower nor any of its Subsidiaries is a partner in any
partnership.
Section 7.18. No Forfeiture. Neither the Borrower nor any of its
Subsidiaries or Affiliates is engaged in or proposes to be engaged in the
conduct of any business or activity which could result in a Forfeiture
Proceeding and, to the best knowledge of Borrower, no Forfeiture Proceeding
against any of them is pending or threatened.
Section 7.19. Solvency.
(a) The present fair market value of the assets of the Borrower (as a
going concern) after giving effect to all the transactions contemplated by the
Facility Documents and the funding of all Commitments hereunder exceeds the
amount that will be required to be paid on or in respect of the existing debts
and other liabilities, as recorded on the Borrower's consolidated balance sheets
described in ss. 7.05, of the Borrower and its Subsidiaries as they mature.
(b) To the best knowledge of the Borrower, the Property of the Borrower
does not constitute unreasonably small capital for the Borrower to carry out its
business as now conducted and as proposed to be conducted in the immediate
future including the capital needs of the Borrower.
(c) The Borrower does not intend to, nor does it believe that it will,
incur debts beyond its ability to pay such debts as they mature (taking into
account the timing and amounts of cash to be received by the Borrower, and of
amounts to be payable on or in respect of debt of the Borrower). The cash
available to the Borrower after taking into account all other anticipated uses
of the cash of the Borrower, is anticipated to be sufficient to pay all such
amounts on or in respect of debt of the Borrower presently recorded on the
Borrower's consolidated balance sheet when such amounts are required to be paid.
(d) The Borrower does not believe that final judgments against it in
actions for money damages that are currently pending could reasonably be
expected to be rendered at a time when, or in an amount such that, the Borrower
will be unable to satisfy any such judgments promptly in accordance with their
terms (taking into account the maximum reasonable amount of such judgments in
any such actions and the earliest reasonable time at which such judgments might
be rendered). The cash available to the Borrower after taking into account all
other anticipated uses of the cash of the Borrower (including the payments on or
in respect of debt referred to in paragraph (c) of this ss. 7.19), is
anticipated to be sufficient to pay all such judgments promptly in accordance
with their terms.
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Section 7.20. Year 2000. Attached hereto as Schedule 5 is the
Borrower's statement regarding Borrower's assessment of any reprogramming
required to permit the proper functioning, in and following the year 2000, of
(i) the Borrower's computer systems, and (ii) equipment containing embedded
microchips (including systems and equipment supplied by others or with which
Borrower's systems interface) and the testing of all such systems and equipment.
To the extent such testing is scheduled for completion after January 1, 1999,
the Borrower will use its best efforts to adhere to that schedule. The cost to
the Borrower of such reprogramming and testing and of the reasonably foreseeable
consequences of year 2000 to the Borrower (including, without limitation,
reprogramming errors and the failure of others' systems or equipment) will not
result in a Default or a Material Adverse Effect. Except for such of the
reprogramming referred to in the preceding sentence as may be necessary, the
computer and management information systems of the Borrower and its Subsidiaries
are and, with ordinary course upgrading and maintenance, will continue for the
term of this Agreement to be, sufficient to permit the Borrower to conduct its
business without Material Adverse Effect.
ARTICLE 8. AFFIRMATIVE COVENANTS.
So long as any portion of the Note shall remain unpaid or the Bank
shall have any Commitment under this Agreement, the Borrower shall:
Section 8.01. Maintenance of Existence. Preserve and maintain its
corporate existence and good standing in the jurisdiction of its incorporation
(which may be any state of the United States of America and may be changed from
time to time), and qualify and remain qualified as a foreign corporation in each
jurisdiction where failure to qualify could have a Material Adverse Effect.
Section 8.02. Conduct of Business. Continue, and cause each of its
Subsidiaries to continue, to engage in an efficient and economical manner in a
business of the same general type as conducted by it on the date of this
Agreement, provided, however, that nothing in this ss. 8.02 shall prevent the
abandonment or termination of a line of business or of any Subsidiary if the
Borrower or a Subsidiary determines that the preservation of such line of
business is no longer desirable in the conduct of the business of the Borrower
or such Subsidiary.
Section 8.03. Maintenance of Insurance. The Borrower shall maintain
insurance against risk of loss on its inventory in amounts, under policies and
with insurers reasonably acceptable to the Bank. In addition, to the extent that
other insurance is available to the Borrower and each of its Subsidiaries at a
price comparable to the price paid by other Persons in the same or similar types
of business conducted by the Borrower and each Subsidiary, maintain, and cause
each of its Subsidiaries to maintain, insurance with financially sound and
reputable insurance companies or associations in such amounts and covering such
risks as are usually carried by companies engaged in the same or a similar
business and similarly situated, which insurance may provide for reasonable
deductibility from coverage thereof. To the extent such other insurance is not
obtained, adopt, in lieu of or supplemental to such insurance, such other plan
or method of protection, whether by the establishment of an insurance fund or
reserve to be held and applied to make good losses from casualties, or
otherwise, and conforming to the practices of similar corporations maintaining
systems of self-insurance.
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Section 8.04. Compliance with Laws. Comply, and cause each of its
Subsidiaries to comply, in all respects with all applicable laws, rules,
regulations and orders, such compliance to include without limitation,
compliance with all laws related to the disposal or handling of toxic waste, and
paying before the same become delinquent all taxes, assessments and governmental
charges imposed upon it or upon its property, except (a) in the case of taxes,
where contested in good faith and by proper proceedings if appropriate reserves
are maintained with respect thereto, or (b) where the failure to comply with a
law would not have a Material Adverse Effect.
Section 8.05. Right of Inspection. Upon reasonable notice and during
normal business hours, permit the Bank or any agent or representative thereof,
to examine and make copies of and abstracts from the financial records of, and
visit the properties of, the Borrower and any of its Subsidiaries, and to
discuss the affairs, finances and accounts of the Borrower and any such
Subsidiary with any of their respective officers and directors and the
Borrower's independent accountants, provided that the Borrower shall receive
reasonable notice of any such meetings with the Borrower's independent
accountants and the Borrower shall have the right to be present at such
meetings.
Section 8.06. Reporting Requirements. Furnish to the Bank:
(a) Audited Annual Financial Statements. As soon as available and in
any event within 90 days after the end of each fiscal year of the Borrower:
(i) if the Borrower shall have no Consolidated Subsidiaries,
the balance sheet of the Borrower as of the end of such fiscal year and
statements of income, statements of cash flows and statements of changes in
shareholders' equity of the Borrower for such fiscal year, all in reasonable
detail and stating in comparative form the respective figures for the
corresponding date and period in the prior fiscal year, and all prepared in
accordance with GAAP, and accompanied by an opinion thereon acceptable to the
Bank by Price Waterhouse Coopers LLP or other independent accountants of
national standing selected by the Borrower, each of such statements to be
prepared in accordance with GAAP; or
(ii) if the Borrower shall have any Consolidated Subsidiaries,
the consolidated balance sheets of the Borrower and its Consolidated
Subsidiaries as of the end of such fiscal year and consolidated statements of
income, statements of cash flows and statements of changes in shareholders'
equity of the Borrower and its Consolidated Subsidiaries for such fiscal year,
all in reasonable detail and stating in comparative form the respective
consolidated figures for the corresponding date and period in the prior fiscal
year, and all prepared in accordance with GAAP, and as to the consolidated
statements accompanied by an opinion thereon acceptable to the Bank by Price
Waterhouse Coopers LLP or other independent accountants of national standing
selected by the Borrower, together with consolidating statements in respect of
all of the foregoing described consolidated financial statements, each of such
consolidating statements to be prepared in accordance with GAAP and certified by
the chief financial officer of the Borrower.
(iii) accompanying the financial statements delivered pursuant
to this Subsection (a), a certificate, in substantially the form of Exhibit B
hereto, by an appropriate officer of the Borrower certifying that the Borrower
was in compliance with ss.ss. 10.01, 10.02, 10.03 and 10.04 as at the end of the
fiscal year to which such financial statements relate, or if Borrower was not in
such compliance, describing any non-compliance in detail, and that no Default or
Event of Default has occurred during the corresponding period, or if a Default
or Event of Default has occurred, describing the same and the steps taken by the
Borrower to cure the same, and setting forth in reasonable detail calculations
showing compliance with the covenants set forth under Article 10 hereof.
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(b) Quarterly Financial Statements. As soon as available and in any
event within 45 days after the end of each of the Borrower's first three fiscal
quarters during each fiscal year of Borrower:
(i) if the Borrower shall have no Consolidated Subsidiaries,
the balance sheet of the Borrower as of the end of such quarter and statement of
income, of the Borrower and its Consolidated Subsidiaries for the period
commencing at the end of the previous fiscal year and ending with the end of
such fiscal quarter, all in reasonable detail and stating in comparative form
the respective figures for the corresponding date and period in the previous
fiscal year, and all prepared in accordance with GAAP, and certified by an
appropriate officer of the Borrower (subject to year-end adjustments); or
(ii) if the Borrower shall have any Consolidated Subsidiaries,
the consolidating and consolidated balance sheets of the Borrower and its
Consolidated Subsidiaries as of the end of such quarter and consolidating and
consolidated statement of income, of the Borrower and its Consolidated
Subsidiaries for the period commencing at the end of the previous fiscal year
and ending with the end of such fiscal quarter, all in reasonable detail and
stating in comparative form the respective consolidated figures for the
corresponding date and period in the previous fiscal year, and all prepared in
accordance with GAAP, and certified by an appropriate officer of the Borrower
(subject to year-end adjustments); and
(iii) accompanying the financial statements delivered pursuant
to this Subsection (b), a certificate, in substantially the form of Exhibit C
hereto, by an appropriate officer of the Borrower certifying that the Borrower
was in compliance with ss.ss. 10.01, 10.02, 10.03 and 10.04 as at the end of the
quarter to which such financial statements relate, or if Borrower was not in
such compliance, describing any non-compliance in detail, and that no Default or
Event of Default has occurred during the corresponding period, or if a Default
or Event of Default has occurred, describing the same and the steps taken by the
Borrower to cure the same, and setting forth in reasonable detail calculations
showing compliance with the covenants set forth under Article 10 hereof.
(c) Notice of Litigation. Promptly after the notice of the commencement
thereof is received by any officer of the Borrower, notice of all actions,
suits, and proceedings before any court or governmental department, commission,
board, bureau, agency or instrumentality, domestic or foreign, directly
affecting the Borrower or any of its Subsidiaries which either (a) relate to the
clean-up of toxic or chemical waste, or (b) if determined adversely to the
Borrower or such Subsidiary, could have a Material Adverse Effect;
(d) Notice of Defaults and Events of Default. As soon as reasonably
practicable, and in any event within 10 days after the occurrence of each
Default or Event of Default, a written notice setting forth the details of such
Default or Event of Default and the action which is proposed to be taken by the
Borrower with respect thereto;
(e) General Information. Such other information respecting the
condition or operations, financial or otherwise, of the Borrower or any of its
Subsidiaries as the Bank may from time to time reasonably request.
(f) ERISA Notices. Promptly after notifying the government, if
government notice is required, and otherwise within ten days after the Borrower
knows that any of the events or conditions specified below with respect to any
Plan or Multiemployer Plan have occurred or exist, a statement signed by a
senior financial officer of the Borrower setting forth details respecting such
event or condition and the action, if any, which the Borrower or its ERISA
Affiliate proposes to take with respect thereto (and a copy of any report or
notice required to be filed with or given to PBGC by the Borrower or an ERISA
Affiliate with respect to such event or condition):
(i) any reportable event, as defined in Section 4043(b) of
ERISA, with respect to a Plan, as to which PBGC has not by regulation waived the
requirement of Section 4043(a) of ERISA that it be notified within 30 days of
the occurrence of such event (provided that a failure to meet the minimum
funding standard of Section 412 of the Code or Section 302 of ERISA including,
without limitation, the failure to make on or before its due date a required
installment under Section 412(m) of the Code or Section 302(e) of ERISA, shall
be a reportable event regardless of the issuance of any waivers in accordance
with Section 412(d) of the Code) and any request for a waiver under Section
412(d) of the Code for any Plan;
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(ii) the distribution under Section 4041 of ERISA of a notice
of intent to terminate any Plan or any action taken by the Borrower or an ERISA
Affiliate to terminate any Plan;
(iii) the institution by PBGC of proceedings under Section
4042 of ERISA for the termination of, or the appointment of a trustee to
administer, any Plan, or the receipt by the Borrower or any ERISA Affiliate of a
notice from a Multiemployer Plan that such action has been taken by PBGC with
respect to such Multiemployer Plan;
(iv) the complete or partial withdrawal from a Multiemployer
Plan by the Borrower or any ERISA Affiliate that results in liability under
Section 4201 or 4204 of ERISA (including the obligation to satisfy secondary
liability as a result of a purchaser default) or the receipt of the Borrower or
any ERISA Affiliate of notice from a Multiemployer Plan that it is in
reorganization or insolvency pursuant to Section 4241 or 4245 of ERISA or that
it intends to terminate or has terminated under Section 4041A of ERISA;
(v) the institution of a proceeding by a fiduciary or any
Multiemployer Plan against the Borrower or any ERISA Affiliate to enforce
Section 515 of ERISA, which proceeding is not dismissed within 30 days;
(vi) the adoption of an amendment to any Plan that pursuant to
Section 401(a)(29) of the Code or Section 307 of ERISA would result in the loss
of tax-exempt status of the trust of which such Plan is a part if the Borrower
or an ERISA Affiliate fails to timely provide security to the Plan in accordance
with the provisions of said Sections.
(g) ERISA Reports. Promptly after the request of the Bank, copies of
each annual report filed pursuant to Section 104 of ERISA with respect to each
Plan (including, to the extent required by Section 104 of ERISA, the related
financial and actuarial statements and opinions and other supporting statements,
certifications, schedules and information referred to in Section 103) and each
annual report filed with respect to each Plan under Section 4065 of ERISA;
provided, however, that in the case of a Multiemployer Plan, such annual reports
shall be furnished only if they are available to the Borrower or an ERISA
Affiliate;
(h) Reports to Other Lenders. Promptly after the furnishing thereof,
copies of any statement or report furnished to any other party pursuant to the
terms of any indenture, loan or credit or similar agreement to which the
Borrower is a party and not otherwise required to be furnished to the Bank
pursuant to any other clause of this ss. 8.06;
(i) Proxy Reports, Etc. Promptly after the sending or filing thereof,
copies of all proxy statements, financial statements and reports which the
Borrower or any of its Subsidiaries sends to its stockholders, and copies of all
regular, periodic and special reports, and all registration statements which the
Borrower or any such Subsidiary files with the Securities and Exchange
Commission or any governmental authority which may be substituted therefor, or
with any national securities exchange;
(j) Notice of Forfeiture Proceeding. Promptly after the commencement
thereof or promptly after the Borrower knows of the commencement or threat
thereof, notice of any Forfeiture Proceeding;
Section 8.07. Audits. The Bank shall have the right to conduct an audit
from time to time of the Borrower's inventory, operations and books and records,
including but not limited to the Borrower's accounts receivable. The costs of
one such audit per calendar year, computed at the Bank's standard rates for
audit charges, shall be paid by the Borrower upon demand by the Bank and the
Bank may, but is not required to, add such costs to the amount of the Prime
Loans outstanding under the Note as a borrowing hereunder. If the Bank conducts
more than one audit per calendar year, and provided the Borrower is not in
Default, the Borrower shall not be responsible for the cost of the additional
audits.
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Section 8.08. Lease Financings. Provide Bank with an opportunity to
furnish a quotation on any lease financing to be undertaken by the Borrower or
any of its Consolidated Subsidiaries.
ARTICLE 9. NEGATIVE COVENANTS.
So long as any portion of the Note shall remain unpaid or the Bank
shall have any Commitment under this Agreement, the Borrower shall not:
Section 9.01. Debt. Create, incur, assume or suffer to exist, or permit
any of its Subsidiaries to create, incur, assume or suffer to exist any Debt,
except:
(a) Debt of the Borrower under this Agreement or the Note;
(b) Debt currently outstanding and reflected on the balance sheet of
the Borrower described in ss. 7.05 hereof, but no renewals, extensions,
increases or refinancings thereof;
(c) Purchase Money Debt not exceeding an aggregate principal amount of
$1,500,000 incurred during any fiscal year of the Borrower;
(d) Subordinated Debt (provided that the incurrence of such
Subordinated Debt does not cause the Borrower to be in violation of the
Covenants set forth in Article 10); and
Section 9.02. Guarantees, Etc. Assume, guarantee, endorse or otherwise
be or become directly or contingently responsible or liable, or permit any of
its Subsidiaries to assume, guarantee, endorse or otherwise be or become
directly or contingently responsible or liable (including, but not limited to,
an agreement to purchase any obligation, stock, assets, goods or services or to
supply or advance any funds, assets, goods or services, or an agreement to
maintain or cause such Person to maintain a minimum working capital or net worth
or otherwise to assure the creditors of any Person against loss) for the
obligations of any Person, except guarantees by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business.
Section 9.03. Liens. (a) Create, incur, assume, or suffer to exist or
permit any of its Subsidiaries to create, incur, assume, or suffer to exist at
any one time, any Lien, upon or with respect to any of its Property, including
without limitation, inventory, accounts, accounts receivable, contract rights,
chattel paper, instruments, acceptances, drafts and general intangibles, all as
defined in the Uniform Commercial Code of the State of New York, except for (i)
Existing Liens, (ii) Permitted Encumbrances, and (iii) Liens granted to the
Bank.
(b) Enter into any sale and lease-back or similar financing device or
scheme in respect of its Property owned prior to such financing, or permit any
Subsidiary to do so.
Section 9.04. Investments. Make, or permit any of its Subsidiaries to
make, any loan or advance to any Person or purchase or otherwise acquire, or
permit any such Subsidiary to purchase or otherwise acquire, any capital stock,
assets, obligations or other securities of, make any capital contribution to, or
otherwise invest in, or acquire any interest in, any Person, except: (a)
investment grade securities; (b) deposits in financial institutions; (c)
investments listed on Schedule 1 hereto; and (d) loans or advances to employees
not to exceed $50,000 in the aggregate during any fiscal year of the Borrower;
provided further that each such loan advance shall be required to be repaid
within one year from the date such advance shall be made (and, if not, the
Borrower shall take appropriate action for collection).
Section 9.05. Sale of Assets. Sell, lease, assign, transfer or
otherwise dispose of, or permit any of its Subsidiaries to sell, lease, assign,
transfer or otherwise dispose of any of its now owned or hereafter acquired
assets, (including, without limitation, shares of stock and indebtedness of such
Subsidiaries, receivables and leasehold interests and including any transfers to
any parent corporation of the Borrower or to any other Affiliate of the
Borrower), except for (i) inventory disposed of in the ordinary course of
business and (ii) not more than twenty percent (20%) of each or any class of
capital stock of any Subsidiary, and (iii) other assets disposed of having an
aggregate fair market value not exceeding $200,000 during any fiscal year of the
Borrower and sold for a price which is within a fair market value for such
assets.
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Section 9.06. Mergers, Etc. Sell, assign, lease or otherwise dispose of
(whether in one transaction or in a series of transactions) all or substantially
all of its assets (whether now owned or hereafter acquired), to any Person;
Merge or consolidate with any Person, or acquire all or substantially all of the
stock or assets or the business of any Person, or permit any of its Subsidiaries
to do so, unless (i) no Default or Event of Default shall exist or shall occur
after giving effect to the contemplated transaction, (ii) the Borrower is the
surviving entity, (iii) the currency for the transaction is entirely the stock
of the Borrower, or, in a cash transaction, the total cost of the transaction is
less than $7,500,000; and (iv) the Borrower provides the Bank with (a) pro-forma
financial statements for the twelve month period ending on the last day of the
preceding month, for the combined entity, (and including any Indebtedness
incurred by Borrower in connection with the transaction) demonstrating
compliance with all of the terms of this Agreement and (b) pro-forma financial
statements for the twelve month period commencing on the projected date of
closing of the contemplated transaction, for the combined entity, (and including
any Indebtedness incurred by Borrower in connection with the transaction)
demonstrating compliance with all of the terms of this Agreement.
Section 9.07. Acquisitions. Make any Acquisition or permit any
Subsidiary to do so, unless (i) no Default or Event of Default shall exist or
shall occur after giving effect to the contemplated transaction, (ii) the
Borrower is the surviving entity, (iii) the currency for the transaction is
entirely the stock of the Borrower, or, in a cash transaction, the total cost of
the transaction is less than $7,500,000; and (iv) the Borrower provides the Bank
with (a) pro-forma financial statements for the twelve month period ending on
the last day of the preceding month for the combined entity (and including any
Indebtedness incurred by Borrower in connection with the transaction)
demonstrating compliance with all of the terms of this Agreement and (b)
pro-forma financial statements for the twelve month period commencing on the
projected date of closing of the contemplated transaction, for the combined
entity, (and including any Indebtedness incurred by Borrower in connection with
the transaction) demonstrating compliance with all of the terms of this
Agreement.
Section 9.08. No Activities Leading to Forfeiture. Engage or permit any
Subsidiaries to engage in the conduct of any business or activity which could
reasonably be expected to result in a Forfeiture Proceeding.
Section 9.09. Creation of Subsidiaries. Create or permit to exist any
Subsidiary with assets or operations unless such Subsidiary shall have first
executed and delivered a Guaranty to the Bank, together with corporate
supporting documentation and a favorable opinion of counsel in respect of such
Guaranty, all in form and substance satisfactory to the Bank.
Section 9.10. No Material Change. Make or permit any material change in
the management or direction of the Borrower's business or operations, including,
but not limited to, a change in its executive management, which is not
satisfactory to the Bank.
ARTICLE 10. FINANCIAL COVENANTS.
So long as any portion of the Note shall remain unpaid or the Bank
shall have any Commitment under this Agreement:
Section 10.01. Funded Debt/EBITDA Ratio. The Borrower shall not permit
the Funded Debt/EBITDA Ratio to exceed 3.0 to 1 measured as at the end of each
fiscal quarter of the Borrower.
Section 10.02. Fixed Charge Coverage Ratio. The Borrower will not
permit the Fixed Charge Coverage Ratio to be less than 1.5 to 1.0 measured as at
the end of each fiscal quarter of the Borrower.
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Section 10.03. Income or Loss. The Borrower shall not permit
Consolidated Income to be a negative amount (a loss) for any fiscal quarter
commencing on or after July 1, 1998 or for any fiscal year commencing on or
after January 1, 1998.
Section 10.04. EBITDA/Interest Expense Ratio. The Borrower will not
permit the EBITDA/Interest Expense Ratio to be less than 4.0 to 1.0 measured as
at the end of each fiscal quarter of the Borrower.
ARTICLE 11. EVENTS OF DEFAULT.
Section 11.01. Events of Default. Any of the following events shall be
an "Event of Default":
(a) The Borrower shall fail to pay the principal of or interest on the
Note within 15 Banking Days after such principal or interest shall be due and
payable, or shall fail to pay any amount of a fee or any other amount payable
under this Agreement within 30 Banking Days after such amount or fee shall be
due and payable;
(b) Any representation or warranty made or deemed made by the Borrower
in this Agreement or which is contained in any certificate, document, opinion,
financial or other statement furnished at any time under or in connection with
any Facility Document shall prove to have been incorrect in any material respect
on or as of the date made;
(c) The Borrower shall fail to perform or observe any term, covenant or
agreement contained in ss.ss. 8.03, 8.04, 8.05 or 8.06, and, if the Borrower
provided the Bank with the notice required under ss. 8.06(d), such failure shall
remain unremedied for 15 consecutive calendar days after written notice thereof
shall have been given to the Borrower by the Bank, and if such notice under ss.
8.06(d) is not provided, then such failure shall remain unremedied for 30
consecutive days after its occurrence; provided, however, that if a breach or
failure specified in this Subsection (c) be such that (i) it is not a breach of
ss.ss. 8.03 or 8.05 and (ii) it can be corrected but not within the period
specified herein, it shall not constitute the basis of an event of default
hereunder (a) if corrective action capable of remedying such breach or failure
is instituted by the Borrower within 5 days of notice of such breach or failure
and diligently pursued until such breach or failure is corrected, (b) if the
Borrower shall within such 5 day period furnish to the Bank a certificate
executed by the President of the Borrower and the Vice President of Finance of
the Borrower certifying (i) that such breach or failure is such that it can be
corrected but not within the applicable period, (ii) that corrective action
capable of remedying such breach or failure has been instituted and is being
diligently pursued and will be diligently pursued until the breach or failure is
corrected, and (iii) that the Borrower shall notify the Bank by certificate
executed as above when such breach or failure has been corrected, and (c) such
breach or failure shall be fully corrected within a reasonable period mutually
agreed to in writing by the Bank and the Borrower not exceeding 30 days;
(d) The Borrower or any Guarantor shall fail to perform or observe any
term, covenant or agreement contained in any Facility Document (other than the
obligations described in (a) and (c) above on its part to be performed or
observed) and such failure shall remain unremedied for 30 consecutive calendar
days after written notice thereof shall have been given by the Bank to the other
parties to such Facility Document in the manner required by such Facility
Document; provided, however, that if a breach or failure specified in this
Subsection (d) be such that (i) it is not a breach of ss.ss. 8.02, 8.07, 9.01,
9.02, 9.03, 9.04, 9.05, 9.06, 9.07, 9.09, 10.01, 10.02, 10.03, or 10.04 and (ii)
it can be corrected but not within the period specified herein, it shall not
constitute the basis of an event of default hereunder (a) if corrective action
capable of remedying such breach or failure is instituted by the Borrower within
5 days of notice of such breach or failure and diligently pursued until such
breach or failure is corrected, (b) if the Borrower shall within such 5 day
period furnish to the Bank a certificate executed by the President of the
Borrower and the Vice President of Finance of the Borrower certifying (i) that
such breach or failure is such that it can be corrected but not within the
applicable period, (ii) that corrective action capable of remedying such breach
or failure has been instituted and is being diligently pursued and will be
diligently pursued until the breach or failure is corrected, and (iii) that the
Borrower shall notify the Bank by certificate executed as above when such breach
or failure has been corrected, and (c) such breach or failure shall be fully
corrected within a reasonable period mutually agreed to in writing by the Bank
and the Borrower not exceeding 30 days;
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(e) The Borrower or any of its Subsidiaries shall: (i) fail to pay any
Borrowed Money Obligation of the Borrower or any Subsidiary in an aggregate
principal amount outstanding exceeding Two Hundred-Fifty Thousand Dollars
($250,000) (other than the payment obligations described in (a) above), or any
interest or premium thereon, within 15 days of when due after any applicable
grace or cure period for such payment (whether by scheduled maturity, required
prepayment, acceleration, demand or otherwise); or (ii) fail to perform or
observe any material term, covenant or condition on its part to be performed or
observed under any agreement or instrument relating to any such indebtedness
referred to in (i) above, when required to be performed or observed, if the
effect of such failure to perform or observe is to accelerate, or to permit the
acceleration of, after the giving of notice or passage of time, or both, the
maturity of such indebtedness, whether or not such failure to perform or observe
shall be waived by the holder of such indebtedness; or any such indebtedness
shall be declared to be due and payable, or required to be prepaid (other than
by a regularly scheduled required prepayment), prior to the stated maturity
thereof;
(f) The Borrower or any of its Subsidiaries which in accordance with
GAAP would be deemed to be a material Subsidiary: (i) shall generally not, or be
unable to, or shall admit in writing its inability to, pay its debts as such
debts become due in the ordinary course of business, except for failure to pay
trade creditors provided that such delay in payment is in accordance with normal
business practices; or (ii) shall make an assignment for the benefit of
creditors, petition or apply to any tribunal for the appointment of a custodian,
receiver or trustee for it or a substantial part of its assets; or (iii) shall
commence any proceeding under any bankruptcy, reorganization, arrangement,
readjustment of debt, dissolution or liquidation law or statute of any
jurisdiction, whether, now or hereafter in effect; or (iv) shall have had any
such petition or application filed, or any such proceeding shall have been
commenced, against it, in which an adjudication or appointment is made or order
for relief is entered and which remains undismissed or unstayed for a period of
90 days or more; or (v) by any act or omission shall indicate its consent to,
approval of or acquiescence in any such petition, application or proceeding or
order for relief or the appointment of a custodian, receiver or trustee for all
or any substantial part of its properties; or (vi) shall suffer any such
custodianship, receivership or trusteeship to continue undischarged for a period
of 90 days or more;
(g) One or more judgments, decrees or orders for the payment of money
in excess of Two Hundred-Fifty Thousand Dollars ($250,000) in the aggregate
shall be rendered against the Borrower and any of its Subsidiaries or any such
judgments, decrees or orders shall continue unsatisfied and in effect for a
period of 30 consecutive days without being vacated, discharged, satisfied or
stayed or bonded pending appeal;
(h) Any of the following events shall occur or exist with respect to
the Borrower or any ERISA Affiliate: (i) any Prohibited Transaction involving
any Plan; (ii) any Reportable Event shall occur with respect to any Plan; (iii)
the filing under Section 4041 of ERISA of a notice of intent to terminate any
Plan or the termination of any Plan; (iv) any event or circumstance exists which
might constitute grounds entitling the PBGC to institute proceedings under
Section 4042 of ERISA for the termination of, or for the appointment of a
trustee to administer, any Plan, or the institution by the PBGC of any such
proceedings; (v) complete or partial withdrawal under Section 4201 or 4204 of
ERISA from a Multiemployer Plan or the reorganization, insolvency, or
termination of any Multiemployer Plan; and in each case above, such event or
condition, together with all other events or conditions, if any, could in the
opinion of the Bank subject the Borrower to any tax, penalty, or other liability
to a Plan, Multiemployer Plan, the PBGC, or otherwise (or any combination
thereof) which in the aggregate exceed or may exceed $250,000.
(i) (A) any Forfeiture Proceeding shall have been commenced or the
Borrower shall have given the Bank written notice of the commencement of any
Forfeiture Proceeding as provided in ss. 8.06(j) or (B) the Bank has a good
faith basis to believe that a Forfeiture Proceeding has been threatened or
commenced;
(j) any of the Guaranties shall at any time after its execution and
delivery and for any reason cease to be in full force and effect or shall be
declared null and void, or the validity or enforceability thereof shall be
contested by any of the Guarantors or any of the Guarantors shall deny it has
any further liability or obligation thereunder or shall fail to perform its
obligations thereunder; provided further, however that with respect to the death
or incompetency of any Guarantor who is a natural person, the Borrower shall
have 30 days after notice from the Bank to provide the Bank with a substitute or
replacement guaranty satisfactory to the Bank in its sole discretion;
(k) the Security Agreements shall at any time and for any reason cease:
(A) to create a valid and perfected priority security interest in and to the
property subject to such Agreements, other than if due to the Bank's actions or
omissions; or (B) to be in full force and effect or shall be declared null and
void, or the validity or enforceability thereof shall be contested by the
Borrower or the Borrower shall deny it has any further liability or obligation
under the Security Agreements or the Borrower shall fail to perform any of its
obligations thereunder after the expiration of any cure, waivers or grace
periods; or
E-25
<PAGE>
Section 11.02. Remedies. If any Event of Default shall occur, the Bank
may, by notice to the Borrower, (a) declare the Commitment to be terminated,
whereupon the same shall forthwith terminate, and (b) declare the outstanding
principal of the Note, all interest thereon and all other amounts payable under
this Agreement and the Note to be forthwith due and payable, whereupon the Note,
all such 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; provided that, in the case
of an Event of Default referred to in ss. 11.01(f) above, the Commitment shall
be automatically terminated, and the Note, all interest thereon and all other
amounts payable under this Agreement shall be automatically immediately due and
payable without presentment, demand, protest or other formalities of any kind,
all of which are hereby expressly waived by the Borrower.
ARTICLE 12. MISCELLANEOUS
Section 12.01. Amendments and Waivers. No amendment or waiver of any
provision of this Agreement nor consent to any departure by the Borrower
therefrom, shall in any event be effective unless the same shall be in writing
and signed by the Bank, and then such waiver or consent shall be effective only
in the specific instance and for the specific purpose which given. No failure on
the part of the Bank to exercise, and no delay in exercising, any right
hereunder shall operate as a waiver thereof or preclude any other or further
exercise thereof or the exercise of any other right. The remedies herein
provided are cumulative and not exclusive of any remedies provided by law.
Section 12.02. Survival. All representations and warranties made herein
shall survive the borrowings hereunder.
Section 12.03. Usury. Anything herein to the contrary notwithstanding,
the obligations of the Borrower under this Agreement and the Note shall be
subject to the limitation that payments of interest shall not be required to the
extent that receipt thereof would be contrary to provisions of law applicable to
the Bank limiting rates of interest which may be charged or collected by the
Bank.
Section 12.04. Expenses. The Borrower shall reimburse the Bank for all
reasonable costs, expenses, and charges (including, without limitation, fees and
charges of external legal counsel for the Bank and costs allocated by its
internal legal department) incurred by the Bank in connection with the
preparation, performance or enforcement of this Agreement.
Section 12.05. Assignment; Participations. This Agreement shall be
binding upon, and shall inure to the benefit of, the Borrower, the Bank and
their respective successors and assigns (except that the Borrower may not assign
or transfer its rights or obligations hereunder), and such successors and
assigns shall thereupon become vested with all the benefits in respect thereof
granted to the Bank herein or otherwise; provided, however, that (i) the Bank
may assign all or any part of any Loan or Loans made by it only with the prior
consent of the Borrower (which shall not be unreasonably withheld), and (ii) the
Bank may sell participations therein, only to a bank, insurance company, trust
company, brokerage house, pension fund, or other financial institution, in which
event (a) in the case of an assignment, the assignee shall have, to the extent
of such assignment (unless otherwise provided therein), the same rights and
benefits and obligations as it would have if it were the Bank hereunder, and (b)
in the case of a participation, the participant shall not have any rights under
this Agreement, the Note, or any other documents referred to herein (the
participant's rights against the Bank in respect of such participation to be
those set forth in the agreement executed by the Bank in favor of the
participant relating thereto) and all amounts payable by the Borrower under
Article 5 hereof shall be determined as if the Bank had not sold such
participation, provided, however, that the Bank may not sell participations
under any agreement which gives the participant a right to approve or disapprove
of any consent, waiver or amendment by the Bank with respect to any provision of
this Agreement (except for any provision hereof relating to the payment of any
amount, the date on which such payment is due, the rate at which interest
accrues on any Loan or any other amount payable hereunder, or the release of any
guarantee of, or the substitution or release of any collateral security for,
such Loans). The Bank may furnish any information concerning the Borrower in the
possession of the Bank from time to time to assignees and participants
(including prospective assignees and participants).
E-26
<PAGE>
Section 12.06. Notices. Except in respect of service of process in
respect of any legal action or proceeding arising out of or relating to this
Agreement, unless the party to be notified otherwise notifies the other party in
writing, notices shall be given to the Bank and to the Borrower by ordinary mail
or telex addressed to such party at its address on the signature page of this
Agreement. Notices to the Bank shall be effective upon receipt.
Section 12.07. Set-Off. The Borrower agrees that, in addition to (and
without limitation of) any right of set-off, banker's lien or counterclaim the
Bank may otherwise have, the Bank shall be entitled, at its option, to offset
balances held by it for the account of the Borrower at any of the Bank's
offices, in dollars or in any other currency, against any principal of or
interest on any of the Loans or any other amount payable by the Borrower under
this Agreement or the Note, which is not paid when due, in which case it shall
promptly notify the Borrower thereof; provided that the Bank's failure to give
such notice shall not affect the validity thereof.
Section 12.08. Jurisdiction; Immunities. (a) The Borrower hereby
irrevocably submits to the jurisdiction of any New York State or United States
Federal court sitting in Monroe County, New York, over any action or proceeding
arising out of or relating to this Agreement or the Note, and the Borrower
hereby irrevocably agrees that all claims in respect of such action or
proceeding may be heard and determined in such New York State or Federal court.
The Borrower agrees that a final judgment in any such action or proceeding shall
be conclusive and may be enforced in other jurisdictions by suit on the judgment
or in any other manner provided by law. The Borrower further waives any
objection to venue in such State and any objection to an action or proceeding in
such State on the basis of forum non conveniens. The Borrower further agrees
that any action or proceeding brought against the Bank shall be brought only in
New York State or United States Federal court sitting in Monroe County.
(b) Nothing in this ss. 12.08 shall affect the right of the Bank to
serve legal process in any other manner permitted by law or affect the right of
the Bank to bring any action or proceeding against the Borrower or its property
in the courts of any other jurisdictions.
(c) To the extent that the Borrower has or hereafter may acquire any
immunity from jurisdiction of any court or from any legal process (whether
through service or notice, attachment prior to judgment, attachment in aid of
execution, execution or otherwise) with respect to itself or its property, the
Borrower hereby irrevocably waives such immunity in respect of its obligations
under this Agreement and the Note.
Section 12.09. Captions. The captions and headings hereunder are for
convenience only and shall not affect the interpretation or construction of this
Agreement.
Section 12.10. Severability. The provisions of this Agreement are
intended to be severable. If for any reason any provision of this Agreement
shall be held invalid or unenforceable in whole or in part in any jurisdiction,
such provision shall, as to such jurisdiction, be ineffective to the extent of
such invalidity or unenforceability without in any manner affecting the validity
or enforceability thereof in any other jurisdiction or the remaining provisions
hereof in any jurisdiction.
E-27
<PAGE>
Section 12.11. Counterparts. This Agreement may be executed in any
number of counterparts, all of which taken together shall constitute one and the
same instrument, and any party hereto may execute this Agreement by signing any
such counterpart.
Section 12.12. Governing Law. This Agreement shall be governed by, and
interpreted and construed in accordance with, the laws of the State of New York;
provided that the foregoing is not intended to limit the maximum rate of
interest which may be charged or collected by the Bank hereunder if, under the
laws applicable to it, the Bank may charge or collect such interest at a higher
rate than is permissible under the laws of said State.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed as of the day and year first above written.
PERFORMANCE TECHNOLOGIES, INCORPORATED
By:_________________________________
Name:_______________________________
Title:______________________________
Address for notices:
315 Science Parkway
Rochester, New York 14620
ATTN: President
THE CHASE MANHATTAN BANK
By:_________________________________
Name:_______________________________
Title:______________________________
Lending and Payment Office:
The Chase Manhattan Bank
One Chase Square
Rochester, New York 14643
Address for notices:
The Chase Manhattan Bank
One Chase Square
Rochester, New York 14643
ATTN: Performance Technologies
Account Representative
E-28
<PAGE>
EXHIBIT A
REVOLVING CREDIT NOTE
$5,000,000 December 30, 1998
FOR VALUE RECEIVED, Performance Technologies, Incorporated, a Delaware
corporation (the "Borrower"), hereby promises to pay to The Chase Manhattan Bank
(the "Bank"), for account of its Lending Office provided for by the Credit
Agreement dated as of December 30, 1998 between the Borrower and the Bank (the
"Credit Agreement"), or order, at the Payment Office the principal sum of Five
Million and No/100 Dollars ($5,000,000) or such portion thereof as may have been
advanced by the Bank pursuant to Article 2 of the Credit Agreement, in lawful
money of the United States of America and in immediately available funds, on the
dates and in the amounts provided in the Credit Agreement, and to pay interest
on the unpaid principal amount hereof from time to time outstanding, at such
office, in like money and funds, for the period commencing on the date of this
Note until such principal sum shall be paid in full, at the rates per annum and
on the dates provided in the Credit Agreement.
The amount, type and date of each Loan made by the Bank to the
Borrower, and each payment made on account of the principal thereof, shall be
recorded by the Bank on its books and, prior to any transfer of this Note,
endorsed by the Bank on the schedule attached hereto or any continuation
thereof, provided, however, that the failure of the Bank to endorse the schedule
shall not affect or impair the Borrower's obligation to repay any Loan or any
interest thereon or any other amount due under the Credit Agreement.
This Note is the Note referred to in the Credit Agreement and evidences
all Loans made by the Bank thereunder. Capitalized terms used in this Note have
the respective meanings assigned to them in the Credit Agreement.
The Credit Agreement provides for the acceleration of the maturity of
this Note upon the occurrence of certain events and for prepayments of Loans
upon the terms and conditions specified therein.
This Note shall be governed by and construed in accordance with the
laws of the State of New York.
PERFORMANCE TECHNOLOGIES, INCORPORATED
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE>
ANNEX TO NOTE
- --------------- -------------- ----------- ----------- ----------- ----------
Principal Principal Unpaid
Date of Loan Type of Loan Amount Amount Principal Notation
of Loan Paid or Amount Made By
Prepaid
- --------------- -------------- ----------- ----------- ----------- ----------
- --------------- -------------- ----------- ----------- ----------- ----------
- --------------- -------------- ----------- ----------- ----------- ----------
- --------------- -------------- ----------- ----------- ----------- ----------
- --------------- -------------- ----------- ----------- ----------- ----------
- --------------- -------------- ----------- ----------- ----------- ----------
- --------------- -------------- ----------- ----------- ----------- ----------
- --------------- -------------- ----------- ----------- ----------- ----------
- --------------- -------------- ----------- ----------- ----------- ----------
- --------------- -------------- ----------- ----------- ----------- ----------
<PAGE>
EXHIBIT B
ANNUAL COMPLIANCE CERTIFICATE
This Compliance Certificate is rendered to The Chase Manhattan Bank
(the "Bank") by Performance Technologies, Incorporated (the "Borrower") pursuant
to ss. 8.06(a)(iii) of the Credit Agreement between The Bank and the Borrower
dated December ___, 1998 (the "Credit Agreement").
The undersigned hereby certifies that in respect of the fiscal year
ending December ___, 19___ (the "Year"):
1. The Borrower was in compliance withss.ss. 10.01, 10.02, 10.03 and
10.04 of the Credit Agreement as at the end of the Year [except
- -----------------].
2. No "Default" or "Event of Default" (as defined in the Credit
Agreement) occurred during the Year [except
- ----------------].
Dated: _____________, 19___
PERFORMANCE TECHNOLOGIES, INCORPORATED
By:_________________________________
Name:_______________________________
Title:______________________________
<PAGE>
EXHIBIT C
QUARTERLY COMPLIANCE CERTIFICATE
This Compliance Certificate is rendered to The Chase Manhattan Bank
(the "Bank") by Performance Technologies, Incorporated (the "Borrower") pursuant
to ss. 8.06(b)(iii) of the Credit Agreement between the Bank and the Borrower
dated December ___, 1998 (the "Credit Agreement").
The undersigned hereby certifies that in respect of the fiscal quarter
ending _____________, 19___ (the "Quarter"):
1.The Borrower was in compliance withss.ss. 10.01, 10.02, 10.03 and
10.04 of the Credit Agreement as at the end of the Quarter [except
- ------------].
2. No "Default" or "Event of Default" (as defined in the Credit
Agreement) occurred during the Quarter [except
- --------------].
Dated: ______________, 19___
PERFORMANCE TECHNOLOGIES, INCORPORATED
By:________________________________
Name:______________________________
Title:_____________________________
<PAGE>
SCHEDULE 1
SCHEDULE OF SUBSIDIARIES AND
INVESTMENTS IN SUBSIDIARIES (ss. 7.07)
PTI Virgin Island Corp. (Foreign Sales Corp.)
NO OTHER ACTIVE SUBSIDIARIES WITH ASSETS OR OPERATIONS
NO INVESTMENTS IN SUBSIDIARIES
<PAGE>
<TABLE>
SCHEDULE 2
<CAPTION>
EXISTING CREDIT ARRANGEMENTS AND LIENS (ss. 7.08)
<S> <C> <C> <C>
- -------------------- ----------------------------------------- ----------------- -----------
Start Date Collateral Description Monthly Payment Term
- -------------------- ----------------------------------------- ----------------- -----------
- --------------------------------------------------------------------------------------------
U.S. Bancorp Leasing and Financial
- -------------------------------------------------------------------------------- -----------
- -------------------- ----------------------------------------- ----------------- -----------
1/96 Production and data processing/ $2,242.15 48 months
computer equipment
- -------------------- ----------------------------------------- ----------------- -----------
- --------------------------------------------------------------------------------------------
Chase Manhattan Bank
- -------------------------------------------------------------------------------- -----------
- -------------------- ----------------------------------------- ----------------- -----------
Line of Credit: machinery, equipment,
fixtures accounts, inventory, general
intangibles, chattel paper and
insurance.
Electrovert Hydrocleaner
- -------------------- ----------------------------------------- ----------------- -----------
- --------------------------------------------------------------------------------------------
City of Rochester
- --------------------------------------------------------------------------------------------
- -------------------- ----------------------------------------- ----------------- -----------
$80,000 Loan from City of Rochester
secured by Chase Manhattan Bank Letter
of Credit
- -------------------- ----------------------------------------- ----------------- -----------
</TABLE>
GUARANTIES
NONE
<PAGE>
SCHEDULE 3
SCHEDULE OF HAZARDOUS MATERIALS (ss. 7.12)
None
<PAGE>
SCHEDULE 4
SCHEDULE OF PARTNERSHIPS AND JOINT VENTURES (ss. 7.17)
None
<PAGE>
SCHEDULE 5 (ss. 7.20)
EXHIBIT 21
<TABLE>
SUBSIDIARIES OF PERFORMANCE TECHNOLOGIES, INCORPORATED
<CAPTION>
At December 31, 1998
Location of Incorporation
Or Organization
<S> <C>
Performance Technologies, Incorporated Delaware
PTI Virgin Islands Company, LTD Virgin Islands
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE DECEMBER 31, 1998 FINANCIAL STATEMENTS OF PERFORMANCE
TECHNOLOGIES, INC. AND SUBSIDIARIES AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001003950
<NAME> PERFORMANCE TECHNOLOGIES, INC.
<MULTIPLIER> 1,000
<CURRENCY> US
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-START> Jan-01-1998
<PERIOD-END> Dec-31-1998
<EXCHANGE-RATE> 1
<CASH> 25,627
<SECURITIES> 0
<RECEIVABLES> 4,799
<ALLOWANCES> 0
<INVENTORY> 4,425
<CURRENT-ASSETS> 36,079
<PP&E> 3,719
<DEPRECIATION> 2,785
<TOTAL-ASSETS> 37,835
<CURRENT-LIABILITIES> 4,289
<BONDS> 6
0
0
<COMMON> 75
<OTHER-SE> 33,177
<TOTAL-LIABILITY-AND-EQUITY> 37,835
<SALES> 30,202
<TOTAL-REVENUES> 30,202
<CGS> 12,339
<TOTAL-COSTS> 10,223
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 8,929
<INCOME-TAX> 3,146
<INCOME-CONTINUING> 5,783
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,783
<EPS-PRIMARY> 0.80
<EPS-DILUTED> 0.76
</TABLE>
