SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1998
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
Commission file number 0-20743
OPEN PLAN SYSTEMS, INC.
(Name of Small Business Issuer in Its Charter)
Virginia 54-1515256
(State or Other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
4299 Carolina Avenue, Building C 23222
Richmond, Virginia (Zip Code)
(Address of Principal Executive Offices)
(804) 228-5600
(Issuer's Telephone Number, Including Area Code)
Securities registered under Section 12(b) of the Act: None.
Securities registered under Section 12(g) of the Act:
Common Stock, no par value
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days. Yes X No
Check if there is no disclosure of delinquent filers in response to Item
405 of Regulation S-B contained in this form, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
The issuer's revenues for the fiscal year ended December 31, 1998 were
$33,676,000.
The aggregate market value of the Common Stock held by non-affiliates of
the Company as of March 18, 1999 was $8,909,416.
The number of shares of Common Stock outstanding as of March 18, 1999, was
4,672,433.
Transitional Small Business Disclosure Format (check one): Yes ___ No X
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Company's definitive Proxy Statement for its 1999 Annual
Meeting of Shareholders (to be filed) is incorporated by reference into Part III
of this Form 10-KSB.
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TABLE OF CONTENTS
PART I
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Page
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Item 1. Description of Business................................................................. 1
Item 2. Description of Property................................................................. 7
Item 3. Legal Proceedings....................................................................... 7
Item 4. Submission of Matters to a Vote of Security Holders..................................... 8
PART II
Item 5. Market for Common Equity and Related Stockholder Matters................................ 9
Item 6. Management's Discussion and Analysis of Financial Condition and Results of
Operations.............................................................................. 10
Item 7. Financial Statements....................................................................16
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..................................................32
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons;
Compliance with Section 16(a) of the Exchange Act.......................................32
Item 10. Executive Compensation..................................................................32
Item 11. Security Ownership of Certain Beneficial Owners and Management..........................32
Item 12. Certain Relationships and Related Transactions..........................................32
Item 13. Exhibits, List and Reports on Form 8-K..................................................33
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PART I
Item 1. .........Description of Business
Open Plan Systems, Inc. (the "Company") was incorporated under the laws of
the Commonwealth of Virginia on September 11, 1989. The Company restores,
remanufactures and markets modular office Work Stations. The Company operates
remanufacturing facilities in Richmond, Virginia and Lansing, Michigan. During
1998, it closed a light remanufacturing facility in Dallas, Texas and sold
assets related to new furniture manufacturing at its Richmond, Virginia plant.
The Office Furniture Industry
The trend in the office furniture industry for the past twenty-five years
has been away from a simple desk and file design to a sophisticated Work Station
design because of the flexibility and productivity advantages that such Work
Stations provide. Work Stations have become more sophisticated as the usage of
computers and telecommunications equipment has increased in modern offices.
The Company competes in the office furniture industry with national and
regional manufacturers of new office furniture and with local and regional
remanufacturers of used office furniture. Steelcase, Inc. ("Steelcase"), Herman
Miller, Inc. ("Herman Miller") and Haworth, Inc. ("Haworth") constitute the
dominant manufacturers, collectively representing approximately two-thirds of
the installed base of Work Stations. Each of these manufacturers has created a
unique system for connecting panels, power and telecommunications raceways,
resulting in virtually no interchangeability between products of different
manufacturers. Each manufacturer's Work Stations provide for several hundred
variations. In recent years, more sophisticated telecommunications, power
distribution and wire management elements have been added to Work Stations as
computer usage has increased in offices. With respect to independent
remanufacturers of used Work Stations, the Company believes that the vast
majority of such remanufacturers are local operations serving a single city or
metropolitan area from a single sales office.
Since the mid-1980s, end-users with existing Work Stations have had four
primary options when considering changes in their existing Work Stations: (i)
acquire upgraded power components, new fabric and panel trim from the Work
Station manufacturer to be retrofitted on existing Work Stations, frequently
during installation in a new facility; (ii) acquire new Work Stations from a
manufacturer or dealer while disposing of existing furniture and Work Stations
to a broker or remanufacturing company; (iii) acquire remanufactured Work
Stations while disposing of the old furniture and Work Stations to brokers or
the remanufacturer; and (iv) acquire "as is" Work Stations.
The business of remanufacturing Work Stations has grown steadily during the
1990's. The Company believes this growth is principally due to the greater
availability of high quality remanufactured Work Stations at prices
substantially below manufacturers' retail list prices for new Work Stations,
thereby providing end-users with substantial value. In addition, the growth of
the remanufacturing business has been assisted by the increased availability of
used Work Stations for remanufacturing. Used Work Stations have become more
readily available in recent years due to an increased base of installed Work
Stations and corporate events such as mergers, acquisitions, divestitures,
downsizings and relocations. The adoption of recycling programs or policies by
businesses has also been a major factor leading to increased demand for
remanufactured Work Stations.
Overview of the Company's Operations
The Company's primary business is the remanufacture of modular office Work
Stations. The Company purchases used Work Stations from end-users, brokers and
dealers and transports the Work Stations to its facilities in Richmond, Virginia
and Lansing, Michigan. The Work Stations are disassembled, inventoried by
component parts and stored. The Company then restores the used Work Stations
through the remanufacturing process to meet customers' needs. Remanufacturing
usually includes sanding, painting, laminating, reupholstering and updating
electrical components.
The Company's design staff works with customers to optimize use of
available office space through customized space plans. Customers are able to
choose from among several colors of laminate and paint and over 1,000 different
fabrics. After the initial sales call, the Company responds to the customer's
needs with a proposal which includes a computer aided design of the space, the
number of Work Stations and the cost, typically within 72 hours. Once a purchase
order is received, the fabric selected by the customer is applied to the panels,
and the various components of the Work Stations are assembled for shipping. The
Work Stations sold by the Company's direct sales force are installed at the
customer's offices by the Company's employees or by approved outside installers
giving the Company control over the entire process. The Company's large
inventory of disassembled component parts permits shipping generally within one
to four weeks of receiving a purchase order, depending on the product and
fabrics required. The Company believes that its ability to provide high quality
Work Stations at discounted prices, coupled with its emphasis on superior
customer service through its design staff and Company trained or approved
installers, gives it a competitive advantage over manufacturers and other
remanufacturers of Work Stations.
The Company's Richmond, Virginia and Lansing, Michigan facilities include
all of the equipment required to remanufacture Work Stations including closed
and open painting and drying booths as well as sanding, woodworking and
reupholstering equipment. Plant layout has been designed to facilitate the
efficient flow of materials and streamline the remanufacturing process through
disassembly, storage, remanufacturing and shipping. Quality control for the
remanufactured products occurs at various stages during the remanufacturing
process including the final quality control verifications at shipment and upon
installation.
The Company sells Work Stations primarily through twelve Company-owned
direct sales offices. The Company believes that each of the fifty largest
metropolitan areas of the United States will support a sales office. In
marketing its products, the Company utilizes several innovative programs,
including its asset banking program, which allows customers to trade-in used
Work Stations in exchange for a credit towards future purchases. In addition,
the Company sells products through certain dealers throughout the country.
Products
The Company's principal product is remanufactured Herman Miller and Haworth
Work Stations. During 1996, the Company also acquired the capacity to
manufacture its own line of new Work Stations. However, during 1998, the Company
sold the assets relating to the manufacture of new Work Stations and
discontinued its product line of new Work Stations.
The Company believes that Work Stations offer significant advantages over
the traditional desk, free-standing file and permanent drywall office layout.
Work Stations enable businesses to house more people in a given space because
Work Stations combine moveable panels, work surfaces, storage units, lighting
and electrical distribution into a single integrated unit. The end result is
less square feet of office space per worker and, therefore, lower facility costs
per employee.
Work Stations often are acoustically treated to provide conversational
privacy required by closer quarters. Because Work Stations usually are lower
than ceiling height, lighting, heating, ventilation and air conditioning are not
confined to individual spaces, allowing distribution among more workers which
reduces building operating costs. Work Stations incorporate electrical circuitry
necessary to operate computers and telecommunications equipment. The Company's
Work Stations meet the safety standards established by Underwriters
Laboratories. The Company believes it is one of only a few remanufacturers whose
Work Station components are listed with Underwriters Laboratories.
Manufacturers and remanufacturers customize Work Stations to accommodate
specific job functions. Each manufacturer offers its Work Stations with or
without power access in a variety of panel heights, widths, paint colors and
fabrics. Work surfaces, drawer and file pedestals, storage components and
accessories are offered with various size and finish options.
The core of the Work Station is a panel two inches thick with widths
varying from 12 inches to 60 inches. Heights vary from 34 inches to 96 inches.
The panel frame may be covered with a laminated surface or, most frequently,
fabric over an acoustical batting to which removable, slotted steel side rails
and top caps are attached to accommodate the customized interconnection of
panels and the hanging of work surfaces or other components. Electrical outlets
and space for telephone and computer cables are provided by removable raceways
of metal and plastic attached at the base of the panel.
In addition to Work Stations, the Company also sells new office chairs,
desks and other case goods purchased from various manufacturers.
Inventory
The number of installed Work Stations has increased steadily over the past
twenty-five years and is now believed to exceed 20 million. The gradual aging of
this installed base of Work Stations has resulted in the increased availability
of used Work Stations for remanufacturing. The Company continuously seeks
opportunities to purchase used Work Stations throughout the United States
through competitive bids or private negotiations with end-users, brokers and
dealers.
Manufacturers of new Work Stations have developed trade-in programs to
assist their dealers in encouraging their customers to purchase the most current
products. Trade-ins also have been used to entice customers of dealers and
manufacturers to trade-in a competitor's Work Stations for new Work Stations.
While each manufacturer has a slightly different approach to the trade-in
market, all frequently contact a list of brokers or remanufacturers, such as the
Company, to solicit the highest bid for the entire inventory.
At the time the Company purchases inventory, it disassembles the Work
Stations and ships the disassembled Work Stations to its facilities where the
Company determines whether the parts should be cleaned and sold as part of its
"as is" sales program or remanufactured and stored as inventory and sold
thereafter. The Company strives to ship all of its customers' orders in four
weeks or less. The Company initiated a two week lead time program to accommodate
shorter lead times from customers that will use a limited selection of fabrics
and laminates. The Company also has the ability to purchase or produce new parts
and accessories which are in short supply in the used furniture market, thereby
eliminating the need to purchase additional Work Stations for these specific
parts. The Company believes its ability to opportunistically acquire used Work
Stations at attractive prices and hold them for future sale gives it a
competitive advantage over other remanufacturers with less capital.
The Company utilizes a computerized inventory control system which serves
its sales, production, shipping and accounting functions. The system enables the
Company to continually monitor its inventory of component parts, to determine
its needs for additional purchases of used Work Stations, to track its work in
process and to facilitate the prompt delivery of remanufactured Work Stations to
its customers.
Distribution
Sales Offices. The Company currently operates twelve sales offices in the
metropolitan areas of Richmond, Washington D.C., Atlanta, Nashville, Chicago,
New York, Philadelphia, Raleigh, Norfolk, Cincinnati, Lansing and Detroit. The
Company believes that marketing and distributing its Work Stations through a
direct sales force located in geographically dispersed sales offices gives it a
competitive advantage over independent remanufacturing competitors who are
typically local companies with limited sales and distribution capacity outside
of their immediate market area. Approximately 80% of the Company's sales
historically have been made to end-users by the Company's own sales
representatives. In order to improve profitability and focus, the Company closed
offices in Dallas, Charlotte and Baltimore in 1998. In 1999, the Company intends
to continue its focus on improving the performance of its existing sales
offices.
Marketing and distributing its Work Stations through its own sales staff
allows the Company to eliminate the costs and additional price mark-up
associated with wholesale distribution, as well as enabling the Company to
retain direct control and oversight of its products and the selling process. A
direct sales force also permits the Company to deliver quality service to each
customer through its design and installation programs.
Dealer Network. In addition to its own sales staff, the Company maintains a
dealer network in those markets that are not sufficiently developed to support a
sales office or in larger markets to supplement the efforts of the direct sales
force. The dealer network allows the Company to market Work Stations on a
cost-effective basis to a large number of businesses which may not be reached by
the Company's sales representatives. Approximately 20% of the Company's sales
historically have been made through dealers. The Company believes that its
limited dealer network complements its strategy of expanding revenues through
its own sales offices. All dealer agreements are non-exclusive and may be
terminated at any time.
"As Is" Sales. A small but profitable portion of the Company's sales is
made to brokers, end-users and others who buy used Work Stations from the
Company on an "as is" basis. The Company's "as is" program involves the
selective purchase of used Work Stations in good condition that do not require
substantial repair or other alteration. The "as is" program appeals to customers
seeking sizable quantities of quality Work Stations at "budget" prices.
Sales and Marketing
General. The Company's sales and marketing strategy relies primarily upon
producing quality products at competitive prices and providing superior customer
service. Each sales office advertises through direct mail, billboards,
newspapers, business magazines and journals. Direct mailing to targeted
professional groups as well as mailings prior to and following trade shows have
resulted in large sales to several new customers. The Company often uses booth
displays at trade shows for national organizations of purchasing managers,
facility managers, interior designers, architects and local business groups. The
Company is firmly committed to advertising and constantly re-evaluates the most
efficient means of reaching prospective customers.
The Company's marketing also emphasizes its commitment to recycling.
Through its remanufacturing process, the Company recycles several million pounds
of office systems furniture each year that might otherwise be deposited in
landfills. Some companies have adopted recycling policies or programs that
require those businesses to purchase recycled products in varying quantities.
Because the Company's remanufactured Work Stations are a recycled product, the
Company may have a marketing advantage over manufacturers of new Work Stations.
Asset Banking. The Company developed its asset banking program in 1994 as a
means to offer additional services to larger middle market and Fortune 500
businesses who reconfigure, dismantle and warehouse large quantities of Work
Stations as an ongoing part of their operations. The asset banking program
allows businesses to trade-in used Work Stations by "depositing" them with the
Company in exchange for a "credit" based on current list prices of new Work
Stations toward future purchases of the Company's remanufactured Work Stations.
Work Stations "deposited" by customers become part of the Company's inventory of
used Work Stations that can be remanufactured and are not expected to be
returned to the customer. When a business with a "credit" chooses to purchase
Work Stations at then-prevailing prices, the customer can make a complete or
partial "withdrawal" from its account to pay for the Work Stations. The customer
has the option to receive cash rather than a "credit" toward a Work Station
purchase. The effect of the program is to make a customer's used Work Stations a
renewable asset. The program eliminates the customer's inventory, storage and
maintenance costs for Work Stations not in use, while at the same time
positioning the Company for a future sale and increasing the Company's inventory
which can be immediately remanufactured and sold. The Company also provides
value-added services, such as design and project management, without charge to
the customer to enhance the attractiveness of the program. The Company is
currently able to offer both Herman Miller and Haworth Work Stations in the
program.
Rental Program. The Company's rental program offers a cost-effective
alternative to ownership of Work Stations. Under the rental program, the Company
rents Work Stations for a minimum term of six months. Rates charged by the
Company vary with the term of the rental, with higher rates being charged for
terms of less than one year. Rent payments typically are due monthly from
customers during the term of the rental. Upon expiration of the term of the
rental, the Work Stations are returned to the Company and can be rented again or
remanufactured and sold for an additional profit. The rental program is an
attractive alternative for those customers with capital spending constraints. In
addition, customers who wish to evaluate long-term furniture requirements are
able to defer a commitment to purchase Work Stations while meeting their
short-term requirements for office furniture. The rental program has not
contributed significantly to the Company's past revenues due to the limited
number of rentals which have occurred to date under the program.
Government Services Administration. The United States Government Services
Administration ("GSA") in 1996 approved the Company's inclusion on the New
Introductory Schedule as a distributor of Work Stations and other related
products and services to the federal government. This has enabled the Company to
sell its remanufactured Work Stations to the federal government as well as
develop a previously untapped source of supply through trade-ins and "asset
banking." The GSA program became a solid contributor to 1998 sales volumes and
the Company believes that it can continue to expand this program.
Customers
The Company's customers range from small businesses to Fortune 500
companies. The typical size of a customer order is ten Work Stations or
approximately $25,000. Profit margins on smaller orders generally are greater
than on larger orders by Fortune 500 companies due to volume discounts provided
by manufacturers of new Work Stations on large orders, which the Company is
required to meet to compete for such orders. The Company is not dependent upon
any single customer or any single group of customers for a significant portion
of its sales. In 1998, the largest customer accounted for less than 5% of sales.
The loss of any one customer would not have a material adverse effect on the
Company.
Competition
The Company experiences intense competition in both the purchase of used
Work Stations and the sale of remanufactured and "as is" Work Stations. In
purchasing used Work Stations, the Company competes with manufacturers, dealers,
brokers and other remanufacturers. The competition between remanufacturers and
either manufacturers or dealers generally takes place in connection with
trade-ins by end-users of used Work Stations for new Work Stations. Brokers
typically purchase used Work Stations for resale to end-users and customers
which may include the Company, while other remanufacturers generally purchase
Work Stations for their own remanufacturing activities.
The Company competes with manufacturers, dealers, brokers and other
remanufacturers in the sale of its remanufactured and "as is" Work Stations.
Competition is primarily based upon price, delivery, design, quality and
customer service. Certain manufacturers, such as Steelcase, remanufacture their
own brand of used Work Stations for resale to customers. These manufacturers and
their dealers are able to offer both new and remanufactured Work Stations to
customers. The Company believes it has a competitive advantage over such
manufacturers and other remanufacturers due to its innovative marketing
programs, direct sales force, discount pricing and customer service. However,
manufacturers and dealers of new and remanufactured Work Stations have certain
competitive advantages including established distribution channels and marketing
programs, substantial financial strength, long-term customers, ready access to
component parts, and availability of used Work Stations through trade-ins.
Manufacturers also can sell new Work Stations at very substantial discounts
which reduces the Company's pricing advantage. Such deeply discounted sales,
however, generally occur only for very large orders which often provide
remanufacturers such as the Company the opportunity to acquire used Work
Stations of such purchasers at very attractive prices.
The Company believes it is the largest independent remanufacturer of Work
Stations in the United States based on gross revenues. Unlike most independent
remanufacturers, which are typically local operations serving a single city or
metropolitan area from a single sales office, the Company is able to compete
effectively in many markets through its distribution channels. The Company also
believes that its remanufacturing services are more comprehensive than the
services provided by most other remanufacturers. Many remanufacturers provide
minor repair services, but lack the personnel, equipment and facilities
necessary to completely remanufacture Work Stations. The Company's manufacturing
facilities include all of the equipment required to produce remanufactured Work
Stations including sanding, painting, drying, woodworking and reupholstering
equipment.
Intellectual Property
The Company is the owner of a service mark for "Open Plan Systems"
registered with the United States Patent and Trademark Office. The Company has
no trademarks or patents.
Original equipment manufacturers have obtained United States' patents on
certain component parts and design and manufacturing processes associated with
their own Work Stations. Management of the Company believes that the
remanufacturing of such Work Stations does not constitute an infringement of any
patents held by these manufacturers. However, there can be no assurance that
infringement claims will not be asserted against the Company. If such claims
were asserted, the Company could incur significant costs and diversion of
resources defending such claims and, in the event the Company did not prevail in
its defense, the Company could incur substantial damages that could have a
material adverse effect on the Company's financial condition and results of
operations.
The Company intends to continue to review existing patents applicable to
Work Stations in the ordinary course of manufacturing new component parts.
Seasonality and Backlog
In prior years, the Company noted a seasonal trend of lower sales volume in
the second and third quarters, but for the past two years the Company has had no
discernable pattern of seasonality. Because the Company recognizes revenues upon
shipment and typically ships Work Stations within three weeks of an order, a
substantial portion of the Company's revenue in each quarter results from orders
placed by customers during that quarter. As a result, the Company's revenues and
profits are difficult to predict and may fluctuate from quarter to quarter. The
Company typically does not have any significant backlog of customer orders
because it generally ships products within three weeks of receipt of an order.
The Company's backlog at December 31, 1998 was approximately $2,439,000.
Employees
As of December 31, 1998, the Company had 212 full time employees,
consisting of 81 manufacturing and remanufacturing personnel, 10 sales managers,
45 salespersons, 26 installers, 2 marketing specialists, 10 designers, 6
customer service, 25 administrative support and 7 management employees. The
Company also had 3 part time employees. The Company believes that its continued
success depends on its ability to attract and retain highly qualified personnel.
None of the Company's employees are covered by a collective bargaining
agreement. The executive officers and substantially all of the salespersons of
the Company have agreed that they will not disclose certain proprietary
information of the Company, and upon termination, will not solicit any customer
of the Company for two years and will not compete with the Company for one year.
The Company considers its relations with employees to be good.
Government Regulation
The Company's operations are subject to a variety of federal, state and
local environmental laws and regulations including those which limit the
discharge, storage, handling and disposal of hazardous materials. The Company's
principal environmental concerns relate to the handling and disposal of paints
and solvents. Management believes that the Company is in material compliance
with applicable federal, state and local environmental regulations. Compliance
with these regulations has not in the past had any material effect on the
Company's earnings, capital expenditures or competitive position; however, the
effect of such compliance in the future cannot be determined. . Regulations
implementing the federal Clean Air Act, as amended in 1990, may require reduced
emissions of volatile organic compounds and hazardous air pollutants, including
certain emissions resulting from the Company's use of paints and solvents in the
remanufacturing process. As a result, the Company may be required to install
emission controls or to institute changes in its remanufacturing processes in
order to comply with these reduced emission standards. The furniture industry
and its suppliers are attempting to develop water-based paint and finishing
materials to replace commonly-used organic-based paints and finishes which are a
major source of regulated emissions. The Company cannot at this time estimate
the impact of these new standards on the Company's operations and future capital
expenditure requirements, or the cost of compliance.
The Company's operations are also governed by laws and regulations relating
to work-place safety and worker health, principally the Occupational Safety and
Health Act and accompanying regulations and various state laws and regulations.
The Company does not believe that future compliance with current laws and
regulations will have a material adverse effect on its financial condition or
results of operations.
Insurance
The Company maintains liability insurance policies covering a number of
risks, including business interruption, property, commercial crime,
comprehensive general liability and workers compensation and employer's
liability insurance. The Company believes that its insurance coverage is
adequate. In addition, the Company has obtained "key-man" insurance in the
amount of $3,500,000 on the life of its former chief executive officer, naming
the Company as sole beneficiary.
Item 2. .........Description of Property
The Company leases 180,000 square feet of space at its facility in
Richmond, Virginia and 91,000 square feet of space at its facility in Lansing,
Michigan. The Richmond lease expires in July 2002. The Company subleases 36,000
square feet at its Richmond facility. The Lansing lease expires in September
2000, subject to a one-year renewal option. The Company also has numerous other
leases for its sales offices throughout the states in which it operates. The
Company owns substantially all of its equipment, including office and
manufacturing equipment. The Company believes that its properties are maintained
in good operating condition and are suitable for its purposes.
Item 3. .........Legal Proceedings
A portion of the potential consideration for the 1996 acquisition of
Immaculate Eagle, Inc. (d/b/a TFM Remanufactured Office Furniture)("TFM") was
87,500 shares of Common Stock of the Company, which has been held in escrow,
with an agreed upon value of $1.3 million, as security for indemnification
obligations of the former shareholders of TFM. In addition, under the terms of
the TFM purchase agreement, if the closing sales price of the Company's Common
Stock on October 1, 1998 was less than $15 per share, the Company was to make a
cash payment to the former shareholders of TFM equal to the difference between
the closing sales price on that date and $15, multiplied by the 87,500 shares of
common stock, (subject to certain adjustments, including claims by the Company
for indemnification). At the valuation date, October 1, 1998, this amount was
$1,115,625.
Management of the Company has reviewed the circumstances of the TFM
acquisition and has determined that the indemnification obligations of the
former TFM shareholders exceed the $1.3 million agreed value of the stock in
escrow. Open Plan Systems has requested the escrow agent to retain all of the
stock and has served notice of the indemnification claims to the former TFM
shareholders. As a result, no cash payment is due on any of the stock in escrow.
The former shareholders of TFM have disputed the indemnification claims. Under
the purchase agreement, the disputed indemnification claims must be arbitrated.
If the Company prevails on all of its claims in arbitration, the escrowed
shares will be returned to the Company. Should the Company not prevail on all of
its claims, the Company may be required to make cash payments to the
shareholders in amounts designated by the arbitrator. The aggregate $1,115,625
difference between the stock's market price on October 1, 1998 and the $15 value
assumed in the TFM purchase agreement has been recorded as a reduction in
goodwill and shareholders' equity.
On November 6, 1998, two former officers of the Company filed a lawsuit in
the State of Michigan, 30th Judicial Court, asserting among other things,
non-compliance with the contractual terms of certain employment agreements. The
plaintiffs assert damages of approximately $400,000 in the aggregate. The
Company believes that these claims are without merit. On the November 9, 1998,
the Company filed suit against the two former officers in the United States
District Court for the Eastern District of Virginia, claiming among other
things, improper use of Company assets. Due to the recent nature of these
actions, the Company is unable to predict the ultimate outcome of these actions.
Item 4. .........Submission of Matters to a Vote of Security Holders
No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year covered by this report.
<PAGE>
PART II
Item 5. .........Market for Common Equity and Related Stockholder Matters
Market for Common Stock. The Company's Common Stock is listed on the Nasdaq
National Market under the symbol "PLAN." The following table shows, for the
periods indicated, the high and low sales prices per share for the Common Stock
as reported by the Nasdaq National Market.
<TABLE>
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Calendar Year High Low
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1997
First Quarter ....................................................................$ 9.25 $ 5.00
Second Quarter....................................................................$ 5.00 $ 3.50
Third Quarter.....................................................................$ 6.75 $ 3.50
Fourth Quarter....................................................................$ 6.25 $ 2.63
1998
First Quarter ....................................................................$ 3.50 $ 2.63
Second Quarter....................................................................$ 2.82 $ 1.94
Third Quarter.....................................................................$ 3.13 $ 2.06
Fourth Quarter....................................................................$ 3.00 $ 1.94
1999
First Quarter (through March 16, 1999)............................................$ 2.92 $ 2.13
</TABLE>
As of March 18, 1999, there were approximately 1,320 holders of record of
the Company's Common Stock.
Dividend Policy. Since the Company's initial public offering in 1996, the
Company has not declared or paid any cash dividends or distributions on its
capital stock. The Company currently intends to retain earnings of the Company
to support operations and to finance expansion and therefore does not anticipate
paying cash dividends on the Common Stock in the foreseeable future. The payment
of cash dividends in the future will depend upon such factors as earnings
levels, capital requirements, the Company's financial condition and other
factors deemed relevant by the Board of Directors.
<PAGE>
Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations
1998 Compared to 1997
Net Sales. Net sales for the year ended December 31, 1998 increased to
$33.7 million from $32.0 million for the year ended December 31, 1997, an
increase of 5.3%. The increased volume was the result of continuing demand for
remanufactured office systems and increased sales at nine of the Company's 12
sales offices. Also contributing to the improved sales were shipments to the
federal government which in large part offset a single major $1.4 million order
in 1997. During 1998, three sales offices were closed as part of the operational
restructuring recorded in the second quarter and discussed in detail below. A
key element of the Company's sales strategy during the second half of the year
was the return to a focus on the Company's core remanufacturing strategy which
includes the remanufacture of Herman Miller and Haworth Work Stations. The
Company's sales strategy remains focused on a direct sales force in those
markets of sufficient potential to justify the investment required.
Operational Restructuring. The Company recorded a charge of $1,290,000 in
the second quarter of 1998. The restructuring charge of $1,290,000 recognizes
the costs related to three important strategic initiatives: 1) A return to a
focus on the core remanufacturing business; 2) streamlining and consolidation of
warehouse operations; and 3) consolidation of existing sales offices and
reductions in sales training staff. Pursuant to the restructuring plan, the
Company refocused on producing remanufactured product, reduced excess warehouse
space, divested certain assets associated with the new Work Station
manufacturing capabilities, and streamlined operations and reduced sales and
administrative staffing by approximately 30 people.
The restructuring charge recorded included approximately $400,000 for lease
termination costs, $600,000 for asset writedowns, and $100,000 for other costs
associated with streamlining operations. The Company believes that it will
achieve annual cost reductions of approximately $1,500,000 as a result of the
restructuring. During the third and fourth quarters, the Company disposed of all
fixed assets included in the restructuring and incurred substantially all of the
severance and lease termination costs associated with the restructuring plan.
Approximately $100,000 of the reserve remains to complete the lease termination
programs and warehouse consolidations. At this time management believes that the
economic impact of this plan is consistent with what was originally estimated.
Under the restructuring plan, the Company reduced its warehousing capacity
in Dallas, Atlanta, Cincinnati and Richmond as well as at its Lansing, Michigan
facility. The plan called for the reduction of 156,000 square feet of leased
warehouse space. Additionally, the Company has divested certain metal working
equipment and has written off its investment in new software acquired to support
new furniture manufacturing operations. This supports the Company's return to
its focus on remanufacturing. The Company believes that these programs will
reduce annual production costs by approximately $450,000 and will help it to
return to gross margins that are more in line with pre-1997 levels.
As part of the sales office restructuring program implemented at the end of
the second quarter, the Company closed its sales offices in Dallas, Charlotte
and Baltimore and reduced sales training staff in certain other markets. The
sales offices closed contributed less than $800,000 in sales during 1998. The
thrust of this program was to reduce the number of low production sales offices
and personnel. The Charlotte, Baltimore and Dallas markets will be serviced by
independent sales representatives or dealers. The Company does not anticipate
that these changes will have a material adverse impact on sales volumes in
future periods.
Gross Margin. The Company's gross margin decreased from $8.4 million or
26.2% for the year ended December 31, 1997 to $7.9 million or 23.5% for the year
ended December 31, 1998. This was caused by increased overhead costs during the
early part of 1998 as well as higher material costs and lower productivity
earlier in the year. During the first half of 1998, the Company's gross margin
percentage was 17.5%. The gross margin percentage improved to 29.1% in the
second half of 1998. The effect of the restructuring actions, improved
manufacturing productivity and other cost reduction activities resulted in the
improved margins. In 1998, the Company experienced less price discounting
pressure than in 1997.
The Company is continuing to analyze its procurement options with a major
emphasis on determining the best, most efficient manner of procuring each item
used in the manufacture and production of its product offerings. The Company has
implemented a three-pronged approach to product acquisition. The Company will
continue to purchase product on the used furniture market when the cost of such
product does not exceed certain pricing thresholds, it will purchase new product
to meet demand when the purchase price is less than that of remanufacturing or
manufacturing the part, and it will manufacture certain component parts where it
is economically advantageous to do so. During 1998, the Company successfully
refocused itself on reducing the cost of its remanufactured products.
Additionally, the Company believes that it can continue to trim inventory levels
for certain items.
Operating Expenses. Selling expenses increased by 10.8% to $7.2 million for
the year ended December 31, 1998 from $6.5 million for the year ended December
31, 1997. Selling expenses also increased as a percentage of sales. The increase
in selling expenses was caused by the Company's efforts in early 1998 to
increase the size of its sales force and branch office network. As noted
previously, the Company restructured its sales efforts at the end of the second
quarter of 1998 to bring these costs more in line with expected revenue trends
and provide a more solid base for future growth. When the Company opens new
sales offices, it typically takes several years to generate enough sales to
provide targeted returns. New sales offices are therefore initially a drain on
Company profits and the Company plans to carefully manage the timing of future
openings of new sales offices. With the Company's emphasis on its current sales
office structure, it expects to decrease these costs as a percentage of sales in
1999, continuing the positive trend established in the second half of 1998.
General and administrative expenses increased by 7.7% to $2.8 million for
the year ended December 31, 1998 from $2.6 million for the year ended December
31, 1997. This was primarily related to increases in corporate management and
personnel expenses during the early part of 1998. During 1998, the Company
incurred significant expenses related to significant changes in senior
management. In 1997, the Company dedicated significant resources to the
evaluation of potential business combinations and acquisitions that were
ultimately determined not to be good strategic fits for the Company. The Company
believes that it has added the appropriate resources to manage the Company's
current operations and still aggressively pursue future growth. The Company
significantly reduced these expenses in the latter part of 1998, with second
half 1998 expenses down $555,000 from the first half of 1998.
Other Non-Operating Income and Expenses. Total other income and expense
decreased from income of $14,000 for the year ended December 31, 1997 to expense
of $248,000 for the year ended December 31, 1998. The primary reasons are that
the Company drew down its entire cash balance and borrowed on its line of credit
during 1997. Bank debt declined from $2.8 million at the end of the second
quarter of 1998 to $1 million by 1998 year-end. The Company believes that
non-operating expenses will decrease in 1999 as the Company continues to reduce
debt balances.
Income Taxes. The Company recorded no tax benefit for the year as opposed
to a benefit of $269,000 in the prior year. As a result of recent operating
losses and the uncertainty of the realization of the potential tax benefits
thereof, the Company has not recorded potential income tax benefits of $1.3
million for 1998. The deferred income tax asset of $1.3 million at December 31,
1998 has been offset by a valuation allowance.
Net Loss. The net loss for the year ended December 31, 1998 was $3,933,000
versus a loss of $748,000 for the year ended December 31, 1997. The net loss was
principally caused by higher production costs relative to sales revenue, higher
selling expenses and the operational restructuring charge.
Liquidity and Capital Resources
Cash Flows from Operating Activities. Net cash provided by operations was
$1.2 million for the year ended December 31, 1998 versus cash used by operations
of $3.5 million for the year ended December 31, 1997. The increase in cash
provided by operations is due primarily to significantly lower inventory levels.
The decrease in inventories is due to an aggressive program of inventory
reduction. The Company believes that it will continue to make progress in
reducing inventory levels in 1999. Accounts receivable increased, primarily
related to government accounts.
Cash Flows from Investing Activities. Net cash used in investing activities
was $.4 million in 1998 versus $1.4 million in 1997. The decrease in investing
activities was the result of the Company reducing its investment in equipment.
The Company anticipates capital spending in 1999 to be less than $600,000 as it
further automates its sales offices and marketing activities and purchases
production equipment to make products more efficiently.
Cash Flows from Financing Activities. Net cash used in financing activities
was $.9 million in 1998 versus net cash provided by financing activities of $1.9
million in 1997. In 1997, the Company had to borrow from its line of credit to
fund the additions to inventory. As inventory levels decreased in the latter
half of 1998, the Company used its cash flow to pay down debt.
Expected Future Cash Flows. Cash provided by operating activities should
increase in 1999 as the Company expects that increases in profitability will be
coupled with decreases in inventory and receivables. The Company anticipates
that current cash balances plus cash flows from operating activities and
borrowings under its line of credit will be adequate to fund its short term and
long term capital needs. As discussed in Item 3, the Company has a potential
obligation to pay cash of up to $1,115,625 to the former shareholders of TFM,
pending the results of arbitration. If any such payments are required, the
Company expects there will be adequate availability under its line of credit to
enable them.
The Company does not currently anticipate making business acquisitions in
1999.
Year 2000 Issues
Many existing computer programs use only two digits to identify a year in
the date field. These programs were designed and developed without considering
the impact of the upcoming change in the century. If not corrected, many
computer applications could fail or create erroneous results by or in the year
2000. The potential costs and uncertainties to companies in addressing this
issue (the "Year 2000 issue") will depend on a number of factors, including
their software and hardware and the nature of their industries. Companies must
also coordinate with other entities with which they electronically interact,
including suppliers, customers, creditors and financial service organizations.
The Company has examined the Year 2000 issue and the potential costs and
consequences to the Company in addressing this issue. The Company has determined
that its existing systems are "Year 2000" compliant and therefore the Company
will not have to convert any existing software, hardware and telephone systems
or manufacturing equipment, in order to process transactions in the Year 2000.
As a result, management believes the Year 2000 issue is not expected to material
impact on the Company's operations.
In assessing the material risks to the Company's business from the Year
2000 problem, the Company has considered the Year 2000 readiness of suppliers,
customers (including the federal government), financial service providers,
public utilities, telecommunication service providers and other third parties
with which it does business. Although the Company has taken, and will continue
to take, reasonable efforts to gather information to determine the Year 2000
readiness of third parties, such information may not be provided voluntarily,
may be otherwise unavailable, or may not be reliable. The Year 2000 compliance
of third parties is substantially beyond the Company's knowledge and control,
and there can be no assurances that the Company will not be adversely affected
by the failure of a third party to adequately address the Year 2000 problem.
The Company will continue to assess its exposure to the Year 2000 issue
with regards to new technology acquired or additional entities with which it
interacts and, if necessary, appropriate contingency plans will be developed.
Amounts expended to date associated with the Company's Year 2000 efforts have
not been material. There can be no assurance that the Company's systems or the
systems of other companies on which the Company relies will not be adversely
affected by the Year 2000 issue.
Seasonality and Impact of Inflation
In prior years, the Company noted a seasonal trend of lower sales volumes
in the second and third quarters but for the past two years the Company has no
discernable pattern of seasonality. Because the Company recognizes revenues upon
shipment and typically ships Work Stations within three weeks of an order, a
substantial portion of the Company's revenues in each quarter results from
orders placed by customers during that quarter. As a result, the Company's
results may vary from quarter to quarter.
Inflation has not had a material impact on the Company's net sales or
income to date. However, there can be no assurances that the Company's business
will not be affected in the future by inflation.
Forward-Looking Statements
The foregoing discussion contains certain forward-looking statements, which
may be identified by phrases such as "the Company expects" or words of similar
effect. In addition, from time to time, the Company may publish forward-looking
statements relating to such matters as anticipated financial performance,
business prospects and similar matters. The Private Securities Litigation Reform
Act of 1995 provides a safe harbor for forward-looking statements. The following
important factors, among other things, in some cases have affected, and in the
future could affect, the Company's actual results and could cause the Company's
actual results for fiscal year 1999 and any interim period to differ materially
from those expressed in any forward-looking statements made by, or on behalf of,
the Company. The Company assumes no duty to update any of the statements in this
report.
Potential Limitations on Future Growth. The Company has experienced
significant growth since it commenced operations in 1989. The Company's
continued growth will be dependent in part on the Company's ability to manage
growth effectively, including the improvement of the Company's financial and
management information systems, the expansion of the Company's manufacturing and
remanufacturing operations and the recruitment and retention of executive staff
and key employees. The Company also will be required to manage working capital
and generate cash flow from operations to meet the needs of an expanding
business. There can be no assurances that the Company's future growth will not
be limited by insufficient cash flow or the lack of adequate financing required
to fund such growth.
Impact of Customer Preferences and Technological Advances on Sales. Certain
potential customers may prefer new Work Stations to the Company's remanufactured
Work Stations due to various factors, including the more developed and better
financed marketing efforts of new Work Station manufacturers and such potential
customers' reluctance to purchase remanufactured products because of image,
perceived questions of quality or other factors. In addition, technological
advances are frequently incorporated into new Work Stations by the leading
manufacturers, particularly with respect to electrical circuits necessary for
more advanced computer and telecommunications features. Although the Company has
the ability to incorporate these technological advances in its remanufactured
Work Stations, any such incorporation may increase remanufacturing costs and may
reduce the price advantage of remanufactured Work Stations over newly
manufactured Work Stations.
Dependence Upon Supply of Work Stations and Component Parts. The Company
presently purchases only used Herman Miller and Haworth Work Stations in its
remanufacturing operations. The Company does not have any binding agreements
relating to the purchase of used Herman Miller or Haworth Work Stations for
remanufacturing and generally purchases such used Work Stations from end-users,
brokers and dealers through competitive bids or directly negotiated
transactions. Although the Company in the past has not experienced a shortage of
used Work Stations at competitive prices, the success of the Company in the
future will depend in part upon its continued ability to obtain Herman Miller,
Haworth and other manufacturers' used Work Stations for remanufacturing in
sufficient quantities and at competitive prices. While the Company believes that
the availability of used Work Stations for remanufacturing will increase as the
installed base of Work Stations increases and ages, there may be periods of
tight supply as the demand for used Work Stations increases which could have a
material adverse effect on the Company's business and profitability.
The Company also purchases new and used component parts for use in the
remanufacture of Work Stations. Although the Company can manufacture certain of
the component parts needed to remanufacture Work Stations, there can be no
assurances that shortages of certain component parts or higher prices for such
parts will not occur in the future. An inability to produce or purchase
necessary component parts in adequate quantities and at competitive prices could
have a material adverse effect on the Company's results of operations and
financial condition.
Dependence on Sales Office Profitability. The Company depends heavily on
its sales offices to provide revenue growth. The Company has opened several new
offices in the past two years. The Company's experience indicates that it takes
several years for a sales office to develop adequate sales volumes to generate
expected returns. Until that time, the Company's selling expenses increase
faster than the gross profit generated from those sales. An inability to
increase revenues of new sales offices to levels that would offset the
continuing expenses of such sales offices may adversely affect the profitability
of the Company's business.
No Assurance of Expansion of Product Lines and Business. The Company has
concentrated its business on remanufacturing Work Stations manufactured by
Herman Miller and Haworth. The Company has considered expanding its product line
to include Work Stations of other manufacturers (particularly Steelcase) through
the acquisition of companies specializing in remanufacturing products of those
manufacturers or the establishment of additional remanufacturing facilities. The
Company has limited experience in remanufacturing Work Stations of manufacturers
other than Herman Miller and Haworth. Due to the differences in and lack of
interchangeability of the various Work Stations and certain component parts
produced by the major manufacturers, the Company's expansion of its product line
will require additional training of production personnel, the establishment of
additional sources of supply of used Work Stations and component parts and, in
some cases, the establishment of different remanufacturing processes. As a
result of these factors, there can be no assurance that the Company will be able
to expand successfully its product line or maintain its historical gross
margins. The failure of the Company to expand successfully its product line
could have a material adverse effect on the growth and profitability of the
Company's business.
Dependence Upon Primary Remanufacturing Facilities. The Company primarily
remanufactures Herman Miller Work Stations at one facility in Richmond,
Virginia, and Haworth Work Stations at one facility in Lansing, Michigan.
Although the Company presently maintains $3,000,000 of business interruption
insurance on the Richmond facility and $250,000 of such insurance on the Lansing
facility, a lengthy interruption of its remanufacturing operations at the
Richmond or Lansing facilities would have a material adverse effect on the
Company's results of operations and financial condition.
Tax Matters Associated with Prior S Corporation Status. Until May 31, 1996,
the Company had elected to be taxed under Subchapter S of the Internal Revenue
Code of 1986, as amended, as an S Corporation for federal and state income tax
purposes since its incorporation in 1989. Unlike a regular or "C Corporation,"
an S Corporation is generally not subject to income tax at the corporate level;
instead, the S Corporation's income is taxed on the personal income tax returns
of its shareholders. The Company's status as an S Corporation was terminated
upon commencement of its initial public offering. If the Company's S Corporation
status were denied for any periods prior to this termination by reason of a
failure to satisfy the S Corporation election or eligibility requirements of the
Code, the Company would be subject to tax on its income as if it were a C
Corporation for these periods. The payment of any such tax could have a material
adverse effect on the Company's financial condition and results of operations if
the full amount thereof is not reimbursed by those individuals who were
shareholders of the Company prior to the initial public offering. Such
shareholders have agreed to pay their pro rata share of any such tax and any
applicable interest, penalties and expenses in the event that the Company's S
Corporation status is denied for any taxable periods up to the date of the
termination of the Company's S Corporation status on May 31, 1996.
Potential Fluctuations in Quarterly Results. Because the Company recognizes
revenues upon shipment and typically ships Work Stations within three weeks of
an order, a substantial portion of the Company's revenue in each quarter results
from orders placed by customers in that quarter. Accordingly, quarterly revenue
levels are subject to substantial fluctuations and are often difficult to
predict. Fluctuations in operating results could result in volatility in the
price of the Company's Common Stock. If revenue levels are below expectations,
operating results will be adversely affected.
Competition. Competition in the Work Station segment of the office
furniture industry is intense. The Company competes with many other companies in
the sale of its new and remanufactured products as well as in the purchase of
"as is" Work Stations and component parts for use in the Company's
remanufactured Work Stations. In the sale of remanufactured Work Stations, the
Company competes with manufacturers of new Work Stations and their
remanufacturing subsidiaries, other independent remanufacturers and dealers of
"as is" Work Stations. In the purchase of used Work Stations that are the
primary source of the Company's supply for its remanufacturing operations, the
Company competes with the manufacturers of new Work Stations and their
remanufacturing subsidiaries, both of which sometimes provide a trade-in
allowance to purchasers of their products, other independent remanufacturers and
Work Station brokers and dealers.
Sales of the Company's remanufactured Work Stations depend on maintaining a
successful balance between price and quality so that its Work Stations are
positioned in the marketplace to provide a product that is (i) comparable or
superior in quality, design and appearance to higher cost new Work Stations and
(ii) superior in quality, features and appearance to lower cost "as is" Work
Stations. Failure by the Company to maintain this balance due to increased
competition in either the purchase or sale of Work Stations could adversely
affect the Company's business. Additionally, certain of the Company's
competitors have greater financial, technical, manufacturing, marketing, sales
and other resources than the Company.
Environmental Regulations. The Company is subject to a variety of federal,
state and local governmental regulations related to the storage, use, discharge
and disposal of toxic, volatile or otherwise hazardous chemicals used in its
manufacturing processes. Regulations implementing the federal Clean Air Act, as
amended in 1990, may require reduced emissions of volatile organic compounds and
hazardous air pollutants, including certain emissions resulting from the
Company's use of paints and solvents in the remanufacturing process. As a
result, the Company may be required to install emission controls or to institute
changes in its remanufacturing processes in order to comply with these reduced
emission standards. There can be no assurance that these and other changes in
environmental regulations in the future will not result in the need for capital
expenditures or otherwise impose financial burdens on the Company. Further, such
regulations could restrict the Company's ability to expand its operations. Any
failure by the Company to obtain required permits for, control the use of, or
adequately restrict the discharge of, hazardous substances under present or
future regulations could subject the Company to substantial liability or could
cause its manufacturing operations to be suspended. Such liability or suspension
of manufacturing operations could have a material adverse effect on the
Company's results of operations and financial condition.
Risk of Patent Infringement Claims. Newly manufactured Work Stations
contain numerous patented component parts. Although the Company is not aware of
any existing or threatened patent infringement claims asserted against it and
does not believe that the remanufacturing of Work Stations infringes the
proprietary rights of any third parties, there can be no assurance that
infringement claims will not be asserted against the Company. In addition, the
Company manufactures or purchases certain new and used component parts included
in its remanufactured Work Stations. To the extent that such activities involve
purchasing or manufacturing component parts similar to patented component parts,
the Company could become subject to claims of patent infringement if the
manufacture or use of such component parts infringed the proprietary rights of
third parties. In addition, the existence of third party proprietary rights
could limit the Company's ability to produce or use certain component parts.
Damages for violation of third party proprietary rights could be substantial and
could have a material adverse effect on the Company's financial condition and
results of operation. Regardless of the validity or the successful assertion of
such claims, the Company would incur significant costs and diversion of
resources with respect to the defense thereof.
<PAGE>
Item 7. Financial Statements
The following audited consolidated financial statements of the Company
are included in this report:
Report of Independent Auditors
Consolidated Balance Sheets at December 31, 1998 and 1997
Consolidated Statements of Operations for the Years Ended December 31,
1998 and 1997
Consolidated Statement of Shareholders' Equity for the Years Ended
December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Years Ended December 31,
1998 and 1997
Notes to Consolidated Financial Statements
<PAGE>
Report of Independent Auditors
Board of Directors and Shareholders
Open Plan Systems, Inc.
We have audited the accompanying consolidated balance sheets of Open Plan
Systems, Inc. as of December 31, 1998 and 1997 and the related consolidated
statements of operations, shareholders' equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Open Plan
Systems, Inc. at December 31, 1998 and 1997, and the consolidated results of its
operations and its cash flows for the years then ended in conformity with
generally accepted accounting principles.
/S/ ERNST & YOUNG LLP
Richmond, Virginia
February 12, 1999
<PAGE>
OPEN PLAN SYSTEMS, INC.
Consolidated Balance Sheets
(amounts in thousands)
<TABLE>
<CAPTION>
December 31
1998 1997
------------------------------------
<S><C> <C> <C>
Assets
Current assets:
Cash and cash equivalents
$ 2 $ 73
Accounts receivable, net 6,289 5,486
Inventories (Note 3) 6,908 10,780
Prepaids and other 672 686
Refundable income taxes 305 795
Deferred income taxes (Note 7) - 106
------------------------------------
Total current assets 14,176 17,926
Property and equipment, net (Note 4) 2,288 3,493
Goodwill, net (Note 1) 3,075 4,427
Other 466 468
------------------------------------
Total assets $ 20,005 $ 26,314
====================================
Liabilities and shareholders' equity
Current liabilities:
Revolving line of credit (Note 5) $ 952 $ 2,110
Trade accounts payable 1,995 2,411
Accrued compensation 263 393
Other accrued liabilities 429 280
Customer deposits 1,000 841
Notes payable 20 126
------------------------------------
Total current liabilities 4,659 6,161
Deferred income taxes (Note 7) - 110
------------------------------------
Total liabilities 4,659 6,271
Shareholders' equity (Notes 6 and 8):
Preferred stock, no par value:
Authorized shares - 5,000
Issued and outstanding shares - none - -
Common stock, no par value:
Authorized shares - 50,000
Issued and outstanding shares - 4,672 - 1998 19,324 20,088
- 4,472 - 1997
Additional capital 137 137
Accumulated deficit (4,115) (182)
------------------------------------
Total shareholders' equity 15,346 20,043
------------------------------------
Total liabilities and shareholders' equity $ 20,005 $ 26,314
====================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Operations
(amounts in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year ended
December 31
1998 1997
--------------------------------
<S><C> <C> <C>
Net sales $33,676 $31,968
Cost of sales 25,765 23,593
--------------------------------
Gross profit 7,911 8,375
Operating expenses:
Amortization of intangibles 275 275
Selling and marketing 7,220 6,524
General and administrative 2,811 2,607
Operational restructuring 1,290 -
--------------------------------
11,596 9,406
--------------------------------
Operating loss (3,685) (1,031)
Other (income) expense:
Interest expense 236 70
Interest income (12) (68)
Other, net 24 (16)
--------------------------------
248 (14)
--------------------------------
Loss before income taxes (3,933) (1,017)
Benefit for income taxes (Note 7) - (269)
--------------------------------
Net loss $(3,933) $ (748)
================================
Basic and diluted loss per share $ (.86) $ (.17)
================================
Weighted average common shares outstanding 4,582 4,472
================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Shareholders' Equity
Years ended December 31, 1998 and 1997
(amounts in thousands)
<TABLE>
<CAPTION>
Common Additional Retained
Stock Capital Earnings Total
(Deficit)
-------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $20,088 $137 $ 566 $20,791
Net loss for 1997 - - (748) (748)
-------------------------------------------------------------------------
Balance at December 31, 1997 20,088 137 (182) 20,043
Issuance of common stock (Note 6) 352 - - 352
Reduction in connection with prior year's
acquisition (1,116) (1,116)
Net loss for 1998 - - (3,933) (3,933)
-------------------------------------------------------------------------
Balance at December 31, 1998 $19,324 $137 $(4,115) $15,346
=========================================================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Cash Flows
(amounts in thousands)
<TABLE>
<CAPTION>
Year ended
December 31
1998 1997
----------------------------------
<S> <C> <C> <C>
Operating activities
Net loss $ (3,933) $ (748)
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Provision for losses on receivables 166 59
Depreciation expense 788 631
Amortization expense 275 275
Operational restructuring 1,290 -
Loss on disposal of property and equipment 18 23
Deferred income taxes (4) (50)
Changes in operating assets and liabilities:
Accounts receivable (969) (293)
Inventories 3,847 (3,973)
Prepaids and other current assets 1 (255)
Refundable income taxes 490 (410)
Other non-current assets (60) (151)
Trade accounts payable (416) 954
Customer deposits 159 186
Accrued and other liabilities (458) 276
----------------------------------
Net cash provided by (used in) operating activities 1,194 (3,476)
Investing activities
Proceeds from sale of property and equipment 131 12
Purchases of property and equipment (484) (1,461)
----------------------------------
Net cash used in investing activities (353) (1,449)
</TABLE>
<PAGE>
OPEN PLAN SYSTEMS, INC.
Consolidated Statements of Cash Flows (continued)
(amounts in thousands)
<TABLE>
<CAPTION>
Year ended
December 31
1998 1997
-----------------------------------
<S> <C> <C> <C> <C> <C> <C>
Financing activities
Net (repayments) borrowings on revolving lines of credit $ (1,158) $ 2,110
Principal payments on notes payable, long-term debt,
and capital lease obligations (106) (178)
Proceeds from sale of common stock net of issuance costs of $83 352 -
-----------------------------------
Net cash (used in) provided by financing activities (912) 1,932
-----------------------------------
Decrease in cash and cash equivalents (71) (2,993)
Cash and cash equivalents at beginning of year 73 3,066
===================================
Cash and cash equivalents at end of year $ 2 $ 73
===================================
Supplemental disclosures
Interest paid $ 236 $ 70
===================================
Income taxes paid $ - $ 191
===================================
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
OPEN PLAN SYSTEMS, INC.
Notes to Consolidated Financial Statements
December 31, 1998 and 1997
Note 1. Summary of Significant Accounting Policies
Open Plan Systems, Inc. (the "Company") was incorporated in Virginia in
September 1989 and is a remanufacturer and marketer of modular office Work
Stations. The Company remanufactures Herman Miller and Haworth product lines and
markets them through Company sales offices located in the East Coast and
Mid-West regions of the United States. In addition, the Company also sells new
product office workstation components from other manufacturers. The following is
a description of the Company's more significant accounting policies.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary. All significant intercompany balances
and transactions have been eliminated in consolidation.
Inventories
Inventories are stated at the lower of average cost or market. Work-in-process
inventories include both the direct and indirect costs of manufacturing such
products.
Property and Equipment
Property and equipment is stated on the basis of cost. Depreciation of equipment
and vehicles is provided by straight-line or accelerated methods over the
estimated useful lives of the related assets, generally three to seven years.
Improvements to leased properties are amortized on a straight-line basis over
the shorter of the term of the respective lease or the estimated useful lives of
the related assets.
Goodwill
Goodwill represents the excess of the purchase price of acquired businesses over
the fair value of net assets acquired and is being amortized on the
straight-line method over a period of twenty years. The carrying value of
goodwill is periodically evaluated by management based on undiscounted cash
flows of the related business units to determine if there has been an impairment
in value. Accumulated amortization was $530,000 and $295,000 at December 31,
1998 and 1997, respectively.
Revenue Recognition
Revenues from product sales are recognized upon shipment. Title and risk of loss
pass to the customer upon shipment.
Advertising
Production costs associated with advertising are expensed as incurred.
Communication costs associated with advertising are reported as advertising
expense as the related space is used. Prepaid advertising costs were $217,000
and $326,000 at December 31, 1998 and 1997, respectively. Advertising costs
charged to expense totaled $887,000 in 1998 and $653,000 in 1997.
Income Taxes
Deferred income taxes are determined based on the differences between the
financial statement and tax bases of assets and liabilities using enacted tax
rates in effect in the years the differences are expected to reverse. Note 1.
Summary of Significant Accounting Policies (Continued)
Cash Equivalents
The Company considers all highly liquid investments with original maturities of
three months or less when purchased to be cash equivalents.
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 amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
Earnings Per Share
In 1997, the Financial Accounting Standards Board (FASB) issued Statement No.
128, Earnings Per Share. Statement 128 replaced the calculation of primary and
fully diluted earnings per share with basic and diluted earnings per share.
Unlike primary earnings per share, basic earnings per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
earnings per share is very similar to the previously reported fully diluted
earnings per share. For 1998 and 1997, there was no difference between basic and
diluted earnings per share. 799,000 and 172,500 stock options have been excluded
from the calculation of earnings per share in 1998 and 1997, respectively, as
their impact would have been anti-dilutive.
Comprehensive Income
In 1997, the FASB issued Statement No. 130, Reporting Comprehensive Income.
Statement 130 requires that all items that are recognized under accounting
standards as components of comprehensive income be reported in a financial
statement that is displayed with the same prominence as other financial
statements. The Company had no components of comprehensive income for 1997 or
1998, therefore the adoption of SFAS No. 130 had no impact on the financial
statements.
Note 2. Operational restructuring
During the second quarter of 1998, the Company recorded a restructuring charge
of $1,290,000 related to warehouse consolidation, returning to a focus on
remanufacturing and a sales office consolidation plan. Significant components of
the operational restructuring charge were $138,000 for severance pay, $418,000
related to anticipated payouts under lease agreements and estimated losses of
$627,000 on the disposal of certain fixed assets. In connection with this plan,
the Company reduced sales and administrative staffing by approximately 30
people.
The Company has disposed of all the fixed assets contemplated in the
restructuring and incurred substantially all costs associated with the
restructuring plan. No adjustment to the original charge recorded has been
necessary. Approximately $100,000 remains accrued in other liabilities and is
expected to closely approximate the remaining costs to be incurred, which are
principally related to lease terminations.
<PAGE>
Note 3. Inventories
Inventories are in two main stages of completion and consisted of the following
(in thousands $):
<TABLE>
<CAPTION>
December 31
1998 1997
---------------- ----------------
<S> <C> <C>
Components and fabric $ 4,221 $ 7,650
Jobs in process and finished goods 2,687 3,130
---------------- ----------------
$ 6,908 $ 10,780
================ ================
</TABLE>
Note 4. Property and Equipment
Property and equipment by major classification was as follows (in thousands $):
<TABLE>
<CAPTION>
December 31
1998 1997
---------------- ----------------
<S> <C> <C>
Production and warehouse equipment $ 2,123 $ 2,725
Office equipment 1,069 1,008
Vehicles 258 258
Leasehold improvements 538 415
Construction-in-process - 397
---------------- ----------------
3,988 4,803
Accumulated depreciation and amortization (1,700) (1,310)
---------------- ----------------
$ 2,288 $ 3,493
================ ================
</TABLE>
Note 5. Indebtedness
During December 1998, the Company negotiated a new revolving line of credit with
a financial institution, and the prior line of credit was paid off in its
entirety. The new credit facility provides for borrowings up to $5,000,000
through December 2001. Borrowings under the line of credit bear interest at
variable rates, the determination of which may vary depending on operating
results. Outstanding borrowings under the line amounted to $952,000 at December
31, 1998 and bore interest at a rate of 8.25%. Advances under the line are
secured by substantially all assets and are limited to specified percentages of
accounts receivable. At December 31, 1998, the Company had $2,048,000 available
under its line of credit. Under the terms of the agreement, the Company is
required to maintain a defined tangible net worth and an interest coverage ratio
beginning in 1999. The Company was in compliance with all covenants at December
31, 1998.
Note 6. Shareholders' Equity
The Company has an agreement with a former officer to purchase upon his death
all of the shares of common stock owned at that time. In order to fund its
potential purchase obligations under this agreement, the Company owns and is the
beneficiary of certain life insurance policies. The purchase price for the
shares will be the fair market value of the shares on the date of death, except
that the Company's purchase obligation under the agreement is limited to the
face amounts of the policies which total $3,500,000.
The Company maintains two stock option plans, the 1996 Stock Incentive Plan (the
"Incentive Plan") and the 1996 Stock Option Plan for Non-Employee Directors (the
"Outside Directors' Plan").
<PAGE>
Note 6. Shareholders' Equity (continued)
The maximum aggregate number of shares of common stock that may be issued
pursuant to the Outside Directors' Plan is 25,000. The Outside Directors' Plan
will terminate following the annual meeting of shareholders in 2000. Under the
Outside Directors' Plan, each non-employee director of the Company serving on
the Board of Directors on July 1, 1996 was granted an option to purchase 1,000
shares of common stock of the Company. Thereafter, each non-employee director
serving on the Board of Directors shall receive an option to purchase 1,000
shares of common stock on the first business day following each annual meeting
of shareholders. The exercise price of stock options granted under the Outside
Directors' Plan must be equal to the fair market value of the common stock on
the date of grant. Each option is first exercisable on the date which is six
months from the date of grant of the option and shall continue to be exercisable
for a term of ten years, subject to certain exceptions. At December 31, 1998 and
December 31, 1997, respectively, the Company had 14,000 and 10,000 options
outstanding and exercisable. These options had weighted average remaining
contractual lives of nine years. The exercise prices for these options were:
4,000 at $11.75; 4,000 at $5.97; and 6,000 at $2.14 for 1998 and 5,000 at $11.75
and 5,000 at $5.97 for 1997. In 1998 and 1997, respectively, the Company granted
6,000 and 5,000 options under the Plan with exercise prices of $2.14 and $5.97.
The weighted average fair value of these options at grant date was $1.20 and
$4.03 per share in 1998 and 1997, respectively. 2,000 options with a weighted
average exercise price of $6.62 were cancelled during 1998.
The maximum aggregate number of shares of common stock that may be issued
pursuant to the Incentive Plan is 400,000. The Incentive Plan provides for
grants of incentive stock options, non-qualified stock options, stock
appreciation rights, restricted stock, and/or phantom stock to any officer,
director, or key employee of the Company. The Incentive Plan will terminate in
March 2006.
The exercise price of incentive stock options granted under the Incentive Plan
must be equal to at least the fair market value of the common stock on the date
of grant. The aggregate fair market value of common stock (determined as of the
date of the option grant) for which an incentive stock option, or related stock
appreciation rights (no stock appreciation rights have been issued) may for the
first time become exercisable in any calendar year may not exceed $100,000.
These options have a term of seven years. Transactions involving the Incentive
Plan are as follows:
<TABLE>
<CAPTION>
Average
Exercise
Shares Price
-------------- -----------
<S> <C> <C> <C>
Outstanding at December 31, 1996 109,375 $9.88
Issued 109,375 $5.98
Cancelled (56,250) $8.36
--------------
Outstanding at December 31, 1997 162,500 $7.79
Issued 177,500 $2.73
Cancelled (155,000) $5.29
--------------
Outstanding at December 31, 1998 185,000 $4.97
==============
</TABLE>
The options outstanding at December 31, 1998 and 1997 had a weighted average
remaining contractual life of six years. For options outstanding at December 31,
1998, 84,375 options had exercise prices and $5.97 and $9.88 and 100,625 options
had exercise prices between $2.44 and $3.88. For options outstanding at December
31, 1997, 3,125 options had an exercise price of $3.88 and 159,375 had exercise
prices between $5.97 and $9.88. At December 31, 1998, there were 30,990 and
53,062 options that were exercisable with weighted average exercise prices of
$8.28 and $2.56, respectively. At December 31, 1997, there were 18,750 options
exercisable with a weighted average exercise price of $9.83. The options granted
in 1998 and 1997 had a weighted average fair value at grant date of $1.54 and
$4.05 per share, respectively.
<PAGE>
Note 6. Shareholders' Equity (Continued)
In June 1998, the Company sold 200,000 shares of common stock to Great Lakes
Capital Corporation, LLC (GLCC) for $2.175 per share and granted nonqualified
stock options to GLCC as follows:
<TABLE>
<CAPTION>
Exercise
Shares Price
<S> <C>
150,000 $3.00
150,000 $4.50
150,000 $6.00
150,000 $7.50
</TABLE>
All of the options are exercisable and expire June 30, 2003. These options had a
weighted average fair value at grant date of $.76 per share.
Concurrent with the sale of stock to GLCC, the Company entered into agreements
to employee two members of GLCC as its chief executive officer and chief
financial officer for terms of 18 months. If the chief executives officer's
employment is terminated prior to June 17, 1999, the options held by GLCC will
expire one year after the date of such termination.
The Company has elected to account for stock-based compensation under these
plans based upon the intrinsic value based method as prescribed by Accounting
Principles Board Opinion No. 25. If the Company had accounted for its stock
options based upon fair values at the date of grant, consistent with FASB
Statement No. 123, the net loss would have increased by $323,000, or $.07 per
share for the year ended December 31, 1998 and the net loss would have increased
by $147,00, or $.03 per share for the year ended December 31, 1997. These
amounts are not indicative of future effects of applying the fair value based
method since the vesting period was used to measure compensation expense. The
fair value for these options was estimated at the date of grant using a
Black-Scholes option pricing model assuming a risk-free interest rate of 5.6%,
dividend yield of 0.0%, a weighted average expected life of the option of 6
years and a volatility factor of .522 for 1998 and .706 for 1997.
Additionally, the Company and GLCC entered into a Voting and Standstill
Agreement whereby GLCC will beneficially own no more than 21% of the issued and
outstanding shares of the Company on a fully diluted basis, provided that the
shares GLCC and its affiliates may acquire pursuant to the 1996 Stock Incentive
Plan and 1996 Stock Option Plan for Non-Employee Directors shall not be deemed
to be additional shares.
Note 7. INCOME TAXES
The provision (benefit) for income taxes is comprised of the following (in
thousands $):
<TABLE>
<CAPTION>
1998 1997
----------------- ----------------
<S><C> <C> <C>
Current:
Federal $ 3 $ (198)
State 1 (21)
----------------- ----------------
4 (219)
Deferred:
Federal (3) (49)
State (1) (1)
----------------- ----------------
(4) (50)
----------------- ----------------
$ - $ (269)
================= ================
</TABLE>
<PAGE>
Note 7. Income Taxes (Continued)
A reconciliation of the benefit from income taxes for the year ended December
31, 1998 and December 31, 1997 and the amount computed by applying the U.S.
statutory federal income tax rate of 34% to income before income taxes is as
follows (in thousands $):
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S> <C> <C>
Income tax benefits at U.S. statutory rates $ (1,337) $ (347)
State taxes, net of federal benefit (157) (21)
Amortization of goodwill 86 86
Other, net 96 13
Valuation allowance 1,312 -
------------------ -----------------
Total income tax benefit $ - $ (269)
================== =================
</TABLE>
The deferred income tax balances at December 31, 1998 and December 31, 1997
consisted of the following (in thousands $):
<TABLE>
<CAPTION>
1998 1997
------------------ -----------------
<S><C> <C> <C>
Deferred tax assets
Accounts receivable allowances $ 104 $ 57
Accrued Liabilities 75 22
Net operating losses 1,113 38
Other 154 35
Valuation allowance (1,312) -
Deferred tax liabilities:
Tax over book depreciation (134) (156)
------------------ -----------------
$ - $ (4)
================== =================
</TABLE>
Net operating loss carryforwards of $2.9 million expire in 2013.
As a result of operating losses in 1998 and 1997 and the uncertainty of the
realization of the potential tax benefits thereof, the Company has offset
potential income tax benefits of $1.3 million with a valuation allowance. The
Company will reevaluate the potential realizability of the net deferred tax
assets in future periods.
Note 8. Commitments and Contingencies
Lease Agreements
The Company leases office space and production facilities in Richmond and
Lansing. The Richmond lease expires in July 2002. The Lansing lease expires in
September 2001. In addition, the Company leases its sales offices under
operating lease agreements expiring in various periods through December 2002.
Automobiles are also leased under terms not exceeding three years. All of these
leases are accounted for as operating leases.
<PAGE>
Future minimum lease payments were as follows at December 31, 1998 (in thousands
$):
<TABLE>
<CAPTION>
Year
<S> <C> <C>
1999 $ 995
2000 810
2001 512
2002 258
---------------
$ 2,575
===============
</TABLE>
The above amounts have been reduced by expected sublease rentals of $86,000 in
1999 and $50,000 in 2000.
Rent expense amounted to $1,164,000 in 1998 and $977,000 in 1997.
Legal Matters
A portion of the potential consideration for the 1996 acquisition of Immaculate
Eagle, Inc. (d/b/a TFM Remanufactured Office Furniture)("TFM") was 87,500 shares
of common stock of the Company, which has been held in escrow, with an agreed
upon value of $1.3 million, as security for indemnification obligations of the
former shareholders of TFM. In addition, under the terms of the TFM purchase
agreement, if the closing sales price of the Company's common stock on October
1, 1998 was less than $15 per share, the Company was to make a cash payment to
the former shareholders of TFM equal to the difference between the closing sales
price on that date and $15, multiplied by the 87,500 shares of common stock,
(subject to certain adjustments, including claims by the Company for
indemnification). The Company's stock traded at $2.25 per share on October 1,
1998 and accordingly the amount potentially payable to the former TFM
shareholders would be $1,115,625.
Management of the Company has reviewed the circumstances of the TFM acquisition
and determined that the indemnification obligations of the former TFM
shareholders exceed the $1.3 million agreed value of the stock in escrow. The
Company has requested the escrow agent retain all of the stock and served notice
of the indemnification claims to the former TFM shareholders. As a result, no
cash payment is due on any of the stock in escrow. The former shareholders of
TFM have disputed the indemnification claims and pursuant to the purchase
agreement, the matter has gone to arbitration.
If the Company prevails on all of its claims in arbitration, the escrowed shares
will be returned to the Company. Should the Company not prevail on all of its
claims, the Company may be required to make cash payments to the shareholders in
amounts designated by the arbitrator. The aggregate $1,115,625 difference
between the stock's market price on October 1, 1998 and the $15 value assumed in
the TFM purchase agreement has been recorded as a reduction in goodwill and
shareholders' equity.
Two former officers of the Company have filed suit against the Company
asserting, among other things, non-compliance with the contractual terms of
certain employment agreements, claiming damages of approximately $400,000. The
Company believes these claims are without merit and intends to contest them. The
Company filed suit against the two former officers claiming, among other things,
improper use of Company assets. Due to the recent nature of these actions, the
Company is unable to predict what the ultimate outcome will be.
<PAGE>
Note 9. Employee Benefit Plan
In January 1995, the Company adopted a defined contribution plan covering
substantially all employees meeting eligibility requirements. Under the plan,
participants may elect to contribute a specified portion of their compensation
to the plan on a tax deferred basis. The Company will match one-half of the
participant's contributions up to six percent of compensation. The Company may
make additional contributions at its discretion.
The Company recorded total expense related to the plan of $126,000 in 1998 and
$86,000 in 1997.
Note 10. Related Party Transactions
The Company incurred legal fees of $258,000 in 1998 and $150,000 in 1997 to a
law firm in which one of the Company's directors is a principal.
A customer whose President is a director of the Company purchased $1,500,000 of
product in 1997.
Note 11. Concentrations of Credit Risk and Financial Instruments
Financial instruments which potentially subject the Company to concentrations of
credit risk consist primarily of accounts receivable. The Company markets its
products and services to customers located primarily in the Eastern and Mid-West
regions of the United States. Production is primarily in response to customer
orders and larger jobs typically require advance deposits. The Company performs
credit evaluations of its customers prior to delivery or commencement of
services and normally does not require collateral. Payments are typically due
within thirty days of billing. The Company maintains an allowance for potential
credit losses and losses have historically been within management's
expectations.
The carrying values of amounts classified as current assets or current
liabilities approximate fair value due to the short-term maturities of these
instruments.
<PAGE>
Note 12. Selected Quarterly Financial Data (Unaudited)
Results of operations for each of the quarters during the years ended December
31, 1998 and 1997 are as follows (in thousands, except per share data):
<TABLE>
<CAPTION>
Quarter Ended
------------------------------------------------------------
March 31st June 30th September 30th December 31st
------------ ---------- --------------- ----------------
<S> <C> <C> <C> <C>
Year ended December 31, 1998
Net sales $ 7,900 $ 8,332 $ 9,600 $ 7,844
Gross Profit $ 1,644 $ 1,189 $ 2,757 $ 2,321
Operating income (loss) $ (1,141) $ (3,157)* $ 321 $ 292
Income (loss) before income taxes $ (1,207) $ (3,229)* $ 240 $ 263
Net income (loss) $ (1,207) $ (3,229)* $ 240 $ 263
Earnings (loss) per common share $ (.27) $ (.72) $ .05 $ .06
Year ended December 31, 1997
Net sales $ 6,437 $ 7,164 $ 9,408 $ 8,959
Gross Profit $ 1,461 $ 2,154 $ 2,544 $ 2,216
Operating income (loss) $ (586) $ 8 $ 179 $ (632)
Income (loss) before income taxes $ (549) $ 25 $ 180 $ (673)
Net income (loss) $ (315) $ 25 $ 147 $ (605)
Earnings (loss) per common share $ (.07) $ .01 $ .03 $ (.14)
</TABLE>
* Results of operations for the quarter ended June 30, 1998 include the impact
of a restructuring charge of $1.3 million.
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 9. Directors, Executive Officers, Promoters and Control Persons; Compliance
with Section 16(a) of the Exchange Act
The information required by this item is incorporated herein by reference
to the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders to be filed within 120 days of the end of the 1998 fiscal year.
Item 10. Executive Compensation
The information required by this item is incorporated herein by reference
to the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders to be filed within 120 days of the end of the 1998 fiscal year.
Item 11. Security Ownership of Certain Beneficial Owners and Management
The information required by this item is incorporated herein by reference
to the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders to be filed within 120 days of the end of the 1998 fiscal year.
Item 12. Certain Relationships and Related Transactions
The information required by this item is incorporated herein by reference
to the Company's definitive Proxy Statement for its 1999 Annual Meeting of
Shareholders to be filed within 120 days of the end of the 1998 fiscal year.
<PAGE>
Item 13. Exhibits, List and Reports on Form 8-K
<TABLE>
<CAPTION>
(a) Exhibits
The following exhibits are filed on behalf of the Company as part of this report:
<S> <C> <C>
3(i) Amended and Restated Articles of Incorporation, incorporated by reference to
Exhibit 3(i) of the Registrant's Form SB-2 Registration Statement, as amended,
File No. 333-3188.
3(ii) Amended and Restated Bylaws, incorporated by reference to Exhibit 3(ii) of the
Registrant's Form SB-2 Registration Statement, as amended, File No. 333-3188.
4 Form of Stock Certificate, incorporated by reference to Exhibit 4 of the
Registrant's Form SB-2 Registration Statement, as amended, File No. 333-3188.
10.1 Commercial Lease Contract, dated May 4, 1993, between M.D. Hodges Enterprises,
Inc. and Open Plan Systems, Inc., incorporated by reference to Exhibit 10.2 of
the Registrant's Form SB-2 Registration Statement, as amended, File No.
333-3188.
10.2 Open Plan Systems, Inc. 1996 Stock Incentive Plan, as amended, incorporated by
reference to Exhibit 4.4 of the Registrant's Form S-8 Registration Statement,
File No. 333-15217.
10.3 Open Plan Systems, Inc. 1996 Stock Option Plan For Non-Employee Directors, as
amended, incorporated by reference to Exhibit 4.4 of the Registrant's Form S-8
Registration Statement, File No. 333-15219.
10.4 Buy-Sell Agreement, dated May 24, 1996, between the Company and Stan A.
Fischer, incorporated by reference to Exhibit 10.7 of the Registrant's Form
SB-2 Registration Statement, as amended, File No. 333-3188.
10.5 Buy-Sell Agreement, dated May 15, 1996, between the Company and Gregory P.
Campbell, incorporated by reference to Exhibit 10.8 of the Registrant's Form
SB-2 Registration Statement, as amended, File No. 333-3188.
10.6 Tax Sharing Agreement, dated May 1, 1996, between the Company and each of the
shareholders named therein, incorporated by reference to Exhibit 10.9 of the
Registrant's Form SB-2 Registration Statement, as amended, File No. 333-3188.
10.7 Form of Employee Non-Qualified Stock Option Agreement
10.8 Form of Non-Employee Director Non-Qualified Stock Option
10.9 Stock Purchase Agreement, dated September 24, 1996, between Open Plan Systems, Inc.,
Immaculate Eagle, Inc., Paul A. Covert, Todd A. Thomann and Siimon, Inc.,
incorporated by reference to Exhibit 2.1 of the Registrant's Form 8-K filed
October 16, 1996, File No. 0-20743.
10.10 Open Plan Systems, Inc. Bonus Program for Officers
10.11 $5,000,000 Line of Credit Agreement with Fleet Bank *
10.12 Management and Consulting Agreement between Open Plan Systems, Inc. and Great Lakes Capital, LLC dated
June 17, 1998 incorporated by reference to Exhibit 10.17 of the Registrant's Form 10-Q filed August 14,
1998
10.13 Registration Rights Agreement between Open Plan Systems, Inc. and Great Lakes Capital, LLC dated June
17, 1998 incorporated by reference to Exhibit 10.20 of the Registrant's Form 10-Q filed August 14, 1998
10.14 Voting and Standstill Agreement between Open Plan Systems, Inc. and Great Lakes Capital, LLC dated June
17, 1998 incorporated by reference to Exhibit 10.19 of the Registrant's Form 10-Q filed August 14, 1998
10.15 Commercial Lease Contract, dated May 1, 1998, between Liberty Property Limited Partnership. and Open
Plan Systems, Inc.
10.16 Commercial Lease Contract, dated September 18, 1998, between Quality Dairy Company and Open Plan
Systems, Inc.
11 Statement re: Computation of Earnings Per Share
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP*
23.2 Consent of Ernst & Young LLP*
27 Financial Data Schedule * (filed electronically only)
________
* Filed herewith
(b) Reports on Form 8-K.
None.
</TABLE>
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OPEN PLAN SYSTEMS, INC.
By: /s/ John L. Hobey
John L. Hobey
March 24, 1999 Chief Executive Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
<S> <C> <C>
/s/ John L. Hobey Chief Executive Officer March 24, 1999
John L. Hobey
/s/ William F. Crabtree Chief Financial Officer (principal March 24, 1999
William F. Crabtree financial officer)
/s/ Neil F. Suffa Corporate Controller and Secretary March 24, 1999
Neil F. Suffa (principal accounting officer)
. /s/ Troy A. Peery, Jr.
Troy A. Peery, Jr. Director March 24, 1999
/s/ Anthony F. Markel
Anthony F. Markel Director March 24, 1999
/s/ Theodore L. Chandler, Jr.
Theodore L. Chandler, Jr. Director March 24, 1999
/s/ Robert F. Mizell
Robert F. Mizell Director March 24, 1999
/s/ W. Sydnor Settle
W. Sydnor Settle Director March 24, 1999
/s/ Edmund W. Mugford
Edmund W. Mugford Director March 24, 1999
/s/ Gary M. Farrell
Gary M. Farrell Director March 24, 1999
</TABLE>
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Document
<S> <C>
3(i) Amended and Restated Articles of Incorporation, incorporated by reference to Exhibit 3(i) of
the Registrant's Form SB-2 Registration Statement, as amended, File No. 333-3188.
3(ii) Amended and Restated Bylaws, incorporated by reference to Exhibit 3(ii) of the Registrant's
Form SB-2 Registration Statement, as amended, File No. 333-3188.
4 Form of Stock Certificate, incorporated by reference to Exhibit 4 of the Registrant's Form SB-2
Registration Statement, as amended, File No. 333-3188.
10.1 Commercial Lease Contract, dated May 4, 1993, between M.D. Hodges Enterprises, Inc. and Open
Plan Systems, Inc., incorporated by reference to Exhibit 10.2 of the Registrant's Form SB-2
Registration Statement, as amended, File No. 333-3188.
10.2 Open Plan Systems, Inc. 1996 Stock Incentive Plan, as amended, incorporated by reference to
Exhibit 4.4 of the Registrant's Form S-8 Registration Statement, File No. 333-15217.
10.3 Open Plan Systems, Inc. 1996 Stock Option Plan For Non-Employee Directors, as amended,
incorporated by reference to Exhibit 4.4 of the Registrant's Form S-8 Registration Statement,
File No. 333-15219.
10.4 Buy-Sell Agreement, dated May 24, 1996, between the Company and Stan A. Fischer, incorporated
by reference to Exhibit 10.7 of the Registrant's Form SB-2 Registration Statement, as amended,
File No. 333-3188.
10.5 Buy-Sell Agreement, dated May 15, 1996, between the Company and Gregory P. Campbell,
incorporated by reference to Exhibit 10.8 of the Registrant's Form SB-2 Registration Statement,
as amended, File No. 333-3188.
10.6 Tax Sharing Agreement, dated May 1, 1996, between the Company and each of the shareholders
named therein, incorporated by reference to Exhibit 10.9 of the Registrant's Form SB-2
Registration Statement, as amended, File No. 333-3188.
10.7 Form of Employee Non-Qualified Stock Option Agreement
10.8 Form of Non-Employee Director Non-Qualified Stock Option Agreement
10.9 Stock Purchase Agreement, dated September 24, 1996, between Open Plan Systems, Inc., Immaculate Eagle,
Inc., Paul A. Covert, Todd A. Thomann and Siimon, Inc., incorporated by reference to Exhibit
2.1 of the Registrant's Form 8-K filed October 16, 1996, File No. 0-20743.
10.10 Open Plan Systems, Inc. Bonus Program for Officers
10.11 $5,000,000 Line of Credit Agreement with Fleet Bank *
10.12 Management and Consulting Agreement between Open Plan Systems, Inc. and Great Lakes Capital, LLC dated
June 17, 1998 incorporated by reference to Exhibit 10.17 of the Registrant's Form 10-Q filed August 14, 1998
10.13 Registration Rights Agreement between Open Plan Systems, Inc. and Great Lakes Capital, LLC dated June
17, 1998 incorporated by reference to Exhibit 10.20 of the Registrant's Form 10-Q filed August 14, 1998
10.14 Voting and Standstill Agreement between Open Plan Systems, Inc. and Great Lakes Capital, LLC dated June
17, 1998 incorporated by reference to Exhibit 10.19 of the Registrant's Form 10-Q filed August 14, 1998
10.15 Commercial Lease Contract, dated May 1, 1998, between Liberty Property Limited Partnership. and Open
Plan Systems, Inc.
10.16 Commercial Lease Contract, dated September 18, 1998, between Quality Dairy Company and Open Plan
Systems, Inc.
11 Statement re: Computation of Earnings Per Share
21 Subsidiaries of the Registrant
23.1 Consent of Ernst & Young LLP*
23.2 Consent of Ernst & Young LLP*
27 Financial Data Schedule * (filed electronically only)
* Filed herewith
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
Year Ended
December 31
1998 1997
----------------------------------------
<S> <C> <C>
Weighted average shares outstanding during the period
4,582 4,472
----------------------------------------
Total 4,582 4,472
========================================
Net earnings (loss) used in computation $ (3,933) $ (748)
========================================
Earnings (loss) per common share $ (.86) $ (.17)
========================================
</TABLE>
<PAGE>
Exhibit 23.1
Consent of independent auditors
We consent to the incorporation by reference in the Registration Statement (Form
S-8, No.333-15219) pertaining to the Open Plan Systems, Inc. 1996 Stock Option
Plan for Non-Employee Directors of our report dated February 12, 1999, with
respect to the consolidated financial statements of Open Plan Systems, Inc.
included in the Annual Report (Form 10-KSB) for the year ended December 31,
1998.
/s/ ERNST & YOUNG
Richmond, Virginia
March 26, 1999
Exhibit 23.2
Consent of Independent Auditors
We consent to the imcorporation by reference in the Registration Statement (Form
S-8, No.333-15217) pertaining to the Open Plan Systems, Inc. 1996 Stock
Incentive Plan of our report dated February 12, 1999, with respect to the
consolidated financial statements of Open Plan Systems, Inc. included in the
Annual Report (Form 10-KSB) for the year ended December 31, 1998.
/s/ ERNST & YOUNG
Richmond, Virginia
March 26, 1999
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE BALANCE
SHEET OF OPEN PLAN SYSTEMS, INC. AS OF DECEMBER 31, 1998 AND THE RELATED
STATEMENTS OF INCOME AND CASH FLOWS FOR THE YEAR THEN ENDED AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0001011738
<NAME> OPEN PLAN SYSTEMS, INC.
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
<CASH> 2
<SECURITIES> 0
<RECEIVABLES> 6,564
<ALLOWANCES> (275)
<INVENTORY> 6,908
<CURRENT-ASSETS> 14,176
<PP&E> 3,988
<DEPRECIATION> (1,700)
<TOTAL-ASSETS> 20,005
<CURRENT-LIABILITIES> 4,659
<BONDS> 0
0
0
<COMMON> 19,324
<OTHER-SE> (3,978)
<TOTAL-LIABILITY-AND-EQUITY> 20,005
<SALES> 33,676
<TOTAL-REVENUES> 33,676
<CGS> 25,765
<TOTAL-COSTS> 25,675
<OTHER-EXPENSES> 11,410
<LOSS-PROVISION> 186
<INTEREST-EXPENSE> 236
<INCOME-PRETAX> (3,933)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3,933)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3,933)
<EPS-PRIMARY> (.86)
<EPS-DILUTED> (.86)
</TABLE>
- -
__________________________________________________
OPEN PLAN SYSTEMS, INC. and
IMMACULATE EAGLE, INC. d/b/a TOTAL
FACILITIES MANAGEMENT
__________________________________________________
__________________________________________________
__________________________________________________
LOAN AND SECURITY AGREEMENT
Dated: December ___, 1998
__________________________________________________
__________________________________________________
__________________________________________________
FLEET BANK, N.A.
__________________________________________________
<PAGE>
-ii-
TABLE OF CONTENTS
<TABLE>
<S> <C> <C> <C>
Page
SECTION 1. CREDIT FACILITY..............................................................................-1-
1.1 Revolving Credit Loans........................................................................-1-
1.2 Use of Proceeds...............................................................................-1-
1.3 Letters of Credit.............................................................................-1-
SECTION 2. INTEREST, FEES AND CHARGES....................................................................-2-
2.1 Interest......................................................................................-2-
2.2 Computation of Interest and Fees..............................................................-4-
2.3 Facility Fee..................................................................................-4-
2.4 Letter of Credit Fees.........................................................................-4-
2.5 Unused Line Fee...............................................................................-4-
2.6 Late Fees.....................................................................................-5-
2.7 Field Examination, Audit and Appraisal Fees...................................................-5-
2.8 Reimbursement of Expenses.....................................................................-5-
2.9 Bank Charges..................................................................................-5-
2.10 Indemnity re: LIBOR...........................................................................-6-
SECTION 3. LOAN ADMINISTRATION...........................................................................-6-
3.1 Manner of Borrowing Revolving Credit Loans....................................................-6-
3.2 Payments......................................................................................-7-
3.3 Mandatory and Permissive Prepayments..........................................................-8-
3.4 Application of Payments and Collections.......................................................-8-
3.5 All Loans to Constitute One Obligation........................................................-8-
3.6 Loan Account..................................................................................-8-
3.7 Statements of Account.........................................................................-9-
SECTION 4. TERM AND TERMINATION..........................................................................-9-
4.1 Term of Agreement.............................................................................-9-
4.2 Termination...................................................................................-9-
SECTION 5. SECURITY INTERESTS...........................................................................-10-
5.1 Security Interest in Collateral..............................................................-10-
5.2 Lien Perfection; Further Assurances..........................................................-11-
SECTION 6. COLLATERAL ADMINISTRATION....................................................................-11-
6.1 General......................................................................................-11-
6.2 Administration of Accounts...................................................................-12-
6.3 Administration of Inventory..................................................................-14-
6.4 Administration of Equipment..................................................................-14-
6.5 Payment of Charges...........................................................................-15-
SECTION 7. REPRESENTATIONS AND WARRANTIES...............................................................-15-
7.1 General Representations and Warranties.......................................................-15-
7.2 Continuous Nature of Representations and Warranties..........................................-21-
7.3 Survival of Representations and Warranties...................................................-21-
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS..........................................................-21-
8.1 Affirmative Covenants........................................................................-21-
8.2 Negative Covenants...........................................................................-24-
8.3 Specific Financial Covenants.................................................................-26-
SECTION 9. CONDITIONS PRECEDENT........................................................................-26-
9.1 Documentation................................................................................-27-
9.2 No Default...................................................................................-28-
9.3 Other Loan Documents.........................................................................-28-
9.4 No Litigation................................................................................-28-
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT................................................-29-
10.1 Events of Default............................................................................-29-
10.2 Acceleration of the Obligations..............................................................-31-
10.3 Other Remedies...............................................................................-31-
10.4 Remedies Cumulative; No Waiver...............................................................-32-
SECTION 11. MISCELLANEOUS....................................................................................-32-
11.1 Power of Attorney............................................................................-32-
11.2 Indemnity....................................................................................-33-
11.3 Modification of Agreement; Sale of Interest..................................................-34-
11.4 Severability.................................................................................-34-
11.5 Successors and Assigns.......................................................................-34-
11.6 Cumulative Effect; Conflict of Terms.........................................................-34-
11.7 Execution in Counterparts....................................................................-34-
11.8 Notice.......................................................................................-35-
11.9 Lender's Consent.............................................................................-35-
11.10 Credit Inquiries.............................................................................-36-
11.11 Time of Essence................................................................................-36-
11.12 Entire Agreement...............................................................................-36-
11.13 Interpretation.................................................................................-36-
11.14 GOVERNING LAW; CONSENT TO FORUM................................................................-36-
11.15 WAIVERS BY BORROWERS...........................................................................-37-
</TABLE>
<PAGE>
LOAN AND SECURITY AGREEMENT
THIS LOAN AND SECURITY AGREEMENT ("Agreement") is made this ____ day of
December, 1998, by and between FLEET BANK, N.A. ("Lender"), with an office at
1125 Route 22 West (3rd Floor), Bridgewater, NJ 08807, OPEN PLAN SYSTEMS, INC.,
a Virginia corporation ("Open Plan"), and IMMACULATE EAGLE, INC. d/b/a TOTAL
FACILITIES MANAGEMENT, a Michigan corporation ("Immaculate Eagle") (each a
"Borrower", and collectively, the "Borrowers"),with their chief executive office
at 4299 Carolina Avenue, Building C, Richmond, VA 23222.
Capitalized terms used in this Agreement have the meanings assigned to them
in Appendix A, General Definitions. Accounting terms not otherwise specifically
defined herein shall be construed in accordance with GAAP, consistently applied.
SECTION 1. CREDIT FACILITY
Subject to the terms and conditions of, and in reliance upon the
representations and warranties made in, this Agreement and the other Loan
Documents, Lender agrees to make a Total Credit Facility of up to $5,000,000.00
available upon Borrowers' request therefor, as follows:
. Lender may, in its sole discretion, for so long as no Default or Event of
Default exists, make Revolving Credit Loans to Borrowers from time to time, as
requested by Borrowers in the manner set forth in subsection 3.1.1 hereof, up to
a maximum principal amount at any time outstanding equal to the lesser of (a)
the Maximum Revolving Credit Amount or (b)the Borrowing Base, which shall be
repayable in accordance with the terms of the Revolving Credit Note. If the
unpaid balance of the Revolving Credit Loans together with all outstanding
Letters of Credit, collectively, "Outstanding Debt" and unpaid reimbursement
obligations related thereto should exceed the Borrowing Base or any other
limitation set forth in this Agreement, such Outstanding Debt shall nevertheless
constitute Obligations that are due and payable on demand, secured by the
Collateral and entitled to all benefits thereof. Lender shall have the right, in
its sole and absolute discretion, to establish reserves from time to time, in
such amounts and with respect to such matters, as Lender deems necessary or
appropriate, against the Borrowing Base.
. The proceeds of the Loans shall be used solely for (i) satisfaction of
all of the existing Indebtedness of Borrowers to the Existing Lenders, (ii) to
enable Borrowers to make a payment to a former shareholder in connection with
the Acquisition and (iii)Borrowers' working capital needs.
<PAGE>
. Lender may, in its sole discretion, for so long as no Default or Event of
Default exists and if requested by Borrowers, issue Letters of Credit for the
account of Borrowers provided that the aggregate amount shall not at any time
exceed the limit established by Lender from time to time. No Letter of Credit
may have an expiration date that is after the last day of the Original Term or
the then applicable Renewal Term. Any amounts paid by Lender in connection with
any Letter of Credit shall automatically be treated as Revolving Credit Loans,
shall be secured by all of the Collateral and shall bear interest and be payable
at the same rate and in the same manner as Revolving Credit Loans. Outstanding
Letters of Credit shall consume Availability under the Borrowing Base by 100% of
the face amount of all Standby Letters of Credit as if such face amount (or
portion thereof) were advances under the Revolving Credit.
SECTION 2. INTEREST, FEES AND CHARGES
..1 Interest
2.1.1 Revolving Credit Interest
(a) Rate Options. Except as provided below, all Loans shall bear interest
at the applicable Floating Rate. At the time of each Revolving Credit Loan, and
thereafter from time to time, Borrowers shall have the right, subject to the
terms and conditions of this Agreement, and provided no Default or Event of
Default has occurred and is continuing, to designate to Lender in writing that
all or a portion of the Revolving Credit Loans shall bear interest at either the
(i) LIBOR Based Rate or (ii) Floating Rate. Interest on each portion thereof
shall accrue and be paid at the time and rate applicable to the respective
option selected by Borrowers or otherwise governing under the terms of this
Agreement. If for any reason the LIBOR Based Rate option is unavailable, the
Floating Rate shall apply. The rate of interest on Floating Rate Loans shall
increase or decrease by an amount equal to any increase or decrease in the Prime
Rate effective as of the opening of business on the day that any such change in
the Prime Rate occurs.
(i) LIBOR Rate Option:
(A) Requests. Provided no Default or Event of Default has occurred and is
continuing, and subject to the provisions of this Section 2.1.1 (a)(i), if
Borrowers desire to have the LIBOR Based Rate apply to all or a portion of the
Loans, Borrowers shall give Lender a written irrevocable request no later than
11:00 A.M. Eastern time on the second (2nd) Business Day prior to the requested
borrowing date specifying (i) the date the LIBOR Based Rate shall apply (which
shall be a Business Day), (ii) the LIBOR Interest Period, and (iii) the amount
to be subject to the LIBOR Based Rate provided that each LIBOR Rate Loan shall
be in the minimum amount equal to Five Hundred Thousand Dollars ($500,000.00)
and the total of all LIBOR Rate Loans shall not exceed Two Million Dollars
($2,000,000.00) at any one time outstanding. In no event may Borrowers have
outstanding at any time more than three (3) different tranches of LIBOR Rate
Loans.
<PAGE>
(B) LIBOR Interest Periods. LIBOR Rate Loans shall be selected by Borrower
for a LIBOR Interest Period during which the LIBOR Based Rate is applicable;
provided, however, that if the LIBOR Interest Period would otherwise end on a
day which shall not be a London Business Day, such LIBOR Interest Period shall
be extended to the next preceding or succeeding London Business Day as is the
Lender's custom in the market to which such LIBOR Rate Loan relates. All accrued
and unpaid interest on a LIBOR Rate Loan shall be paid at the end of the LIBOR
Interest Period in accordance with Section 3.2.2. No LIBOR Interest Period with
respect to any of the Loans may end after the Maturity Date. Subject to all of
the terms and conditions applicable to a request to convert all or a portion of
the Loans to a LIBOR Rate Loan, Borrowers may extend a LIBOR Rate Loan as of the
last day of the LIBOR Interest Period to a new LIBOR Rate Loan. If Borrowers
fail to notify Lender of the LIBOR Interest Period for a subsequent LIBOR Rate
Loan at least two (2) Business Days prior to the last day of the then current
LIBOR Interest Period of an outstanding LIBOR Rate Loan, then such outstanding
LIBOR Rate Loan shall, at the end of the applicable LIBOR Interest Period,
accrue interest at the Floating Rate.
(C) Adjustments. The Adjusted LIBOR Rate may be automatically adjusted by
Lender on a prospective basis to take into account the additional or increased
cost of maintaining any necessary reserves for Eurodollar deposits or increased
costs due to changes in applicable law or regulation or the interpretation
thereof occurring subsequent to the commencement of the then applicable LIBOR
Interest Period, including but not limited to, changes in tax laws (except
changes of general applicability in corporate income tax laws) and changes in
the reserve requirements imposed by the Board of Governors of the Federal
Reserve System (or any successor or other applicable governing body), excluding
the Reserve Percentage and any Reserve which has resulted in a payment pursuant
to Section 2.7 below, that increase the cost to Lender of funding the LIBOR Rate
Loan. Lender shall promptly give Borrowers notice of such a determination and
adjustment, which determination shall be prima facie evidence of the correctness
of the fact and the amount of such adjustment.
(D) Unavailability. If Borrowers shall have requested the rate based on the
Adjusted LIBOR Rate in accordance with this Section 2.1.1(a)(i) and Lender shall
have determined, in good faith, that Eurodollar deposits equal to the amount of
the principal of the requested LIBOR Rate Loan and for the LIBOR Interest Period
specified are unavailable, or that the rate based on the Adjusted LIBOR Rate
will not adequately and fairly reflect the cost of the Adjusted LIBOR Rate
applicable to the specified LIBOR Interest Period, of making or maintaining the
principal amount of the requested LIBOR Rate Loan during the LIBOR Interest
Period specified, or that by reason of circumstances affecting Eurodollar
markets, adequate means do not exist for ascertaining the rate based on the
Adjusted LIBOR Rate applicable to the specified LIBOR Interest Period, Lender
shall promptly give notice of such determination to Borrowers that the rate
based on the Adjusted LIBOR Rate is not available. A determination, in good
faith, by Lender hereunder shall be prima facie evidence of the correctness of
the fact and amount of such additional costs or unavailability. Upon such a
determination, (i) the obligation to convert to, or maintain a LIBOR Rate Loan
at the rate based on the Adjusted LIBOR Rate shall be suspended until Lender
shall have notified Borrowers that such conditions shall have ceased to exist,
and (ii) the portion of the Loans subject to the request or requested conversion
shall accrue interest at the Floating Rate.
<PAGE>
2.1.2 Default Rate of Interest. Upon and at all times while an Event of
Default exists, the principal amount of all Loans shall bear interest at a rate
per annum equal to 4% above the interest rate otherwise applicable thereto (the
"Default Rate").
2.1.3 Maximum Interest. In no event whatsoever shall the aggregate of all
amounts deemed interest hereunder or under the Notes and charged or collected
pursuant to the terms of this Agreement or pursuant to the Notes exceed the
highest rate permissible under any law which a court of competent jurisdiction
shall, in a final determination, deem applicable hereto. If any provisions of
this Agreement or the Notes are in contravention of any such law, the rate
hereunder shall automatically be reduced to the maximum rate permitted by
applicable law, and Lender shall, in its discretion, to the extent permitted by
applicable law, apply such excess to the principal balance of the Loans or
refund such excess to Borrowers, and such provisions shall be deemed amended to
conform thereto.
. Interest and all fees shall be calculated daily and shall be computed on
the actual number of days elapsed over a year of three hundred sixty (360) days.
For the purpose of computing interest and fees hereunder, all items of payment
received by Lender shall be deemed applied by Lender on account of the
Obligations (subject to final payment of such items) on the second (2nd)
Business Day after receipt by Lender of such items in Lender's account, provided
however, that for the purposes of determining Availability, such items of
payment received by Lender shall be deemed applied by Lender on account of the
Obligations on the same day received.
. Borrowers shall pay to Lender, a facility fee in an amount equal to fifty
thousand dollars ($50,000.00) ("Facility Fee") which is deemed fully earned and
nonrefundable on the Closing Date. An amount equal to twenty-five thousand
dollars ($25,000.00) shall be due and payable on the first (1st) Business Day of
January, 1999, and the balance of the Facility Fee in an amount equal to
twenty-five thousand dollars ($25,000.00), shall be payable in thirty (34) equal
monthly payments in advance on the first (1st) Business Day of the month,
commencing on February 1, 1999 and continuing on the same day of each month
thereafter until the November 1, 2001.
. Borrower shall pay to Lender 2.50% per annum of the aggregate face amount
of such Standby Letters of Credit outstanding from time to time during the term
of this Agreement, plus in each case all normal and customary charges associated
with the issuance thereof, which fees and charges shall be deemed fully earned
upon issuance amendment and/or negotiation of each such Letter of Credit, shall
be due and payable on the first (1st) Business Day of each month and shall not
be subject to rebate or proration upon the termination of this Agreement for any
reason.
<PAGE>
. Borrower shall, on a monthly basis on the first (1st) Business Day of
each calendar month, pay to Lender an unused line fee in the amount of one
quarter of one percent (.25%) per annum on the difference between the Maximum
Revolving Credit Amount and the amount of the average actual outstanding Loans
during the preceding month.
2.6 Borrowers shall pay to Lender a late fee equal to 5% of any payment
which is not received in full within ten (10) days after it is due.
. Borrowers shall pay to Lender audit and appraisal fees in accordance with
Lender's current schedule of fees in effect from time to time (currently $750
per examiner per day) in connection with Lender's field examinations, audits and
appraisals of each Borrower's books and records and such other matters as Lender
shall deem appropriate, plus all out-of-pocket expenses incurred by Lender in
connection with such audits and appraisals. Lender does not expect such field
examinations, audits and appraisals to occur more frequently than once per
quarter; provided that, Lender shall have the unconditional right to conduct
field examinations, audits and appraisals whenever, in its sole discretion, it
deems necessary.
. If, at any time or times regardless of whether or not an Event of Default
then exists, Lender incurs legal or accounting expenses or any other costs or
out-of-pocket expenses in connection with (i) the analysis, negotiation and
preparation of this Agreement or any of the other Loan Documents, any amendment,
modification, replacement or termination of this Agreement or any of the other
Loan Documents; (ii) the administration of this Agreement or any of the other
Loan Documents and the transactions contemplated hereby and thereby (including
any out-of-pocket expenses incurred by any relationship manager or portfolio
manager in connection with their visitation of the Borrowers' facilities); (iii)
any litigation, contest, dispute, suit, proceeding or action (whether instituted
by Lender, Borrowers or any other Person) in any way relating to the Collateral,
this Agreement or any of the other Loan Documents or Borrowers' affairs; (iv)
any attempt to enforce any rights of Lender against Borrowers or any other
Person which may be obligated to Lender by virtue of this Agreement or any of
the other Loan Documents, including, without limitation, the Account Debtors; or
(v) any attempt to inspect, verify, protect, preserve, restore, collect, sell,
liquidate or otherwise dispose of or realize upon the Collateral or protect,
preserve or defend Lender's rights therein; then all such legal and accounting
expenses, other costs and out of pocket expenses of Lender shall be charged to
Borrowers. All amounts chargeable to Borrowers under this Section 2.8 shall be
Obligations secured by all of the Collateral, shall be payable on demand to
Lender and shall bear interest from the date such demand is made until paid in
full at the Floating Rate applicable to the Loans from time to time. Borrowers
shall also reimburse Lender for expenses incurred by Lender in its
administration of the Collateral to the extent and in the manner provided in
Section 6 hereof.
<PAGE>
. Borrowers shall pay to Lender, on demand, any and all fees, costs or
expenses which Lender pays to a bank or other similar institution arising out of
or in connection with (i) the forwarding to Borrowers or any other Person on
behalf of Borrowers, by Lender of proceeds of Loans made by Lender to Borrowers
pursuant to this Agreement and (ii) the depositing for collection by Lender of
any check or item of payment received or delivered to Lender on account of the
Obligations.
. Borrowers hereby indemnify Lender and holds Lender harmless from and
against any and all losses or expenses that Lender may sustain or incur as a
consequence of any prepayment or any Default by Borrowers in the payment of the
principal of or interest on any LIBOR Rate Loan or failure by Borrowers to
complete a borrowing of, a prepayment of or conversion of or to a LIBOR Rate
Loan after notice thereof has been given by Borrowers, including (but not
limited to) any interest payable by Lender to lenders of funds obtained by it in
order to make or maintain its LIBOR Rate Loans hereunder, and any other loss or
expense incurred by Lender by reason of the liquidation or re-employment of
deposits or other funds acquired by Lender to make, continue, convert into or
maintain, a LIBOR Rate Loan.
SECTION 3. LOAN ADMINISTRATION
. Borrowings under the Credit Facility established pursuant to Section 1
hereof shall be as follows:
3.1.1 Loan Requests. A request for a Revolving Credit Loan shall be made,
or shall be deemed to be made, by an Authorized Officer in the following manner:
(i) Borrowers may give Lender notice of the intention to borrow, in which notice
Borrowers shall specify the amount of the proposed borrowing and the proposed
borrowing date (which shall be a Business Day), no later than 12:00 P.M. Eastern
time on the proposed borrowing date, provided, however, that no such request may
be made at a time when there exists a Default or an Event of Default; and (ii)
the becoming due of any amount required to be paid under this Agreement or any
of the Notes, whether as interest or for any other Obligation, shall be deemed
irrevocably to be a request for a Revolving Credit Loan on the due date in the
amount required to pay such interest or other Obligation. As an accommodation to
Borrowers, Lender may permit electronic requests for Loans and electronic
transmittal of instructions, authorizations, agreements or reports to Lender by
Borrowers. Unless Borrowers specifically direct Lender in writing not to accept
or act upon electronic communications from Borrowers, Lender shall have no
liability to Borrowers for any loss or damage suffered by Borrowers as a result
of Lender's honoring of any requests, execution of any instructions,
authorizations or agreements or reliance on any reports communicated to it
electronically and purporting to have been sent to Lender by Borrowers and
Lender shall have no duty to verify the origin of any such communication or the
authority of the person sending it.
<PAGE>
3.1.2 Disbursement. Each Borrower hereby irrevocably authorizes Lender to
disburse the proceeds of each Loan requested, or deemed to be requested,
pursuant to this subsection 3.1.2 as follows: (i) the proceeds of each Loan
requested under subsection 3.1.1(i) shall be disbursed by Lender in lawful money
of the United States of America in immediately available funds, in the case of
the initial borrowing, in accordance with the terms of the written disbursement
letter from Borrowers, and in the case of each subsequent borrowing, by wire
transfer to such bank account as may be agreed upon by Borrowers and Lender from
time to time or elsewhere if pursuant to a written direction from Borrowers; and
(ii) the proceeds of each Loan requested under subsection 3.1.1(ii) shall be
disbursed by Lender by way of direct payment of the relevant interest or other
Obligation.
3.1.3 Authorization. Each Borrower hereby irrevocably authorizes Lender, in
Lender's sole discretion, to advance to Borrowers, and to charge to Borrowers'
Loan Account hereunder as a Revolving Credit Loan (regardless of whether an
Overadvance is thereby created) a sum sufficient to pay all interest, when due,
accrued on the Obligations during the immediately preceding month, all principal
when due, and all costs, fees and expenses at any time owed by Borrowers to
Lender hereunder.
3.1.4 Borrowing Base Certificates. Borrowers shall give Lender a Borrowing
Base Certificate no less frequently than once per week, or on such more frequent
basis as Lender may request.
. Except where evidenced by the Note or other instruments issued or made by
Borrowers to Lender specifically containing payment provisions which are in
conflict with this Section 3.2 (in which event the conflicting provisions of
said Note or other instruments shall govern and control), the Obligations shall
be payable as follows:
3.2.1 Principal. Principal payable on account of Loans shall be payable by
Borrowers to Lender immediately upon the earliest of (i) the receipt by Lender
or Borrowers of any proceeds of any of the Collateral to the extent of said
proceeds under the conditions set forth in Sections 3.3.1 and 6.2.5 below, (ii)
the occurrence of an Event of Default in consequence of which Lender elects to
accelerate the maturity and payment of the Obligations, or (iii) termination of
this Agreement pursuant to Section 4 hereof; provided, however, that if an
Overadvance shall exist at any time, Borrowers shall, on demand, immediately
repay the Overadvance.
3.2.2 Interest. Interest accrued on the Loans shall be due on the earliest
of (i) the first calendar day of each month (for the immediately preceding
month) computed through the last calendar day of the preceding month for
Floating Rate Loans, (ii) the Business Day immediately succeeding the last day
of the LIBOR Interest Period for LIBOR Rate Loans, (iii) the occurrence of an
Event of Default in consequence of which Lender elects to accelerate the
maturity and payment of the Obligations or (iv) termination of this Agreement
pursuant to Section 4 hereof.
3.2.3 Costs, Fees and Charges. Costs, fees and charges payable pursuant to
this Agreement shall be payable by Borrowers as and when provided in Section 2
hereof to Lender or to any other Person designated by Lender in writing.
<PAGE>
3.2.4 Other Obligations. The balance of the Obligations (other than those
set forth in this Section 3.2) requiring the payment of money shall be payable
by Borrowers to Lender as and when provided in this Agreement, the Note, the
Other Agreements or the Security Documents, or on demand, whichever is later.
..3 Mandatory and Permissive Prepayments
3.3.1 Proceeds of Sale, Loss, Destruction or Condemnation of Collateral.
Except as provided in subsection 6.4.2 hereof, if Borrowers sell any of the
Equipment, Real Property, or any other Property, other than inventory sold in
the ordinary course of business, or if any of the Collateral is lost or
destroyed or taken by condemnation, Borrowers shall pay to Lender, unless
otherwise agreed by Lender, as and when received by Borrowers, or as the case
may be, Lender shall retain and apply as a mandatory prepayment of the Revolving
Credit Loan, a sum equal to the proceeds (including insurance proceeds and
payments) received by Borrowers from such sale, loss, destruction or
condemnation.
3.3.2 LIBOR Rate Loans. No portion of the LIBOR Rate Loans may be prepaid
for any reason during a LIBOR Interest Period unless Borrowers first satisfy in
full their obligations under Section 2.10 arising from such prepayment.
. Subject to subsection 2.2 of this Agreement, all items of payment
received by Lender by 12:00 Noon Eastern time, on any Business Day shall be
deemed received on that Business Day. All items of payment received after 12:00
Noon Eastern time, on any Business Day shall be deemed received on the following
Business Day. Until payment in full of all Obligations and termination of this
Agreement, Borrowers irrevocably waive (except as otherwise expressly provided
for by Lender) the right to direct the application of any and all payments and
collections at any time or times hereafter received by Lender from or on behalf
of Borrowers, and Borrowers do hereby irrevocably agree that Lender shall have
the continuing exclusive right to apply and reapply any and all such payments
and collections received at any time or times hereafter by Lender or its agent
against the Obligations, in such manner as Lender may deem advisable,
notwithstanding any entry by Lender upon any of its books and records. If, as
the result of receipt of proceeds or collections of Collateral as authorized by
subsection 6.2.6 hereof, a credit balance exists in the Loan Account, such
credit balance shall not accrue interest in favor of Borrowers, but shall be
available to Borrowers at any time or times for so long as no Default or Event
of Default exists. Such credit balance may be applied to and offset any of the
Obligations arising from time to time. If there is no outstanding balance in the
Loan Account, and as the result of receipt of proceeds or collections, Borrowers
accumulate a credit balance in the Loan Account, such credit balance shall be
transferred, so long as no Default or Event of Default exists, to an account
established by Borrowers with the Lender and such account with the credit
balance shall accrue interest in favor of Borrowers.
. The Loans shall constitute one general Obligation of Borrowers, and shall
be secured by Lender's Lien upon all of the Collateral.
<PAGE>
. Lender shall enter all Loans as debits to the Loan Account and shall also
record in the Loan Account all payments made by Borrowers on any Obligations and
all proceeds of Collateral which are finally paid to Lender, and may record
therein, in accordance with customary accounting practice, other debits and
credits, including interest and all charges and expenses properly chargeable to
Borrowers.
. Lender will account to Borrowers monthly with a statement of Loans,
charges and payments made pursuant to this Agreement, and such account rendered
by Lender shall be deemed final, binding and conclusive upon Borrowers unless
Lender is notified by Borrowers in writing to the contrary within 45 days of the
date each accounting is mailed to Borrowers. Such notice shall only be deemed an
objection to those items specifically objected to therein.
SECTION 4. TERM AND TERMINATION
. Subject to Lender's right to cease making Loans to Borrowers upon or
after the occurrence, and during the continuance, of any Default or Event of
Default, this Agreement shall be in effect for a period of three (3) years from
the date hereof (the "Original Term") and, subject to Lender's final credit
approval, this Agreement shall automatically renew itself for one-year periods
thereafter (the "Renewal Terms") unless terminated as provided in Section 4.2
hereof; however, any renewal is subject to a renegotiation of all fees and
Termination Charges applicable to and payable by Borrowers during any Renewal
Term.
..2 Termination
4.2.1 Termination by Lender. Upon at least sixty (60) days prior written
notice to Borrowers, Lender may terminate this Agreement as of the last day of
the Original Term or the then current Renewal Term and Lender may terminate this
Agreement without notice upon or after the occurrence, and during the
continuance, of an Event of Default.
4.2.2 Termination by Borrower. Upon at least sixty (60) days prior written
notice to Lender, Borrowers may, at their option, terminate this Agreement;
provided, however, no such termination shall be effective until Borrowers have
paid all of the Obligations and the Termination Charges (as set forth below) in
immediately available funds and all Letters of Credit have expired or have been
cash collateralized to Lender's satisfaction. Any notice of termination given by
Borrowers shall be irrevocable unless Lender otherwise agrees in writing, and
Lender shall have no obligation to make any Loans or issue or procure any
Letters of Credit on or after the termination date stated in such notice.
Subject only to Section 4.2.5 below, Borrowers may elect to terminate this
Agreement in its entirety only and no section of this Agreement or type of Loan
available hereunder may be terminated singly.
<PAGE>
4.2.3 Termination Charges. On any day other than the effective date of
termination of this Agreement for any reason, Borrowers shall pay to Lender (in
addition to the then outstanding principal, accrued interest and other charges
owing under the terms of this Agreement and any of the other Loan Documents) as
liquidated damages for the loss of the bargain and not as a penalty, an amount
equal to (A) one and one half of one percent (1.50%) of the Total Credit
Facility if the termination date occurs during the first year of the Original
Term, (B) one percent (1.00%) if the termination date occurs during the second
year of the Original Term, and (C) one-half of one percent (.5%) if the
termination date occurs during the third year of the Original Term. Such
Termination Charges shall not apply if such facility is refinanced by another
division of Lender.
4.2.4 Effect of Termination. All of the Obligations shall be immediately
due and payable upon the termination date stated in any notice of termination of
this Agreement. All undertakings, agreements, covenants, warranties and
representations of each Borrower contained in the Loan Documents shall survive
any such termination and Lender shall retain its Liens in the Collateral and all
of its rights and remedies under the Loan Documents notwithstanding such
termination until Borrowers have paid the Obligations to Lender, in full, in
immediately available funds together with the applicable Termination Charges
under Section 4.2.3, if any, the balance of the Facility Fee under Section 2.3,
and with respect to any outstanding Letters of Credit issued in favor of
Borrowers and any other outstanding Obligations of Borrowers to Lender, Lender
has obtained an appropriate indemnification by any new lender. Notwithstanding
the payment in full of the Obligations, Lender shall not be required to
terminate its security interests in the Collateral unless, with respect to any
loss or damage Lender may incur as a result of dishonored checks or other items
of payment received by Lender from Borrowers or any Account Debtor and applied
to the Obligations, Lender shall, at its option, (i) have received a written
agreement in form and substance satisfactory to Lender, executed by Borrowers
and by any Person whose loans or other advances to Borrowers are used in whole
or in part to satisfy the Obligations, indemnifying Lender from any such loss or
damage; or (ii) have retained such monetary reserves and Liens on the Collateral
for such period of time as Lender, in its reasonable discretion, may deem
necessary to protect Lender from any such loss or damage.
SECTION 5. SECURITY INTERESTS
. To secure the prompt payment and performance to Lender of the
Obligations, Borrowers hereby grant to Lender a continuing first Lien upon all
of Borrowers' assets, including without limitation, all of the following
Property and interests in Property of Borrowers, whether now owned or existing
or hereafter created, acquired or arising and wheresoever located:
(i) Accounts;
(ii) Inventory;
(iii) Equipment;
(iv) General Intangibles;
<PAGE>
(v) Fixtures;
(vi) Deposit Accounts;
(vii) Chattel Paper;
(viii) Instruments;
(ix) Documents;
(x) Investment Property;
(xi) All monies and other Property of any kind now or at any
time or times hereafter in the possession or under the control of
Lender or a bailee or Affiliate of Lender;
(xii) All books and records (including, without limitation,
customer lists, credit files, computer programs, print-outs, and
other computer materials and records) of Borrowers pertaining to
any of (i) through (xi) above; and
(xiii) All accessions to, substitutions for and all
replacements, products and cash and non-cash proceeds of (i)
through (xii) above, including, without limitation, proceeds of
and unearned premiums with respect to insurance policies insuring
any of the Collateral.
. Borrowers shall execute such UCC-1 financing statements as are required
by the Code and such other instruments, assignments or documents as are
necessary to perfect Lender's Lien upon any of the Collateral and shall take
such other action as may be required by applicable law to perfect or to continue
the perfection of Lender's Lien upon the Collateral, including without
limitation, the execution of all instruments, documents and agreements required
to have Lender's Lien noted on all certificates of title for each Borrower's
Property for which such a certificate has been issued and delivery to Lender of
all Collateral requested by Lender to be so delivered in order for Lender to
obtain a perfected Lien thereon. Unless prohibited by applicable law, Borrowers
hereby authorize Lender to execute and file any such financing statement on
Borrowers' behalf. The parties agree that a carbon, photographic or other
reproduction of this Agreement shall be sufficient as a financing statement and
may be filed in any appropriate office in lieu thereof. At Lender's request,
Borrowers shall also promptly execute or cause to be executed and shall deliver
to Lender any and all documents, instruments and agreements deemed necessary by
Lender to give effect to or carry out the terms or intent of the Loan Documents,
including, without limitation, delivery of all landlord/ warehousemen lien
subordination/waiver agreements requested by Lender.
<PAGE>
SECTION 6. COLLATERAL ADMINISTRATION
6.1 General
6.1.1 Location of Collateral. All Collateral, other than Inventory in
transit, consigned in the ordinary course of business and motor vehicles,
will at all times be kept by Borrowers at one or more of the business
locations and sales offices set forth in Exhibit 6.1.1 hereto and shall
not, without the prior written approval of Lender, be moved therefrom
except, prior to an Event of Default and Lender's acceleration of the
maturity of the Obligations in consequence thereof, for (i) sales of
Inventory in the ordinary course of business; and (ii) removals in
connection with dispositions of Equipment that are authorized by subsection
6.4.2 hereof.
6.1.2 Insurance of Collateral. Borrowers shall maintain and pay for
insurance upon all Collateral wherever located and with respect to each
Borrower's business, covering casualty, hazard, public liability, flood and
such other risks in such amounts and with such insurance companies as are
reasonably satisfactory to Lender. Borrowers shall deliver the originals of
such policies to Lender with satisfactory lender's loss payable
endorsements, naming Lender as lender loss payee, assignee, mortgagee
and/or additional insured, as appropriate and providing that all such
insurance proceeds are paid to Lender. Each policy of insurance or
endorsement shall contain a clause requiring the insurer to give not less
than 30 days prior written notice to Lender in the event of cancellation of
the policy for any reason whatsoever and a clause specifying that the
interest of Lender shall not be impaired or invalidated by any act or
neglect of either Borrower or the owner of the Property or by the
occupation of the premises for purposes more hazardous than are permitted
by said policy. If Borrowers fail to provide and pay for such insurance,
Lender may, at its option, but shall not be required to, procure the same
and charge Borrowers therefor. Borrowers agree to deliver to Lender,
promptly as rendered, true copies of all reports made in any reporting
forms to insurance companies.
6.1.3 Protection of Collateral. All expenses of protecting, storing,
warehousing, insuring, handling, maintaining and shipping the Collateral,
any and all excise, property, sales, and use taxes imposed by any state,
federal, or local authority on any of the Collateral or in respect of the
sale thereof shall be borne and paid by Borrowers. If Borrowers fail to
promptly pay any portion thereof when due, and Borrowers fail to
immediately make such past due payment after Lender requests, Lender may,
at its option, but shall not be required to, pay the same and charge
Borrowers therefor. Lender shall not be liable or responsible in any way
for the safekeeping of any of the Collateral or for any loss or damage
thereto or for any diminution in the value thereof, or for any act or
default of any warehouseman, carrier, forwarding agency, or other person
whomsoever, but the same shall be at Borrowers' sole risk.
..2 Administration of Accounts
<PAGE>
6.2.1 Records, Schedules and Assignments of Accounts. Borrowers shall
keep accurate and complete records of its Accounts and all payments and
collections thereon in a format similar to the format provided to and
accepted by Lender during the initial field examination, and shall submit
to Lender on such periodic basis as Lender shall request a sales and
collections report for the preceding period, in form satisfactory to
Lender. On or before the fifteenth (15th) day of each month from and after
the date hereof, Borrowers shall deliver to Lender, in form acceptable to
Lender, a detailed aged trial balance of all Accounts existing as of the
last day of the preceding month, specifying the face value, discounts and
rebates, if any, dates of invoices and due dates for each Account Debtor
obligated on an Account so listed ("Schedule of Accounts"), and, upon
Lender's request therefor, copies of proof of delivery and the original
copy of all documents, including, without limitation, repayment histories,
present status reports relating to the Accounts so scheduled, and copies of
each Borrowers' master customer address listing, and such other matters and
information relating to the status of then existing Accounts as Lender
shall reasonably request. Borrowers shall, if requested by Lender, execute
and deliver to Lender formal written assignments of all of its Accounts
from time to time, which shall include all Accounts that have been created
since the date of the last assignment, together with copies of invoices or
invoice registers related thereto.
6.2.2 Discounts, Allowances, Disputes. If Borrowers grant any
discounts, allowances or credits that are not shown on the face of the
invoice for the Account involved, Borrowers shall report such discounts,
allowances or credits, as the case may be, to Lender as part of the next
required Schedule of Accounts. If any amounts due and owing in excess of
$20,000.00 are in dispute between a Borrower and any Account Debtor, such
Borrower shall provide Lender with written notice thereof at the time of
submission of the next Schedule of Accounts, explaining in detail the
reason for the dispute, all claims related thereto and the amount in
controversy. Upon and while an Event of Default exists, Lender shall have
the right to settle or adjust all disputes and claims directly with the
Account Debtor and to compromise the amount or extend the time for payment
of the Accounts upon such terms and conditions as Lender may deem
advisable, and to charge the deficiencies, costs and expenses thereof,
including attorneys' fees, to Borrowers.
6.2.3 Taxes. If an Account includes a charge for any tax payable to
any governmental taxing authority, Lender is authorized (without any
obligation or duty on Lender's part), in its sole discretion upon an
Default or Event of Default, to pay the amount thereof to the proper taxing
authority for the account of Borrowers and to charge Borrowers therefor,
provided, however that Lender shall not be liable for any taxes to any
governmental taxing authority that may be due by Borrowers.
6.2.4 Account Verification. Whether or not a Default or an Event of
Default has occurred, any of Lender's officers, employees or agents shall
have the right, at any time or times hereafter, in the name of Lender, any
designee of Lender or Borrowers, to verify the validity, amount or any
other matter relating to any Accounts by mail, telephone, telegraph or
otherwise. Borrowers shall cooperate fully with Lender in an effort to
facilitate and promptly conclude any such verification process.
<PAGE>
6.2.5 Maintenance of Dominion Account. Borrowers shall maintain a
Dominion Account at Lender and if Lender requests shall establish a lockbox
arrangement acceptable to Lender under which Account Debtors shall be
requested to make all remittances directly to such lockbox. Borrowers shall
be obligated to immediately deposit into, or cause to be directly remitted
to, such Dominion Account, any proceeds of Collateral received by
Borrowers. All funds deposited in the Dominion Account shall immediately
become the property of Lender. Borrowers shall, upon request of Lender from
time to time, obtain the agreement by such banks in favor of Lender to
waive any offset rights against the funds so deposited and honor all
directions of Lender. Lender assumes no responsibility for such
arrangement, including, without limitation, any claim of accord and
satisfaction or release with respect to deposits accepted by any bank
thereunder.
6.2.6 Collection of Accounts, Proceeds of Collateral. To expedite
collection, Borrowers shall endeavor in the first instance to make
collection of its Accounts. All remittances received by Borrowers on
account of Accounts, together with the proceeds of any other Collateral,
shall be held as Lender's property by Borrowers as trustee of an express
trust for Lender's benefit and Borrowers shall immediately deposit same in
kind in the Dominion Account. Lender retains the right at all times to
notify Account Debtors that Accounts have been assigned to Lender and to
collect Accounts directly in its own name and to charge the collection
costs and expenses, including attorneys' fees to Borrowers. Lender has no
duty to protect, insure, collect or realize upon the Accounts or preserve
rights therein.
..3 Administration of Inventory
6.3.1 Records and Reports of Inventory. Borrowers shall keep accurate
and complete records of its Inventory. Borrowers shall furnish to Lender
Inventory reports in form and detail satisfactory to Lender at such times
as Lender may request, but at least once each month, not later than the
fifteenth (15) day of such month. Borrowers shall conduct a physical
inventory no less frequently than annually and shall provide to Lender, a
report based on each such physical inventory promptly thereafter, together
with such supporting information as Lender shall request.
6.3.2 Returns of Inventory. If at any time or times hereafter, any
Account Debtor returns any Inventory to either Borrower, the shipment of
which generated an Account on which such Account Debtor is obligated in
excess of $10,000.00, and the amount of such returned Inventory with
respect to such Account exceeds $10,000.00, Borrowers shall immediately
notify Lender of the same, specifying the reason for such return and the
location, condition and intended disposition of the returned Inventory.
6.3.3 Inventory Valuation System. Borrowers shall at all times
maintain an Inventory valuation system acceptable to Lender, each
Borrower's existing system being acceptable to Lender.
<PAGE>
..4 Administration of Equipment
6.4.1 Records and Schedules of Equipment. Borrowers shall keep
accurate records itemizing and describing the kind, type, quality, quantity
and value of its Equipment and all dispositions made in accordance with
subsection 6.4.2 hereof, and shall furnish Lender with a current schedule
containing the foregoing information on at least an annual basis and more
often if requested by Lender. Immediately on request therefor by Lender,
Borrowers shall deliver to Lender any and all evidence of ownership of the
Equipment.
6.4.2 Dispositions of Equipment. Borrowers will not sell, lease or
otherwise dispose of or transfer any of the Equipment or any part thereof
without the prior written consent of Lender; provided, however, that, so
long as no Default or Event of Default exists, Borrowers shall be entitled
to make dispositions of Equipment which, in the aggregate during any
consecutive twelve-month period, have a fair market value or book value,
whichever is less, of $10,000.00 or less.
. All amounts chargeable to Borrowers under Section 6 hereof shall be
Obligations secured by all of the Collateral, shall be payable on demand
and shall bear interest from the date such advance was made until paid in
full at the Floating Rate applicable to the Loans from time to time.
SECTION 7. REPRESENTATIONS AND WARRANTIES
. To induce Lender to enter into this Agreement and to make advances
hereunder, each Borrower warrants, represents and covenants to Lender that:
7.1.1. Organization and Qualification. Each Borrower is a corporation
duly organized, validly existing and in good standing under the laws of the
jurisdiction of its incorporation. Each Borrower is duly qualified and is
authorized to do business and is in good standing as a foreign corporation
in each state or jurisdiction listed on Exhibit 7.1.1 hereto and in all
other states and jurisdictions where the character of its Properties or the
nature of its activities make such qualification necessary.
<PAGE>
7.1.2 Corporate Power and Authority. Each Borrower has full corporate
power and authority to enter into, execute, deliver and perform this
Agreement and each of the other Loan Documents to which it is a party. The
execution, delivery and performance of this Agreement and each of the other
Loan Documents have been duly authorized by all necessary corporate action
and do not and will not (i) require any consent or approval of the
shareholders of either Borrower; (ii) contravene either Borrower's charter,
articles or certificate of incorporation or by-laws; (iii) violate, or
cause either Borrower to be in default under, any provision of any law,
rule, regulation, order, writ, judgment, injunction, decree, determination
or award in effect having applicability to either Borrower; (iv) result in
a breach of or constitute a default under any indenture or loan or credit
agreement or any other agreement, lease or instrument to which either
Borrower is a party or by which it or its Properties may be bound or
affected; or (v) 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 either Borrower.
7.1.3 Legally Enforceable Agreement. This Agreement is, and each of
the other Loan Documents when delivered under this Agreement will be, a
legal, valid and binding obligation of each Borrower enforceable against it
in accordance with its respective terms.
7.1.4 Capital Structure. Exhibit 7.1.4 hereto states (i) the correct
name of each of the Subsidiaries, if any, of each Borrower, its
jurisdiction of incorporation and the percentage of its Voting Stock owned
by each Borrower, (ii) the name of each Borrower's corporate or joint
venture Affiliates and the nature of the affiliation, (iii) the number,
nature and holder of all outstanding Securities of each Borrower and each
Subsidiary of such Borrower and (iv) the number of authorized, issued and
treasury shares of each Borrower and each Subsidiary of such Borrower, such
issued shares shall include the 87,500 shares of common stock held in
escrow as security for indemnification obligations to the former
shareholders of Immaculate Eagle by Open Plan pursuant to the terms of that
certain purchase agreement by and between Open Plan and Immaculate Eagle
dated October 1, 1996. Each Borrower has good title to all of the shares it
purports to own of the stock of each of its Subsidiaries, free and clear in
each case of any Lien other than Permitted Liens. All such shares have been
duly issued and are fully paid and non-assessable. Except as disclosed on
Exhibit 7.1.4, there are no outstanding options to purchase, or any rights
or warrants to subscribe for, or any commitments or agreements to issue or
sell, or any Securities or obligations convertible into, or any powers of
attorney relating to, shares of the capital stock of either Borrower or any
of its Subsidiaries. Except as shown on Exhibit 7.1.4, there are no
outstanding agreements or instruments binding upon any shareholder of
either Borrower relating to the ownership of its shares of capital stock.
7.1.5 Corporate Names. Neither Borrower nor any of its Subsidiaries
have been known as or used any corporate, fictitious or trade names except
those listed on Exhibit 7.1.5 hereto. Except as set forth on Exhibit 7.1.5,
neither Borrower nor any of its Subsidiaries have been the surviving
corporation of a merger or consolidation or acquired all or substantially
all of the assets of any Person.
7.1.6 Business Locations; Agent for Process. Each of Borrower's and
its Subsidiaries' chief executive offices and other places of business are
as listed on Exhibit 6.1.1 hereto. During the preceding five-year period,
neither Borrower nor any of its Subsidiaries had an office, place of
business or agent for service of process other than as listed on Exhibit
6.1.1. Except as shown on Exhibit 6.1.1, no Inventory is stored with a
bailee, warehouseman or similar party, nor is any Inventory consigned to
any Person.
<PAGE>
7.1.7 Title to Properties; Priority of Liens. Each Borrower and each
of its Subsidiaries' has good, indefeasible and marketable title to and fee
simple ownership of, or valid and subsisting leasehold interests in, all of
its real Property (including the Real Property), and good title to all of
the Collateral and all of its other Property, in each case, free and clear
of all Liens except Permitted Liens. Each Borrower has paid or discharged,
or reserved for, all lawful claims which, if unpaid, might become a Lien
against any Properties of such Borrower that is not a Permitted Lien. The
Liens granted to Lender under Section 5 hereof are first priority Liens,
subject only to Permitted Liens.
7.1.8 Accounts. Unless otherwise indicated in writing to Lender, with
respect to each Account:
(i) It is genuine and in all respects what it purports to be, and it
is not evidenced by a judgment;
(ii) It arises out of a completed, bona fide sale and delivery of
goods or rendition of services by each Borrower in the ordinary course of
its business and in substantial compliance with the terms and conditions of
all purchase orders, contracts or other documents relating thereto and
forming a part of the contract between such Borrower and the Account
Debtor;
(iii) It is, for a liquidated amount maturing as stated in the
duplicate invoice covering such sale or rendition of services, a copy of
which has been furnished or is available to Lender;
(iv) To the best of each Borrower's knowledge, such Account, and
Lender's security interest therein is not (by voluntary act or omission of
each Borrower) subject to any offset, Lien, deduction, defense, dispute,
counterclaim or any other adverse condition except for disputes resulting
in returned goods where the amount in controversy is deemed by Lender to be
immaterial, and each such Account is absolutely owing to such Borrower and
is not contingent in any respect or for any reason.
(v) Neither Borrower has made any agreement with any Account Debtor
thereunder for any extension, compromise, settlement or modification of any
such Account or any deduction therefrom, except discounts, rebates or
allowances which are granted by such Borrower in the ordinary course of its
business for prompt payment and which are reflected in the calculation of
the net amount of each respective invoice related thereto and are reflected
in the Schedules of Accounts submitted to Lender pursuant to subsection
6.2.1 hereof;
(vi) There are no facts, events or occurrences which in any way impair
the validity or enforceability of any Accounts or (other than with respect
to discounts and rebates granted by such Borrower in the ordinary course of
its business), tend to reduce the amount payable thereunder from the face
amount of the invoice and statements delivered to Lender with respect
thereto;
<PAGE>
(vii) To the best of each Borrower's knowledge, without independent
investigation, the Account Debtor thereunder (1) had the capacity to
contract at the time any contract or other document giving rise to the
Account was executed and (2) such Account Debtor was Solvent at the time
this Account arose; and
(viii) To the best of each Borrower's knowledge, without independent
investigation, there are no proceedings or actions which are threatened or
pending against any Account Debtor thereunder which might result in any
material adverse change in such Account Debtor's financial condition or the
collectibility of such Account.
7.1.9 Equipment. The Equipment is in satisfactory operating condition
and repair, in light of its intended use, and, to the extent permitted
hereunder, all necessary replacements of and repairs thereto shall be made
so that such condition shall be maintained and preserved, reasonable wear
and tear excepted. Neither Borrower will permit any material item of the
Equipment to become affixed to any real Property leased to such Borrower so
that an interest arises therein under the real estate laws of the
applicable jurisdiction unless the landlord of such real Property has
executed a landlord waiver or leasehold mortgage in favor of and in form
acceptable to Lender, and neither Borrower will permit any of the Equipment
to become an accession to any personal Property other than Equipment that
is subject to first priority Liens in favor of Lender.
7.1.10 Financial Statements; Fiscal Year. The Consolidated and
Consolidating balance sheets of Borrowers and such other Persons described
therein (including the accounts of all Subsidiaries, if any, of such
Borrower for the respective periods during which a Subsidiary relationship
existed) as of December 31, 1997, and the related statements of income,
changes in stockholder's equity, and changes in financial position for the
periods ended on such dates, have been prepared in accordance with GAAP and
present fairly the financial positions of each Borrower at such dates and
the results of such Borrower's operations for such period. Since June 30,
1998, there has been no material change in the condition, financial or
otherwise, of either Borrower and no change in the aggregate value of
Equipment and real Property (including the Real Property) owned by
Borrowers. The fiscal year of each Borrower and each of its Subsidiaries
ends on December 31st of each year.
7.1.11 Full Disclosure. The financial statements referred to in
subsection 7.1.10 hereof do not, nor does this Agreement or any other
written statement of either Borrower to Lender, contain any untrue
statement of a material fact or, (when taken as a whole with all other
information submitted by each Borrower or made available to, and reviewed
by Lender), omit a material fact necessary to make the statements contained
therein or herein not misleading. There is no fact which either Borrower
has failed to disclose to Lender in writing which materially affects
adversely or, so far as each Borrower can now foresee, will materially
affect adversely the Properties, business, prospects, profits or condition
(financial or otherwise) of either Borrower or the ability of either
Borrower to perform this Agreement or the other Loan Documents.
<PAGE>
7.1.12 Solvent Financial Condition. Each Borrower is now and, after
giving effect to the Loans to be made hereunder, at all times will be,
Solvent.
7.1.13 Surety Obligations. Except as set forth on Exhibit 7.1.13
hereto, neither Borrower nor any Subsidiary of such Borrower is obligated
as surety or indemnitor under any surety or similar bond or other contract
issued or entered into or any agreement to assure payment, performance or
completion of performance of any undertaking or obligation of any Person.
7.1.14 Taxes. Each Borrower's and each such Subsidiary of Borrower's
federal tax identification number is shown on Exhibit 7.1.14 hereto. Each
Borrower and each Subsidiary of such Borrower has filed all federal, state
and local tax returns and other reports it is required by law to file and
has paid, or made provision for the payment of, all taxes, assessments,
fees, levies and other governmental charges upon it, its income and
Properties as and when such taxes, assessments, fees, levies and charges
are due and payable, unless and to the extent any thereof are being
actively contested in good faith and by appropriate proceedings and each
Borrower maintains reasonable reserves on its books therefor. The provision
for taxes on the books of each Borrower and each Subsidiary of such
Borrower are adequate for all years not closed by applicable statutes, and
for its current fiscal year.
7.1.15 Brokers. There are no claims against either Borrower for
brokerage commissions, finder's fees or investment banking fees in
connection with the transactions contemplated by this Agreement.
7.1.16 Patents, Trademarks, Copyrights and Licenses. Each Borrower and
each Subsidiary of such Borrower owns or possesses all the patents,
trademarks, service marks, trade names, copyrights and licenses used in and
necessary for the present and planned future conduct of its business
without any known conflict with the rights of others. All such patents,
trademarks, service marks, tradenames, copyrights, licenses and other
similar rights are listed on Exhibit 7.1.16 hereto.
7.1.17 Governmental Consents. Each Borrower and each Subsidiary of
such Borrower has, and is in good standing with respect to, all
governmental consents, approvals, licenses, authorizations, permits,
certificates, inspections and franchises necessary to continue to conduct
its business as heretofore or proposed to be conducted by it and to own or
lease and operate its Properties as now owned or leased by it.
<PAGE>
7.1.18. Compliance with Laws. Except as set forth on Exhibit 7.1.18
hereto, each Borrower and each Subsidiary of such Borrower has duly
complied with, and its Properties, business operations and leaseholds are
in compliance in all material respects with, the provisions of all federal,
state and local laws, rules and regulations applicable to such Borrower or
such Subsidiary, as applicable, its Properties or the conduct of its
business and there have been no citations, notices or orders of
noncompliance issued to either Borrower or any Subsidiary under any such
law, rule or regulation except where such noncompliance would not have a
material and adverse effect on such Borrower's business, Property,
financial condition or prospects. Each Borrower and each Subsidiary of such
Borrower has established and maintains an adequate monitoring system to
ensure that it remains in compliance with all federal, state and local
laws, regulations and rules applicable to it. No Inventory has been
produced in violation of the Fair Labor Standards Act (29 U.S.C. 201 et
seq.), as amended.
7.1.19 Restrictions. Neither Borrower nor any Subsidiary of a Borrower
is a party or subject to any contract, agreement, or charter or other
corporate restriction, which materially and adversely affects its business
or the use or ownership of any of its Properties. Neither Borrower nor any
Subsidiary of a Borrower is a party or subject to any contract or agreement
which restricts its right or ability to incur Indebtedness, other than as
set forth on Exhibit 7.1.19 hereto, none of which prohibit the execution of
or compliance with this Agreement or the other Loan Documents by either
Borrower or any Subsidiary of a Borrower, as applicable.
7.1.20 Litigation. Except as set forth on Exhibit 7.1.20 hereto, there
are no actions, suits, proceedings or investigations pending, or to the
knowledge of either Borrower or any Subsidiary of either Borrower,
threatened, against or affecting either Borrower or the business,
operations, Properties, prospects, profits or condition of either Borrower
or any Subsidiary of Borrower. Neither Borrower nor any Subsidiary of a
Borrower is in default with respect to any order, writ, injunction,
judgment, decree or rule of any court, governmental authority or
arbitration board or tribunal.
7.1.21 No Defaults. Except as set forth on Exhibit 7.1.21, no event
has occurred and no condition exists which would, upon or after the
execution and delivery of this Agreement or Borrowers' performance
hereunder, constitute a Default or an Event of Default. Neither Borrower
nor any Subsidiary of a Borrower is in default, and no event has occurred
and no condition exists which constitutes, or which with the passage of
time or the giving of notice or both would constitute, a default in the
payment of any Indebtedness to any Person for Money Borrowed.
7.1.22 Leases. Exhibit 7.1.22(a) hereto is a complete listing of all
capitalized leases of Borrowers and each Subsidiary of Borrowers and
Exhibit 7.1.22(b) hereto is a complete listing of each operating lease of
Borrowers. Borrowers and each Subsidiary of Borrowers is in full compliance
with all of the terms of each of its respective capitalized and operating
leases except where such noncompliance would not have a material and
adverse effect on either Borrowers' business, Property, financial condition
or prospects.
7.1.23 Pension Plans. Except as disclosed on Exhibit 7.1.23 hereto,
neither Borrower nor any Subsidiary of a Borrower has any Plan. Each
Borrower and each Subsidiary of such Borrower is in full compliance in all
material respects with the requirements of ERISA and the regulations
promulgated thereunder with respect to each Plan. No fact or situation that
could result in a material adverse change in the financial condition of
either Borrower or any Subsidiary of such Borrower exists in connection
with any Plan. Neither Borrower nor any Subsidiary of a Borrower has
withdrawal liability in connection with a Multiemployer Plan.
<PAGE>
7.1.24 Trade Relations. There exists no actual or threatened
termination, cancellation or limitation of, or any modification or change
in, the business relationship between either Borrower or any Subsidiary of
such Borrower and any customer or any group of customers whose purchases
individually or in the aggregate are material to the business of Borrowers
or with any material supplier, and there exists no present condition or
state of facts or circumstances which would materially affect adversely
Borrowers or any Subsidiary of Borrowers or prevent either Borrower or any
Subsidiary of such Borrower from conducting such business after the
consummation of the transactions contemplated by this Agreement in
substantially the same manner in which it has heretofore been conducted.
7.1.25 Labor Relations. Except as described on Exhibit 7.1.25 hereto,
neither Borrower nor any Subsidiary of Borrower is a party to any
collective bargaining agreement. There are no material grievances, disputes
or controversies with any union or any other organization of Borrowers' or
any Subsidiary of Borrowers' employees, or threats of strikes, work
stoppages or any asserted pending demands for collective bargaining by any
union or organization.
7.1.26 Year 2000 Compliance. The Borrowers have reviewed the area
within its business and operations which could be adversely affected by,
and have developed or are developing a program to address on a timely
basis, the risk that certain computer applications used by the Borrowers
may be unable to recognize and perform properly date-sensitive functions
involving duties prior to and after December 31, 1999 (the "Year 2000
Problem"). The year 2000 Problem will not result, and is not reasonably
expected to result, in any Material Adverse Effect.
. Each representation and warranty contained in this Agreement and the
other Loan Documents shall be continuous in nature and shall, in all
material respects, remain accurate, complete and not misleading at all
times during the term of this Agreement.
. All representations and warranties of Borrowers contained in this
Agreement or any of the other Loan Documents shall survive the execution,
delivery and acceptance thereof by Lender and the parties thereto and the
closing of the transactions described therein or related thereto.
SECTION 8. COVENANTS AND CONTINUING AGREEMENTS
. During the term of this Agreement, and thereafter for so long as
there are any Obligations to Lender, each Borrower covenants that, unless
otherwise consented to by Lender in writing, it shall:
<PAGE>
8.1.1 Visits and Inspections. Permit representatives of Lender, from
time to time, as often as may be reasonably requested, but only during
normal business hours, to visit and inspect the Properties of each Borrower
and any Subsidiary of such Borrower, inspect, audit and make extracts from
its books and records, and discuss with its officers, its employees and its
independent accountants, each Borrower's and each of its Subsidiaries'
business, assets, liabilities, financial condition, business prospects and
results of operations.
8.1.2 Notices. Promptly notify Lender in writing of the occurrence of
any event or the existence of any fact which renders any representation or
warranty in this Agreement or any of the other Loan Documents inaccurate,
incomplete or misleading in any material respect.
8.1.3 Financial Statements. Keep, and cause each Subsidiary of
Borrowers to keep, adequate records and books of account with respect to
its business activities in which proper entries are made reflecting all of
its financial transactions; and cause to be prepared and furnished to
Lender the following (all to be prepared on a consistent basis):
(i) not later than ninety (90) days after the close of each
fiscal year of Borrowers, audited financial statements of the
Borrowers and their Subsidiaries as of the end of such year, on a
Consolidated and Consolidating (if applicable) basis, certified as to
such Consolidated financial statements of the Borrowers by a firm of
independent certified public accountants of recognized standing
selected by Borrowers but acceptable to Lender to have been prepared
in accordance with GAAP;
(ii) not later than thirty (30) days after the end of each month
hereafter, including the last month of Borrowers' fiscal year,
unaudited interim financial statements of Borrowers and their
Subsidiaries as of the end of such month and of the portion of
Borrowers' fiscal year then elapsed, on a Consolidated basis,
certified by the principal financial officer of Borrowers to have been
prepared in accordance with GAAP and fairly to present the
Consolidated financial position and results of operations of Borrowers
and their Subsidiaries for such month and period subject only to
changes from audit and year-end adjustments and except that such
statements need not contain notes;
(iii) not later than thirty (30) days prior to the close of each
fiscal year of Borrowers, financial projections for Borrowers, for
Borrowers' upcoming fiscal year to include, but not limited to,
Borrowers' balance sheets, profit and loss statement and cash flow
statements, prepared on a month by month basis, in form acceptable to
Lenders, provided however, for the fiscal year end dated December 31,
1998, such financial projections shall be delivered by Borrower on or
before December 31, 1998;
(iv) promptly after the sending or filing thereof, as the case
may be, copies of any proxy statements, financial statements or
reports which Borrower has sent to all of its shareholders and copies
of any regular, periodic and special reports or registration
statements which Borrower files with the Securities and Exchange
Commission or any governmental authority which may be substituted
therefor, or any national securities exchange;
(v) promptly after the filing thereof, copies of any annual
report to be filed under ERISA in connection with each Plan;
<PAGE>
(vi) not later than fifteen (15) days after the end of each
calender month, a Collateral Update Certificate of Borrowers
andaccounts receivable agings, accounts payable agings, inventory
valuation report by location, and backup for the reported ineligible
accounts receivable and inventory collateral;
(vii) together with each set of financial statements described in
(i) and (ii) above, a compliance certificate signed by the Borrowers'
chief financial officer, certifying that (i) all representations and
warranties set forth in the loan documents are true and correct; (ii)
none of the covenants in the loan documents has been breached; and
(iii) no event has occurred which would constitute an Event of Default
under the loan documents; and
(viii) such other data and information (financial and otherwise)
as Lender, from time to time, may reasonably request, bearing upon or
related to the Collateral or either Borrower's financial condition or
results of operations, including without limitation, detailed monthly
accounts payable agings.
Concurrently with the delivery of the financial statements described in
clause (i) of this subsection 8.1.3, Borrower shall forward to Lender a copy of
the accountants' letter to either Borrower's management that is prepared in
connection with such financial statements and also shall cause to be prepared
and shall furnish to Lender a certificate of the aforesaid certified public
accountants certifying to Lender that, based upon their examination of the
financial statements of the Borrowers and their Subsidiaries performed in
connection with their examination of said financial statements, they are not
aware of any Default or Event of Default, or, if they are aware of such Default
or Event of Default, specifying the nature thereof, and acknowledging in a
manner satisfactory to Lender, that they are aware that Lender is relying on
such financial statements in making its decision with respect to the Loans.
Concurrently with the delivery of the financial statements described in clauses
(i) and (ii) of this subsection 8.1.3, or more frequently if requested by
Lender, Borrowers shall cause to be prepared and furnished to Lender a
Compliance Certificate in the form of Exhibit 8.1.3 hereto executed by the chief
financial officer of Borrowers.
8.1.4 Landlord and Storage Agreements. Provide Lender with copies of all
leases and other material written agreements between either Borrower and any
landlord or warehouseman which owns any premises at which any Inventory may,
from time to time, be kept.
8.1.5 Year 2000 Compliance. Take all action necessary to assure that all
times the computer-based systems utilized by Borrowers and each of their
Subsidiaries are able to effectively interpret, process and manipulate data,
including dates before, on and after December 31, 1999. At Lender's request,
Borrowers shall provide to Lender assurance reasonably satisfactory to Lender
that the computer-based systems utilized by Borrowers and each of their
Subsidiaries are able to recognize and perform without error functions involving
dates before, on and after December 31, 1999.
<PAGE>
8.1.6 Bank Accounts. The Borrowers will maintain their main depository and
operating accounts with Lender. Borrowers will be responsible for all customary
service charges associated with any accounts maintained at Lender.
. During the term of this Agreement, and thereafter for so long as there
are any Obligations to Lender, each Borrower covenants that, it shall not:
8.2.1 Mergers; Consolidations; Acquisitions. Merge or consolidate, or
permit any Subsidiary of either Borrower to merge or consolidate, with any
Person; nor acquire all or any substantial part of the Properties of any Person.
8.2.2 Loans. Make or permit any Subsidiary of either Borrower to make, any
loans or other advances of money to any Person, other than loans in the ordinary
course of business for Borrowers' established payroll practices or for travel by
Borrowers' employees, not to exceed in the aggregate $25,000.00.
8.2.3 Total Indebtedness. Create, incur, assume, or suffer to exist, or
permit any Subsidiary of either Borrower to create, incur, assume, or suffer to
exist, any Indebtedness, except:
(i) Obligations owing to Lender;
(ii) Subordinated Debt (if applicable);
(iii) accounts payable to trade creditors and current operating
expenses (other than for Money Borrowed) which are not aged more than 90
days from billing date or more than 60 days from the due date, in each case
incurred in the ordinary course of business and paid within such time
period, unless the same are being actively contested in good faith and by
appropriate and lawful proceedings; and Borrowers shall have set aside such
reserves, if any, with respect thereto as are required by GAAP and deemed
adequate by such Borrower and its independent accountants;
(iv) Obligations to pay Rentals permitted by subsection 8.2.13 and
Capitalized Lease Obligations permitted under subsection 8.2.8;
(v) Permitted Purchase Money Indebtedness;
(vi) taxes not yet due or being contested in the manner described in
subsection 7.1.14 hereto; and
(vii) contingent liabilities arising out of endorsements of checks and
other negotiable instruments for deposit or collection in the ordinary
course of business.
<PAGE>
8.2.4 Affiliate Transactions. Enter into, or be a party to, or permit any
Subsidiary of either Borrower to enter into, or be a party to, any transaction
with any Affiliate of either Borrower or any stockholder, except in the ordinary
course of and pursuant to the reasonable requirements of Borrowers' or such
Subsidiary's business and upon fair and reasonable terms which are fully
disclosed to Lender and are no less favorable to Borrowers or such Subsidiary
than Borrowers or such Subsidiary would obtain in a comparable arm's length
transaction with a Person not an Affiliate or stockholder of Borrowers or any
Subsidiary of a Borrower.
8.2.5 Limitation on Liens. Create or suffer to exist, or permit any
Subsidiary of either Borrower to create or suffer to exist, any Lien upon any of
its Property, income or profits, whether now owned or hereafter acquired,
except:
(i) Liens at any time granted in favor of Lender;
(ii) Liens for taxes (excluding any Lien imposed pursuant to any of
the provisions of ERISA) not yet due, or being contested in the manner
described in subsection 7.1.14 hereto, but only if in Lender's judgment
such Lien does not adversely affect Lender's rights or the priority of
Lender's Lien in the Collateral;
(iii) such other Liens as appear on Exhibit 8.2.5 hereto;
(iv) Purchase Money Liens securing Permitted Purchase Money
Indebtedness; and
(v) such other Liens as Lender may hereafter approve in writing.
8.2.6 Subordinated Debt. Make any payment of any part or all of any
Subordinated Debt or take any other action or omit to take any other action in
respect of any Subordinated Debt, in contravention of the written terms of any
instrument evidencing such Subordinated Debt.
8.2.7 Distributions. Declare or make or permit any Subsidiary of either
Borrower to declare or make any Distributions.
8.2.8 Capital Expenditures. Make Capital Expenditures including Capitalized
Lease Obligations which, in the aggregate, as to Borrowers and their
Subsidiaries, exceed Five Hundred Thousand Dollars ($500,000.00) during any
fiscal year of Borrowers.
<PAGE>
8.2.9 Disposition of Assets. Sell, lease or otherwise dispose of, or permit
any Subsidiary of either Borrower to sell, lease or otherwise dispose of any of,
its Properties, including any disposition of Property as part of a sale and
leaseback transaction, to or in favor of any Person, except (i) sales of
Inventory in the ordinary course of business for so long as there has been no
acceleration of the Obligations; or (ii) dispositions expressly authorized by
and referenced in this Agreement.
8.2.10 Stock of Subsidiaries. Issue, or permit any Subsidiary of either
Borrower to issue, any additional shares of its capital stock.
8.2.11 Bill-and-Hold Sales, Etc. Make a sale to any customer on a
bill-and-hold, guaranteed sale, sale and return, sale on approval basis or sale
on a repurchase or return basis, or make a sale of inventory on a consignment
basis whereby such consigned inventory exceeds $100,000.00 in the aggregate.
8.2.12 Restricted Investment. Make or have, or permit any Subsidiary of
either Borrower to make or have, any Restricted Investment.
8.2.13 Leases. Become, or permit any Subsidiary of either Borrower to
become, a lessee under any new operating lease (other than a lease under which
either Borrower or any Subsidiary of a Borrower is lessor) of Property if the
aggregate Rentals payable during any current or future period of 12 consecutive
months under such lease in question and all other new leases (other than leases
that are represented by Capitalized Lease Obligations) under which either
Borrower or any Subsidiary of a Borrower is then lessee would exceed $50,000.00
in any fiscal year. The annual aggregate amount for such new operating leases
shall not include operating leases currently in effect, any renewals thereof or
any escalations of the lease payments therein. The term "Rentals" means, as of
the date of determination, all payments which the lessee is required to make by
the terms of any lease.
8.2.14 Tax Consolidation. File or consent to the filing of any consolidated
income tax return with any Person other than a Subsidiary of either Borrower.
. During the term of this Agreement, and thereafter for so long as there
are any Obligations to Lender, each Borrower covenants that, unless otherwise
consented to by Lender in writing, it shall:
8.3.1 Minimum Interest Coverage Ratio. Borrowers will maintain an Interest
Coverage Ratio of not less than 1.50 to 1.0 to be measured on a cumulative
fiscal year to date basis.
8.3.2 Effective Tangible Net Worth. Borrower shall maintain Effective
Tangible Net Worth of not less than $11,000,000.00 on the Closing Date and on
quarter-end December 31, 1998; thereafter on each successive fiscal quarter end
date, commencing March 30, 1999, Borrowers shall have a minimum Effective
Tangible Net Worth equal to the sum of (i) the Tangible Net Worth required as of
the last day of the preceding quarter, plus (ii) sixty percent (60%) of the net
earnings (if a positive amount) during the fiscal quarter ending on such date.
<PAGE>
8.3.3 Consecutive Quarterly Losses. Not have quarterly losses in excess of
$1.00 for any two (2) consecutive quarters, such losses shall be measured
commencing the first (1st) quarter following the Closing Date.
SECTION 9. CONDITIONS PRECEDENT
Notwithstanding any other provision of this Agreement or any of the other
Loan Documents, and without affecting in any manner the rights of Lender under
the other sections of this Agreement, Lender may, in its sole discretion, make
any Loan under this Agreement, so long as each of the following conditions has
been and continues to be satisfied:
. Lender shall have received, in form and substance satisfactory to Lender
and its counsel, a duly executed copy of this Agreement and the other Loan
Documents, together with such additional documents, instruments and certificates
as Lender and its counsel shall require in connection therewith from time to
time, all in form and substance satisfactory to Lender and its counsel,
including, without limitation, the following:
(A) Certified copies of each Borrower's casualty insurance policies,
together with loss payable endorsements on Lender's standard form of Lender
Loss Payee and Mortgagee Endorsement naming Lender as lender loss payee
and/or mortgagee, as applicable, and certified copies of each Borrower's
liability insurance policies, together with endorsements naming Lender as
additional insured;
(B) Certified copies of (i) resolutions of each Borrower's board of
directors authorizing the execution and delivery of this Agreement and the
Loan Documents and the performance of all transactions contemplated hereby
and thereby, (ii) each Borrower's by-laws, and (iii) an incumbency
certificate of each Borrower;
(C) A copy of the Articles or Certificate of Incorporation of each
Borrower, and all amendments thereto, certified by the Secretary of State
or other appropriate official of its jurisdiction of incorporation;
(D) Good standing certificate for each Borrower, issued by the
Secretary of State or other appropriate official of each Borrower's
jurisdiction of incorporation and each jurisdiction where the conduct of
Borrowers' business activities or the ownership of its Properties
necessitates qualification;
(E) A closing certificate signed by the chief executive officer of
each Borrower dated as of the date hereof, stating that (i) the
representations and warranties set forth in Section 7 hereof are true and
correct on and as of such date, (ii) each Borrower is on such date in
compliance with all the terms and provisions set forth in this Agreement
and (iii) on such date no Default or Event of Default exists;
<PAGE>
(F) The Security Documents duly executed, accepted and acknowledged by
or on behalf of each of the signatories thereto;
(G) The Other Agreements duly executed and delivered by each Borrower;
(H) The favorable, written opinion of counsel to Borrowers as to the
transactions contemplated by this Agreement and any of the other Loan
Documents as required by Lender;
(I) Written instruction from Borrowers directing the application of
proceeds of the initial Loans made pursuant to this Agreement and an
initial Borrowing Base Certificate from Borrowers;
(J) Duly executed agreements establishing the Dominion Account with
financial institutions acceptable to Lender for the deposit of the
collections of Accounts and other proceeds of the sale of Inventory;
(K) Payoff agreement and UCC-3 termination statements from each
Borrowers' Existing Lender;
(L) UCC-1 financing statement, state and federal tax lien and judgment
searches;
(M) Payment of all fees and expenses owing hereunder;
(N) Landlord and Mortgagee waivers as required by Lender;
(O) All governmental and third party consents necessary to effectuate
the transactions contemplated herein;
(P) Validity and Support Agreements, in form and substance acceptable
to Bank, executed by John Hobey, William Crabtree and Neil Suffa.
(Q) Delivery of and Lender's satisfaction with Borrowers' September
30, 1998 third quarter Consolidated financial statement reflecting
Borrowers' physical inventory count as of September 30, 1998.
(R) Such other documents, instruments and agreements as Lender shall
reasonably request in connection with the foregoing matters.
. No Default or Event of Default shall exist.
<PAGE>
. Each of the conditions precedent set forth in the other Loan Documents
shall have been satisfied.
. Except as set forth on Exhibit 7.1.20 hereto, no action, proceeding,
investigation, regulation or legislation shall have been instituted, threatened
or proposed before any court, governmental agency or legislative body (i) to
enjoin, restrain or prohibit, or to obtain damages in respect of, or which is
related to or arises out of this Agreement or the consummation of the
transactions contemplated hereby or (ii) which relates to the Collateral,
assets, business operations or obligations of either Borrower which (in Lender's
judgment) could have a material adverse effect upon the creditworthiness,
condition, operations or prospects (financial or otherwise) of either Borrower.
SECTION 10. EVENTS OF DEFAULT; RIGHTS AND REMEDIES ON DEFAULT
. The occurrence of one or more of the following events shall constitute an
"Event of Default":
10.1.1 Payment of Obligations. Borrowers shall fail to pay any Obligations
owing hereunder or under the Notes, or any other of the Obligations, on the due
date thereof (whether due at stated due date, maturity, on demand, upon
acceleration, or otherwise).
10.1.2 Misrepresentations. Any representation, warranty or other statement
made or furnished to Lender by or on behalf of Borrowers or any Subsidiary of
Borrowers in this Agreement, any of the other Loan Documents or any instrument,
certificate or financial statement furnished in compliance with or in reference
thereto, proves to have been false or misleading in any material respect when
made or furnished or when reaffirmed pursuant to Section 7.2 hereof.
10.1.3 Breach of Specific Covenants. Borrowers shall fail or neglect to
perform, keep or observe any covenant contained herein on the date that
Borrowers are required to perform, keep or observe such covenant.
10.1.4 Breach of Other Covenants. Borrowers shall fail or neglect to
perform, keep or observe any covenant contained in this Agreement (other than a
covenant which is dealt with specifically elsewhere in Section 10.1 hereof).
10.1.5 Default Under Security Documents/Other Agreements. Any event of
default shall occur under, or Borrowers shall default in the performance or
observance of any term, covenant, condition or agreement contained in, any of
the Security Documents or the Other Agreements and such default shall continue
beyond any applicable grace period.
<PAGE>
10.1.6 Other Defaults. There shall occur any default or event of default on
the part of Borrowers under any agreement, document or instrument to which
either Borrower is a party or by which either Borrower or any of its Property is
bound, creating or relating to any Indebtedness (other than the Obligations) in
excess of $250,000.00.
10.1.7 Uninsured Losses. Any material loss, theft, damage or destruction of
any of the Collateral not fully covered (subject to such deductibles as Lender
shall have permitted) by insurance.
10.1.8 Adverse Changes. There shall occur any material adverse change in
the financial condition or business prospects of Borrowers.
10.1.9 Insolvency and Related Proceedings. Either Borrower shall cease to
be Solvent or shall suffer the appointment of a receiver, trustee, custodian or
similar fiduciary, or shall make an assignment for the benefit of creditors, or
any petition for an order for relief shall be filed by or against either
Borrower under the Bankruptcy Code (if against a Borrower, the continuation of
such proceeding for more than 45 days), or a Borrower shall make any offer of
settlement, extension or composition to its unsecured creditors generally.
10.1.10 Business Disruption; Condemnation. There shall occur a cessation of
a substantial part of the business of either Borrower for a period which
significantly affects either Borrower's capacity to continue its business, on a
profitable basis; or either Borrower shall suffer the loss or revocation of any
license or permit now held or hereafter acquired by either Borrower which is
necessary to the continued or lawful operation of its business; or either
Borrower shall be enjoined, restrained or in any way prevented by court,
governmental or administrative order from conducting all or any material part of
its business affairs; or any material lease or agreement pursuant to which
either Borrower leases, uses or occupies any Property shall be canceled or
terminated prior to the expiration of its stated term and such cancellation or
termination will have a material adverse effect on such Borrower's business,
financial condition, Collateral or prospects; or any part of the Collateral
shall be taken through condemnation or the value of such Property shall be
impaired through condemnation.
10.1.11 Change of Ownership. Any transfer of the issued and outstanding
shares of common stock or other evidence of ownership of such Borrower or
election of the Board of Directors which would constitute a Change of Control in
such Borrower
10.1.12 ERISA. A Reportable Event shall occur which Lender, in its sole
discretion, shall determine in good faith constitutes grounds for the
termination by the Pension Benefit Guaranty Corporation of any Plan or for the
appointment by the appropriate United States district court of a trustee for any
Plan, or if any Plan shall be terminated in a "distress termination" pursuant to
Section 4041(c) or any such trustee shall be requested or appointed, or if
either Borrower is in "default" (as defined in Section 4219(c)(5) of ERISA) with
respect to payments to a Multiemployer Plan resulting from such Borrower's
complete or partial withdrawal from such Plan.
<PAGE>
10.1.13 Challenge to Agreement. Either Borrower or any Subsidiary of a
Borrower shall challenge or contest in any action, suit or proceeding the
validity or enforceability of this Agreement or any of the other Loan Documents,
the legality or enforceability of any of the Obligations or the perfection or
priority of any Lien granted to Lender.
10.1.14 Criminal Action or Forfeiture. Either Borrower or any Subsidiary of
a Borrower shall be criminally indicted or convicted under any law or engage in
any conduct which is reasonably likely to result in a forfeiture of any material
Property of a Borrower or any Subsidiary of a Borrower.
10.1.15 Judgments or Executions. Except as set forth on Exhibit 7.1.20
hereto, any money judgment or judgments in excess of $25,000.00, or any writ of
attachment, execution or similar process is filed against Borrower.
. Without in any way limiting the right of Lender to demand payment of any
portion of the Obligations payable on demand in accordance with Section 3.2
hereof, upon or at any time after the occurrence of an Event of Default, all or
any portion of the Obligations shall, at the option of Lender and without
presentment, demand, protest or further notice by Lender, become at once due and
payable and Borrowers shall forthwith pay to Lender, the full amount of such
Obligations, provided, that upon the occurrence of an Event of Default specified
in subsection 10.1.9 hereof, all of the Obligations shall become automatically
due and payable without declaration, notice or demand by Lender.
. Upon and after the occurrence of an Event of Default, Lender shall have
and may exercise from time to time the following rights and remedies (to the
full extent permitted by applicable law):
10.3.1 All of the rights and remedies of a secured party under the Code or
under other applicable law, and all other legal and equitable rights to which
Lender may be entitled, all of which rights and remedies shall be cumulative and
shall be in addition to any other rights or remedies contained in this Agreement
or any of the other Loan Documents, and none of which shall be exclusive.
10.3.2 The right to take immediate possession of the Collateral, and to (i)
require Borrowers to assemble the Collateral, at Borrowers' expense, and make it
available to Lender at a place designated by Lender which is reasonably
convenient to both parties, and (ii) enter any premises where any of the
Collateral shall be located and to keep and store the Collateral on said
premises until sold (and if said premises be the Property of Borrowers,
Borrowers agree not to charge Lender for storage thereof).
<PAGE>
10.3.3 The right to sell or otherwise dispose of all or any Collateral in
its then condition, or after any further manufacturing or processing thereof, at
public or private sale or sales, with such notice as may be required by law, in
lots or in bulk, for cash or on credit, all as Lender, in its sole discretion,
may deem advisable. Borrowers agree that seven (7) days written notice to
Borrowers of any public or private sale or other disposition of Collateral shall
be reasonable notice thereof, and such sale shall be at such locations as Lender
may designate in said notice. Lender shall have the right to conduct such sales
on Borrowers' premises, without charge therefor, and such sales may be adjourned
from time to time in accordance with applicable law. Lender shall have the right
to sell, lease or otherwise dispose of the Collateral, or any part thereof, for
cash, credit or any combination thereof, and Lender may purchase all or any part
of the Collateral at public or, if permitted by law, private sale and, in lieu
of actual payment of such purchase price, may set off the amount of such price
against the Obligations. The proceeds realized from the sale of any Collateral
may be applied, after allowing two (2) Business Days for collection, first to
the costs, expenses and attorneys' fees incurred by Lender in collecting the
Obligations, in enforcing the rights of Lender under the Loan Documents and in
collecting, retaking, completing, protecting, removing, storing, advertising for
sale, selling and delivering any Collateral; second to the interest due upon any
of the Obligations; and third, to the principal of the Obligations. If any
deficiency shall arise, Borrowers shall remain liable to Lender therefor.
10.3.4 Upon an Event of Default, Lender is hereby granted a license or
other right to use, without charge, Borrowers' labels, patents, copyrights,
rights of use of any name, trade secrets, tradenames, trademarks and advertising
matter, or any Property of a similar nature, as it pertains to the Collateral,
in advertising for sale and selling any Collateral and Borrowers' rights under
all licenses and all franchise agreements shall inure to Lender's benefit.
10.3.5 Lender may, at its option, reduce or modify the Borrowing Base , or
any portion thereof or the advance rates or to take additional reserves in the
Borrowing Base.
<PAGE>
. All covenants, conditions, provisions, warranties, guaranties,
indemnities, and other undertakings of Borrowers contained in this Agreement and
the other Loan Documents, or in any document referred to herein or contained in
any agreement supplementary hereto or in any schedule given to Lender or
contained in any other agreement between Lender and Borrowers, heretofore,
concurrently, or hereafter entered into, shall be deemed cumulative to and not
in derogation or substitution of any of the terms, covenants, conditions, or
agreements of Borrowers herein contained. The failure or delay of Lender to
require strict performance by Borrowers of any provision of this Agreement or to
exercise or enforce any rights, Liens, powers, or remedies hereunder or under
any of the aforesaid agreements or other documents or security or Collateral
shall not operate as a waiver of such performance, Liens, rights, powers and
remedies, but all such requirements, Liens, rights, powers, and remedies shall
continue in full force and effect until all Loans and all other Obligations
owing or to become owing from Borrowers to Lender shall have been fully
satisfied. None of the undertakings, agreements, warranties, covenants and
representations of Borrowers contained in this Agreement or any of the other
Loan Documents and no Event of Default by either Borrower under this Agreement
or any other Loan Documents shall be deemed to have been suspended or waived by
Lender, unless such suspension or waiver is by an instrument in writing
specifying such suspension or waiver and is signed by a duly authorized
representative of Lender and directed to Borrowers. Nothing herein contained
shall at any time compel Lender to accept at any time any cure offered or
proposed by Borrowers or any other Person as to any Event of Default.
SECTION 11. MISCELLANEOUS
. Each Borrower hereby irrevocably designate, make, constitute and appoint
Lender (and all Persons designated by Lender) as Borrowers' true and lawful
attorney (and agent-in-fact) and Lender, or Lender's agent, may, without notice
to Borrowers and in either Borrowers's or Lender's name, but at the cost and
expense of Borrowers:
11.1.11 At such time or times as Lender or said agent, in its sole
discretion, may determine, endorse Borrowers' name on any checks, notes,
acceptances, drafts, money orders or any other evidence of payment or proceeds
of the Collateral which come into the possession of Lender or under Lender's
control.
11.1.12 At such time or times as Lender or its agent in its sole discretion
may determine: (i) demand payment of the Accounts from the Account Debtors,
enforce payment of the Accounts by legal proceedings or otherwise, and generally
exercise all of Borrowers' rights and remedies with respect to the collection of
the Accounts; (ii) receive, open and dispose of all mail addressed to Borrowers
and to notify postal authorities to change the address for delivery thereof to
such address as Lender may designate; (iii) endorse the name of Borrowers upon
any of the items of payment or proceeds relating to any Collateral and deposit
the same to the account of Lender on account of the Obligations; (iv) endorse
the name of Borrowers upon any chattel paper, document, instrument, invoice,
freight bill, bill of lading or similar document or agreement relating to the
Accounts, Inventory and any other Collateral; (v) use Borrowers' stationery and
sign the name of each Borrower to verifications of the Accounts and notices
thereof to Account Debtors; (vi) use the information recorded on or contained in
any data processing equipment and computer hardware and software relating to the
Accounts, Inventory, Equipment and any other Collateral; (vii) do all other acts
and things necessary, in Lender's determination, to fulfill Borrowers'
obligations under this Agreement. Upon a Default or Event of Default, Lender or
its agent in its sole discretion may determine:(i) settle, adjust, compromise,
discharge or release any of the Accounts or other Collateral or any legal
proceedings brought to collect any of the Accounts or other Collateral; (ii)
sell or assign any of the Accounts and other Collateral upon such terms, for
such amounts and at such time or times as Lender deems advisable; (iii) take
control, in any manner, of any item of payment or proceeds relating to any
Collateral; (iv) prepare, file and sign Borrowers' names to a proof of claim in
bankruptcy or similar document against any Account Debtor or to any notice of
lien, assignment or satisfaction of lien or similar document in connection with
any of the Collateral; (v) make and adjust claims under policies of insurance;
and (vi) do all other acts and things necessary, in Lender's determination, to
fulfill Borrowers' obligations under this Agreement.
<PAGE>
. Borrowers hereby agree to indemnify Lender and hold Lender harmless from
and against any liability, loss, damage, suit, action or proceeding ever
suffered or incurred by Lender (including attorneys' fees and legal expenses) as
the result of Borrowers' failure to observe, perform or discharge Borrower's
duties hereunder, provided that, Borrowers shall not be liable for any
liability, loss, damage, suit, action or proceeding arising out of Lender's
gross negligence and willful misconduct. In addition, Borrowers shall defend
Lender against and save it harmless from all claims of any Person with respect
to the Collateral. Without limiting the generality of the foregoing, these
indemnities shall extend to any claims asserted against Lender by any Person
under any Environmental Laws or similar laws by reason of Borrowers' or any
other Person's failure to comply with laws applicable to solid or hazardous
waste materials or other toxic substances. Notwithstanding any contrary
provision in this Agreement, the obligation of Borrower under this Section 11.2
shall survive the payment in full of the Obligations and the termination of this
Agreement.
. This Agreement may not be modified, altered or amended, except by an
agreement in writing signed by Borrowers and Lender. Borrowers may not sell,
assign or transfer any interest in this Agreement, any of the other Loan
Documents, or any of the Obligations, or any portion thereof, including, without
limitation, Borrowers' rights, title, interests, remedies, powers, and duties
hereunder or thereunder. Borrowers hereby consent to Lender's participation,
sale, assignment, transfer or other disposition, at any time or times hereafter,
of this Agreement and any of the other Loan Documents, or of any portion hereof
or thereof. In the case of an assignment, the assignee shall have, to the extent
of such assignment, the same rights, benefits and obligations as it would if it
were "Lender" hereunder and Lender shall be relieved of all obligations
hereunder upon any such assignments. Borrowers' agree that it will use its best
efforts to assist and cooperate with Lender in any manner reasonably requested
by Lender to effect the sale of participations in or assignments of any of the
Loan Documents or any portion thereof or interest therein, including, without
limitation, assisting in the preparation of appropriate disclosure documents.
Borrowers further agree that Lender may disclose credit information regarding
Borrower to any potential participant or assignee.
. Wherever possible, each provision of this Agreement shall be interpreted
in such manner as to be effective and valid under applicable law, but if any
provision of this Agreement shall be prohibited by or invalid under applicable
law, such provision shall be ineffective only to the extent of such prohibition
or invalidity, without invalidating the remainder of such provision or the
remaining provisions of this Agreement.
. This Agreement, the Other Agreements and the Security Documents shall be
binding upon and inure to the benefit of the successors and assigns of Borrower
and Lender.
<PAGE>
. The provisions of the Other Agreements and the Security Documents are
hereby made cumulative with the provisions of this Agreement. Except as
otherwise provided in Section 3.2 hereof and except as otherwise provided in any
of the other Loan Documents by specific reference to the applicable provision of
this Agreement, if any provision contained in this Agreement is in direct
conflict with, or inconsistent with, any provision in any of the other Loan
Documents, the provision contained in this Agreement shall govern and control.
. This Agreement may be executed in any number of counterparts and by
different parties hereto in separate counterparts, each of which when so
executed and delivered shall be deemed to be an original and all of which
counterparts taken together shall constitute but one and the same instrument.
. Except as otherwise provided herein, all notices, requests and demands to
or upon a party hereto, to be effective, shall be in writing and shall be sent
by certified or registered mail, return receipt requested, by personal delivery
against receipt, by overnight courier or by facsimile and, unless otherwise
expressly provided herein, shall be deemed to have been validly served, given or
delivered immediately when delivered against receipt, three (3) Business Days
after deposit in the mail, postage prepaid, or one (1) Business Day after
delivery to an overnight courier or, in the case of facsimile notice, when sent,
addressed as follows:
If to Lender: Fleet Bank, N.A.
ABL Department
Mail Stop NJSPW03I
1125 Route 22 West (3rd Floor)
Bridgewater, NJ 08807
Attention: Michael J. Byrne
Facsimile No.: (908) 253-4062
With a copy to: Blank Rome Comisky & McCauley LLP
One Logan Square
Philadelphia, PA 19103
Attention: Lawrence F. Flick II, Esquire
Facsimile No.: 215-569-5522
If to Borrower: Open Plan System, Inc.
4299 Carolina Avenue
Building C
Richmond, VA 23222
Attention: Jack Hobey, President
Facsimile No.: (804) 228-5656
With a copy to: Williams, Mullen, Christian & Dobbins
1021 East Cary Street, 16th Floor
Richmond, VA 23219
Attention: Michael Buseck, Esquire
Theodore L. Chandler Jr., Esquire
Facsimile No.: 804-783-6507
<PAGE>
or to such other address as each party may designate for itself by notice given
in accordance with this Section 11.8; provided, however, that any notice,
request or demand to or upon Lender pursuant to subsections 2.1.1., 3.1.1 or
4.2.2 hereof shall not be effective until received by Lender.
. Whenever Lender's consent is required to be obtained under this
Agreement, any of the Other Agreements or any of the Security Documents as a
condition to any action, inaction, condition or event, Lender shall be
authorized to give or withhold such consent in its sole and absolute discretion
and to condition its consent upon the giving of additional collateral security
for the Obligations, the payment of money or any other matter.
. Each Borrower hereby authorizes and permits Lender to respond to usual
and customary credit inquiries from third parties concerning either Borrower;
provided, however, that Lender shall have no duty or obligation to so respond or
continue to respond.
. Time is of the essence of this Agreement, the Other Agreements and the
Security Documents.
. This Agreement and the other Loan Documents, together with all other
instruments, agreements and certificates executed by the parties in connection
therewith or with reference thereto, embody the entire understanding and
agreement between the parties hereto and thereto with respect to the subject
matter hereof and thereof and supersede all prior agreements, understandings and
inducements, whether express or implied, oral or written.
. No provision of this Agreement or any of the other Loan Documents shall
be construed against or interpreted to the disadvantage of any party hereto by
any court or other governmental or judicial authority by reason of such party
having or being deemed to have structured or dictated such provision.
<PAGE>
. THIS AGREEMENT HAS BEEN NEGOTIATED, EXECUTED AND DELIVERED IN NEW JERSEY.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF
THE STATE OF NEW JERSEY; PROVIDED, HOWEVER, THAT IF ANY OF THE COLLATERAL SHALL
BE LOCATED IN ANY JURISDICTION OTHER THAN NEW JERSEY, THE LAWS OF SUCH
JURISDICTION SHALL GOVERN THE METHOD, MANNER AND PROCEDURE FOR FORECLOSURE OF
LENDER'S LIEN UPON SUCH COLLATERAL AND THE ENFORCEMENT OF LENDER'S OTHER
REMEDIES IN RESPECT OF SUCH COLLATERAL TO THE EXTENT THAT THE LAWS OF SUCH
JURISDICTION ARE DIFFERENT FROM OR INCONSISTENT WITH THE LAWS OF NEW JERSEY. AS
PART OF THE CONSIDERATION FOR NEW VALUE RECEIVED, AND REGARDLESS OF ANY PRESENT
OR FUTURE DOMICILE OR PRINCIPAL PLACE OF BUSINESS OF EITHER BORROWER OR LENDER,
EACH BORROWER HEREBY CONSENTS AND AGREES THAT THE SUPERIOR COURT OF NEW JERSEY
OR, AT LENDER'S OPTION, THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEW
JERSEY, SHALL HAVE EXCLUSIVE JURISDICTION TO HEAR AND DETERMINE ANY CLAIMS OR
DISPUTES BETWEEN BORROWER AND LENDER PERTAINING TO THIS AGREEMENT OR TO ANY
MATTER ARISING OUT OF OR RELATED TO THIS AGREEMENT. EACH BORROWER EXPRESSLY
SUBMITS AND CONSENTS IN ADVANCE TO SUCH JURISDICTION IN ANY ACTION OR SUIT
COMMENCED IN ANY SUCH COURT, AND EACH BORROWER HEREBY WAIVES ANY OBJECTION WHICH
BORROWER MAY HAVE BASED UPON LACK OF PERSONAL JURISDICTION, IMPROPER VENUE OR
FORUM NON CONVENIENS AND HEREBY CONSENTS TO THE GRANTING OF SUCH LEGAL OR
EQUITABLE RELIEF AS IS DEEMED APPROPRIATE BY SUCH COURT. EACH BORROWER HEREBY
WAIVES PERSONAL SERVICE OF THE SUMMONS, COMPLAINT AND OTHER PROCESS ISSUED IN
ANY SUCH ACTION OR SUIT AND AGREES THAT SERVICE OF SUCH SUMMONS, COMPLAINT AND
OTHER PROCESS MAY BE MADE BY REGISTERED OR CERTIFIED MAIL ADDRESSED TO EITHER
BORROWER AT THE ADDRESS SET FORTH IN THIS AGREEMENT AND THAT SERVICE SO MADE
SHALL BE DEEMED COMPLETED UPON THE EARLIER OF BORROWERS' ACTUAL RECEIPT THEREOF
OR THREE (3) DAYS AFTER DEPOSIT IN THE U.S. MAILS, PROPER POSTAGE PREPAID.
NOTHING IN THIS AGREEMENT SHALL BE DEEMED OR OPERATE TO AFFECT THE RIGHT OF
LENDER TO SERVE LEGAL PROCESS IN ANY OTHER MANNER PERMITTED BY LAW, OR TO
PRECLUDE THE ENFORCEMENT BY LENDER OF ANY JUDGMENT OR ORDER OBTAINED IN SUCH
FORUM OR THE TAKING OF ANY ACTION UNDER THIS AGREEMENT TO ENFORCE SAME IN ANY
OTHER APPROPRIATE FORUM OR JURISDICTION.
<PAGE>
. EACH BORROWER WAIVES (i) THE RIGHT TO TRIAL BY JURY (WHICH LENDER HEREBY
ALSO WAIVES) IN ANY ACTION, SUIT, PROCEEDING OR COUNTERCLAIM OF ANY KIND ARISING
OUT OF OR RELATED TO ANY OF THE LOAN DOCUMENTS, THE OBLIGATIONS OR THE
COLLATERAL: (ii) PRESENTMENT, DEMAND AND PROTEST AND NOTICE OF PRESENTMENT,
PROTEST, DEFAULT, NON PAYMENT, MATURITY, RELEASE, COMPROMISE, SETTLEMENT,
EXTENSION OR RENEWAL OF ANY OR ALL COMMERCIAL PAPER, ACCOUNTS, CONTRACT RIGHTS,
DOCUMENTS, INSTRUMENTS CHATTEL PAPER AND GUARANTIES AT ANY TIME HELD BY LENDER
ON WHICH EITHER BORROWER MAY IN ANY WAY BE LIABLE AND HEREBY RATIFIES AND
CONFIRMS WHATEVER LENDER MAY DO IN THIS REGARD; (iii) EXCEPT AS OTHERWISE
EXPRESSLY PROVIDED BY THIS AGREEMENT, NOTICE PRIOR TO TAKING POSSESSION OR
CONTROL OF THE COLLATERAL OR ANY BOND OR SECURITY WHICH MIGHT BE REQUIRED BY ANY
COURT PRIOR TO ALLOWING LENDER TO EXERCISE ANY OF LENDER'S REMEDIES; (iv) THE
BENEFIT OF ALL VALUATION, APPRAISEMENT AND EXEMPTION LAWS; AND (v) NOTICE OF
ACCEPTANCE HEREOF. EACH BORROWER ACKNOWLEDGES THAT THE FOREGOING WAIVERS ARE A
MATERIAL INDUCEMENT TO LENDER'S ENTERING INTO THIS AGREEMENT AND THAT LENDER IS
RELYING UPON THE FOREGOING WAIVERS IN ITS FUTURE DEALINGS WITH BORROWERS. EACH
BORROWER WARRANTS AND REPRESENTS THAT IT HAS REVIEWED THE FOREGOING WAIVERS WITH
ITS LEGAL COUNSEL AND HAS KNOWINGLY AND VOLUNTARILY WAIVED ITS JURY TRIAL RIGHTS
FOLLOWING CONSULTATION WITH LEGAL COUNSEL. IN THE EVENT OF LITIGATION, THIS
AGREEMENT MAY BE FILED AS A WRITTEN CONSENT TO A TRIAL BY THE COURT.
IN WITNESS WHEREOF, this Agreement has been duly executed on the day and
year specified at the beginning of this Agreement.
OPEN PLAN SYSTEMS, INC.
By:
IMMACULATE EAGLE, INC. d/b/a Total Facilities Management
By:
Accepted:
FLEET BANK, N.A.
By:
Michael J. Byrne, Vice President
<PAGE>
APPENDIX A
GENERAL DEFINITIONS
When used in the Loan and Security Agreement dated as of November ____,
1998, by and among Fleet Bank, N.A., Open Plan Systems, Inc. and Immaculate
Eagle, Inc., the following terms shall have the following meanings (terms
defined in the singular to have the same meaning when used in the plural and
vice versa):
Account Debtor - any Person who is or may become obligated under or on
account of an Account.
Accounts - collectively, all Accounts, contract rights, Chattel Paper,
Instruments and Documents, whether now owned or hereafter created or acquired by
Borrowers or in which Borrowers now have or hereafter acquired any interest.
Acquisition - that certain acquisition by OPSI of all outstanding common
stock of IEI pursuant to that certain Purchase Agreement dated October 1, 1996
by and between OPSI and IEI.
Adjusted LIBOR Rate - For any LIBOR Interest Period, as applied to a LIBOR
Rate Loan, the rate per annum (rounded upwards, if necessary to the next 1/16 of
1%) determined pursuant to the following formula:
Adjusted Libor Rate = Libor Rate
(1.00 - Reserve Percentage)
The term "LIBOR Rate" shall mean, as applicable to any LIBOR Rate Loan, the
rate per annum (rounded upward, if necessary to the nearest 1/32 of one percent)
as determined on the basis of the offered rates for deposits in U.S. dollars,
for a period of time comparable to such LIBOR Rate which appears on the Telerate
page 3750 as of 11:00 a.m. London time on the day that is two (2) London Banking
Days preceding the first day of such LIBOR Rate; provided, however, if the rate
described above does not appear on the Telerate System on any applicable
interest determination date, the LIBOR Rate shall be the rate (rounded upwards
as described above, if necessary) for deposits in dollars for a period
substantially equal to the interest period on the Reuters Page "LIBOR" (or such
other page as may replace the LIBOR Page on that service for the purpose of
displaying such rates), as of 11:00 a.m. (London Time), on the day that is two
(2) London Banking Days prior to the beginning of such interest period.
Affiliate - a Person (other than a Subsidiary): (i) which directly or
indirectly through one or more intermediaries controls, or is controlled by, or
is under common control with, a Person; (ii) which beneficially owns or holds 5%
or more of any class of the Voting Stock of a Person; or (iii) 5% or more of the
Voting Stock (or in the case of a Person which is not a corporation, 5% or more
of the equity interest) of which is beneficially owned or held by a Person or a
Subsidiary of a Person.
<PAGE>
Agreement - the Loan and Security Agreement referred to in the first
sentence of this Appendix A, all Exhibits thereto and this Appendix A as each of
the same may be amended, modified, renewed, extended, replaced, restated or
substituted from time to time.
Aggregate Adjusted Availability - an amount equal to the Borrowing Base
less the sum of (i) the amount of Revolving Credit Loans outstanding as of the
date any such calculation is made (including Loans requested to be made on such
date) plus (ii) all sums due and owing to trade creditors which remain
outstanding beyond normal trade terms (as set forth in this Agreement) or
special terms granted in writing by trade creditors, plus (iii) any reserves
against the Borrowing Base, plus (iv) closing payments and expenses.
Applicable Margin - a marginal rate of interest which is added to the
Adjusted LIBOR Rate or Floating Rate, as the case may be, to determine the
effective rate of interest on LIBOR Rate Loans or Floating Rate Loans, as the
case may be. The Applicable Margin (i) for LIBOR Rate Loans shall be 2.50% and
(ii) for Floating Rate Loans shall be .50%. If no Event of Default has occurred
or exists, and provided, Borrowers' Financial Statements for December 31, 1999
fiscal year end reflect a pretax profit of Borrowers of at least $2,000,000.00
(such Financial Statements delivered pursuant to Section 8.1.3(i)), the
Applicable Margin for LIBOR Rate Loans and Floating Rate Loans shall be reduced
by .25%. Furthermore, if no Event of Default has occurred or exists, and
provided, Borrowers' Financial Statements for December 31, 2000 fiscal year end
reflect a pretax profit of Borrowers of at least $2,500,000.00 (such Financial
Statements delivered pursuant to Section 8.1.3(i)), the Applicable Margin for
LIBOR Rate Loans and Floating Rate Loans shall be reduced by .25% from the
Applicable Margin then in effect. The Applicable Margin shall be adjusted five
(5) Business Days after receipt of the applicable Financial Statements. At any
time that such Financial Statements are required to be delivered under the terms
of this Agreement and is not so delivered, then the Applicable Margin shall be
the highest rate specified for the subject type of Loan until the Financial
Statements are so delivered.
Authorized Officer - any officer of Borrowers authorized by resolution of
the Board of Directors of Borrowers to execute documents, instruments,
certificates and agreements on behalf of Borrowers in favor of Lender and who is
identified on the incumbency certificate referenced in Section 9.1(B) herein.
Availability - the amount of money which Borrowers are entitled to borrow
from time to time as Revolving Credit Loans, such amount being the difference
derived when the sum of the principal amount of Revolving Credit Loans then
outstanding (including any amounts which Lender may have paid for the account of
Borrowers pursuant to any of the Loan Documents and which have not been
reimbursed by Borrowers) is subtracted from the lesser of (i) the Maximum
Revolving Credit Amount or (ii) the Borrowing Base. If the amount outstanding is
equal to or greater than the lesser of (i) Maximum Revolving Credit Amount or
(ii) the Borrowing Base, Availability is 0.
Bank - Fleet Bank, N.A. or such other bank as Lender may hereafter
designate.
<PAGE>
Borrowing Base - as at any date of determination thereof, an amount up to
the sum of 80% of the face value of Borrower's Eligible Accounts minus such
reserves as Lender may have established from time to time.
Borrowing Base Certificate - the certificate signed by the controller or
accounting manager of Borrowers showing the status of Borrowers' Inventory,
outstanding Revolving Credit Loans and other information in the form of Exhibit
A-1 to the Agreement.
Business Day - any day excluding Saturday, Sunday and any day which is a
legal holiday under the laws of the State of New Jersey or is a day on which
banking institutions located in such state are closed.
Capital Expenditures - cash expenditures made for the acquisition of any
fixed assets or improvements, replacements, substitutions or additions thereto
which have a useful life of more than one year, including the total principal
portion of Capitalized Lease Obligations excluding expenditures for the
replacement of any assets leased under a Capitalized Lease Obligation in
connection with a casualty or loss thereof.
Cash Flow - for any period means Borrowers' (i) Adjusted Net Earnings from
Operations for such period plus (ii) depreciation, interest and amortization
expenses for such period plus (iii) deferred taxes for such period, less (iv)
non-financed Capital Expenditures, less (v) principal payments on account of
current maturities of long-term Indebtedness and less (vi) principal payments on
Capitalized Lease Obligations, all as determined in accordance with GAAP.
Capitalized Lease Obligation - any Indebtedness represented by obligations
under a lease that is required to be capitalized for financial reporting
purposes in accordance with GAAP.
"Change of Control" means (i) a "Person" or a "group" (within the meaning
of Sections 13(d) and 14(d)(ii) of the Securities Exchange Act of 1934, as
amended (the "Exchange Act") becomes the ultimate "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act) of more than 30% of the total voting power
of the voting stock of the Borrowers on a fully diluted basis or (ii) a majority
of the Board of Directors of the Borrowers then in office shall not consist of
individuals who on the Closing Date constitute the Board of Directors of the
Borrowers or new directors whose election or whose nomination for election by
stockholders, was approved by at least two thirds of the members of the Board of
Directors then in office who were either members of the Board of Directors on
the Closing Date or whose election or nomination was previously so approved.
Closing Date - the date on which all of the conditions precedent in Section
9 of the Agreement are satisfied and the initial Loan is made or issued under
the Agreement.
<PAGE>
Code - the Uniform Commercial Code as adopted and in force in the State of
New Jersey and as from time to time in effect.
Collateral - all of the Property and interests in Property described in
Section 5 of the Agreement, and all other Property and interests in Property
that now or hereafter secure the payment and performance of any of the
Obligations.
Collateral Update Certificate - as defined in subsection 8.1.3(vi) of the
Agreement.
Consolidated and Consolidating - the consolidation and consolidating in
accordance with GAAP of the accounts or other items as to which such term
applies.
Current Liabilities - at any date means the amount at which all of the
current liabilities of a Person would be properly classified as current
liabilities on a balance sheet at such date in accordance with GAAP (including
the Revolving Credit Loans and the current maturities of any long-term
Indebtedness).
Default - an event or condition, the occurrence of which would, with the
lapse of time or the giving of notice, or both, become an Event of Default.
Default Rate - as defined in subsection 2.1.2 of the Agreement.
Distribution - in respect of any corporation means and includes: (i) the
payment of any dividends or other distributions on capital stock of the
corporation (except distributions in such stock) and (ii) the redemption or
acquisition of Securities unless made contemporaneously from the net proceeds of
the sale of Securities.
Dominion Account - a special account of Lender established by Borrowers
pursuant to the Agreement at Lender and over which Lender shall have sole and
exclusive access and control for withdrawal purposes.
EBIT - means the following, without duplication, for any period, each
calculated for such period: (a) net income plus (b) any provision for (or less
any benefit from) income taxes and franchise taxes deducted in the determination
of net income; plus (c) interest expense deducted in the determination of net
income (including any bank charges, fees or costs); plus (d) losses (or less
gains) from asset dispositions or other non-cash items (excluding sales,
expenses or losses related to current assets) included in the determination of
net income; less (e) after tax extraordinary gains (or plus after tax
extraordinary losses), each of the above calculated in accordance with GAAP.
Effective Tangible Net Worth - means the Tangible Net Worth of Borrowers
plus Subordinated Debt plus indebtedness due from Borrowers to shareholders of
Borrowers as of the date hereof.
<PAGE>
Eligible Account - an Account arising in the ordinary course of either
Borrower's business from the sale of goods or rendition of services which
Lender, in its sole credit judgment, deems to be an Eligible Account. Without
limiting the generality of the foregoing, no Account shall be an Eligible
Account if:
(i) it arises out of a sale made by a Borrower to a Subsidiary or an
Affiliate of a Borrower or to a Person controlled by an Affiliate of a
Borrower; or
(ii) it is due or unpaid more than ninety (90) days after the original
invoice date; or
(iii) 50% or more of the Accounts from the Account Debtor are not
deemed Eligible Accounts hereunder; or
(iv) any covenant, representation or warranty contained in the
Agreement with respect to such Account has been breached; or
(v) the Account Debtor is also Borrower's creditor or supplier, or the
Account Debtor has disputed liability with respect to such Account (to the
extent of such dispute, as determined by Lender), or the Account Debtor has
made any claim with respect to any other Account due from such Account
Debtor to a Borrower (to the extent of such dispute, as determined by
Lender), or the Account otherwise is or may become subject to any right of
setoff by the Account Debtor; or
(vi) the Account Debtor has commenced a voluntary case under the
federal bankruptcy laws, as now constituted or hereafter amended, or made
an assignment for the benefit of creditors, or a decree or order for relief
has been entered by a court having jurisdiction in the premises in respect
of the Account Debtor in an involuntary case under the federal bankruptcy
laws, as now constituted or hereafter amended, or any other petition or
other application for relief under the federal bankruptcy laws has been
filed against the Account Debtor, or if the Account Debtor has failed,
suspended business, ceased to be Solvent, or consented to or suffered a
receiver, trustee, liquidator or custodian to be appointed for it or for
all or a significant portion of its assets or affairs; or
(vii) it arises from a sale to an Account Debtor outside the United
States and Canada, unless the sale is on letter of credit, foreign credit
insurance, guaranty or acceptance terms, in each case acceptable to Lender
in its sole discretion; or
(viii) it arises from a sale to the Account Debtor on a bill-and-hold,
guaranteed sale, sale-or-return, sale-on-approval, consignment or any other
repurchase or return basis; or
<PAGE>
(ix) the Account Debtor is the United States of America or any
department, agency or instrumentality thereof, unless Borrower assigns its
right to payment of such Account to Lender, in a manner satisfactory to
Lender, so as to comply with the Assignment of Claims Act of 1940 (31
U.S.C. 203 et seq., as amended); or
(x) the Account is not at all times subject to Lender's duly
perfected, first priority security interest and no other Lien other than a
Permitted Lien; or
(xi) the goods giving rise to such Account have not been delivered to
and accepted by the Account Debtor or the services giving rise to such
Account have not been performed by the applicable Borrower and accepted by
the Account Debtor or the Account otherwise does not represent a final
sale; or
(xii) the Account is evidenced by chattel paper or an instrument of
any kind, or has been reduced to judgment; or
(xiii) the applicable Borrower has made any agreement with the Account
Debtor for any deduction therefrom, including, without limitation, any
rebate offered by such Borrower (to the extent of such deduction or rebate,
as determined by Lender), except for discounts or allowances which are made
in the ordinary course of business for prompt payment and which discounts
or allowances are reflected in the calculation of the face value of each
invoice related to such Account; or
(xiv) it is otherwise deemed unacceptable by Lender in its reasonable
discretion.
Environmental Laws - all federal, state and local laws, rules,
regulations, ordinances, programs, permits, guidance, orders and consent
decrees relating to environmental matters.
Equipment - collectively, all machinery, apparatus, equipment,
fittings, furniture, fixtures, motor vehicles and other tangible personal
Property (other than Inventory) of every kind and description used in
either Borrower's operations or owned by either Borrower or in which either
Borrower has an interest, whether now owned or hereafter acquired by either
Borrower and wherever located, and all parts, accessories and special tools
and all increases and accessions thereto and substitutions and replacements
therefor.
ERISA - the Employee Retirement Income Security Act of 1974, as
amended, and all rules and regulations from time to time promulgated
thereunder.
Event of Default - as defined in Section 10.1 of the Agreement.
Existing Lenders - Crestar Bank, N.A.
<PAGE>
Financial Statements - The consolidated and consolidating balance
sheets, income statements, statements of cash flows and statements of the
Borrowers, all prepared in accordance with GAAP and provided by Borrowers
pursuant to Section 8.1.3(i) hereof. All Financial Statements shall set
forth the current Fiscal Year.
Floating Rate - a rate of interest equal to the Prime Rate plus the
Applicable Margin.
Floating Rate Loans - collectively, all Loans bearing interest at the
Floating Rate. GAAP - generally accepted accounting principles in the
United States of America in effect from time to time.
General Intangibles - collectively, all personal property of Borrowers
(including things in action) other than goods, Accounts, Chattel Paper,
Documents, Instruments, Investment Property and money, whether now owned or
hereafter created or acquired by Borrowers.
IEI - Immaculate Eagle, Inc.
Indebtedness - as applied to a Person means, without duplication
(i) all items, which in accordance with GAAP would be included in
determining total liabilities as shown on the liability side of a balance
sheet of such Person as at the date as of which Indebtedness is to be
determined, including, without limitation, Capitalized Lease Obligations,
(ii) all obligations of other Persons which such Person has
guaranteed,
(iii) all reimbursement obligations in connection with letters of
credit or letter of credit guaranties issued for the account of such
Person, and
(iv) in the case of Borrower (without duplication), the Obligations.
Interest Coverage Ratio - means the ratio of Borrowers' EBIT
(including any bank charges) to their interest expense (including any bank
charges).
Inventory - collectively, all Inventory of Borrowers, whether now
owned or hereafter acquired including, without limitation, all goods
intended for sale or lease by Borrowers, or for display or demonstration;
all work in process; all raw materials and other materials and supplies of
every nature and description used or which might be used in connection with
the manufacture, printing, packing, shipping, advertising, selling, leasing
or furnishing of such goods or otherwise used or consumed in Borrowers'
business; and all Documents evidencing and General Intangibles relating to
any of the foregoing, whether now owned or hereafter acquired by Borrowers.
Investment Property - has the meaning ascribed thereto in the Code.
<PAGE>
Letter of Credit - any standby letter of credit issued under the terms
hereof.
LIBOR Based Rate - a rate of interest on the Revolving Credit Loans
equal to the Adjusted LIBOR Rate plus the Applicable Margin.
LIBOR Interest Period - a period of 1, 2, 3 and 6 month(s) duration
during which the LIBOR Based Rate is applicable.
LIBOR Rate Loans - collectively, all Loans bearing interest at the
LIBOR Based Rate.
Lien - any interest in Property securing an obligation owed to, or a
claim by, a Person other than the owner of the Property, whether such
interest is based on common law, statute or contract and including, without
limitation, the security interest, security title or lien arising from a
security agreement, mortgage, deed of trust, deed to secure debt,
encumbrance, pledge, conditional sale or trust receipt, or a lease,
consignment or bailment for security purposes. The term "Lien" shall also
include reservations, exceptions, encroachments, easements, rights-of-way,
covenants, conditions, restrictions, leases and other title exceptions and
encumbrances affecting Property. For the purpose of the Agreement,
Borrowers shall be deemed to be the owner of any Property which it has
acquired or holds subject to a conditional sale agreement or other
arrangement pursuant to which title to the Property has been retained by or
vested in some other Person for security purposes.
Loan Account - the loan account established on the books of Lender
pursuant to Section 3.6 of the Agreement.
Loan Documents - the Agreement, the Other Agreements and the Security
Documents as each of the same may be amended, modified, renewed, extended,
replaced, restated or substituted from time to time.
Loans - all loans and advances of any kind made by Lender pursuant to
the Agreement.
London Business Day - any Business Day on which banks in London,
England are open for business.
Material Adverse Effect - any event, condition or occurrence as to any
one or more Borrowers or any of their Subsidiaries which individually or in
the aggregate with any other such event, condition or occurrence, in the
judgment of Lender, could be expected to materially and adversely affect
the financial condition, business, prospects or Properties of any of the
Borrowers or the ability of any Borrower to duly and timely perform and pay
its obligations hereunder and under the other Loan Documents.
Maturity Date - the last day of the Original Term or, if any Renewal
Term is in effect, then the last day of such Renewal Term.
<PAGE>
Maximum Revolving Credit Amount - the difference between (i) the Total
Credit Facility, and (ii) the sum of (a) any outstanding standby letters of
credit, and (b) any reserves set by Lender under the Revolving Credit
Facility.
Money Borrowed - means (i) Indebtedness arising from the lending of
money by any Person to a Borrower; (ii) Indebtedness, whether or not in any
such case arising from the lending by any Person of money to a Borrower,
(A) which is represented by notes payable or drafts accepted that evidence
extensions of credit, (B) which constitutes obligations evidenced by bonds,
debentures, notes or similar instruments, or (C) upon which interest
charges are customarily paid (other than accounts payable) or that was
issued or assumed as full or partial payment for Property; (iii)
Indebtedness that constitutes a Capitalized Lease Obligation; (iv)
reimbursement obligations with respect to letters of credit or guaranties
of letters of credit and (v) Indebtedness of a Borrower under any guaranty
of obligations that would constitute Indebtedness for Money Borrowed under
clauses (i) through (iii) hereof, if owed directly by a Borrower.
Multiemployer Plan - has the meaning set forth in Section 4001(a)(3)
of ERISA.
Note - collectively, the Revolving Credit Note.
Obligations - all Loans and all other advances, debts, liabilities,
obligations, covenants and duties, together with all interest, fees and
other charges thereon, owing, arising, due or payable from Borrowers to
Lender of any kind or nature, present or future, whether or not evidenced
by any note, Letter of Credit, guaranty or other instrument, whether
arising under the Agreement or any of the other Loan Documents or otherwise
whether direct or indirect (including those acquired by assignment),
absolute or contingent, primary or secondary, due or to become due, now
existing or hereafter arising and however acquired. The term includes
without limitation, all interest, charges, fees, expenses, attorneys' fees,
and any other sums chargeable to Borrower, under any of the Loan Documents.
OPSI - Open Plan Systems, Inc.
Original Term - as defined in Section 4.1 of the Agreement.
Other Agreements - any and all agreements and instruments (other than
the Agreement and the Security Documents), heretofore, now or hereafter
executed by Borrowers, any guarantor, or any other third party and
delivered to Lender in respect of the transactions contemplated by the
Agreement, as each of the same may be amended, modified, renewed, extended,
replaced, restated or substituted from time to time.
Overadvance - the amount, if any, by which the outstanding principal
amount of Revolving Credit Loans exceeds the Borrowing Base.
<PAGE>
Participating Lender - each Person who shall be granted the right by
Lender to participate in any of the Loans described in the Agreement and
who shall have entered into a participation agreement in form and substance
satisfactory to Lender.
Patents, Trademarks, Copyrights and Licenses Security Agreement -
collectively, the Patents, Trademarks, Copyrights and Licenses Security
Agreement and Power of Attorney to be executed by Borrowers on or about the
Closing Date in favor of Lender, in form and substance satisfactory to
Lender.
Permitted Liens - any Lien of a kind specified in subsection 8.2.5 of
the Agreement.
Permitted Purchase Money Indebtedness - Purchase Money Indebtedness of
Borrowers incurred after the date hereof which is secured by a Purchase
Money Lien and which, when aggregated with the principal amount of all
other such Indebtedness and Capitalized Lease Obligations of Borrowers at
the time outstanding, does not exceed $50,000.00. For the purposes of this
definition, the principal amount of any Purchase Money Indebtedness
consisting of capitalized leases shall be computed as a Capitalized Lease
Obligation.
Person - an individual, partnership, corporation, limited liability
company, joint stock company, land trust, business trust, or unincorporated
organization, or a government or agency or political subdivision thereof.
Plan - an employee benefit plan now or hereafter maintained for
employees of either Borrower that is covered by Title IV of ERISA.
Prime Rate - the rate of interest announced or quoted by Lender from
time to time as its prime rate for commercial loans, whether or not such
rate is the lowest rate charged by Lender to its most preferred borrowers;
and, if such prime rate for commercial loans is discontinued by Lender as a
standard, a comparable reference rate designated by Lender as a substitute
therefor shall be the Prime Rate.
Projections - Borrowers' forecasted Consolidated and Consolidating (if
applicable) (a) balance sheets, (b) profit and loss statements, and (c)
cash flow statements, all prepared on a consistent basis with Borrower's
historical financial statements, together with appropriate supporting
details and a statement of underlying assumptions.
Property - any interest in any kind of property or asset, whether
real, personal or mixed, or tangible or intangible.
Purchase Money Indebtedness - means and includes (i) Indebtedness
(other than the Obligations) for the payment of all or any part of the
purchase price of any fixed assets, (ii) any Indebtedness (other than the
Obligations) incurred at the time of or within ten (10) days prior to or
after the acquisition of any fixed assets for the purchase price thereof,
and (iii) any renewals, extensions or refinancings thereof, but not any
increases in the principal amounts thereof outstanding at the time.
<PAGE>
Purchase Money Lien - a Lien upon fixed assets which secures Purchase
Money Indebtedness, but only if such Lien shall at all times be confined
solely to the fixed assets, the purchase price of which was financed
through the incurrence of the Purchase Money Indebtedness secured by such
Lien.
Real Property - the real estate (with buildings, improvements, rents
and profits) described on Exhibit A-2 to this Agreement.
Regulation D - Regulation D of the Board of Governors of the Federal
Reserve System, comprising Part 204 of Title 12, Code of Federal
Regulations, as amended, and any successor thereto.
Rentals - as defined in subsection 8.2.13 of the Agreement.
Renewal Terms - as defined in Section 4.1 of the Agreement.
Reportable Event - any of the events set forth in Section 4043(b) of
ERISA.
Reserve - for any day, that reserve (expressed as a decimal) which is
in effect (whether or not actually incurred) with respect to Bank on such
day, as prescribed by the Board of Governors of the Federal Reserve System
(or any successor or any other banking authority to which Bank is subject
including any board or governmental or administrative agency of the United
States or any other jurisdiction to which Bank is subject), for determining
the maximum reserve requirement (including without limitation any basic,
supplemental, marginal or emergency reserves) for Eurocurrency liabilities
as defined in Regulation D.
Reserve Percentage - for Bank on any day, that percentage (expressed
as a decimal) which is in effect on such day, prescribed by the Board of
Governors of the Federal Reserve System (or any successor or any other
banking authority to which Lender is subject, including any board or
governmental or administrative agency of the United States or any other
jurisdiction to which Bank is subject) for determining the maximum reserve
requirement (including without limitation any basic, supplemental, marginal
or emergency reserves) for (i) deposits of United States Dollars or (ii)
Eurocurrency liabilities as defined in Regulation D, in each case used to
fund a LIBOR Rate Loan subject to an Adjusted LIBOR Rate. The Adjusted
LIBOR Rate shall be adjusted automatically on and as of the effective day
of any change in the Reserve Percentage.
Restricted Investment - any investment made in cash or by delivery of
Property to any Person, whether by acquisition of stock, Indebtedness or
other obligation or Security, or by loan, advance or capital contribution,
or otherwise, or in any Property except the following (those investments
listed in clauses (v) through (viii) below only permitted if there are no
outstanding Revolving Credit Loans):
(i) investments in one or more Subsidiaries of either Borrower to
the extent existing on the Closing Date;
<PAGE>
(ii) Property to be used in the ordinary course of business;
(iii) Current assets arising from the sale of goods and services
in the ordinary course of business of each Borrower;
(iv) investments in any publically traded companies which are in
substantially the same line of business as Borrowers or would be
considered by Borrowers to be competitors of Borrowers in an amount
not to exceed $10,000.00 in the aggregate;
(v) investments in direct obligations of the United States of
America, or any agency thereof or obligations guaranteed by the United
States of America, provided that such obligations mature within one
year from the date of acquisition thereof;
(vi) investments in certificates of deposit maturing within one
year from the date of acquisition issued by a bank or trust company
organized under the laws of the United States or any state thereof
having capital surplus and undivided profits aggregating at least
$100,000,000;
(vii) investments in commercial paper given the highest rating by
a national credit rating agency and maturing not more than two hundred
seventy (270) days from the date of creation thereof; and
(viii) mutual funds that invest in any of the foregoing.
Revolving Credit Loan - a Loan made by Lender as provided in Section
1.1 of the Agreement.
Revolving Credit Facility - the credit facility established by Lender
for the making of Revolving Credit Loans pursuant to Section 1.1.1 hereof.
Revolving Credit Note - the secured promissory note to be executed by
Borrowers on the Closing Date in favor of Lender to evidence Borrowers'
obligation to repay the Revolving Credit Loans, which shall be in the form
of Exhibit A-3 to the Agreement.
Schedule of Accounts - as defined in subsection 6.4.1 of the
Agreement.
Security - shall have the same meaning as in Section 2(1) of the
Securities Act of 1933, as amended.
Security Documents - the Patents, Trademarks, Copyrights and Licenses
Security Agreement, and all other instruments and agreements now or at any
time hereafter securing the whole or any part of the Obligations, as each
of the same may be amended, modified, renewed, extended, replaced, restated
or substituted from time to time.
<PAGE>
Solvent - as to any Person, such Person (i) owns Property whose fair
saleable value is greater than the amount required to pay all of such
Person's Indebtedness (including contingent debts), (ii) is able to pay all
of its Indebtedness as such Indebtedness matures and (iii) has capital
sufficient to carry on its business and transactions and all business and
transactions in which it is about to engage.
Subordinated Debt - Unsecured indebtedness of Borrowers that is
subordinated to the Obligations in a manner, under terms and subject to a
written agreement satisfactory to Lender.
Subsidiary - any corporation of which a Person owns, directly or
indirectly through one or more intermediaries, more than 50% of the Voting
Stock at the time of determination.
Tangible Capital Funds - as defined in Section 8.3.1.
Tangible Net Worth - means the excess of Borrowers' assets over
liabilities as will be shown on a balance sheet of Borrowers, prepared in
accordance with GAAP, consistently applied, provided, however, such amounts
are to be net of amounts carried on the books of Borrowers for any and all
of the following: (i) unamortized debt discount and expense, (ii) patents,
patent applications, copyrights, trademarks, tradenames, goodwill,
experiments or organizational expenses and other like intangible assets and
other items that would be characterized as intangible assets in accordance
with GAAP.
Termination Charge - as defined in Section 4.2.3.
Total Credit Facility - $5,000,000.00
Voting Stock - Securities of any class or classes of a corporation the
holders of which are ordinarily, in the absence of contingencies, entitled
to elect a majority of the corporate directors (or Persons performing
similar functions).
Other Terms. All other terms contained in the Agreement shall have,
when the context so indicates, the meanings provided for by the Code to the
extent the same are used or defined therein.
Certain Matters of Construction. The terms "herein", "hereof" and
"hereunder" and other words of similar import refer to the Agreement as a
whole and not to any particular section, paragraph or subdivision. Any
pronoun used shall be deemed to cover all genders. The section titles,
table of contents and list of exhibits appear as a matter of convenience
only and shall not affect the interpretation of the Agreement. All
references to statutes and related regulations shall include any amendments
of same and any successor statutes and regulations. All references to any
of the Loan Documents shall include any and all modifications thereto and
any and all extensions or renewals thereof.
<PAGE>
LIST OF EXHIBITS
<TABLE>
<S> <C>
Exhibit A-1 Borrowing Base Certificate
Exhibit A-2 Real Property
Exhibit A-3 Revolving Credit Note
Exhibit 6.11 Borrowers' and each Subsidiary's of Borrowers' Business Locations
Exhibit 7.1.1 Jurisdictions in which Borrower and each Subsidiary is Authorized to do Business
Exhibit 7.1.4 Capital Structure of Borrowers
Exhibit 7.1.5 Corporate Names
Exhibit 7.1.13 Existing Sureties
Exhibit 7.1.14 Tax Identification Numbers of Subsidiaries
Exhibit 7.1.16 Patents, Trademarks, Copyrights and Licenses
Exhibit 7.1.17 Contracts Restricting Borrowers' Right to Incur Debts
Exhibit 7.1.18 Compliance with Laws
Exhibit 7.1.20 Litigation
Exhibit 7.1.22(a) Capitalized Leases
Exhibit 7.1.22(b) Operating Leases
Exhibit 7.1.23 Pension Plans
Exhibit 7.1.25 Labor Contracts
Exhibit 8.1.3 Compliance Certificate
Exhibit 8.2 Loans
Exhibit 8.2.5 Permitted Liens
</TABLE>
