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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 for the quarterly period ended December 31, 1999.
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 for the transition period from _____________ to
_______________.
Commission file number: 000-22673
SCHICK TECHNOLOGIES, INC.
(Exact name of registrant as specified in its charter)
Delaware 11-3374812
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
31-00 47th Avenue 11101
Long Island City, New York (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (718) 937-5765
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [ ] No [X]
As of March 14, 2000, 10,136,113 shares of common stock, par value $.01 per
share, were outstanding.
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<PAGE>
SCHICK TECHNOLOGIES, INC.
TABLE OF CONTENTS
<TABLE>
<S> <C>
PART I. FINANCIAL INFORMATION:
Item 1. Financial Statements:
Consolidated Balance Sheets as of December 31, 1999 and
March 31, 1999 ........................................................... Page 1
Consolidated Statements of Operations for the three and nine
months ended December 31, 1999 and 1998 ................................... Page 2
Consolidated Statements of Cash Flows for the nine
months ended December 31, 1999 and 1998 .................................. Page 3
Notes to Consolidated Financial Statements ............................... Page 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations ................................................ Page 7
Item 3. Quantitative and Qualitative Disclosures about Market Risk ................ Page 10
PART II. OTHER INFORMATION:
Item 1. Legal Proceedings ......................................................... Page 10
Item 2. Changes in Securities and Use of Proceeds ................................ Page 12
Item 3. Defaults Upon Senior Securities ........................................... Page 12
Item 4. Submission of Matters to a Vote of Security Holders ....................... Page 12
Item 5. Other Information ......................................................... Page 12
Item 6. Exhibits and Reports on Form 8-K .......................................... Page 12
SIGNATURES ........................................................................... Page 14
EXHIBIT 27
EXHIBIT 10.25
<PAGE>
PART I. Financial Information
Item 1. Financial Statements
Schick Technologies, Inc.
Consolidated Balance Sheets
(In thousands, except share amounts)
December 31, March 31,
1999 1999
------------ --------
(unaudited)
Assets
Current assets
<S> <C> <C>
Cash and cash equivalents $ 1,692 $ 1,415
Short-term investments -- 360
Accounts receivable, net of allowance for
doubtful accounts of $2,318 and $4,512 1,858 4,205
Inventories 6,643 10,686
Income taxes receivable 127 2,720
Prepayments and other current assets 164 321
-------- --------
Total current assets 10,484 19,707
Equipment, net 5,718 7,221
Investments 815 1,250
Other assets 1,024 1,208
-------- --------
Total assets $ 18,041 $ 29,386
======== ========
Liabilities and Stockholders' Equity
Current liabilities
Accounts payable and accrued expenses $ 5,169 $ 8,946
Bridge note payable 6,222 5,000
Accrued salaries and commissions 626 1,296
Deferred revenue 1,031 564
Deposits from customers 576 513
Warranty obligations 352 402
Capital lease obligations, current 53 84
-------- --------
Total current liabilities 14,029 16,805
Loan payable 575 --
Capital lease obligations 4 45
-------- --------
Total liabilities 14,608 16,850
Commitments and contingencies
Stockholders' equity
Preferred stock ($.01 par value; 2,500,000
Shares authorized; none issued and outstanding) -- --
Common stock ($.01 par value; 25,000,000 shares authorized;
10,059,384 shares issued and outstanding) 101 101
Additional paid-in capital 41,751 41,236
Accumulated deficit (38,419) (28,801)
-------- --------
Total stockholders' equity 3,433 12,536
-------- --------
Total liabilities and stockholders' equity $ 18,041 $ 29,386
======== ========
</TABLE>
The accompanying notes are an integral part
of these consolidated financial statements
1
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Schick Technologies, Inc.
Consolidated Statements of Operations (unaudited)
(In thousands, except per-share amounts)
<TABLE>
<CAPTION>
Three months ended Nine months ended
December 31, December 31,
1999 1998 1999 1998
-------- -------- -------- --------
<S> <C> <C> <C> <C>
Revenues, net $ 4,771 $ 15,540 $ 16,574 $ 38,288
-------- -------- -------- --------
Cost of sales 2,806 12,031 12,387 25,671
Excess and obsolete inventory 165 2,741 774 2,741
-------- -------- -------- --------
Total cost of sales 2,971 14,772 13,161 28,412
-------- -------- -------- --------
Gross profit 1800 768 3,413 9,876
Operating expenses
Selling and marketing 1,590 5,457 6,001 13,754
General and administrative 1,601 2,209 5,116 4,997
Research and development 595 907 2,164 2,773
Bad debt expense -- 1,810 9 2,548
-------- -------- -------- --------
Total operating expenses 3,786 10,383 13,290 24,072
-------- -------- -------- --------
Loss from operations (1,986) (9,615) (9,877) (14,196)
Other income (expense)
Gain from sale of investment -- -- 565 --
Interest income 32 48 71 477
Interest expense (90) (2) (377) (8)
-------- -------- -------- --------
Total other income (expense) (58) 46 259 469
-------- -------- -------- --------
Loss before income taxes (2,044) (9,569) (9,618) (13,727)
Benefit from income taxes -- (565) -- (495)
-------- -------- -------- --------
Net loss $ (2,044) $ (9,004) $ (9,618) $(13,232)
======== ======== ======== ========
Basic and diluted loss per share $ (0.20) $ (0.90) $ (0.96) $ (1.32)
======== ======== ======== ========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
2
<PAGE>
Schick Technologies, Inc.
Consolidated Statements of Cash Flow (unaudited)
(In thousands)
<TABLE>
<CAPTION>
Nine months ended
December 31,
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (9,618) $(13,232)
Adjustments to reconcile net loss to
net cash used in operating activities
Depreciation and amortization 1,577 1,359
Deferred income taxes -- 349
Provision for excess and obsolete inventory 774 2,741
Provision for doubtful accounts 9 2,548
Gain from sale of investment in Photobit Corporation (565) --
Changes in assets and liabilities:
Accounts receivable 2,338 (300)
Inventories 3,269 (5,997)
Income taxes receivable 2,593 (3,092)
Prepayments and other current assets 157 180
Other assets 182 (270)
Accounts payable and accrued expenses (4,290) 3,697
Income taxes payable -- (144)
Deferred revenue 467 121
Deposits from customers 63 (104)
Warranty obligations (50) 121
-------- --------
Net cash used in operating activities (3,094) (12,023)
Cash flows from investing activities:
Proceeds from maturities of held to maturity investments 360 21,224
Purchase of held to maturity investments -- (10,561)
Purchase of minority interest in Photobit Corporation -- (250)
Proceeds from sale of investment in Photobit Corporation stock 1,000 --
Capital expenditures (139) (3,263)
-------- --------
Net cash provided from investing activities 1,221 7,150
-------- --------
Cash flows from financing activities:
Proceeds from exercise of common stock options -- 32
Proceeds of loan payable 1,000 --
Proceeds of bridge note payable 1,222 --
Principal payments of capital lease obligations (72) --
-------- --------
Net cash provided from financing activities 2,150 32
-------- --------
Net increase (decrease) in cash and cash equivalents 277 (4,841)
Cash and cash equivalents at beginning of period 1,415 6,217
-------- --------
Cash and cash equivalents at end of period $ 1,692 $ 1,376
======== ========
</TABLE>
The accompanying notes are an integral
part of these consolidated financial statements
3
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Schick Technologies, Inc.
Notes to Consolidated Financial Statements (unaudited)
(in thousands, except share and per share amounts)
1. Basis of Presentation
The consolidated financial statements of Schick Technologies, Inc. (the
"Company") have been prepared in accordance with generally accepted accounting
principles for interim financial information and the rules of the Securities and
Exchange Commission (the "SEC") for quarterly reports on Form 10-Q, and do not
include all of the information and footnote disclosures required by generally
accepted accounting principles for complete financial statements. These
statements should be read in conjunction with the audited consolidated financial
statements and notes thereto for the year ended March 31, 1999 included in the
Company's Annual Report on Form 10-K.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting of normal, recurring
adjustments) necessary for a fair presentation of results of operations for the
interim periods. The results of operations for the nine months ended December
31, 1999, are not necessarily indicative of the results to be expected for the
full year ending March 31, 2000.
The consolidated financial statements of the Company, at December 31, 1999,
include the accounts of the Company and its wholly owned subsidiaries. All
significant intercompany balances have been eliminated.
During the quarter ending December 31, 1999, the Company continued to incur
operating losses and has a deficiency in working capital. In spite of the
Company's cost reductions, refinancing and tightening of credit, there can be no
assurance that the Company will achieve profitability or generate sufficient
working capital to permit its continuation as a going concern. The ability of
the Company to satisfy its cash requirements is dependent in part on the
Company's ability to attain adequate sales and profit levels and to control
warranty obligations by increasing warranty revenues and reducing warranty
costs, and to collect its accounts receivable on a timely basis. Management
currently believes that existing capital resources, which have been diminished
as a result of losses in fiscal 1999 and the first nine months of fiscal 2000,
and sources of credit, including the Greystone credit facility, are adequate to
meet its current cash requirements. However, if the Company's cash needs are
greater than anticipated, the restructuring of the bridge note payable is not
completed, or the Company does not satisfy drawdown conditions under the amended
loan agreement with Greystone Funding Corporation, the Company will be required
to seek additional or alternative financing sources. There can be no assurance
that such financing will be available or available on terms acceptable to the
Company.
2. Inventories
Inventories at December 31, 1999 and March 31, 1999 are comprised of the
following:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 1999
----------------- --------------
<S> <C> <C>
Raw materials .......................................... $ 2,587 $ 3,657
Work-in-process ........................................ 8,257 7,598
Finished goods ......................................... 2,007 4,897
Reserve for slow moving/obsolete ....................... (6,208) (5,466)
-------- --------
Total inventories .......................... $ 6,643 $ 10,686
======== ========
</TABLE>
3. Loss Per Share
The computation of basic and diluted loss per share for the three and nine
months ended December 31, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Three months ended December 31, Nine months ended December 31,
-------------------------------- --------------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Net loss available to common stockholders .......... $ (2,044) $ (9,004) $ (9,618) $ (13,232)
Weighted average shares outstanding
for basic and diluted loss per share ......... 10,059,384 10,002,987 10,059,384 9,996,023
Basic and diluted loss per share ................... $ (0.20) $ (0.90) $ (0.96) $ (1.32)
============ ============ ============ ============
</TABLE>
4
<PAGE>
4. Commitments and Contingencies
Employment Agreements
On or subsequent to December 31, 1999, the Company entered into employment
agreements with four executive officers. These agreements provide for monthly
base salaries which, when annualized, aggregate $710 in executive compensation
and for benefits. In addition, certain of the Company's agreements provide for
the issuance of common stock and/or common stock options to the executives,
which generally vest ratably over the term of the agreements (2-3 years).
Additionally, certain executives may earn bonus compensation based upon the
specific terms of the respective agreements, as defined.
Product Liability
The Company is subject to the risk of product liability and other liability
claims in the event that the use of its products results in personal injury or
other claims. Although the Company has not experienced any product liability
claims to date, any such claims could have an adverse impact on the Company. The
Company maintains insurance coverage related to product liability claims, but
there can be no assurance that product liability or other claims will not exceed
its insurance coverage limits, or that such insurance will continue to be
available on commercially acceptable terms, or at all.
SEC Investigation and Other
In August 1999, the Company, through its outside counsel, contacted the Division
of Enforcement of the Securities and Exchange Commission ("SEC") to advise it of
certain matters related to the Company's restatement of earnings. The SEC has
made a voluntary request for the production of certain documents. The Company
intends to cooperate fully with the SEC staff and has provided responsive
documents to it. In addition, investigators associated with the U.S. Attorney's
Office have made inquires of certain former employees, apparently in connection
with the same event. The inquiries are in a preliminary stage and the Company
cannot predict their potential outcome.
Litigation
During fiscal 1999, several shareholder class action lawsuits were filed against
the Company. In May 1999 a consolidated and amended class action complaint was
filed naming the Company, certain of its officers and former officers and
various third parties as defendants. The complaint alleges that certain
defendants issued false and misleading statements concerning the Company's
publicly reported earnings in violation of the federal securities laws. The
complaint seeks certification of a class of persons who purchased the Company's
common stock between July 1, 1997 and February 19, 1999, inclusive, and does not
specify the amount of damages sought. The Company intends to defend itself
vigorously against such allegations and believes the claims to be without merit.
As these actions are in their preliminary stages, the Company is unable to
predict the ultimate outcome of these claims. The outcome, if unfavorable, could
have a material adverse effect on the financial position and results of
operations of the Company.
During 1996, the Company was named as a defendant in patent infringement
litigation commenced by a competitor in the United States and France. The
Company is vigorously defending itself against such allegations and believes the
claims to be without merit. The Company has filed a countersuit against the
competitor for infringement of a U.S. Patent which has been exclusively licensed
to the Company. The Company has obtained a formal opinion of intellectual
property counsel that its products do not infringe the competitor's U.S. patent.
The Company has filed motions for summary judgment seeking the dismissal of the
action in the United States. Such motions are currently pending. The Company is
unable to predict the ultimate outcome of this litigation. The outcome, if
unfavorable, could have a material adverse effect on the financial position and
results of operations of the Company. No provision has been made for any,
potential losses at December 31, 1999 as the range of potential loss, if any,
cannot be reasonably estimated.
During 1997, the Company was named as a defendant in patent litigation involving
a patent directed to a display system for digital dental radiographs. In July
1997 the Company reached a settlement under which it paid $600 for a world wide,
non-exclusive license for the patent. The license fee was expensed during 1998.
5
<PAGE>
The Company may be a party to a variety of legal actions (in addition to those
referred to above), such as employment and employment discrimination-related
suits, employee benefit claims, breach of contract actions, tort claims,
shareholder suits, including securities fraud, and intellectual property related
litigation. In addition, because of the nature of its business, the Company is
subject to a variety of legal actions relating to its business operations.
Recent court decisions and legislative activity may increase the Company's
exposure for any of these types of claims. In some cases, substantial punitive
damages may be sought. The Company currently has insurance coverage for some of
these potential liabilities. Other potential liabilities may not be covered by
insurance, insurers may dispute coverage, or the amount of insurance may not be
sufficient to cover the damages awarded. In addition, certain types of damages
such as punitive damages, may not be covered by insurance, and insurance
coverage for all or certain forms of liability may become unavailable or
prohibitively expensive in the future.
5. Investment in Photobit Corporation
In September 1997, the Company purchased a minority interest of 5%, for
$1,000 in Photobit Corporation, a developer of complementary metal-oxide
semiconductor ("CMOS"), APS imaging technology. In July 1998, the Company
invested an additional $250 in Photobit Corporation, bringing its total
investment in Photobit to $1,250. The Company is the exclusive licensee of the
APS technology for medical applications and utilizes the technology in its
bone-mineral density assessment device and certain components of its computed
dental x-ray imaging system. The Company carries the investment at cost. In
September 1999, the Company sold 250,000 shares of Photobit stock for $1,000 and
recorded an investment gain of approximately $565.
6. Bridge Note Payable
Effective July 30, 1999, the Company secured an extension to the secured
promissory note it initially issued in March 1999 for $5,000. Pursuant to the
amended and restated note, the principal of the note was increased to $6,222.
The increase in the principal amount resulted from the conversion of certain
trade payables owed to the third-party lender into the principal balance of the
note. The amended and restated note bears interest at the rate of prime plus two
and one-half percent per annum. Interest on the note is payable monthly and the
note is secured by the Company's tangible and intangible assets. The principal
is payable in quarterly installments of $1,000 commencing December 31, 1999. The
Company is also required to make additional principal payments equal to 25% of
the net proceeds of any equity or debt financing or asset sale (other than sales
of inventory in the ordinary course of business) to the extent that 25% of such
proceeds exceeds the $1,000 principal installment due at the end of the quarter
in which the financing or asset sale is completed. In connection with the
amended and restated note, the Company issued 650,000 warrants to the
note-holder. The warrants are exercisable for a period of 5 years and each has
an exercise price of $2.19. The Company is not in compliance with certain
financial covenants, and other terms and provisions contained in the extended
bridge loan and is currently in the process of restructuring the obligation.
7. NASDAQ Delisting
On September 15, 1999, the Company received notice from the Nasdaq Listings
Qualifications Panel that its common stock would no longer be listed on the
Nasdaq National Market effective with the close of business on September 15,
1999. The panel's action was based on the Company's inability to timely file its
Annual Report on Form 10-K for the fiscal year ended March 31, 1999 and public
interest concerns regarding the Company's revenue recognition and sales
practices.
8. Loan Payable
In December 1999, the Company entered into a Loan Agreement (the "Loan
Agreement") with Greystone Funding Corporation ("Greystone") to provide up to
$7.5 million of subordinated debt in the form of a secured credit facility.
Pursuant to the Loan Agreement, and to induce Greystone to enter into said
Agreement, the Company issued to Greystone and its designees, warrants to
purchase 3,000,000 shares of the Company's Common Stock at an exercise price of
$0.75 per share. The Company agreed to issue to Greystone or its designees
warrants to purchase an additional 2,000,000 shares at an exercise price of
$0.75 per share in connection with a cash payment of $1 million by Greystone to
the Company in consideration of a sale of Photobit stock by the Company to
Greystone. The sale of the Photobit stock was made subject to a right of first
refusal held by Photobit and its founders. By letter dated February 17, 2000,
counsel for Photobit informed the Company that Photobit considers the Company's
sale of its shares to Greystone to be void on the basis of the Company's
purported failure to properly comply with Photobit's right of first refusal.
6
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On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 27, 1999 (the "Amended Loan
Agreement") which amended and restated the Loan Agreement pursuant to which
Greystone agreed to provide up to $7.5 million of subordinated debt in the form
of a secured credit facility. The $1 million cash payment to the Company was
converted as of December 27, 1999 into an initial advance of $1 million under
the Amended Loan Agreement. Pursuant to the Amended Loan Agreement, and to
induce Greystone to enter into said Agreement, the Company issued warrants to
Greystone and its designees, consisting of those warrants previously issued
under the Loan Agreement, to purchase 5,000,000 shares of the Company's Common
Stock at an exercise price of $0.75 per share, exercisable at any time after
December 27, 1999. Under the Amended Loan Agreement, the Company also issued to
Greystone or its designees warrants (the "Additional Warrants") to purchase an
additional 13,000,000 shares of common stock, which Additional Warrants will
vest and be exercisable at a rate of two shares of Common Stock for each dollar
advanced under the Amended Loan Agreement in excess of the initial draw of $1
million. Any Additional Warrants which do not vest prior to expiration or
surrender of the line of credit will be forfeited and canceled. In connection
with the Greystone secured credit facility, effective as of February 15, 2000,
DVI Financial Services, Inc., the Company's senior lender, consented to the
Company's grant to Greystone of a second priority lien encumbering the Company's
assets, under and subject in priority and right of payment to all liens granted
by the Company to DVI.
The $1 million proceeds of the initial draw has been allocated to the loan
and 15 million warrants issued, based upon their relative fair values at
issuance. The carrying value of the note of $575 is being accreted to the face
value of $1 million using the interest method over the seven-year term of the
loan. However, in the event that the loan is paid sooner, the Company will
recognize a charge for the unamortized discount remaining in such period. The
fair value of 3 million warrants issued in connection with the agreement,
amounting to $90, is being accounted for as a deferred financing cost. This
cost, included in "Other Assets" in the accompanying balance sheet, is being
amortized on a straight-line basis over the seven year life of the loan.
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
This Quarterly Report on Form 10-Q contains forward-looking statements within
the meaning of Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Securities Exchange Act of 1934, as amended. The words or
phrases "believes," "may," "will likely result," "estimates," "projects,"
"anticipates," "expects" or similar expressions and variations thereof are
intended to identify such forward-looking statements. Actual results, events and
circumstances could differ materially from those set forth in such statements
due to various factors. Such factors include risks relating to recent
substantial operating losses, dependence on financing, dependence on products,
competition, the changing economic and competitive conditions in the medical and
dental digital radiography markets, dependence on key personnel, dependence on
distributors, ability to manage growth, fluctuation in results and seasonality,
regulatory approvals, technological developments, protection of technology
utilized by the Company, patent infringement claims and other litigation, need
for additional financing and further risks and uncertainties, including those
detailed and in the Company's other filings with the Securities and Exchange
Commission.
General
The Company designs, develops and manufactures digital imaging systems and
devices for the dental and medical markets. In the field of dentistry, the
Company has developed, and currently manufactures and markets, an intra-oral
digital radiography system. The Company has also developed a bone mineral
density assessment device, which was introduced in December of 1997, to assist
in the diagnosis of osteoporosis. The Company is also developing a digital
mammography device, and has commenced development of a general digital
radiography device for intended use in various applications.
Results of Operations
Net revenues for the three months ended December 31, 1999 decreased $10.7
million (69%) to $4.8 million from $15.5 million during the comparable period of
fiscal 1999. Net revenues for the nine months ended December 31, 1999, decreased
$21.7 million (57%) to $16.6 million from $38.3 million during the comparable
period of fiscal 1999. The revenue decline is due to lower sales of the
Company's CDR(R) dental product and accuDEXA(TM) bone density assessment device.
Fiscal 2000 revenues were negatively affected by reduced marketing activity for
the Company's products, by reducing credit granting to select dealers,
hospitals, universities and governmental agencies and, the Company believes, by
the negative perception that existed in the marketplace concerning the Company's
viability and long-term ability to upgrade and service its products. For the
quarter ended December 31, 1999, net revenues of the Company's accuDEXA and CDR
product decreased to approximately $0.7 million (14%) and $4.1 million (86%),
respectively compared to $2.5 million (16%) and $13.0 million (84%),
respectively in the comparable quarter of fiscal 1999. For the nine months ended
December 31, 1999, net revenues of the Company's accuDEXA and CDR products
decreased to approximately $2.8 million (17%) and $13.8 million (83%),
7
<PAGE>
respectively of the Company's net revenues as compared to $12.7 million (33%)
and $25.6 million (67%), respectively in the comparable nine months of fiscal
1999.
The rate of returns in fiscal 2000 for the Company's CDR and accuDEXA
products decreased significantly from that of fiscal 1999. The decreased return
rate for CDR is believed to be attributable to several factors, including the
following: First, during fiscal 1999, the Company resolved certain technical
problems in transitioning its CDR product line from CCD sensors to APS sensors.
Shipments of the Company's initial version of its new APS sensor for the CDR
product, which were primarily delivered from April 1998 through August 1998,
exhibited a high failure rate and other technical problems during fiscal 1999.
The Company has provided for replacements of systems shipped during this period
where practical and provided for anticipated returns for units which were not
upgraded during fiscal 1999. In September 1998, the Company began shipping a new
version of the APS sensor which has exhibited a lower failure rate than the
initial version. Second, the Company's single user CDR System requires minimal
installation. Commencing in September 1998, the Company initiated a program in
coordination with its computer supplier, in which the supplier installed all
single-user CDR Systems. As a result of logistical problems in implementing this
program, the supplier's installations experienced significant delays, which led
to a higher than normal rate of return for single user systems shipped in this
period. Starting in January 1999, the Company resumed its original method of CDR
installation and has since experienced a reduced rate of return.
The Company also experienced decreased rate of returns of accuDEXA units.
The Company believes the decrease in such returns is due to several factors,
including the following: First, early shipments of accuDEXA experienced a higher
than normal failure rate due to shipping damage, as well as humidity and
temperature sensitivity of several components in the initial design of the
product. The Company took steps to address these problems and believes that
failure rates relating to such damage and sensitivity have dropped
significantly. In this regard, the Company currently expects to implement a
number of additional improvements to accuDEXA, to further increase reliability,
in the first half of fiscal 2001. Second, the Company initiated a change in its
sales policy which affected accuDEXA sales made from May 1998 through November
1998. During this time, the Company waived its customary 10% deposit charged to
customers prior to shipment of goods. In December 1998, the Company changed its
credit policy requiring prepayment from non-dealer customers.
Total cost of sales for the three months ended December 31, 1999 decreased
$11.8 million (80%) to $3.0 million (62% of net revenues) from $14.8 million
(95% of net revenues) for the comparable period of fiscal 1999. Total cost of
sales decreased for the three and nine months ended December 31, 1999 due to
lower direct and indirect labor costs, warranty expenditures, material costs,
royalty costs, and overhead costs as a result of decreased revenues in the
respective periods; and a decrease in the provision for excess and obsolete
inventory. The decrease in the provision for excess and obsolete inventory from
fiscal 1999 to fiscal 2000 is primarily attributable to the obsolescence of
inventory in the third quarter of fiscal 1999 due to the introduction of the new
APS sensors. The cost savings in the three months resulted in increased gross
profit percentage of 37.7% in fiscal 2000, compared to 5.0% in fiscal 1999.
However, these decreases were not adequate to cause the Company's gross profit
percentage for the nine months ended December 31, 1999 to be greater than the
gross profit percentage for fiscal 1999. The gross profit percentage for the
nine months ended December 31, 1999 was 20.6% compared to 25.8% in fiscal 1999.
In January 1999, in an effort to streamline operations and reduce expenses, and
as a result of more efficient manufacturing processes and a higher rate of
outsourcing, the Company reduced its direct manufacturing labor force from 101
to 64 employees and relocated the operations of its wholly-owned subsidiary,
Schick X-Ray Corp., from its facility in Roebling, New Jersey to the Company's
headquarters in Long Island City, New York. In August 1999, Schick X-Ray was
dissolved and its operations absorbed by the Company.
Selling & marketing expenses for the three months ended December 31, 1999,
decreased $3.9 million (71%) to $1.6 million (33% of net revenues) from $5.5
million (35% of net revenues) for the comparable period of fiscal 1999. Selling
and marketing expenses for the nine months ended December 31, 1999, decreased
$7.8 million (56%) to $6.0 million (36% of net revenues) from $13.8 million (36%
of net revenues) during the comparable period of fiscal 1999. The decreases for
the three and nine months ended December 31, 1999 are due to decreases in direct
selling expenses in the CDR and accuDEXA product lines, trade show expenses and
other marketing expenses. Additionally, the Company reduced its direct sales
force and associated overhead expenses as a result of decreased revenues.
General and administrative expenses for the three months ended December 31,
1999, decreased $0.6 million
8
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(28%) to $1.6 million (34% of net revenues) from $2.2 million (14% of net
revenues) for the comparable period of fiscal 1999. General and administrative
expenses for the nine months ended December 31, 1999, increased $0.1 million (2%
of net revenues) to $5.1 million (31% of net revenues) from $5.0 million (13% of
net revenues) during the comparable period of fiscal 1999. The increases for the
three and nine months ended December 31, 1999 were primarily attributable to
increases in professional services rendered in connection with the restatement
of the Company's interim financial statements for fiscal 1999 partially offset
by decreases in payroll and related costs.
Research and development expenses for the three months ended December 31,
1999, decreased $0.3 million (34%) to $0.6 million (12% of net revenues) from
$0.9 million (6% of net revenues) for the comparable period of fiscal 1999.
Research and development expenses for the nine months ended December 31, 1999,
decreased $ 0.6 million (22%) to $2.2 million (13% of net revenues) from $2.8
million (7% of net revenues) for the comparable period of fiscal 1999. The
decreases for the three and nine months ended December 31, 1999 are primarly
attributable to a decrease in payroll and related costs due to a reduction in
personnel, partially offset by increase in test services and supply expenses.
Interest income decreased to $32 thousand in the three months ended
December 31, 1999 from $48 thousand in the comparable period of fiscal 1999.
Interest income for the nine months ended December 31, 1999 decreased to $71
thousand from $477 thousand for the comparable period of fiscal 1999. The
decrease is attributable to lower cash balances and investments in short-term
interest-bearing securities that were purchased with the proceeds of the
Company's July 1997 Initial Public Offering. Interest expense of $90 thousand
and $377 thousand for the three and nine month periods ended December 31,1999,
respectively, was principally attributable to the bridge note payable.
Liquidity and Capital Resources
At December 31, 1999, the Company had $1.7 million in cash and cash
equivalents and a working capital deficiency of $3.5 million compared to $1.4
million in cash and cash equivalents, $0.4 million in short-term investments and
$2.9 million in working capital at March 31, 1999. The decrease in working
capital is primarily attributable to the loss from operations for the nine
months ended December 31, 1999. Ongoing losses in fiscal 2000 have further
reduced working capital.
During the nine months ended December 31, 1999, cash used in operations was
$3.1 million compared to $12.0 million used in operations during the comparable
period of fiscal 1999. Increases to cash were primarily provided by the sale of
a portion of the Company's investment in Photobit stock and loan proceeds from
the Company's bridge note payable and loan payable. This cash was used to fund
the Company's operating losses and account payable reduction, which more than
exceeded reductions in accounts receivable, inventory and collection of
refundable income taxes. Accounts receivable decreased from $4.2 million at
March 31, 1999 to $1.9 million at December 31, 1999 due to reduced sales and
restricted credit granting to select dealers, hospitals, universities and
governmental agencies. Inventory decreased from $10.7 million at March 31, 1999
to $6.6 million at December 31, 1999 primarily due to the Company's planned
reduction of inventory levels. The Company received estimated tax payment and
net operating loss refunds of approximately $2.6 million during the nine months
ended December 1999.
The Company's capital expenditures during the three months ended December
31, 1999 amounted to $0.1 million. Such expenditures included leasehold
improvements, computers, and production equipment.
DVI Financial Services, Inc. ("DVI") has provided the Company with loans
and advances up to $6.2 million in the aggregate (the "Bridge Loan"), which is
secured by first priority liens on collateral (the "Collateral") consisting of
all of the Company's now-owned and hereafter-acquired tangible and intangible
personal property including, without limitation, cash, marketable securities,
accounts receivable, inventories, contract rights, patents, trademarks,
copyrights and other general intangibles, machinery, equipment and interests in
real estate of the Company, together with all products and proceeds thereof. In
connection with the Bridge Loan, and reflecting the Company's repayment
obligations thereunder as well as the security interest created thereby in the
Collateral, the Company executed a Secured Promissory Note and a Security
Agreement (the "Security Agreement") dated January 25, 1999, and executed an
Amended and Restated Secured Promissory Note dated July 30, 1999. The Security
Agreement provides, in part, that the Company may not permit the creation of any
lien or encumbrance on the Company's property or assets. The Company is not in
compliance with certain financial covenants and other terms and provisions
contained in the Bridge Loan. The Company and DVI have entered into a commitment
letter for the restructuring of its Bridge Loan.
In December 1999, the Company entered into a Loan Agreement (the "Loan
Agreement") with Greystone Funding Corporation ("Greystone") to provide up to
$7.5 million of subordinated debt in the form of a
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secured credit facility. Pursuant to the Loan Agreement, and to induce Greystone
to enter into said Agreement, the Company issued to Greystone and its designees,
warrants to purchase 3,000,000 shares of Company's Common Stock at an exercise
price of $0.75 per share. The Company agreed to issue to Greystone or its
designees warrants to purchase an additional 2,000,000 shares at an exercise
price of $0.75 per share in connection with a cash payment of $1 million by
Greystone to the Company in consideration of a sale of Photobit stock by the
Company to Greystone. The sale of the Photobit stock was made subject to a right
of first refusal held by Photobit and its founders. By letter dated February 17,
2000, counsel for Photobit informed the Company that Photobit considers the
Company's sale of its shares to Greystone to be void on the basis of the
Company's purported failure to properly comply with Photobit's right of first
refusal.
On March 17, 2000, the Company and Greystone entered into an Amended and
Restated Loan Agreement effective as of December 27, 1999 (the "Amended Loan
Agreement"), which amended and restated the Loan Agreement, pursuant to which
Greystone agreed to provide up to $7.5 million of subordinated debt in the form
of a secured credit facility. The $1 million cash payment to the Company was
converted as of December 27, 1999 into an initial advance of $1 million under
the Amended Loan Agreement. Pursuant to the Amended Loan Agreement and to induce
Greystone to enter into said Agreement, the Company issued warrants to Greystone
and its designees, consisting of those warrants previously issued under the Loan
Agreement, to purchase 5,000,000 shares, of the Company's Common Stock at an
exercise price of $0.75 per share, exercisable at any time after December 27,
1999. Under the Amended Loan Agreement, the Company also issued to Greystone or
its designees warrants (the "Additional Warrants") to purchase an additional
13,000,000 shares of common stock, which Additional Warrants will vest and be
exercisable at a rate of two shares of Common Stock for each dollar advanced
under the Amended Loan Agreement in excess of the initial draw of $1 million.
Any additional warrants which do not vest prior to expiration or surrender of
the line of credit will be forfeited and canceled. In connection with the
Greystone secured credit facility, effective as of February 15, 2000, DVI
consented to the Company's grant to Greystone of a second priority lien
encumbering the Company's assets, under and subject in priority and right of
payment to all liens granted by the Company to DVI.
The Company has also undertaken various cost-cutting measures including
reduction of facilities and personnel by over 40% from peak levels of fiscal
1999. The Company discontinued certain promotional programs which had resulted
in increased credit risk, and concomitantly limited credit to selected domestic
dealers. The Company continues efforts to improve its products and methods of
production and believes it has strengthened customer support services to its
customers.
In spite of the Company's cost reductions, refinancing and tightening of
credit, there can be no assurance that the Company will achieve profitability or
generate sufficient working capital to permit its continuation as a going
concern. The ability of the Company to satisfy its cash requirements is
dependent in part on the Company's ability to attain adequate sales and profit
levels and to control warranty obligations by increasing warranty revenues and
reducing warranty costs and to collect its account receivable on a timely basis.
Management currently believes that existing capital resources and sources of
credit, including the Greystone credit facility, are adequate to meet its
current cash requirements. However, if the Company's cash needs are greater than
anticipated, the restructuring of the DVI Bridge Loan is not completed or the
Company does not satisfy drawdown conditions under the Amended Loan Agreement,
the Company will be required to seek additional or alternative financing
sources. There can be no assurance that such financing will be available or
available on terms acceptable to the Company.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The DVI Bridge Loan bears an annual interest rate based on the prime rate
plus 2.5%. Because the interest rate is variable, the Company's cash flow may be
adversely affected by increases in interest rates. Management does not, however,
believe that any risk inherent in the variable-rate nature of the loan is likely
to have a material effect on the Company's interest expense or available cash.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The Company and/or certain of its officers and former officers, are
involved in the proceedings described below:
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I. The Company is a named defendant in two lawsuits instituted by Trophy
Radiologie, S.A. (`Trophy S.A.'), a subsidiary of Trex Medical Corporation. One
lawsuit was instituted in France and the other in the United States.
The French lawsuit was filed in November 1995, in the tribunal de Grande
Instance de Bobigny, the French patent court, and originally alleged that the
Company's CDR(R)system infringes French Patent No. 2,547,495, European Patent
No. 129,451 and French Certificate of Addition No. 2,578,737. These patents, all
of which are related, are directed to a CCD-based intra-oral sensor. Since
filing its lawsuit, Trophy S.A. has withdrawn its allegation of infringement
with respect to the Certificate of Addition. Trophy S.A. is seeking a permanent
injunction and unspecified damages, including damages for its purported lost
profits. The Company believes that the lawsuit is without merit and is
vigorously defending it.
The lawsuit in the United States was filed in March 1996 by Trophy S.A.,
Trophy Radiology, Inc., a United States subsidiary of Trophy S.A. (`Trophy
Inc.') and the named inventor on the patent in suit, Francis Mouyen, a French
citizen. The suit was brought in the United States District Court for the
Eastern District of New York, and alleges that the Company's CDR(R) system
infringes United States Patent No. 4,593,400 (the `400 patent'), which is
related to the patents in the French lawsuit. Trophy S.A., Trophy Inc. and
Mouyen are seeking a permanent injunction and unspecified damages, including
damages for purported lost profits, enhanced damages for the Company's purported
willful infringement and an award of attorney fees. The Company believes that
the lawsuit is without merit and is vigorously defending it. The Company's
counsel in the United States suit has issued a formal opinion that the CDR
system does not infringe the 400 patent.
In addition, the Company has counter-sued Trophy S.A. and Trophy Inc. for
infringement of United States Patent No. 4,160,997, an expired patent which was
exclusively licensed to the Company by its inventor, Dr. Robert Schwartz, and
for false advertising and unfair competition. The Company believes that its
counter-suit is meritorious, and is vigorously pursuing it.
On September 12, 1997, after having been given permission to do so by the
Court, the Company served two motions for summary judgment seeking dismissal of
the action pending in the United States District Court for the Eastern District
of New York, on the grounds of non-infringement and patent invalidity. On
February 22, 2000, oral argument on these motions was heard by the Court. The
motions are currently pending.
While the Company believes such suits against it are without merit, there
can be no assurance that the Company will be successful in its defense of any of
these actions, or in its counter-suit. If the Company is unsuccessful in its
defense of any of these actions, it could have a material adverse effect upon
the Company. Moreover, regardless of their outcome, the Company may be forced to
expend significant amounts of money in legal fees in connection with these
lawsuits.
II. In late 1998 through early 1999, nine shareholder complaints purporting
to be class action lawsuits were filed in the United States District Court for
the Eastern District of New York. Plaintiffs filed a Consolidated and Amended
Complaint on or about May 27, 1999 and, on or about November 24, 1999, filed a
Second Amended and Consolidated Complaint (the "Complaint"). The Complaint names
as defendants the Company, David B. Schick, Thomas E. Rutenberg, and David
Spector (collectively, the "Individual Defendants"), as well as
PricewaterhouseCoopers LLP.
The Complaint alleges, inter alia, that certain defendants issued false and
misleading statements concerning the Company's publicly reported earnings in
violation of the federal securities laws. The Complaint seeks certification of a
class of persons who purchased the Company's Common Stock between July 1, 1997
and February 19, 1999, inclusive, and does not specify the amount of damages
sought.
The Company has retained counsel, believes that these lawsuits are without
merit, and intends to vigorously defend them. On or about February 11, 2000, the
Company and the Individual Defendants filed a Motion to Dismiss the Complaint.
As these actions are in their preliminary stages, the Company is unable to
predict their ultimate outcome. The outcome, if unfavorable, could have a
material adverse effect on the Company.
III. In August 1999, the Company, through its outside counsel, contacted
the Division of Enforcement of the Securities and Exchange Commission ("SEC") to
advise it of certain matters related to the Company's restatement of earnings.
The SEC has made a voluntary request for the production of certain documents.
The Company intends to cooperate fully with the SEC staff and has provided
responsive documents to it. The inquiry is in a preliminary
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stage and the Company cannot predict its potential outcome.
The Company may be a party to a variety of legal actions (in addition to
those referred to above), such as employment and employment
discrimination-related suits, employee benefit claims, breach of contract
actions, tort claims, shareholder suits, including securities fraud, and
intellectual property related litigation. In addition, because of the nature of
its business, the Company is subject to a variety of legal actions relating to
its business operations. Recent court decisions and legislative activity may
increase the Company's exposure for any of these types of claims. In some cases,
substantial punitive damages may be sought. The Company currently has insurance
coverage for some of these potential liabilities. Other potential liabilities
may not be covered by insurance, insurers may dispute coverage, or the amount of
insurance may not be sufficient to cover the damages awarded. In addition,
certain types of damages, such as punitive damages, may not be covered by
insurance and insurance coverage for all or certain forms of liability may
become unavailable or prohibitively expensive in the future.
Item 2. Changes in Securities and Use of Proceeds
(d) On July 7, 1997, the Company's initial public offering (the "Offering")
of 1,750,000 shares of its common stock, $.01 par value per share (the "Common
Stock") closed. The Company's registration statement on Form S-1 (Registration
No. 333-33731) was declared effective by the Securities and Exchange Commission
on June 30, 1997. As part of the Offering, the Company granted to the
Underwriters over-allotment options to purchase up to 262,500 shares of Common
Stock ("the "Underwriters' Option"). On July 10, 1997, the underwriters
exercised the Underwriters' Option purchasing 262,500 shares of Common Stock
from the Company. The aggregate offering price of 2,012,500 shares of Common
Stock registered for the account of the Company pursuant to the Offering
(inclusive of the Underwriters' Option) was $37.2 million.
The aggregate net proceeds received by the Company from the Offering and as
a result of the exercise of the Underwriters' Option, after deducting
underwriting and commissions and expenses were $33,508,731. During the period of
July 1, 1997 through December 31, 1999, such net proceeds have been applied as
follows: (i) $1,606,000 for leasehold improvements; (ii) $5,248,000 for plant
and equipment; (iii) $1,450,000 to purchase certain assets of Keystone Dental
X-Ray Corp.; (iv) $1,250,000 to purchase a 5% interest in Photobit, Inc.; (v)
$1,512,833 to pay the notes payable and interest in the amount of $144,296 to
Merck & Co., Inc.; and (vii) the remaining $22,442,000 was used in its entirety
for working capital purposes and to fund the Company's substantial operation
losses in fiscal 1999 and 2000. None of the net proceeds were paid, directly or
indirectly, to directors, officers, controlling stockholders, or affiliates of
the Company.
Item 3. Defaults Upon Senior Securities
DVI Financial Services, Inc. ("DVI") has provided the Company with loans
and advances up to $6,222,000 in the aggregate (the "Bridge Loan"), which is
secured by first priority liens on collateral consisting of all of the Company's
now-owned and hereafter-acquired tangible and intangible personal property
including, without limitation, cash, marketable securities, accounts receivable,
inventories, contract rights, patents, trademarks, copyrights and other general
intangibles, machinery, equipment and interests in real estate of the Company,
together with all products and proceeds thereof. The Company is not in
compliance with certain financial covenants and other terms and provisions
contained in the Bridge Loan. The Company and DVI have entered into a commitment
letter for the restructuring of its Bridge Loan.
Item 4. Submission of Matters to a Vote of Security Holders
Not Applicable.
Item 5. Other Information
Not Applicable.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
10.25 Amended and Restated Loan Agreement, dated March 17, 2000, and made
effective as of December 27, 1999, by and between Schick Technologies,
Inc., a Delaware corporation, Schick
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Technologies, Inc., a New York corporation, and Greystone Funding
Corporation, a Virginia corporation
27 Financial Data Schedule (Filed in electronic format only)
(b) Reports on Form 8-K
None
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SCHICK TECHNOLOGIES, INC.
SIGNATURE
Pursuant to the requirement of the Securities Exchange Act of 1934, the
registrant has duly caused this Report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCHICK TECHNOLOGIES, INC.
Date: March 24, 2000 By: /S/ David B. Schick
David B. Schick
Chief Executive Officer
By: /S/ Ronald Rosner
Ronald Rosner
Controller
(Principal Financial Officer)
14
AMENDED AND RESTATED LOAN AGREEMENT
THIS AMENDED AND RESTATED LOAN AGREEMENT (this "Agreement"), is made
effective and entered into as of the 27th day of December 1999 (the "Agreement
Date"), by and between GREYSTONE FUNDING CORPORATION, a Virginia corporation
(the "Lender"), and SCHICK TECHNOLOGIES, INC., a Delaware corporation (the
"Company") and SCHICK TECHNOLOGIES, INC., a New York corporation ("Schick New
York"). The Company and Schick New York are hereinafter individually referred to
herein as a "Borrower" and collectively as the "Borrowers."
W I T N E S S E T H :
WHEREAS, the Borrowers are engaged in the business of designing, developing
and manufacturing, marketing, selling and servicing digital radiographic imaging
systems and devices for the dental and medical markets and other related fields
(collectively, the "Business Operations"); and
WHEREAS, the Borrowers have requested the Lender to extend to the Borrowers
a loan and line of credit in the principal amount of up to $7,500,000, which the
Borrowers will utilize in connection with the Business Operations and as
contemplated by this Agreement; and
WHEREAS, the Lender is ready, willing and able to make such line of credit
available to the Borrowers upon the terms and subject to the conditions set
forth in this Agreement;
WHEREAS, on December 27, 1999 the Lender purchased from the Company certain
stock of Photobit Corporation for $1,000,000 in cash together with a promissory
note (the "Stock Purchase") which Stock Purchase is being rescinded as of its
purchase date pursuant to an Agreement to Rescind Stock Purchase between Lender
and Company of even date herewith; and
WHEREAS, on December 27, 1999, in order to induce Lender to enter into a
Loan Agreement between the parties, the Company issued to Lender and its
designees warrants to purchase three million (3,000,000) shares of the Company's
Common Stock and, in connection with the Stock Purchase, the Company also issued
to Lender and its designees additional warrants to purchase two million
(2,000,000) shares of the Company's Common Stock; and
WHEREAS, Lender has agreed that the cash portion of the Stock Purchase
shall be retained by Borrower and deemed to constitute the initial Advance
hereunder if Company agrees that Lender shall retain the Warrants issued to it
by Borrower in connection with the Stock Purchase, and that Lender be issued
additional Warrants pursuant to the terms hereof; and
WHEREAS, the Company has agreed that Lender shall retain the Warrants
previously issued to it by Borrower and that it will issue to Lender additional
Warrants, effective as of December 27, 1999, pursuant to the terms hereof; and
<PAGE>
WHEREAS, the Borrowers and Lender desire to amend and restate the Loan
Agreement among them dated December 27, 1999 to reflect the foregoing;
NOW, THEREFORE, in consideration of the premises and the mutual covenants
herein contained, the parties hereby agree as follows:
ARTICLE I. DEFINITIONS
Section 1.01. Defined Terms. In addition to the other terms defined
elsewhere in this Agreement, as usederein, the following terms shall have the
following meanings:
"Advances" shall mean funds advanced under the Line of Credit from time to
time by the Lender to either or both of the Borrowers pursuant to this
Agreement; each of which Advances shall be subject at all times to the terms and
conditions set forth herein.
"Advance Period" shall mean the period from the Agreement Date to a date
which shall be two (2) years following the Agreement Date.
"Advance Requests" shall mean a Borrower's written request made during the
Advance Period to the Lender for any one or more Advances under the Line of
Credit provided for herein.
"Affiliate" shall mean, with respect to any Person, any other Person in
control of, controlled by, or under common control with the first Person, and
any other Person who has a substantial interest, direct or indirect, in the
first Person or any of its Affiliates, including, without limitation, any
officer or director of the first Person or any of its Affiliates; for the
purpose of this definition, a "substantial interest" shall mean the direct or
indirect legal or beneficial ownership of more than five (5%) percent of any
class of stock or similar interest.
"Agreement" shall mean this Loan Agreement as it may from time to time be
amended and/or supplemented.
"Agreement Date" shall mean December 27, 1999.
"Applicable Law" shall mean all applicable provisions of all (a)
constitutions, statutes, ordinances, rules, regulations and orders of all
governmental and/or quasi-governmental bodies, (b) Government Approvals, and (c)
orders, judgments and decrees of all courts and arbitrators.
"Business Day" shall mean a day other than (a) a Saturday, (b) a Sunday, or
(c) in the case of a day on which any payment hereunder is to be made in the
State of New York, a day on which commercial banks in the State of New York are
authorized or required by law to close.
"Capital Base" shall mean, for any fiscal period in question, the sum of
(a) the consolidated stockholders' equity of the Company and its consolidated
Subsidiaries, as calculated in accordance with GAAP, and (b) all Subordinated
Debt outstanding at the end of such fiscal period.
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"Capital Expenditures" shall mean with respect to any Person, all
expenditures of such Person for tangible assets which are capitalized, and the
fair value of any tangible assets leased by such Person under any lease which
would be a Capitalized Lease, determined in accordance with GAAP, including all
amounts paid or accrued by such Person in connection with the purchase (whether
on a cash or deferred payment basis) or lease (including Capitalized Lease
Obligations) of any machinery, equipment, tooling, real property, improvements
to real property (including leasehold improvements), or any other tangible asset
of the Borrowers which is required, in accordance with GAAP, to be treated as a
fixed asset on the consolidated balance sheet of such Person.
"Capitalized Lease" shall mean any lease which is or should be capitalized
on the balance sheet of the lessee thereunder in accordance with GAAP.
"Capitalized Lease Obligation" shall mean with respect to any Person, the
amount of the liability which reflects the amount of future payments under all
Capitalized Leases of such Person as at any date, determined in accordance with
GAAP.
"Code" shall mean the Internal Revenue Code of 1986, as amended, and the
rules and regulations promulgated thereunder, as in effect from time to time.
"Collateral" shall mean all now-owned and hereafter-acquired tangible and
intangible personal property of the Borrowers, including, without limitation,
all cash, marketable securities, accounts receivable, inventories, Contract
rights, patents, trademarks, copyrights and other general intangibles,
machinery, equipment and interests in real estate of the Borrowers, together
with all products and proceeds thereof.
"Common Stock" shall mean the common stock, $.01 par value per share, of
the Company; being the only issued class or series of voting securities of the
Company.
"Contract" shall mean any indenture, agreement (other than this Agreement),
other contractual restriction, lease in which either of the Borrowers is a
lessor or lessee, license, instrument, or certificates of incorporation of the
Borrowers.
"Current Assets" shall mean, at a particular date, all assets which would,
in conformity with GAAP, be properly classified as current assets on the
consolidated balance sheet of the Company and its Subsidiaries as at such date.
"Current Liabilities" shall mean, at a particular date, all liabilities
which would, in conformity with GAAP, be properly classified as current
liabilities on the consolidated balance sheet of the Company and its
Subsidiaries as at such date, including all Line of Credit Advances then
outstanding under the Line of Credit Note.
"Current Ratio" shall mean, on any given date, the ratio of Current Assets
to Current Liabilities.
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"Default" shall mean any of the events specified in Article VII hereof,
whether or not any requirement for the giving of notice, the lapse of time, or
both, or any other condition, has been satisfied.
"EBITDA" shall mean earnings before interest, taxes, depreciation and
amortization.
"ERISA" shall mean the Employee Retirement Income Security Act of 1974, as
in effect from time to time.
"ERISA Affiliate" shall mean, with respect to any Person, any other Person
which is under common control with the first Person within the meaning of
Section 414(b) or 414(c) of the Code.
"Event of Default" shall mean any of the events specified in Article VII
hereof, provided that any requirement for the giving of notice, the lapse of
time, or both, or any other condition, has been satisfied.
"Excess Available Cash" shall mean for any particular fiscal quarter in
question, 100% of the positive amount, if any, by which the Company's and
Subsidiaries cash and cash equivalents on the last Business Day of the quarter,
as set forth in its statement of cash flows for such quarter, collectively on
the final day of such fiscal quarter, exceed (i) the total of (x) Net Cash to be
Used in Operating Activities, (y) Net Cash to be Used in Investing Activities
and (z) any required principal payments to DVI, for the coming fiscal quarter as
set forth in the Company's budget or (ii) an amount equal to the Company's
average monthly cash expenditures during the fiscal quarter in question.
"Existing Indebtedness" shall mean any Indebtedness of the Borrowers
incurred prior to the Agreement Date. Existing Indebtedness shall include
obligations to DVI.
"Existing Liens" shall mean any Lien or other encumbrance that was incurred
as a result of any Existing Indebtedness.
"Fiscal Year" shall mean the fiscal year of the Borrowers which ends on
March 31 of each year. In the event that such Fiscal Year is so changed from
March 31 to another date with the consent of the Lender, then the quarterly
periods and annual periods referred to in Article V hereof shall also be amended
to coincide with such Fiscal Year, as so changed.
"GAAP" shall mean generally accepted accounting principles in the United
States of America, consistently applied, unless the context otherwise requires,
with respect to any financial terms, ratios or covenants contained herein, as
then in effect with respect to the preparation of financial statements;
provided, however, that if any change in GAAP enacted subsequent to the
Agreement Date shall affect the financial covenants referred to herein, the
parties shall, in good faith, appropriately amend such covenants to reflect such
changes in GAAP.
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"Government Approval" shall mean an authorization, consent, non-action,
approval, license or exemption of, registration or filing with, or report to,
any governmental or quasi-governmental department, agency, body or other unit.
"Guaranty", "Guaranteed" or to "Guarantee", as applied to any Indebtedness
or Liability, shall mean and include the following, unless entered into in the
ordinary course of business: (a) a guaranty, directly or indirectly, in any
manner, including by way of endorsement (other than endorsements of negotiable
instruments for collection), of any part or all of such obligation, and (b) an
agreement, contingent or otherwise, and whether or not constituting a guaranty,
assuring, or intended or the practical effect of which is to assure, the payment
or performance (or payment of damages in the event of non-performance) of any
part or all of such obligation whether by (i) the purchase of securities or
obligations, (ii) the purchase, sale or lease (as lessee or lessor) of property,
or the purchase or sale of services, primarily for the purpose of enabling the
obligor with respect to such obligation to make any payment or performance (or
payment of damages in the event of non-performance) of or on account of any part
or all of such obligation, or to assure the owner of such obligation against
loss, (iii) the supplying of funds to or in any other manner investing in the
obligor with respect to such obligation, (iv) the repayment of amounts drawn
down by beneficiaries of letters of credit not arising out of the import of
goods, (v) the supplying of funds to or investing in a Person on account of all
or any part of such Person's obligation under a Guaranty of any such obligation
or indemnifying or holding harmless, in any way, such Person against any part or
all of such obligation, or (vi) otherwise.
"Indebtedness" of any Person shall mean, without duplication, (i) all
indebtedness of such Person for borrowed money or for the deferred purchase
price of property or services, (ii) all indebtedness of such Person evidenced by
a note, bond, debenture or similar instrument, (iii) the outstanding undrawn
amount of all letters of credit issued for the account of such Person and,
without duplication, all un-reimbursed amounts drawn thereunder, (iv) all
indebtedness of any other person or entity secured by any Lien on any property
owned by such Person, whether or not such indebtedness has been assumed, (v) all
contingent obligations of such Person, (vi) all unfunded benefit liabilities of
such Person, (vii) all payment obligations of such Person under any interest
rate protection agreement (including, without limitation, any interest rate
swaps, caps, floors, collars and similar agreements) and currency swaps and
similar agreements, (viii) all indebtedness and liabilities of such Person
secured by any Lien or mortgage on any property of such Person, whether or not
the same would be classified as a liability on a balance sheet, (ix) the
liability of such Person in respect of banker's acceptances and the estimated
liability under any participating mortgage, convertible mortgage or similar
arrangement, (x) the aggregate principal amount of rentals or other
consideration payable by such Person in accordance with GAAP over the remaining
unexpired term of all Capitalized Leases of such Person, (xi) all judgments or
decrees by a court or courts or competent jurisdiction entered against such
Person, (xii) all indebtedness, payment obligations, contingent obligations,
etc. of any partnership in which such Person holds a general partnership
interest, provided that if such indebtedness is non-recourse, only the portion
of such indebtedness equal to such Person's percentage ownership interest in
such partnership shall be included in this definition, (xiii) all convertible
debt and subordinated debt owed by such Person, (xiv) all preferred stock issued
by such Person that, in either case, are
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redeemable for cash on a mandatory basis, a cash equivalent, a note receivable
or similar instrument or are convertible on a mandatory basis to Indebtedness as
defined herein (other than Indebtedness described in clauses (iii), (vi), (x),
(xi) or (xiv) of this definition), and (xv) all obligations, liabilities,
reserves and any other items which are listed as a liability on a balance sheet
of such Person determined on a consolidated basis in accordance with GAAP, but
excluding (A) all general contingency reserves and reserves for deferred income
taxes and investment credit and (B) all customary trade payables and accrued
expenses not more than sixty (60) days past due and (C) any indebtedness of such
Person evidenced by a note or notes that is secured by a pledge of cash or cash
equivalents with a value equal to or greater than the amount of the related
indebtedness and which generates cash flow sufficient to pay all sums due on
such indebtedness when the same are due and payable.
"Interest Coverage Ratio" shall mean, as to the Company and its
Subsidiaries on a consolidated basis for any given fiscal period, the ratio of
EBITDA earned in such fiscal period to the total amount of Interest Expense
incurred in such fiscal period.
"Interest Expense" shall mean, with respect to any Person for any fiscal
period, all interest on, or the interest component of, all Indebtedness.
"Investment", as applied to any Borrower, shall mean: (a) any shares of
capital stock, assets, evidence of Indebtedness or other security issued by any
other Person to a Borrower or any Subsidiary, (b) any loan, advance or extension
of credit to, or contribution to the capital of, any other Person, other than
credit terms extended to customers in the ordinary course of business, (c) any
Guaranty of any indebtedness or liability of any other Person, (d) any
obligation owed to a Borrower secured by a Lien on, or payable out of the
proceeds of production from, any property of any other Person, whether or not
such obligation shall have been assumed by such Person, (e) any other investment
by a Borrower or any Subsidiary thereof in any assets or securities of any other
Person, and (f) any commitment to make any Investment.
"Lien", as applied to the property or assets (or the income or profits
therefrom) of any Borrower, shall mean (in each case, whether the same is
consensual or nonconsensual or arises by contract, operation of law, legal
process or otherwise): (a) any mortgage, lien, pledge, attachment, assignment,
deposit arrangement, encumbrance, charge, lease constituting a Capitalized Lease
Obligation, conditional sale or other title retention agreement, or other
security interest or encumbrance of any kind in respect of any property
(including, without limitation, stock of any Subsidiary) of a Borrower, or upon
the income or profits therefrom, (b) any arrangement, express or implied, under
which any property of a Borrower is transferred, sequestered or otherwise
identified for the purpose of subjecting or making available the same for the
payment of indebtedness or the performance of any other liability in priority to
the payment of the general, unsecured creditors of a Borrower, (c) any
Indebtedness which remains unpaid more than five (5) calendar days after the
same shall have become due and payable and which, if unpaid, might by law
(including but not limited to bankruptcy or insolvency laws) or otherwise be
given any priority whatsoever over the general, unsecured creditors of a
Borrower, (d) any agreement (other than this Agreement) or other arrangement,
express or implied, which, directly or indirectly, prohibits a Borrower from
creating or incurring any Lien on any of its
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properties or assets or which conditions the ability to do so on the security,
on a pro rata or other basis, of indebtedness other than indebtedness
outstanding under this Agreement, and (e) any arrangement, express or implied,
under which any right or claim of a Borrower is subject or subordinated in any
way to any right or claim of any other Person.
"Line of Credit" shall mean the line of credit in the maximum principal
amount outstanding at any one time of $7,500,000 to be made by the Lender to the
Borrowers pursuant to this Agreement.
"Maturity Date" shall mean the earlier of (a) the first date on which the
Company shall have received, in the aggregate, $12,500,000 or more from equity
and/or debt financings consummated subsequent to the Agreement Date, or (b)
December 27, 2004.
"Material Adverse Effect" shall mean any event or condition that has or
could reasonably be anticipated to have a material adverse effect on the Working
Capital, condition (financial or otherwise), assets, liabilities, reserves,
business, prospects, management or Business Operations of either of the
Borrowers, when taken individually or as a consolidated whole.
"Net Income", as applied to the Borrowers, shall mean the net income (or
loss) of the Company and its consolidated Subsidiaries for the period in
question, after giving effect to deduction of or provision for all operating
expenses, all taxes and reserves (including reserves for deferred taxes) and all
other proper deductions, all determined in accordance with GAAP; provided that,
for purposes of calculating Net Income, there shall be excluded and no effect
shall be given to:
(a) any restoration of any contingency reserve, except to the extent that
provision for such reserve was made out of income for the subject period;
(b) any net gains or losses on the sale or other disposition, not in the
ordinary course of business, of Investments and/or other capital assets,
provided that there shall also be excluded any related charges for taxes
thereon; and
(c) any net gain arising from the collection of the proceeds of any
insurance policy or policies.
"Note" shall mean the Line of Credit Promissory Note, dated the Agreement
Date in the maximum principal amount of $7,500,000 issued by the Borrowers and
payable to the order of the Lender, to represent the aggregate amounts
outstanding from time to time under the Line of Credit, all in the form of
Exhibit "A" annexed hereto and made a part hereof.
"Obligations" shall mean the collective reference to all Indebtedness and
other liabilities and obligations of every kind and description owed by the
Borrowers to the Lender from time to time, however evidenced, created or
incurred, whether direct or indirect, primary or secondary, fixed or contingent,
now or hereafter existing, due or to become due, including but not limited to
obligations represented by or arising under this Agreement, the Note and/or the
Security Documents.
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"Permitted Liens" shall mean those Liens expressly permitted to Section
6.02 below.
"Person" shall mean any individual, partnership, corporation, limited
liability company, banking association, business trust, joint stock company,
trust, unincorporated association, joint venture, governmental authority or
other entity of whatever nature.
"Principal Payment Date" shall mean the date which is forty-five (45) days
after the last business day of each December, March, June and September
commencing on May 15, 2000.
"Registration Rights Agreement" shall mean the Registration Rights
Agreement in the form of Exhibit "D" hereto, dated the Agreement Date by and
between the Lender and the Company pursuant to which the Company will register
the shares of the Company's Common Stock underlying the Warrants.
"SEC" shall mean the Securities and Exchange Commission, or any successor
to the functions of such agency.
"Security Agreement" shall mean the Security Agreement in the form of
Exhibit "C" hereto, dated the Agreement Date, by and between the Lender and the
Borrower, as same may be amended and/or supplemented from time to time in
accordance therewith, pursuant to which the Lender has received a continuing
priority lien and security interest in and to all of the Collateral,
subordinated only to the first priority Lien of the Senior Lender.
"Security Documents" shall mean the collective reference to: (a) the
Security Agreement, (b) any specific assignments executed and delivered pursuant
to the Security Agreement, and (c) all UCC Financing Statements and other
documents filed or recorded to evidence and/or perfect the foregoing, or to
further or collaterally secure same, all as may be amended or supplemented from
time to time in accordance therewith.
"Senior Lender" shall mean DVI Financial Services, Inc. ("DVI") which has
provided the Borrower with loans and advances up to $6,222,415.63 in the
aggregate (the "Senior Indebtedness"); which is secured by first priority Liens
on the Collateral.
"Subordinated Debt" shall mean all indebtedness for money borrowed and
other liabilities of the Borrower, whether or not evidenced by promissory notes,
which is subordinated in right of payment, in a manner satisfactory to the
Lender (as evidenced by its prior written approval thereof), to all other
Obligations of the Borrowers to the Lender.
"Subsidiary" or "Subsidiaries" shall mean the individual or collective
reference to any corporation of which 50% or more of the outstanding shares of
stock of each class having ordinary voting power (other than stock having such
power only by reason of the happening of a contingency) is at the time owned by
the Company, directly or indirectly through one or more Subsidiaries of the
Company. Schick New York is a Subsidiary of the Company.
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"UCC Financing Statements" shall mean the Uniform Commercial Code financing
statements on Form UCC-1 (or other applicable form) executed by the Borrowers,
in form for filing and recording in the appropriate state and county
jurisdictions in which any of the Borrower maintains any assets or conducts any
business.
"Warrants" shall refer to the eighteen million (18,000,000) warrants issued
hereunder by Borrower to Lender, which have an agreed-upon fair value of $.03
per Warrant.
"Working Capital" shall mean, on any given date, the amount by which the
Borrowers' consolidated Current Assets shall exceed their consolidated Current
Liabilities, as determined in accordance with GAAP.
Section 1.02. Use of Defined Terms. All terms defined in this Agreement
shall have their defined meanings when used in the Note, the Security Documents,
and all certificates, reports or other documents made or delivered pursuant to
this Agreement, unless otherwise defined therein or unless the specific context
shall otherwise require.
Section 1.03. Accounting Terms. All accounting terms not specifically
defined herein shall be construed in accordance with GAAP.
ARTICLE II. GENERAL TERMS
Section 2.01. The Line of Credit.
(a) Advances; Periodic Repayments of Advances. Subject at all times to all
of the terms and conditions of this Agreement, including Section 2.02, Section
2.03 and Article IV hereof, during the Advance Period the Lender hereby agrees
to provide to the Borrowers a Line of Credit of up to a maximum of $7,500,000.
The Lender shall have no obligation to provide any Advances and the Borrowers
shall not submit any Advance Request to the Lender at any time (i) in which a
Default or an Event of Default hereunder shall have occurred and be continuing,
or (ii) following the Advance Period. Unless an Event of Default hereunder shall
have occurred and be continuing or this Agreement shall be sooner terminated
pursuant to the terms hereof, all outstanding Advances, together with all unpaid
accrued interest thereon, shall be due and payable in full by the Borrowers to
the Lender on the Maturity Date. Notwithstanding the foregoing, unless otherwise
agreed to in writing by the Lender in connection with the Restructuring Plan or
otherwise, on each Principal Payment Date, the Company shall reduce all Advances
outstanding on such Principal Payment Date by making a cash payment against such
Advances to the Lender in an amount which shall be equal to the Excess Available
Cash, if any, during the calendar quarter immediately preceding the Interest
Payment Date in question.
(b) Interest. The Borrowers shall pay the Lender interest on all
outstanding Advances under the Line of Credit at the rate of ten (10%) percent
per annum, all in accordance with the Note. Such interest shall be payable on a
quarterly basis on the last Business Day of each of December, March, June and
September, commencing December 30, 1999 (each an "Interest Payment Date"). The
amount of interest payable on each Interest Payment Date shall be based on the
average outstanding amount of the Advances in the calendar quarter immediately
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preceding such Interest Payment Date (for the December 30, 1999 Interest Payment
Date, calculated from the Agreement Date to December 30, 1999). Interest shall
be based on a three hundred sixty (360) day year, counting the actual number of
days in each month. Unless a Default or Event of Default exists at the beginning
of any calendar quarter, the interest shall be calculated at the non-default
rate set forth in the Note; and in the event that a Default or Event of Default
shall occur during any calendar quarter, then the additional interest
attributable to the increase in interest rate resulting therefrom shall be
payable on demand (or, in the absence of demand, on the next scheduled Interest
Payment Date in conjunction with the quarterly interest payment).
(c) Prepayment. The Borrowers shall have the right to prepay outstanding
Advances in whole or in part, without premium or penalty, at any time and from
time to time.
(d) Maturity Date. Unless an Event of Default hereunder shall have occurred
and be continuing, hereof, the Borrowers shall pay in full all of the
Obligations in respect of the Line of Credit on the Maturity Date, subject to
prior mandatory prepayments or reductions of outstanding Advances out of Excess
Available Cash as provided in Section 2.01(a) hereof.
(e) The Note. The Loan shall be evidenced by the Note, the terms and
conditions of which are hereby incorporated herein by reference and made a part
hereof.
Section 2.02. Procedure for Making Advances. (a) Simultaneous with each
Advance Request, the Company will deliver to the Lender (i) a certificate
executed by the President, Chief Executive Officer or Chief Financial Officer of
Borrower attesting in their capacity as executive officers of such Borrower
that, as at the date of each Advance Request, no Default or Event of Default
hereunder shall have occurred and be continuing, and (ii) a reasonably detailed
statement of the intended use of the proceeds of such Advance, including if
applicable the item or items to be purchased and the Indebtedness or other
liabilities to be paid (the "Advance Analysis"); (b) The Lender shall notify the
Company, in writing, within five (5) Business Days of receipt of the Advance
Analysis whether or not the Lender will make the Advance. The Lender may refuse
to make the Advance if: (i) it does not approve the use of the proceeds of such
Advance Request for the uses set forth in the Advance Analysis (the "Written
Notification"), which approval shall not be unreasonably withheld. Among other
things, it shall not be unreasonable for the Lender to disapprove the Advance
Request because either of the Borrowers has suffered a Material Adverse Effect
and such Material Adverse Effect remains uncured. In addition, the Lender may
refuse to make an Advance if, in the exercise of its sole discretion it
determines that it would be imprudent to make such Advance because of the status
of any litigation or investigation respecting either of the Borrowers or their
officers or directors;
(c) If Lender does not approve the Advance Request for any reason other
than the status of any litigation or investigation, the Written Notification
shall provide a reasonably detailed explanation of the reason(s) therefor. Upon
approval of the Advance Request by the Lender it will authorize an immediate
drawing of such Advance under the Line of Credit and fund the Advance for the
purposes specified in the Advance Analysis for any reason other than the status
of any litigation or investigation. In the event that the Lender does not
approve the
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Advance Analysis, the parties shall promptly undertake in good faith to
expeditiously resolve the matter; if the parties do not resolve the matter to
their mutual satisfaction by the earlier of (a) five (5) business days after
Borrower's receipt of the Written Notification, or (b) ten (10) business days
after Lender's receipt of the Advance Analysis, the parties shall submit this
matter to arbitration administered by the American Arbitration Association under
its Commercial Arbitration Rules, and jointly request that said arbitration be
conducted in an expedited manner, and the parties shall abide by and perform any
decision and/or award rendered by the arbitrator(s) and agree that a judgment of
any court having jurisdiction may be entered upon the award, and that neither
party shall seek to challenge or overturn the decision and/or award rendered by
the arbitrator(s). Any arbitration proceedings conducted hereunder shall be held
in New York, New York; and
(d) If the actual use of proceeds differs materially from the purposes
specified in the Advance Analysis, the Company shall notify the Lender in a
writing which shall provide (i) a reasonably detailed explanation of the reasons
for the change; and (ii) an updated statement of the intended use of proceeds.
After receipt of such notice, the parties shall follow the procedures enumerated
in Sections 2.02(b) and 2.02(c) above.
(e) The Lender and Borrowers agree that the $1,000,000 cash payment made by
Lender in connection with the Stock Purchase shall be retained by the Company
and shall constitute the initial Advance hereunder made as of the Agreement
Date.
Section 2.03. Issuance of Warrants .
(a) On the Agreement Date, the Company shall issue to the Lender a total of
eighteen million (18,000,000) fully vested Warrants, of which five million
(5,000,000) Warrants are immediately exercisable as of the Agreement Date and
the remaining thirteen million (13,000,000) Warrants shall each become
exercisable once it is no longer subject to forfeiture, as set forth in Section
2.03(b) hereinafter.
(b) Lender and Borrowers agree that with respect to all Advances from
$1,000,001 to $7,500,000 in the aggregate, for each dollar which Lender does not
advance to Borrowers hereunder prior to the expiration or surrender of the Line
of Credit, Warrants to purchase two (2) shares of Company Common Stock shall be
forfeited and canceled.;
(c) By way of example of the application of Sections 2.03 (a) and (b)
above, if the Borrowers have outstanding at any one time under this Agreement
Advances of $3,000,000, then the Lender shall be entitled to exercise Warrants
to purchase an aggregate of 9,000,000 shares of Company Common Stock. (d) By way
of further example, based upon a maximum of $7,500,000 of Advances which may be
made by the Borrowers hereunder, if at any time or from time to time prior to
the Maturity Date there shall be outstanding at any time the full $7,500,000 of
Advances, the Lender shall be entitled to exercise Warrants to purchase an
aggregate of 18,000,000 shares of Company Common Stock, at the exercise prices
described in the Warrants.
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(e) In all cases described in this Section 2.03, the number of shares
of Common Stock and exercise prices per share are subject to adjustment to
protect the holder against dilution, all as provided in the form of Warrants.
Section 2.04. Security for the Obligations. The Note and all other
Obligations shall at all times be secured by a security interest in all of the
Collateral which shall be subordinated only to the first priority Lien of the
Senior Lender, all pursuant to the terms of the Security Agreement and any
specific assignments executed and delivered pursuant thereto; all as evidenced
by UCC Financing Statements which the Lender and its counsel may require to be
executed and filed.
Section 2.05. Further Obligations. With respect to all Obligations for
which the interest rate is not otherwise specified herein (whether such
Obligations arise hereunder, pursuant to the Note or any of the Security
Documents, or otherwise), such Obligations shall bear interest at the rate(s) in
effect from time to time pursuant to the Note.
Section 2.06. Obligations Unconditional. The payment and performance of all
Obligations shall constitute the absolute and unconditional obligations of the
Borrowers, and shall be independent of any defense or rights of set-off,
recoupment or counterclaim which the Borrower might otherwise have against the
Lender. All payments required by this Agreement and/or the Note or Security
Documents shall be paid free of any deductions and without abatement, diminution
or set-off.
Section 2.07. Reversal of Payments. To the extent that any payment or
payments made to or received by the Lender pursuant to this Agreement, the Note
or any of the Security Documents are subsequently invalidated, declared to be
fraudulent or preferential, set aside, or required to be repaid to any trustee,
receiver or other person under any state or federal bankruptcy or other such
law, then, to the extent thereof, such amounts shall be revived as Obligations
and continue in full force and effect hereunder and be secured pursuant to the
Security Documents, as if such payment or payments had not been received by the
Lender.
Section 2.08. Return of Warrants to the Company.
(a) In the event that the Lender refuses to make Advances duly requested by
the Borrowers in accordance with Section 2.02 hereof AND such refusal is:
(i) based on the Lender's concern over developments relating to the
pendency of any investigation or litigation respecting either of the
Borrowers or their officers or directors at the sole discretion of the
Lender, or
(ii) determined by arbitration to be an unreasonable refusal by the
Lender to make Advances as provided in Section 2.02(c) hereof,
the Company shall be entitled to receive from the Lender the number of Warrants
described in Section 2.08(b) hereof;
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(b) If prior to date of such refusal to make Advances, the Lender has
Advanced to the Borrowers pursuant to this Agreement:
(i) up to a maximum level of Advances of $2,500,000, the Lender shall
return 2,000,000 Warrants to the Company;
(ii) between a maximum level of Advances of $2,500,000 and $5,000,000,
the Lender shall return 1,000,000 Warrants to the Company; and
(iii) more than a maximum level of Advances of $5,000,000, the Lender
shall not be required to return any Warrants to the Company;
Section 2.09. Fair Value of Warrants. The parties agree that the Warrants
have a fair value, as of the Agreement Date, of $.03 per Warrant.
ARTICLE III. REPRESENTATIONS AND WARRANTIES
The Borrowers hereby jointly and severally make the following
representations and warranties to the Lender, all of which representations and
warranties shall survive the Agreement Date, the delivery of the Notes and the
making of Advances, and are as follows:
Section 3.01. Financial Matters.
(a) The Borrowers have heretofore furnished to the Lender (i) the audited
consolidated financial statements (including consolidated balance sheets,
consolidated statements of income and consolidated statements of cash flows) of
the Company and its consolidated Subsidiaries as at March 31, 1996, 1997, and
1998 and for each of the three (3) consecutive Fiscal Years ended on such dates,
and (ii) the unaudited consolidated financial statements (including consolidated
balance sheets, consolidated statements of income and consolidated statements of
cash flows) of the Company and its consolidated Subsidiaries as of the March 31,
1999 (collectively, the "Financial Statements").
(b) The Financial Statements have been prepared in accordance with GAAP on
a consistent basis for all periods, are complete and correct in all material
respects, and fairly present the consolidated financial condition of the Company
and its consolidated Subsidiaries as at said dates, and the results of
operations for the periods stated. The books of account and other financial
records of the Company and each of the Subsidiaries have been maintained in
accordance with GAAP, consistently applied. The Borrowers acknowledge that the
financial results set forth in its Financial Statements for the first, second
and third quarters of the Fiscal Year ended March 31,1999 will require
restatement and that the representations set forth in this Section 3.01(b) are
subject to, and qualified by, any such Restatement(s).
(c) Neither the Company nor any of the Subsidiaries has any liabilities,
Indebtedness, obligations or commitments of any kind or nature whatsoever,
whether absolute, accrued, contingent or otherwise above $100,000 in the
aggregate or $25,000 individually (collectively "Liabilities and
Contingencies"), including, without limitation, Liabilities and Contingencies
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under employment agreements and with respect to any "earn-outs", stock
appreciation rights, or related compensation obligations, except: (i)
Liabilities and Contingencies disclosed in the Financial Statements or footnotes
thereto, or in the Pro Forma Balance Sheet, (ii) Liabilities and Contingencies
not incurred in the ordinary course of the Business Operations, all of which
(and the amounts thereof, to the extent determinable) are disclosed on Schedules
to this Agreement (to the extent required to be so disclosed hereunder) or in
public filings made with the SEC under the Securities Exchange Act of 1934, as
amended (true and complete copies of which filings have been furnished to the
Lender), (iii) Liabilities and Contingencies incurred in the ordinary course of
business and consistent with past practice since the date of the most recent
Financial Statements, which are not required to be disclosed on Schedules to
this Agreement, or (iv) those Liabilities which are not required to be disclosed
under GAAP. The reserves, if any, reflected on the consolidated balance sheet of
the Company and the Subsidiaries included in the most recent Financial
Statements are appropriate and reasonable. The Borrowers have not had and do not
presently have any contingent obligations, liabilities for taxes or unusual
forward or long-term commitments except as specifically set forth in the
Financial Statements or in Schedule "3.01" annexed hereto.
(d) Except as otherwise reflected on Schedule "3.01," Schedule "3.04" or
Schedule "3.05" to this Agreement, since the date of the most recent Financial
Statements, no Material Adverse Effect shall have occurred and shall be
continuing, including, without limitation, the following:
(i) there has been no change in any assumptions underlying, or in any
methods of calculating, any bad debt, contingency or other reserve relating
to the Company or any of the Subsidiaries;
(ii) there have been no write-downs in the value of any inventory of,
and there have been no write-offs as uncollectible of any notes, accounts
receivable or other receivables of, the Company and the Subsidiaries,
except for write-downs and write-offs in the ordinary course of business
and consistent with past practice, none of which shall be material (and all
of which are described in the Schedules to this Agreement or in the
Financial Statements);
(iii) no material debts have been canceled, no claims or rights of
substantial value have been waived and no significant properties or assets
(real, personal or mixed, tangible or intangible) have been sold,
transferred, or otherwise disposed of by the Company or any Subsidiary,
except in the ordinary course of business and consistent with past
practice;
(iv) there has been no change in any method of accounting or
accounting practice utilized by the Company or any of the Subsidiaries;
(v) no material casualty, loss or damage has been suffered by the
Company or any of the Subsidiaries, regardless of whether such casualty,
loss or damage is or was covered by insurance; and
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(vi) no action described in this Section 3.01(d) has been agreed to be
taken by the Company or any of the Subsidiaries.
Section 3.02. Organization; Corporate Existence. Each of the Borrowers: (a)
is a corporation duly organized, validly existing and in good standing under the
laws of the States of Delaware or New York, (b) has all requisite corporate
power and authority to own its properties and to carry on its businesses as now
conducted and as proposed hereafter to be conducted, (c) is duly qualified to do
business as a foreign corporation in each and every jurisdiction where such
qualification is necessary and where the failure to so qualify would have a
material adverse effect on its financial condition, business, operations, assets
or properties, and (d) has all requisite corporate power and authority to
execute and deliver, and perform all of its obligations under this Agreement,
the Notes, the Warrants and the Security Documents. True and complete copies of
the: (i) Certificates of Incorporation of each of the Borrowers, as amended and
restated to date, and (ii) By-Laws of each of the Borrowers, together with all
amendments thereto, have been furnished to the Lender.
Section 3.03. Authorization. The execution, delivery and performance by
each of the Borrowers of their respective obligations under this Agreement, the
Notes, the Warrants, the Registration Rights Agreement and the Security
Documents have been duly authorized by all requisite corporate action and will
not, either prior to or as a result of the consummation of the Advances
contemplated by this Agreement: (a) violate any provision of Applicable Law, any
order of any court or other agency of government, any provision of the
Certificates of Incorporation or By-Laws of the Borrowers, or any Contract,
indenture, agreement or other instrument to which any of the Borrowers is a
party, or by which any of the Borrowers or any of their assets or properties are
bound, other than in agreements between the Company and DVI relating to the
creating of Liens or (b) be in conflict with, result in a breach of, or
constitute (after the giving of notice of lapse of time or both) a default
under, or, except as may be provided in this Agreement, result in the creation
or imposition of any Lien of any nature whatsoever upon any of the property or
assets of any of the Borrowers pursuant to, any such Contract, indenture,
agreement or other instrument. Except in respect of the filing of a Form 10-K
(including amendments thereto) and/or a Form 8-K or Form 10-Q under the
Securities Exchange Act of 1934, as amended, the Borrowers are not required to
obtain any Government Approval, consent or authorization from, or to file any
declaration or statement with, any governmental instrumentality or agency in
connection with or as a condition to the execution, delivery or performance of
any of this Agreement, the Notes, the Warrants or the Security Documents.
Section 3.04. Litigation. Except as disclosed on Schedule "3.04" annexed
hereto, there is no action, suit or proceeding at law or in equity or by or
before any governmental instrumentality or other agency now pending or, to the
knowledge of the Borrowers, threatened against or directly affecting the
Borrowers or any of their respective assets, which, if adversely determined,
would have a Material Adverse Effect on any of such assets or on the business,
operations, properties, assets or condition, financial or otherwise, of the
Borrowers.
Section 3.05. Material Contracts. Except as disclosed on Schedule "3.05"
annexed hereto, none of the Borrowers is a party to any Contract, agreement or
instrument or subject to
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any charter or other corporate restriction that could have a Material Adverse
Effect on the Business Operations, properties, assets or operations of the
Borrowers or is subject to any liability or obligation under or relating to any
collective bargaining agreement, or in default in the performance, observance or
fulfillment of any of the obligations, covenants or conditions contained in any
Contract, agreement or instrument to which it is a party or by which any of its
assets or properties is bound, which default, individually or in the aggregate,
could have a Material Adverse Effect on Borrower.
Section 3.06. Title to Properties. The Borrowers have good and marketable
title to all of their respective properties and assets, free and clear of all
mortgages, security interests, restrictions, encumbrances or other Liens of any
kind, except for restrictions on the nature of use thereof imposed by Applicable
Law, and except for Existing Liens, none of which materially interfere with the
use and enjoyment of such properties and assets in the normal course of the
Business Operations as presently conducted, or materially impair the value of
such properties and assets for the purpose of such business.
Section 3.07. Real Properties. Each of the Borrowers is the record fee
owner or lessee of all of the Real Properties owned or leased by such Borrower,
and:
(a) All of the owned and leased real properties (other than real properties
under Immaterial Leases) will be owned or leased free and clear of any and all
mortgages, liens, charges, easements and encumbrances binding upon any of the
Borrowers, except for the Mortgages and the Lease Assignments, and except for
encumbrances or imperfections of title listed in Schedule "3.07" annexed hereto
or other related immaterial zoning, easements or other restrictions of record,
none of which shall: (i) be material in amount; (ii) materially detract from the
value of any of the Real Properties; (iii) materially impair the use of any of
the Real Properties in connection with the Business Operations; or (iv) render
title to any of the Real Properties unmarketable or indefeasible;
(b) Except as set forth in Schedule "3.07" annexed hereto, the Real
Properties and all buildings and improvements located thereon have been
constructed to have access, ingress, egress, water supply, storm and sanitary
sewage facilities, telephone, gas, electricity, fire protection, and, without
limitation, other required public utilities, which are adequate for the uses
thereof in the Borrowers' business; and all access, ingress and egress to and
from the Real Properties, and all utility connections thereto, are by public
streets and roads;
(c) Except as set forth in Schedule "3.07" annexed hereto, all buildings
and improvements located on the Real Properties (including, without limitation,
the roofs, basements, appliances, the plumbing, heating and electric systems,
the cesspools and septic systems, if any, and the elevators, if any) are in good
working order, condition and repair (reasonable wear and tear excepted) for the
purposes currently used by the Borrowers, and, to the Borrowers' knowledge, are
maintained in accordance with Applicable Law in all material respects; and, to
the Borrowers' knowledge, no condition exists pursuant to which any adjoining or
other landowner may claim damage to such landowner's property by reason of
drainage from or any other condition existing upon the Real Properties; and
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(d) Except as set forth in Schedule "3.07" annexed hereto, the use of the
Real Properties in and for the purposes of the Business Operations is in full
compliance with all building, zoning and other Applicable Law in all material
respects.
Section 3.08. Machinery and Equipment. The machinery and equipment owned,
leased and/or otherwise used by the Borrowers is covered under the Security
Agreement and is, as to each individual material item of machinery and
equipment, and in the aggregate as to all such machinery and equipment, in good
and usable condition and in a state of good maintenance and repair (reasonable
wear and tear excepted), and adequate for its use in the Business Operations.
Section 3.09. Capitalization. Except as set forth on Schedule "3.09"
annexed hereto, the Company has no Subsidiaries other than Schick New York.
Neither the Company nor Schick New York owns any capital stock, equity or assets
of any other corporation, form or entity, except for the Company's investment in
Photobit Corporation. Schedule "3.09" annexed hereto fully describes the
capitalization of Photobit Corporation and the nature of the Company's
investment therein.
Section 3.10. Solvency. The Advances made and to be made by the Borrowers
under this Agreement, do not and will not render the Borrowers insolvent or with
unreasonably small capital for their business; value of all of the assets and
properties of the Borrowers do now, and will, upon the funding of the Advances
contemplated hereby, exceed the aggregate Liabilities and Indebtedness of the
Borrowers (including contingent liabilities); none of the Borrowers is
contemplating either the filing of a petition under any state or federal
bankruptcy or insolvency law, or the liquidation of all or any substantial
portion of its assets or property and the Borrowers have no knowledge of any
Person contemplating the filing of any such petition against the Borrowers.
Section 3.11. Patents, Trademarks and Other Intellectual Property. Schedule
"3.11" annexed hereto correctly sets forth a list and brief description of:
(a) all patents, patent applications, copyright registrations and
applications, registered trade names, and trademark registrations and
applications, both domestic and foreign, which are presently owned, filed or
held by any of the Company, any Subsidiaries or any of their Affiliates (or any
of them), and/or any of the directors or officers of the Company, and which are
used in the Business Operations;
(b) all material licenses, both domestic and foreign, which are owned or
controlled by any of the Company, any Subsidiaries or any of their Affiliates
(or any of them), and/or any of the directors or officers of the Company, and
which are used in the Business Operations; and
(c) all material written franchises, licenses and/or similar arrangements
granted to any of the Company, any Subsidiaries or any of their Affiliates (or
any of them), and/or any of the directors or officers of the Company for the
benefit of the Business Operations, or granted to others by the Company for the
benefit of the Business Operations. All letters patent, patent applications,
copyright registrations and applications, registered trade names, trademark
registrations and applications, franchises, licenses and other arrangements set
forth in
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Schedule "3.11" are, except as otherwise provided by their terms and conditions,
assignable to the Lender, subject to the rights of the Senior Lender(s), and do
not, to the knowledge of any Borrower, infringe upon the rights of others, and
are not subject to any pending challenge except as set forth in Schedule "3.11".
To the best of the Borrower's knowledge, no product, system or apparatus sold by
Borrower infringes on any patent owned by others.
Section 3.12. Full Disclosure. Except as set forth on Schedule "3.12"
annexed hereto, no statement of fact made by or on behalf of any of the
Borrowers in this Agreement, in any Security Document, or in any agreement,
certificate or schedule furnished to the Lender pursuant hereto (including,
without limitation, all registration statements, proxy materials and Forms 10-K,
10-Q, 8-K, and amendments thereto, for the fiscal period from July 1997 through
September 30, 1999, as filed with the SEC) contains or will contain any untrue
statement of a material fact, or omits or will omit to state any material fact
necessary to make any statements contained herein or therein not misleading.
Except for matters of a general economic or political nature which do not affect
the Borrower uniquely, there is no fact presently known to the Borrower which
has not been disclosed to the Lender, which materially adversely affects, or so
far as the Borrower can foresee, will materially adversely affect, their
property, business, operations or condition (financial or otherwise).
Section 3.13. No Investment Company. None of the Borrowers is an
"investment company", or a company "controlled" by an "investment company", as
such terms are defined in the Investment Company Act of 1940, as amended.
Section 3.14. Margin Securities. None of the Borrowers owns or has any
present intention of acquiring any "margin security" within the meaning of
Regulation G (12 CFR Part 207), or any "margin stock" within the meaning of
Regulation U (12 CFR Part 221), of the Board of Governors of the Federal Reserve
System (herein called "margin security" and "margin stock"). None of the
proceeds of the Line of Credit will be used, directly or indirectly, for the
purpose of purchasing or carrying, or for the purpose of reducing or retiring
any Indebtedness which was originally incurred to purchase or carry, any margin
security or margin stock or for any other purpose which might constitute the
transactions contemplated hereby a "purpose credit" within the meaning of said
Regulation G or Regulation U, or cause this Agreement to violate any other
regulation of the Board of Governors of the Federal Reserve System or the
Securities Exchange Act of 1934, as amended, or any rules or regulations
promulgated under such statutes.
Section 3.15. Tax Returns. Except as otherwise set forth in footnotes to
the consolidated balance sheet of Borrowers as at September 30, 1999, and except
for any non-material misstatement of income tax obligations and except for any
returns currently on extension pursuant to properly filed extension, the
Borrowers have filed all federal, state and local tax returns required to be
filed by any of them and have paid or made adequate provision (as reflected in
the balance sheets described in Section 3.01 hereof) for the payment of all
federal, state and local taxes, charges and assessments.
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Section 3.16. ERISA. Except as set forth in Schedule "3.16" annexed hereto,
none of the Borrowers nor any ERISA Affiliate of any of the Borrowers maintains
or has any obligation to make any contributions to any pension, profit sharing
or other similar plan providing for deferred compensation to any employee. With
respect to any such plan(s) as may now exist or may hereafter be established by
the Borrowers or any ERISA Affiliate of any of the Borrowers, and which
constitutes an "employee pension benefit plan" within the meaning of Section
3(2) of ERISA, except as set forth on Schedule "3.16": (a) the Borrowers or the
subject ERISA Affiliate have paid and shall cause to be paid when due all
amounts necessary to fund such plan(s) in accordance with its terms, (b) except
for normal premiums payable by the Borrowers to the Pension Benefit Guaranty
Corporation ("PBGC"), the Borrowers or the subject ERISA Affiliate have not
taken and shall not take any action which could result in any Liability to the
PBGC, or any of its successors or assigns, (c) the present value of all vested
accrued benefits thereunder shall not at any time exceed the value of the assets
of such plan(s) allocable to such vested accrued benefits, (d) there have not
been and there shall not be any transactions such as would cause the imposition
of any tax or penalty under Section 4975 of the Code or under Section 502 of
ERISA, which would adversely affect the funded benefits attributable to the
Borrowers or the subject ERISA Affiliate, (e) there has not been and there shall
not be any termination or partial termination thereof (other than a partial
termination resulting solely from a reduction in the number of employees of the
Borrowers or an ERISA Affiliate of the Borrowers, which reduction is not
anticipated by the Borrowers), and there has not been and there shall not be any
"reportable event" (as such term is defined in Section 4043(b) of ERISA) on or
after the effective date of Section 4043(b) of ERISA with respect to any such
plan(s) subject to Title IV of ERISA, (f) no "accumulated funding deficiency"
(as defined in Section 412 of the Code) has been or shall be incurred on or
after the effective date of Section 412 of the Code, (g) except as otherwise
reflected on Schedule "3.16" annexed hereto, such plan(s) have been and shall be
determined to be "qualified" within the meaning of Section 401(a) of the Code,
and have been and shall be duly administered in compliance with ERISA and the
Code, and (h) the Borrowers are not aware of any fact, event, condition or cause
which might adversely affect the qualified status thereof. As respects any
"multiemployer plan" (as such term is defined in Section 3(37) of ERISA) to
which any of the Borrowers or any ERISA Affiliate thereof has heretofore been,
is now, or may hereafter be required to make contributions, such Borrowers or
such ERISA Affiliate has made and shall make all required contributions thereto,
and there has not been and shall not be any "complete withdrawal" or "partial
withdrawal" (as such terms are respectively defined in Sections 4203 and 4205 of
ERISA) therefrom on the part of the Borrowers or such ERISA Affiliate.
Section 3.17. Compliance with Laws. The Borrowers are in compliance in all
material respects with all occupational safety, health, wage and hour,
employment discrimination, environmental, flammability, labeling and other
Applicable Law which are material to their respective businesses and the
Business Operations, and the Borrowers are not aware of any state of facts,
events, conditions or occurrences which may now or hereafter constitute or
result in a violation of any of such Applicable Law, or which may give rise to
the assertion of any such violation, the effect of which could have a material
adverse effect on any Borrowers.
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Section 3.18. Licenses and Permits. Each of the Borrowers have all federal,
state and local licenses and permits required to be maintained in connection
with and material to the Business Operations (including all Food and Drug
Administration ("FDA") permits and licenses), and all such licenses and permits
are valid and in full force and effect.
Section 3.19. Environmental Laws.
(a) Except as disclosed on Schedule "3.19" annexed hereto: (i) the
Borrowers have complied in all material respects with all Environmental Laws
relating to their respective businesses and properties, and (ii) there exists no
Hazardous Substances in or under any Existing Real Properties or storage tanks,
except those that are stored and used in compliance with Applicable Laws.
(b) Except as disclosed in Schedule "3.19" annexed hereto, to the best of
the Borrowers' knowledge, there exist no past or present violations of
Environmental Laws which will result in a material adverse effect on the
business, operations, prospects, assets, property or condition (financial or
otherwise) of the Borrowers.
(c) During the term of this Agreement, and for so long as any Loans remain
outstanding, the Borrower shall comply in all material respects with all
applicable Environmental Laws, and shall, in addition, promptly notify the
Lender of any and all claims, demands or Notices received under any
Environmental Laws and the Borrowers' response thereto.
(d) As used in this Agreement, the following terms have the following
meanings:
"Environmental Laws" include all federal, state, and local laws, rules,
regulations, ordinances, permits, orders, and consent decrees agreed to by the
Borrowers, relating to health, safety, and environmental matters applicable to
the business and property of the Borrowers. Such laws and regulations include
but are not limited to the Resource Conservation and Recovery Act ("RCRA"), 42
U.S.C.ss.6901 et seq., as amended; the New Jersey Environmental Cleanup and
Recovery Act ("ECRA"); the Comprehensive Environmental Response, Compensation
and Liability Act ("CERCLA"), 42 U.S.C.ss.9601 et seq., as amended; the Toxic
Substances Control Act ("TSCA"), 15 U.S.C.ss.2601 et seq., as amended; and the
Clean Water Act, 33 U.S.C.ss.1331 et seq., as amended.
"Hazardous Substances", "Release", "Respond" and "Response" shall have the
meanings assigned to them in CERCLA, 42 U.S.C. ss.9601, as amended.
"Notice" means any summons, citation, directive, information request,
notice of potential responsibility, notice of violation or deficiency, order,
claim, complaint, investigation, proceeding, judgment, letter, or other
communication, written or oral, actual or threatened, from the United States
Environmental Protection Agency or other federal, state, or local agency or
authority, or any other entity or individual, public or private, concerning any
intentional or unintentional act or omission which involves management of
Hazardous Substances on or off any real properties; the imposition of any lien
on any real properties, including but not limited to liens asserted by
government entities in connection with any Borrower's response to the presence
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or Release of Hazardous Substances; and any alleged violation of or
responsibility under any Environmental Laws.
Section 3.20. Reaffirmation. Each and every request by a Borrower for
Advances under Section 2.01 or Section 2.02 above shall constitute a
reaffirmation of the truth and accuracy in all material respects of the
Borrowers' representations and warranties hereunder and under the Security
Documents on and as of the date of such request.
Section 3.21. Labor Relations; Compliance. None of the Borrowers has been
or is a party to any collective bargaining or other labor Contract. Except as
disclosed in Schedule "3.21" annexed hereto, there has not been, there is not
presently pending or existing, and there is not Threatened, (a) any strike,
slowdown, picketing, work stoppage, or employee grievance process, (b) any
Proceeding against or affecting any Borrower relating to the alleged violation
of any Applicable Law pertaining to labor relations or employment matters,
including any charge or complaint filed by an employee or union with the
National Labor Relations Board, the Equal Employment Opportunity Commission, or
any comparable Governmental Body, organizational activity, or other labor or
employment dispute against or affecting any of the Borrowers or their premises,
or (c) any application for certification of a collective bargaining agent. No
event has occurred or circumstance exists that could provide the basis for any
work stoppage or other labor dispute. There is no lock-out of any employees by
any Borrower, and no such action is contemplated by any Borrower. Each Borrower
has complied in all respects with all Applicable Law relating to employment,
equal employment opportunity, nondiscrimination, immigration, wages, hours,
benefits, collective bargaining, the payment of social security and similar
taxes, occupational safety and health, and plant closing. No Borrower is liable
for the payment of any compensation, damages, taxes, fines, penalties, or other
amounts, however designated, for failure to comply with any of the foregoing
Applicable Law.
3.22. Insurance.
(a) All polices to which any Borrower is a party or that provide coverage
to any Borrower, or any director or officer of a Borrower:
(i) are valid, outstanding, and enforceable;
(ii) are issued by an insurer that is reasonably believed by Borrowers
to be financially sound and reputable;
(iii) taken together, provide adequate insurance coverage for the
assets and the operations of the Borrowers for all risks to which the
Borrowers are normally exposed;
(iv) are sufficient for compliance with all Applicable Law and
Contracts to which any Borrower is a party or by which any of them is
bound;
(v) will continue in full force and effect following the consummation
of the execution, delivery of this Agreement, the warrants and the Security
Documents; and
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(vi) do not provide for any retrospective premium adjustment or other
experienced-based liability on the part of any Borrower.
(b) Except as disclosed in Schedule "3.22" annexed hereto, no Borrower has
received (A) any refusal of coverage or any notice that a defense will be
afforded with reservation of rights, or (B) any notice of cancellation or any
other indication that any insurance policy is no longer in full force or effect
or will not be renewed or that the issuer of any policy is not willing or able
to perform its obligations thereunder.
(c) The Borrowers have paid all premiums due, and have otherwise performed
all of their respective obligations, under each policy to which any Borrower is
a party or that provides coverage to any Borrower or director thereof.
(d) The Borrowers have given notice to the insurer of all material claims
that may be insured thereby.
ARTICLE IV. CONDITIONS OF MAKING THE ADVANCES
The effectiveness of this Agreement, and the obligations of the Lender to
make any Advance hereunder, are subject to the following conditions precedent:
Section 4.01. Representations and Warranties. The representations and
warranties set forth in Article III hereof shall be true and correct in all
material respects on and as of the Agreement Date, and on each subsequent date
that an Advance is to be made, provided, however, that for the purpose of
determining whether the representations and warranties are true and correct as
of the date that an Advance may be made, the Company shall have the right to
amend its disclosure schedules attached to this Agreement, provided, that the
Lender receives such amended disclosure schedules at least five (5) business
days prior to such Advance Analysis and is provided with the necessary
documentation and access to the Company to determine the effect of such
amendment.
Section 4.02. Loan Documents. The Borrowers shall have duly executed and
delivered to the Lender upon the execution of this Agreement, all of the
following:
(a) All UCC Financing Statements, stock certificates and stock powers, and
other certificates and documents required thereunder;
(b) The Note;
(c) A certificate of the Secretary or an Assistant Secretary of each of the
Borrowers certifying the votes of the Boards of Directors of the Borrowers, each
authorizing and directing the execution and delivery of this Agreement, the
Notes, the Warrants, the Security Agreement, and all further agreements,
instruments, certificates and other documents pursuant hereto and thereto;
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(d) A certificate of the Secretary or an Assistant Secretary of each of the
Borrowers certifying the names of the officers of each of the Borrowers who are
authorized to execute and deliver this Agreement, the Notes, the Warrants, the
Security Agreement, and all other agreements, instruments, certificates and
other documents to be delivered pursuant hereto and thereto, together with the
true signatures of such officers. The Lender may conclusively rely on such
certificate until they shall receive any further such certificate canceling or
amending the prior certificate and submitting the signatures of the officers
named in such further certificate;
(e) Certificates of the Secretary of State of Delaware and New York, all
dated reasonably prior to the Agreement Date or the date of the Advance
Analysis, as applicable, stating that each Borrowers is duly incorporated and in
good standing in such jurisdiction and that Schick is qualified to do business
in New York;
(f) The Shareholders Agreement;
(g) The Security Agreement;
(h) The Registration Rights Agreement.
Section 4.03. Restructuring Plan. The Borrowers shall have developed,
completed and commenced to implement a written plan (the "Restructuring Plan"),
the content of which shall be satisfactory to and approved and authorized by
both the Board of Directors of the Company and the Lender (which shall not be
unreasonably withheld or delayed). The Restructuring Plan shall include, without
limitation, matters involving (a) the consent and renegotiating of the existing
loan with the Borrowers' Senior Lender, (b) the hiring and retaining of outside
consultants, (c) procedures for dealing with significant vendors and payment of
any significant outstanding payables, (d) procedures for dealing with the
collection of accounts receivable, (e) the hiring of any new executive level
employees and (f) a detailed annual operating and capital budget approved by
Lender (which approval shall not be unreasonably withheld).
Section 4.04. Board of Directors. The Greystone Designees shall (i) be
elected to the Boards of Directors of the Company and Schick New York and the
Company's Audit Committee and Compensation Committee, (ii) not have been removed
from such positions and (iii) if they resign from such positions shall promptly
be replaced by other individuals designated by the Lender as contemplated by
Section 5.14.
Section 4.05. RESERVED.
Section 4.06. The Warrants. The Company shall have issued to the Lender the
Warrants.
Section 4.07. RESERVED.
Section 4.08. Further Matters. All legal matters, and the form and
substance of all documents, incident to the transactions contemplated hereby
shall be satisfactory to counsel for the Lender.
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Section 4.09. No Default. No Default or Event of Default shall have
occurred and continues to occur without being remedied.
ARTICLE V. AFFIRMATIVE COVENANTS
The Borrowers hereby jointly and severally covenant and agree that, from
the date hereof and until all Obligations (whether now existing or hereafter
arising) have been paid in full and the Borrowers have no further right to
extension or funding under this Agreement, each of the Borrowers shall:
Section 5.01. Corporate and Insurance. Do or cause to be done all things
necessary to at all times (a) other than mergers solely among Borrowers,
preserve, renew and keep in full force and effect its corporate existence,
rights, licenses, permits and franchises, (b) comply with this Agreement and
maintain and preserve the Lender's Liens and the priority thereof, (c) maintain,
preserve and protect all of its franchises and material trade names, and
preserve all of its material property used or useful in the conduct of its
business and keep the same in good repair, working order and condition
(reasonable wear and tear excepted), and from time to time make, or cause to be
made, all needed and proper repairs, renewals, replacements, betterments and
improvements thereto, so that the Business Operations carried on in connection
therewith may be properly and advantageously conducted at all times, (d) keep,
under the coverage of an "umbrella" policy or other form of coverage reasonably
acceptable to the Lender, its insurable properties adequately insured at all
times, by financially sound and reputable insurers reasonably acceptable to the
Lender, to such extent and against such risks, including fire and other risks
and casualty insured against by extended coverage, and maintain, as part of such
coverage, liability and such other insurance, as is customarily maintained by
companies engaged in similar businesses (including, without limitation, products
liability insurance), in amounts reasonably satisfactory to the Lender and each
Lender, all of which insurance policies shall name the Lender and each Lender as
loss payee and an additional insured as its interests appear, and shall provide
for the Lender and each Lender to receive written notice thereof at least twenty
(20) days prior to any cancellation, modification or non-renewal of the subject
policy, and (e) comply with all Applicable Law material to its Business
Operations, whether now in effect or hereafter enacted, promulgated or issued.
Section 5.02. Payment of Taxes. File, pay and discharge, or cause to be
paid and discharged, all taxes, assessments and governmental charges or levies
imposed upon the Borrowers or upon their income and profits or upon any of their
property (real, personal or mixed) or upon any part thereof, before the same
shall become in default, as well as all lawful claims for labor, materials,
supplies and otherwise, which, if unpaid when due, might become a Lien or charge
upon such property or any part thereof; provided, however, that the Borrowers
shall not be required to pay and discharge or cause to be paid and discharged
any such tax, assessment, charge, levy or claim (other than taxes and/or
assessments relating to real property or the use thereof) so long as (a) the
validity thereof shall be contested in good faith by appropriate proceedings and
the Borrowers shall have set aside on their books adequate reserves with respect
to any such tax, assessment, charge, levy or claim so contested, and (b) payment
with respect to
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any such tax, assessment, charge, levy or claim shall be made before any of the
Borrowers' property shall be seized or sold in satisfaction thereof.
Section 5.03. Notice of Proceedings. Give prompt written notice to the
Lender of:
(a) Any proceedings instituted against any of the Borrowers in any federal
or state court or before any commission or other regulatory body, whether
federal, state or local, which, if adversely determined, could have a material
adverse effect upon such Borrower's business, operations, properties, assets or
condition, financial or otherwise;
(b) Changes in location of material assets; and
(c) Material Adverse Effects or defaults to the Lender or the Senior
Lender.
Section 5.04. Periodic Reports. Furnish to the Lender:
(a) Within ninety (90) calendar days after the end of each Fiscal Year: (i)
consolidated balance sheets, statements of income, statements of stockholders'
equity, and statements of cash flows of the Borrowers, together with footnotes
and supporting schedules thereto, all certified by independent certified public
accountants selected by the Borrowers and reasonably acceptable to the Lender
(and commencing with Fiscal Year 2002 with the form of certification to be
without material qualification or otherwise satisfactory to the Lender), showing
the financial condition of the Borrowers at the close of such Fiscal Year and
the results of operations of the Borrowers during such Fiscal Year; (ii) an
unaudited consolidating balance sheet and statement of income of each of the
Borrowers, together with appropriate adjustments and eliminations; and (iii) a
schedule of all Contracts, capital contributions and loan transactions between
any Borrowers (on the one hand) and any other Borrowers or any Subsidiary (on
the other hand), including therein a schedule of all cash capital contributions
made by any Borrower and all Indebtedness (including Indebtedness for Money
borrowed) owed to any Borrower by any other Borrower or any Subsidiary
(hereinafter collectively referred to as "Intercompany Investment(s)"), as at
the end of such Fiscal Year;
(b) Within forty-five (45) calendar days after the end of each fiscal
quarter: (i) unaudited consolidated and consolidating balance sheets and
statements of income of the Borrowers, together with supporting schedules
thereto, prepared by the Borrowers and certified by the Company's Chairman,
President or Chief Financial Officer, such balance sheets to be as of the close
of such fiscal quarter and such statements of income to be for the period from
the beginning of the then-current Fiscal Year to the end of such fiscal quarter,
together with comparative statements of income for the corresponding fiscal
quarter in the immediately preceding Fiscal Year, in each case subject to normal
audit and year-end adjustments which shall not be material; (ii) a schedule of
all Intercompany Investments (specifying therein, the respective obligors and
obligees) as at the end of such fiscal quarter; and (iii) a written calculation
of Excess Available Cash.
(c) Concurrently with the delivery of each of the financial statements
required by Sections 5.04(a) and 5.04(b) above, a certificate (the "Compliance
Certificate") on behalf of the
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Borrowers (signed by the Chairman, Chief Executive Officer, Chief Financial
Officer or President of the Company, in substantially the form annexed as
Exhibit "F" to this Agreement, (i) calculating, setting forth, and certifying as
to the accuracy of the calculations required under Sections 5.08 through 5.11
hereof, and (ii) certifying that he has examined the provisions of this
Agreement and that no Event of Default has occurred and/or is continuing;
(d) Such other supplemental financial information pertaining to the
Borrowers as the Lender may from time to time reasonably request (provided, that
as to items listed in clauses (iii) and (iv) below, not more frequently than
annually) including: (i) aging schedules of all accounts receivable and accounts
payable of the Borrowers as of the end of any one or more months, (ii) an
analysis of the Borrowers' inventory as at the end of any one or more months in
a form reasonably satisfactory to the requesting Lender, (iii) within thirty
(30) days after the commencement of each Fiscal Year, a consolidated Capital
Expenditure budget and a separate consolidated research and development
expenditure budget of the Borrowers for such Fiscal Year showing the nature and
amount of the proposed Capital Expenditures and proposed research and
development expenditures; and within ninety (90) days after the end of each
Fiscal Year, updated reports showing the actual Capital Expenditures and actual
research and development expenditures for such immediately preceding Fiscal
Year; and (iv) within thirty (30) days after the commencement of each Fiscal
Year, a consolidated cash flow and profit and loss projection of the Borrowers
for such Fiscal Year;
(e) Within ten (10) days after filing with the SEC, true and complete
copies of all registration statements, proxy materials and other periodic
reports (including Forms 10-K, 10-Q, 8-K and other related forms) filed on
behalf of any or all of the Borrowers or any Subsidiary with the SEC under the
Securities Act of 1933, as amended, and/or the Securities Exchange Act of 1934,
as amended; and
(f) Promptly, from time to time, such other information regarding the
Borrowers' operations, assets, business, affairs and financial condition, as the
Lender may reasonably request.
Section 5.05. Books and Records; Inspection. Maintain at its corporate
headquarters books and records respecting all of the Business Operations at the
Borrowers' principal places of business, and permit Lenders or representatives
of the Lender to inspect, at any time during normal business hours, upon
reasonable notice, and without undue disruption of the Business Operations, all
of the Borrowers' various books and records, and to make copies, abstracts
and/or reproductions thereof.
Section 5.06. Notice of Default or Material Adverse Effect. Promptly advise
the Lender in writing of: (a) any Material Adverse Effect; or (b) the existence
or occurrence of any Default or Event of Default.
Section 5.07. Accounting. Maintain a standard system of accounting in order
to permit the preparation of consolidated financial statements in accordance
with GAAP.
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Section 5.08. Current Ratio. Beginning in March 2001, as at the end of each
Fiscal Year, maintain a Current Ratio of not less than 1 to 1.
Section 5.09. Interest Coverage Ratio. Beginning in March 2002, as at the
end of each Fiscal Year, maintain an Interest Coverage Ratio of not less than
1.50 to 1.
Section 5.10. EBITDA. As at the end of each Fiscal Year, maintain an EBITDA
at not less than the minimum amount set forth below for such date:
Fiscal Year Ending Minimum EBITDA
------------------ --------------
March 31, 2001 0
March 31, 2002 $2,500,000
March 31, 2003 $5,000,000
March 31, 2004 $7,500,000
Section 5.11. RESERVED.
Section 5.12. Reports on Application of the Net Proceeds of Advances. The
Borrowers shall furnish to the Lender at (a) each regularly scheduled meeting of
the Board of Directors of the Company, and (b) on a quarterly basis on each
Interest Payment Date, a written report as to the application of the net
proceeds of all Advances, if any, made in the immediately preceding calendar
quarter.
Section 5.13. Further Deliveries. Exert its best efforts to obtain and
deliver to the Lender any and all further consents, including landlord's and/or
lessee's consents and estoppel certificates in respect of the Lease Assignments,
certificates of occupancy, and other relevant matters, to the extent that the
same have not previously been delivered, are not available for delivery, or are
not delivered to the Lender in accordance with this Agreement and the Security
Documents, and which subsequent deliveries are expressly consented to in writing
by Lender.
Section 5.14. Board of Directors of the Company and Subsidiaries.
(a) Take all requisite corporate actions to cause the Boards of Directors
of each of the Borrowers to elect two additional persons designated by the
Lender (collectively, the "Initial Greystone Designees") to the Board of
Directors of the Company and each of its subsidiaries.
(b) Take all requisite corporate actions to cause an additional person
designated by the Lender ("Subsequent Greystone Designee" and together with the
Initial Greystone Designees the "Greystone Designees") to be elected to the
Boards of Directors of the Borrowers in accordance with the following formula:
Greystone Designees = Schick Seats / (1-Greystone %) - Schick Seats
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provided, that, unless the Lender has Advanced to Borrowers pursuant to this
Agreement more than a maximum level of advances of $6,000,000, the number of
Greystone Designees shall not equal less than two directors or more than 50% of
each Board of Directors and provided that the number Greystone Designees shall
be rounded to the closest integer. If the Lender Advances more than a maximum
level of Advances of $6,000,000 to the Borrowers pursuant to this Agreement,
Greystone Designees shall equal the Schick Seats plus one. As used in this
Section, "Schick Seats" shall mean the total number of seats occupied on the
Board of Directors excluding those seats occupied by Greystone Designees; and
"Greystone %" shall mean the number of Warrants then exercisable by Greystone or
any designee of Greystone under this Agreement, together with the number of
shares held by Greystone or any designee of Greystone as the result of properly
exercising its Warrants hereunder divided by the number of Borrowers' shares
which are issued and outstanding, plus the number of Warrants issued and then
exercisable by Greystone or any designee of Greystone under this Agreement plus
the number of shares held by Greystone or any designee of Greystone as the
result of properly exercising its Warrants. Schedule 5.14 annexed hereto sets
forth a tabular application of the formula contained in this Section.
(c) From and after the Agreement Date, fill vacancies created by death or
inability of any of the Greystone Designees to continue to serve on the Board of
Directors of the Company and its Subsidiaries, by another person designated by
the Lender.
(d) Take all requisite corporate actions to cause one person designated by
the Lender to serve on both the Company's Audit Committee and its Compensation
Committee.
Section 5.15. Environmental Response. In the event of any discharge, spill,
injection, escape, emission, disposal, leak or other Release of Hazardous
Substances on any Real Property owned or leased by any of the Borrowers, which
is not authorized by a permit or other approval issued by the appropriate
governmental agencies, and which requires notification to or the filing of any
report with any federal or state governmental agency, the Borrowers shall
promptly: (i) notify the Lender; and (ii) comply with the notice requirements of
the Environmental Protection Agency and applicable state agencies, and take all
steps necessary to promptly clean up such discharge, spill, injection, escape,
emission, disposal, leak or other Release in accordance with all applicable
Environmental Laws and the Federal National Contingency Plan, and, if required,
receive a certification from all applicable state agencies or the Environmental
Protection Agency, that such Real Property has been cleaned up to the
satisfaction of such agency(ies). In addition, if applicable, the Borrower shall
promptly register with the New Jersey Department of Environmental Protection any
underground storage tanks installed after the Agreement Date pursuant to the
applicable regulations contained in the New Jersey Underground Storage Tank Act,
N.J.S.A. 58: 10A-21, et seq.
Section 5.16. Management. Cause David Schick, to continue to be employed as
Chief Executive Officer of the Company at the pleasure of the Board of Directors
pursuant to the terms of an employment agreement to be executed by and between
Borrowers and David Schick, as attached hereto as Exhibit "E" except in the
event of death or disability.
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Section 5.17. Right of First Refusal. In the event and to the extent that
the Company shall elect to (i) raise any additional capital through any public
or private offer and sale of any of its equity securities (an "Equity
Offering"), or the Company hereby agrees to grant to the Lender the right and
option (the "Right of First Refusal"), but not the obligation, to purchase any
such equity securities of the Company (the "Equity Securities"). Such Right of
First Refusal shall be implemented in accordance with the following procedures:
(a) The Company shall give the Lender not less than twenty (20) Business
Days prior written notice of any intention by the Company to consummate any
Equity Offering. Within five (5) Business Days following receipt of such notice,
the Lender shall notify the Company, in writing, as to whether the Lender has an
interest in purchasing the Equity Securities being offered for sale. If the
Lender expresses an affirmative interest, the Company and the Lender shall
thereafter promptly meet and attempt to negotiate in good faith the terms and
conditions of the Lender's purchase of the Equity Securities. In the event that
the parties are unable to agree upon the terms and conditions of such
transaction by the earlier to occur of (i) fifteen (15) Business Days from the
Company's notice, or (ii) ten (10) Business Days from the initial meeting with
respect to such proposed transaction, then the Company shall be free to sell the
Equity Securities to any third party, subject, however, to the rights of the
Lender set forth in Section 5.17(b) below. Nothing herein shall prevent the
Company, at any time, from entering into negotiations with any third parties
concerning or relating to the sale of Equity Securities provided that a
Greystone representative shall be permitted to attend any such negotiations.
(b) In the event and to the extent that the Company shall receive a written
offer or proposal from any Person (whether or not Affiliated with the Company)
(a "Third Party") to purchase or sell any Equity Securities in a proposed Equity
Offering (the "Third Party Proposal"), the Company shall promptly furnish to the
Lender a true and complete copy of such Third Party Proposal. Such Third Party
Proposal for Equity Offerings must be in the form either (i) a letter of intent,
(ii) a Final Term Sheet or (iii) a Registration Statement filed with the
Securities and Exchange Commission. The Lender shall have a period of ten (10)
Business Days from receipt of such Third Party Proposal to notify the Company in
writing as to whether the Lender intends to match the terms of such Third Party
Proposal. If such Third Party Proposal is from a proposed underwriter or agent
seeking to sell the Equity Securities, the Lender may, at its sole option, elect
to match the Third Party Proposal by purchasing the Equity Securities, at a
price per share which shall be net of all selling commissions, discounts and
other offering expenses. To the extent that there shall be any material
amendments or modifications to such Third Party Proposal, the Company shall
promptly forward to the Lender a complete copy of each such amended Third Party
Proposal, and the twenty (20) Business Day period in which the Lender may match
such amended Third Party Proposal shall again commence upon delivery to the
Lender of such amended Third Party Proposal(s).
(c) In the event that the Lender shall notify the Company of its
unwillingness to match the terms of any final Third Party Proposal, or shall
fail to timely notify the Company of its intention to so match such final Third
Party Proposal, the Lender's Right of First Refusal with respect to such Third
Party Proposal shall expire.
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Section 5.18. Employee Options. Take all requisite corporate action
reasonably within its control to cause the shareholders to vote at the first
annual meeting of Shareholders of the Company that takes place after the
Agreement Date to either increase the number of shares available under the
Company's 1996 Employee Stock Option Plan or to establish a new stock option
plan to authorize the issuance of options to purchase an aggregate of 750,000
shares of Common Stock.
Section 5.19. Registration Rights. Shall register the shares of Schick
Common Stock underlying the Warrants as provided in the Registration Rights
Agreement and shall not be in breach of such Registration Rights Agreement.
Section 5.20. Intellectual Property.
(a) Borrower agrees to timely pay any and all maintenance, renewal, annuity
fees and the like to the appropriate governmental entity in order to keep all of
its intellectual property in full force and effect.
(b) Borrower agrees to bring any action or legal proceeding as may
reasonably be necessary in order to defend its intellectual property against
third party infringers thereof of which it has knowledge.
Section 5.21. Disclosure. The Company will promptly inform the Greystone
Designees of all developments with regard to the pendency of any investigation
or litigation respecting either the Borrowers or their officers or directors.
The Greystone Designees will determine in their own business judgment whether to
relay such information to other Greystone employees.
Section 5.22. Restructuring Plan. The Borrowers shall update and amend the
Restructuring Plan including the detailed budgets contained therein, once every
six months, provided that the content thereof shall be satisfactory to and
approved and authorized by both the Board of Directors of the Company and the
Lender (which shall not be unreasonably withheld). Upon such approval and
authorization the Borrowers shall diligently implement the Restructuring Plan.
ARTICLE VI. NEGATIVE COVENANTS
The Borrowers jointly and severally covenant and agree that, until all
Obligations (whether now existing or hereafter arising) have been paid in full
and the Borrowers have no further right to extension or funding under this
Agreement, unless the Lender shall otherwise consent in writing, none of the
Borrowers shall, directly or indirectly:
Section 6.01. Indebtedness and Liabilities. Incur, create, assume, become
or be liable in any manner with respect to, or permit to exist, any Indebtedness
or Liability, other than:
(a) Indebtedness to the Lender for Advances, or otherwise;
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(b) Indebtedness and Liabilities with respect to trade obligations,
accounts payable and other normal accruals incurred in the ordinary course of
business, or with respect to which any of the Borrowers is contesting in good
faith the amount or validity thereof by appropriate proceedings, and then only
to the extent that the Borrowers have set aside on their books adequate reserves
therefor;
(c) Indebtedness under those Real Property Leases listed on Schedule "3.07"
annexed hereto;
(d) Indebtedness under Existing Operating Leases listed on Schedule "3.05"
annexed hereto;
(e) Existing Indebtedness, but only to the extent set forth on Schedule
"6.01(e)" annexed hereto;
(f) Purchase money Indebtedness or other Indebtedness incurred or assumed
in connection with Investments (including the acquisition of additional assets
or businesses) and Capital Expenditures made following the Agreement Date;
provided, however, that: (i) the Borrowers shall, in connection with the
incurrence of any and all such Indebtedness, be in compliance with the
provisions of Section 6.06(c) and Section 6.09 hereof; and (ii) to the extent
that the Borrowers shall elect to incur Indebtedness for money borrowed (other
than purchase money Indebtedness) from any financial institution in connection
with any permitted Investment contemplated by Section 6.06(c) hereof, they shall
afford the Lender a right of first refusal to provide the financing therefor;
provided, that the terms and conditions of any such financing which the Lender
may (at their sole discretion) elect to offer shall be on terms and conditions
which, in the aggregate, shall be no less favorable to the Borrowers than those
offered by any other financial institution;
(g) Intercompany Investments which are represented by instruments that are
promptly delivered (with all necessary endorsements thereon) to the Lender
pursuant to the Security Agreement; and
(h) Subordinated Debt in such amounts and upon such terms and conditions as
shall be reasonably acceptable to the Lender.
Section 6.02. Liens. Create, incur, assume or suffer to exist any Lien or
other encumbrance of any nature whatsoever on any of its assets, now or
hereafter owned, other than:
(a) Subject to Section 5.02 above, Liens securing the payment of taxes
which are either not yet due or the validity of which is being contested in good
faith by appropriate proceedings, and as to which the Borrowers shall have set
aside on their books adequate reserves;
(b) Deposits under workers' compensation, unemployment insurance and social
security laws, or to secure the performance of bids, tenders, contracts (other
than for the repayment of Money Borrowed) or leases, or to secure statutory
obligations or surety or appeal
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bonds, or to secure indemnity, performance or other similar bonds in the
ordinary course of business;
(c) Liens imposed by law, such as carriers', warehousemen's or mechanics'
liens, incurred by the Borrowers in good faith in the ordinary course of
business and discharged promptly after same are incurred, and fully bonded Liens
arising out of a judgment or award against the Borrowers with respect to which
the Borrowers shall currently be prosecuting an appeal, a stay of execution
pending such appeal having been secured;
(d) Liens in favor of the Lender;
(e) Existing Liens which are to survive the Agreement Date and which are
expressly reflected and described as such in Schedule "6.02(e)" annexed hereto;
(f) Other Liens incurred in connection with Indebtedness expressly
permitted pursuant to Section 6.01 above, but only to the extent that such Liens
secure Indebtedness in amounts not in excess of those permitted by such Section
6.01;
(g) Encumbrances consisting of easements, rights-of-way, survey exceptions
and other similar restrictions on the use of real property reflected on title
reports accepted by the Lender, or minor irregularities in title thereto which
do not materially impair the use of such property in the operation of the
business of the Borrowers; and
(h) Liens arising out of judgments or awards with respect to which the
Borrowers shall be prosecuting an appeal in good faith and in respect of which a
stay of execution shall have been or is being sought.
Section 6.03. Guarantees. Except for the Guarantee by any one of the
Borrowers of obligations of any of the other Borrower, Guarantee, endorse or
otherwise in any manner become or be responsible for obligations of any other
Person, except: Guarantees, not to exceed $100,000 outstanding at any point in
time in the aggregate, in respect of the financing of automobiles or other items
for use by employees, consultants or agents of the Borrowers.
Section 6.04. Sales of Assets and Management. (a) Sell, lease, transfer,
encumber or otherwise dispose of any of the Borrowers' properties, assets,
rights, licenses or franchises other than (i) sales of inventories in the
ordinary course of business, (ii) licenses, joint ventures and related
transactions entered into, modified or terminated in the ordinary course of
business, including but not limited to the licensing of Borrowers' intellectual
property; (iii) the disposition of obsolete personal properties in the ordinary
course of business, (iv) the termination of Excluded Contracts, or (v) the
subletting of any of the real property leased by Borrowers or (b) turn over the
management of, or enter into any management contract with respect to the
Business Operations or such properties, assets, rights, licenses or franchises.
Section 6.05. Sale-Leaseback. Enter into any arrangement, directly or
indirectly, with any Person whereby any of the Borrowers shall sell or transfer
any property (real, personal or
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mixed) used in the Business Operations, whether now owned or hereafter acquired,
and thereafter rent or lease such property.
Section 6.06. Investments; Acquisitions. Make any Investment in, or
otherwise acquire or hold securities (including, without limitation, capital
stock and evidences of indebtedness) of, or make loans or advances to, or enter
into any arrangement for the purpose of providing funds or credit to, any other
Person (including any Affiliate), except:
(a) advances to employees of any one or more of the Borrower: (i) for
business expenses not to exceed at any time $50,000 in the aggregate, and (ii)
for personal needs not to exceed at any time $100,000 in the aggregate as to all
employees of the Borrower;
(b) investments in obligations of the United States or certificates of
deposit of the Lender or other commercial banks, or other similar investments
reasonably satisfactory to the Lender;
(c) so long as no Default or Event of Default has occurred and is
continuing, an Investment in or acquisition of the securities, assets or
properties of any Person in which: (i) the aggregate consideration paid or
payable by any or all of the Borrowers (whether in the form of cash, notes
and/or any other securities obligating any of the Borrowers to mandatory
payments of dividends, Interest Expense or other redemption obligations) does
not exceed Three Hundred Thousand ($300,000) Dollars in any one Fiscal Year; and
(ii) the aggregate Indebtedness for money borrowed (including purchase money
Indebtedness incurred in connection with any such Investment) does not exceed
One Hundred Fifty Thousand ($150,000) Dollars in any one Fiscal Year; and
(d) intercompany investments, but only if and to the extent evidenced by
appropriate instruments (including, without limitation, in respect of
Indebtedness, negotiable promissory notes in principal amount equal to any and
all such Intercompany Investments so incurred), all of which shall be promptly
delivered (with all necessary endorsements thereon) to the Lender pursuant to
the Security Agreement.
Section 6.07. Corporate Form; Acquisitions. Dissolve or liquidate, or
consolidate or merge with or into, sell all or substantially all of the assets
of any of the Borrowers to, or otherwise acquire all or substantially all of the
securities, assets or properties of, any other Person; provided, that any such
transaction shall be permitted without the prior written consent of the Lender:
(a) if solely between or among Borrowers, or (b) if constituting an acquisition
or Investment otherwise permitted and within the dollar consideration and
Indebtedness limitations provided in Section 6.06(c) above.
Section 6.08. Dividends and Redemptions. Except for a transaction otherwise
permitted pursuant to Section 6.06(c) above, or (subject to the provisions of
Section 6.16 below) dividends paid or declared by any one or more Borrowers to
any other Borrower(s): (a) directly or indirectly declare or pay any dividends,
or make any distribution of cash or property, or both (other than dividends
solely in the form of Common Stock of the Company), to any Person in respect of
any of the shares of the capital stock of any of the Borrowers; or (b) directly
or
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indirectly redeem, purchase or otherwise acquire for consideration any
securities or shares of the capital stock of any of the Borrower or any other
Person.
Section 6.09. Indebtedness for Capital Expenditures. Other than
Indebtedness to the Lender, as contemplated by this Agreement: (a) incur
Indebtedness (including purchase money Indebtedness) in connection with Capital
Expenditures in any Fiscal Year, including direct purchases and/or Capitalized
Lease Obligations (other than Existing Capitalized Lease Obligations or
substitutes therefor at the same or lower annual rentals), for fixed assets or
personal property, where the aggregate Indebtedness (including purchase money
Indebtedness) so incurred shall exceed $250,000 in such Fiscal Year; or (b)
enter into any Operating Leases which obligates the Borrowers to rental payments
in any Fiscal Year which shall be $150,000, in the aggregate, in excess of the
Borrowers' aggregate rental payments under Operating Leases in the immediately
preceding Fiscal Year, provided, however, that the Borrower shall be permitted
to exercise its option to renew the Company's real property leases on its
facilities in Long Island City, New York.
Section 6.10. Change of Business. As to any of the Borrowers, directly or
indirectly: (a) engage in a business materially different from the general
nature of the Business Operations as now being conducted or as same may
hereafter be reasonably expanded from time to time in like areas of business, or
(b) wind up its Business Operations or cease substantially all of its normal
Business Operations for a period in excess of thirty (30) consecutive days, or
(c) suffer any material disruption, interruption or discontinuance of a material
portion of its normal Business Operations for a period in excess of ninety (90)
consecutive days, or (d) materially amend or terminate any material agreement.
Section 6.11. Receivables. Sell, assign, discount or dispose in any way of
any accounts receivable, promissory notes or trade acceptances held by any of
the Borrowers with or without recourse, except for any sale, assignment,
discounting or disposal of any such accounts receivable, promissory notes or
trade acceptances in connection with efforts to collect same (including
endorsements) in the ordinary course of business.
Section 6.12. Corporate Charter and By-Laws. Agree, consent, permit or
otherwise undertake to amend any of the terms or provisions of the Company's
Certificate of Incorporation or By-Laws.
Section 6.13. Affiliate Transactions. Enter into any Contract, agreement or
transaction with any Affiliate of any of the Borrowers (other than among
Borrowers) except after prior written notice to the Lender and then only upon
the prior written consent of the Lender.
Section 6.14. Fiscal Year. Amend its Fiscal Year.
Section 6.15. Debt. Issue, prepay, redeem or purchase any Senior Debt,
Subordinated Debt or redeemable preferred stock, except in accordance with the
terms of the Restructuring Plan. Furthermore, subject to the provisions of
Section 6.16 and Section 6.17 below, the Company or any Subsidiary may redeem or
purchase capital stock of any other Subsidiary which is a Borrower, if and to
the extent wholly-owned by the Company or another Subsidiary.
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Section 6.16. Sales of Capital Stock. Sell, lease, transfer, assign,
encumber or otherwise dispose of any shares of capital stock (collectively, a
"Stock Transfer") of the Company or any Subsidiary, except that stock options to
employees of the Company may be granted and exercised pursuant to existing stock
option plans of the Company.
Section 6.17. Compensation of Management. Increase compensation to
executive officers above the amount that has been agreed upon by Lender and the
Company's Compensation Committee.
Section 6.18. Litigation Settlements. Settle any material litigation which
involves the loss of any rights or payment of any moneys or royalties in excess
of $25,000 without the consent of Lender, which consent shall not be
unreasonably withheld or delayed.
Section 6.19. Use of Advances. Draw any Advances for any purpose not
otherwise approved by the Lender.
Section 6.20. Restructuring Plan. Fail to materially adhere to the
Restructuring Plan, as amended from time to time, pursuant to Section 5.22
hereof.
ARTICLE VII. DEFAULTS
Section 7.01. Events of Default. Each of the following events is herein,
and in the Note and the Security Documents, sometimes referred to as an Event of
Default:
(a) if any representation or warranty made in this Agreement, or in any of
the Security Documents, or in any report, certificate, financial statement or
other instrument furnished in connection with this Agreement or the borrowing
hereunder, shall be false, inaccurate or misleading in any material respect when
made or when deemed made hereunder;
(b) any failure to pay principal of or interest on the Note or any other
Obligations of the Borrowers to the Lender when the same shall be due and
payable, whether on a Principal Payment Date, an Interest Payment Date, at the
Maturity Date thereof or at a date required for prepayment or by acceleration or
otherwise;
(c) any default in the performance of any of the financial covenants
contained in Section 5.08 through Section 5.10, or any default in the due
observance or performance of any covenant, condition or agreement contained in
any Section of Article VI hereof;
(d) any default in the due observance or performance of any covenant,
condition or agreement (other than in Section 5.08 through Section 5.10) to be
observed or performed under Article V hereof, or otherwise pursuant to the terms
hereof, and the continuance of such default unremedied for a period of twenty
(20) days after written notice thereof to the Borrowers;
(e) if either of the Borrowers have suffered any Material Adverse Effect
which shall remain unremedied for a period of thirty (30) days after written
notice thereof to the Borrowers;
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(f) any default with respect to any Indebtedness for money borrowed of the
Borrowers (other than to the Lender) in an amount in excess of $50,000, if the
effect of such default is to permit the holder to accelerate the maturity of any
such Indebtedness for money borrowed or to cause such Indebtedness for money
borrowed to become due prior to the stated maturity thereof;
(g) any material default in the due observance or performance of any
covenant, condition or agreement on the part of the Borrowers to be observed or
performed under the Note, the Warrants or any of the Security Documents,
including, without limitation, any event which subordinates or otherwise renders
invalid or unenforceable the Lender's first Liens, encumbrances and security
interests on the assets and properties of the Borrowers (subject only to the
Permitted Liens) and the continuation of such default beyond any applicable
grace period provided therein;
(h) if any Borrower shall: (i) apply for or consent to the appointment of a
receiver, trustee, custodian or liquidator of it or any of its properties, (ii)
admit in writing its inability to pay its debts as they mature, (iii) make a
general assignment for the benefit of creditors, (iv) be adjudicated a bankrupt
or insolvent or be the subject of an order for relief under Title 11 of the
United States Code, or (v) file a voluntary petition in bankruptcy, or a
petition or an answer seeking reorganization or an arrangement with creditors or
to take advantage of any bankruptcy, reorganization, insolvency, readjustment of
debt, dissolution or liquidation law or statute, or an answer admitting the
material allegations of a petition filed against him or it in any proceeding
under any such law, or (vi) take or permit to be taken any action in furtherance
of or for the purpose of effecting any of the foregoing;
(i) if any order, judgment or decree shall be entered, without the
application, approval or consent of the Borrowers, by any court of competent
jurisdiction, approving a petition seeking reorganization of any Borrowers, or
appointing a receiver, trustee, custodian or liquidator of any Borrowers, or of
all or any substantial part of its assets, and such order, judgment or decree
shall continue unstayed and in effect for any period of thirty (30) days;
(j) if final judgment(s) for the payment of money in excess of $25,000
individually or $100,000 in the aggregate shall be rendered against any
Borrowers, and the same shall remain undischarged, unsatisfied and unbonded for
a period of thirty (30) consecutive days following notice of said final
judgment(s) to such Borrowers, during which execution shall not be effectively
stayed;
(k) the occurrence of any levy upon or seizure or attachment of any
property of any Borrowers having an aggregate fair value in excess of $100,000
individually or $250,000 in the aggregate, which levy, seizure or attachment
shall not be set aside, bonded or discharged within thirty (30) days after the
date thereof;
(l) if the Greystone Designees are removed without good cause from or are
not elected or reelected to the Boards of Directors of the Borrowers or the
people designated by the Lender to serve on the Company's Audit Committee or
Compensation Committee have been
36
<PAGE>
removed without good cause from such committee and no person designated by
Greystone has been elected to replace such director or committee member;
Section 7.02. Remedies. Upon the occurrence of any Event of Default, and at
all times thereafter during the continuance thereof: (a) the Note, and any and
all other Obligations of the Borrowers to the Lender, shall, at the Lender's
option (except in the case of Sections 7.01(g) and 7.01(h) hereof, the
occurrence of which shall automatically effect acceleration, regardless of any
action or forbearance in respect of any prior or ongoing Default or Event of
Default which may be inconsistent with such automatic acceleration), become
immediately due and payable, both as to principal, interest and other charges,
without presentment, demand, or notice of any kind, all of which are hereby
expressly waived, anything contained herein or in the Note or other evidence of
such Obligations to the contrary notwithstanding, (b) all outstanding
Obligations under the Note, and all other outstanding Obligations, shall bear
interest at the default rate of interest provided in the Note, (c) the Lender
may file suit against the Borrowers on the Note and/or seek specific performance
or injunctive relief thereunder (whether or not a remedy exists at law or is
adequate), (d) the Lender shall not be obligated to make any further Advances,
and (e) the Lender shall have the right, in accordance with the Note and the
Security Documents, to exercise any and all remedies in respect of such or all
of the collateral security for the Obligations as the Lender may determine in
its discretion (without any requirement of marshaling of assets, or other such
requirement).
ARTICLE VIII. PARTICIPATING LENDERS; ASSIGNMENT.
Section 8.01. Participations. Anything in this Agreement to the contrary
notwithstanding, the Lender may, at any time and from time to time, without the
requirement of any consent of the Borrowers, and without in any manner affecting
or impairing the validity of any Obligations or any collateral security
therefor, transfer, assign or grant participating interests in the Loan as the
Lender shall in its sole discretion determine, to such other Persons (the
"Participants") as the Lender may determine. The Lender shall give written
notice to the Borrowers of such Participations. Notwithstanding the granting of
any such participating interests: (a) the Borrowers shall look solely to the
Lender for all purposes of this Agreement and the transactions contemplated
hereby, (b) the Borrowers shall at all times have the right to rely upon any
waivers or consents signed by the Lender as being binding upon all of the
Participants, and (c) all communications in respect of this Agreement and such
transactions shall remain solely between the Borrowers and the Lender hereunder.
Section 8.02. Transfer. Anything in this Agreement to the contrary
notwithstanding, the Lender may, at any time and from time to time, without the
requirement of any consent of the Borrowers, and without in any manner affecting
or impairing the validity of any Obligations or any collateral security
therefor, transfer and assign all or any portion of its right to receive payment
or foreclose on its security interest provided for in this Agreement, the Note
and the Security Documents to any Person (an "Assignee Lender"). The Lender
shall give written notice to the Borrowers prior to making any such transfer or
assignment.
37
<PAGE>
ARTICLE IX. MISCELLANEOUS
Section 9.01. Survival. This Agreement and all covenants, agreements,
representations and warranties made herein and in the certificates delivered
pursuant hereto, shall survive the making by the Lender of the Advances, and the
execution and delivery to the Lender of the Note, and shall continue in full
force and effect for so long as the Note or any other Obligations of the
Borrowers to the Lender are outstanding and unpaid. Whenever in this Agreement
any of the parties hereto is referred to, such reference shall be deemed to
include the successors and permitted assigns of such party; and all covenants,
promises and agreements in this Agreement contained, by or on behalf of the
Borrowers, shall inure to the benefit of the successors and assigns of the
Lender.
Section 9.02. Indemnification. The Borrowers shall indemnify the Lender and
its directors, officers, employees, attorneys and lenders against, and shall
hold the Lender and such Persons harmless from, any and all losses, claims,
damages and liabilities and related expenses, including reasonable counsel fees
and expenses, incurred by the Lender or any such Person arising out of, in any
way connected with, or as a result of: (a) the Borrowers' use of any of the
proceeds of the Loan made by the Lender to the Borrowers; (b) this Agreement,
the Borrowers' ownership and operation of the Borrowers' assets, including all
real properties and improvements or any Contract, the performance by the
Borrowers or any other Person of their respective obligations thereunder, and
the consummation of the transactions contemplated by this Agreement; and/or (c)
any claim, litigation, investigation or proceeding relating to any of the
foregoing, whether or not the Lender or its directors, officers, employees,
attorneys or Lenders are a party thereto; provided that the indemnity provisions
set forth in this Section 9.02 shall not apply to any such losses, claims,
damages, liabilities or related expenses arising from (i) any unexcused breach
by the Lender of any of its obligations under this Agreement, (ii) the willful
misconduct or gross negligence of the Lender, provided that any such loss,
claim, damage, liability or expense has resulted from the willful misconduct or
gross negligence of the Lender and further provided, that such willful
misconduct or gross negligence was the primary cause thereof (i.e., more than
50% of the causation), or (iii) the breach of any commitment or legal obligation
of the Lender to any Person. The foregoing indemnity shall remain operative and
in full force and effect regardless of the expiration of the term of this
Agreement, the consummation of the transactions contemplated by this Agreement,
the repayment of the Loan, the invalidity or unenforceability of any term or
provision of this Agreement, the Security Documents or the Note, any
investigation made by or on behalf of the Lender, and the content or accuracy of
any representation or warranty made by the Borrowers or their Affiliates under
this Agreement. All amounts due under this Section 9.02 shall be payable on
written demand therefor.
Section 9.03. Governing Law. This Agreement, the Note, the Warrants and the
Security Documents shall (irrespective of where same are executed and delivered)
be governed by and construed in accordance with the laws of the State of New
York (without giving effect to principles of conflicts of laws).
Section 9.04. Waiver and Amendment. Neither any modification or waiver of
any provision of this Agreement, the Note, the Warrants or the Security
Documents, nor any consent to any departure by the Borrowers therefrom, shall in
any event be effective unless the same shall be set forth in writing duly signed
or acknowledged by the Lender and the Borrowers, and then
38
<PAGE>
such waiver or consent shall be effective only in the specific instance, and for
the specific purpose, for which given. No notice to or demand on the Borrowers
in any instance shall entitle the Borrowers to any other or future notice or
demand in the same, similar or other circumstances.
Section 9.05. Reservation of Remedies. Neither any failure nor any delay on
the part of any of the parties hereto in exercising any right, power or
privilege hereunder, or under the Note, any of the Security Documents, or any
other instrument given as security for any of the Obligations, shall operate as
a waiver thereof, nor shall a single or partial exercise thereof preclude any
other or future exercise, or the exercise of any other right, power or
privilege.
Section 9.06. Notices. All notices, requests, demands and other
communications under or in respect of this Agreement or any transactions
hereunder shall be in writing (which may include telegraphic or telecopied
communication) and shall be personally delivered or mailed (by prepaid
registered or certified mail, return receipt requested), sent by prepaid
recognized overnight courier service, or telegraphed or telecopied by facsimile
transmission to the applicable party at its address or telecopier number
indicated below.
If to the Lender:
c/o Greystone & Co., Inc.
152 West 57th Street, 60th Floor
New York, New York 10019
Attn: Stephen Rosenberg
Telecopier # (212) 649-9701
with a copy to:
Greenberg Traurig
2005 Market Street
Philadelphia, PA 19103
Attn: Michael Lehr
Telecopier # (215) 988-7801
If to the Borrowers:
Schick Technologies, Inc.
31-00 47th Avenue
Long Island City, New York 11101
Attn: David Schick
Telecopier # (718) 729-3469
39
<PAGE>
with a copy to:
Schick Technologies, Inc.
31-00 47th Avenue
Long Island City, New York 11101
Attn: Zvi Raskin, Esq.
Telecopier # (718) 937-5962
or, as to each party, at such other address or telecopier number as shall be
designated by such party in a written notice to the other parties delivered as
aforesaid. All such notices, requests, demands and other communications shall be
deemed given when personally delivered or when deposited in the mails with
postage prepaid (by registered or certified mail, return receipt requested) or
delivered to the telegraph company or overnight courier service, addressed as
aforesaid, or when submitted by facsimile transmission to a telecopier number
designated by such addressee.
Section 9.07. Binding Effect. This Agreement shall be binding upon and
inure to the benefit of the Borrowers and the Lender and their respective
successors and permitted assigns, except that the Borrowers shall not assign any
of its rights or obligations hereunder without the prior written consent of the
Lender.
Section 9.08. Consent to Jurisdiction; Waiver of Jury Trial. The parties
hereto hereby consent to the jurisdiction of all courts of the State of New York
and the United States District Court for the Southern District of New York, as
well as to the jurisdiction of all courts from which an appeal may be properly
taken from such courts, for the purpose of any suit, action or other proceeding
arising out of or with respect to this Agreement, the Note, the Warrants, the
Security Documents, any other agreements, instruments, certificates or other
documents executed in connection herewith or therewith, or any of the
transactions contemplated hereby or thereby, or any of the parties' obligations
hereunder or thereunder. The parties hereto hereby expressly waive any and all
objections which they may have as to venue in any of such courts, and also waive
trial by jury in any such suit, action or proceeding. The Lender or Borrowers
may file a copy of this Agreement as evidence of the foregoing waiver of right
to jury trial.
Section 9.09. Severability. If any provision of this Agreement is held
invalid or unenforceable, either in its entirety or by virtue of its scope or
application to given circumstances, such provision shall thereupon be deemed
modified only to the extent necessary to render same valid, or not applicable to
given circumstances, or excised from this Agreement, as the situation may
require, and this Agreement shall be construed and enforced as if such provision
had been included herein as so modified in scope or application, or had not been
included herein, as the case may be.
Section 9.10. Captions. The Article and Section headings in this Agreement
are included herein for convenience of reference only, and shall not affect the
construction or interpretation of any provision of this Agreement.
40
<PAGE>
Section 9.11. Sole and Entire Agreement. This Agreement, the Note, the
Security Documents, and the other agreements, instruments, certificates and
documents referred to or described herein and therein constitute the sole and
entire agreement and understanding between the parties hereto as to the subject
matter hereof, and supersede all prior discussions, agreements and
understandings of every kind and nature between the parties as to such subject
matter.
[THE BALANCE OF THIS PAGE INTENTIONALLY LEFT BLANK]
41
<PAGE>
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be
duly executed by their duly authorized officers on the date set forth below, but
all as of the day and year first above written.
Effective Date: December 27, 1999
GREYSTONE FUNDING CORPORATION
By:/s/ Stephen Rosenberg
-----------------------------------
Stephen Rosenberg
Chief Executive Officer
Date: March 17, 2000
SCHICK TECHNOLOGIES, INC., a Delaware corporation
By: /s/ David Schick
-----------------------------------
David Schick
Chief Executive Officer
Date: March 17, 2000
SCHICK TECHNOLOGIES, INC., a New York corporation
By: /s/ David Schick
-----------------------------------
David Schick
Chief Executive Officer
Date: March 17, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated financial statements and is qualified in its entirety by reference
to such statements.
</LEGEND>
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> MAR-31-2000
<PERIOD-END> DEC-31-1999
<CASH> 1,692
<SECURITIES> 0
<RECEIVABLES> 4,176
<ALLOWANCES> 2,318
<INVENTORY> 6,643
<CURRENT-ASSETS> 10,484
<PP&E> 10,065
<DEPRECIATION> 4,347
<TOTAL-ASSETS> 18,041
<CURRENT-LIABILITIES> 14,029
<BONDS> 0
0
0
<COMMON> 101
<OTHER-SE> 3,332
<TOTAL-LIABILITY-AND-EQUITY> 18,041
<SALES> 0
<TOTAL-REVENUES> 16,574
<CGS> 13,161
<TOTAL-COSTS> 13,290
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 377
<INCOME-PRETAX> (9,618)
<INCOME-TAX> (0)
<INCOME-CONTINUING> (9,618)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (9,618)
<EPS-BASIC> (.96)
<EPS-DILUTED> (.96)
</TABLE>
