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U.S. SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-QSB
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QUARTERLY REPORT FILED PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the quarter ended Commission File Number
JUNE 30, 1998 1-12337
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QC OPTICS, INC.
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(Name of Small Business
Issuer As Specified In Its Charter)
DELAWARE 04-2916548
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
46 JONSPIN ROAD, WILMINGTON, MASSACHUSETTS 01887
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(Address of Principal Executive Offices, Zip Code)
(978) 657-7007
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(Issuer's Telephone Number, Including Area Code)
Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), (2) and
has been subject to such filing requirements for the past 90 days.
Yes X No
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As of July 31, 1998, the Company had outstanding 3,242,500 shares of Common
Stock, $.01 par value per share.
Transitional Small Business Disclosure Format: Yes No X
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<PAGE>
QC OPTICS, INC.
INDEX
<TABLE>
<CAPTION>
PART 1 - FINANCIAL INFORMATION PAGE NUMBER
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Item 1. Financial Statements
<S> <C>
Balance Sheets at June 30, 1998 and December 31, 1997 1
Statements of Operations for the three months and six months
ended June 30, 1998 and 1997 2
Statements of Cash Flows for the six months ended
June 30, 1998 and 1997 3
Notes to Financial Statements 4
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 5
PART II - OTHER INFORMATION
Item 1. Legal Proceedings 8
Item 2. Changes in Securities 8
Item 3. Default Upon Senior Securities 8
Item 4. Submission of Matters to a Vote of Security Holders 8
Item 5. Other Information 8
Item 6. Exhibits and Reports on Form 8-K 9
Signatures 10
</TABLE>
<PAGE>
PART 1 - FINANCIAL INFORMATION
ITEM 1 - FINANCIAL STATEMENTS
QC OPTICS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1998 1997
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ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $3,885,624 $3,766,534
Accounts receivable, less allowance of $50,000
($100,000 at December 31, 1997) 2,033,232 2,509,002
Inventory (Note 3) 4,561,976 4,025,428
Refundable income taxes -- --
Prepaid expenses 46,048 76,974
----------- -----------
Total current assets 10,526,880 10,377,938
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PROPERTY AND EQUIPMENT, AT COST:
Furniture and fixtures 214,805 189,350
Machinery and equipment 348,547 342,609
Leasehold improvements 76,714 76,714
Motor vehicles 21,574 21,574
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661,640 630,247
Less - Accumulated depreciation and amortization 449,268 402,528
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Property and equipment, net 212,372 227,719
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DEFERRED TAX ASSETS 349,500 349,500
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OTHER ASSETS 36,004 82,924
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Total assets $11,124,756 $11,038,081
=========== ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $805,310 $742,563
Accrued payroll and related expenses 473,035 457,505
Accrued income taxes 141,600 221,789
Accrued expenses 489,059 702,817
Customer deposits 670,866 645,817
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Total current liabilities 2,579,870 2,770,491
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COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock, $.01 par value -
Authorized -- 1,000,000 shares
Issued and outstanding -- no shares -- --
Common stock, $.01 par value -
Authorized -- 10,000,000 shares
Issued and outstanding -- 3,242,500 shares 32,425 32,425
Additional paid-in capital 9,902,886 9,902,886
Accumulated deficit (1,390,425) (1,667,721)
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Total stockholders' equity 8,544,886 8,267,590
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Total liabilities and stockholders' equity $11,124,756 $11,038,081
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
1
<PAGE>
QC OPTICS, INC.
STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
------------ ----------- ----------- -----------
JUNE 30, JUNE 30,
1998 1997 1998 1997
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
NET SALES $3,038,366 $1,732,827 $6,176,790 $3,523,519
COST OF SALES 1,545,710 855,417 3,337,865 1,721,060
---------- ---------- ---------- ----------
Gross profit 1,492,656 877,410 2,838,925 1,802,459
OPERATING EXPENSES:
Selling, general and administrative expenses 847,838 887,695 1,846,882 2,006,540
Engineering expenses 361,998 318,689 672,944 673,713
---------- ---------- ---------- ----------
Total operating expenses 1,209,836 1,206,384 2,519,826 2,680,253
---------- ---------- ---------- ----------
Operating income (loss) 282,820 (328,974) 319,099 (877,794)
INTEREST INCOME (NET) 53,034 40,483 115,697 94,003
---------- ---------- ---------- ----------
Income (loss) before provision (benefit) for 335,854 (288,491) 434,796 (783,791)
PROVISION (BENEFIT) FOR INCOME TAXES 121,800 (114,700) 157,500 (308,100)
---------- ---------- ---------- ----------
Net Income (Loss) $ 214,054 ($173,791) $ 277,296 ($475,691)
========== ========== ========== ==========
BASIC AND DILUTED NET INCOME (LOSS) PER COMMON AND
COMMON EQUIVALENT SHARE (Note 2) $ 0.07 ($0.05) $ 0.09 ($0.15)
========== ========== ========== ==========
DILUTED WEIGHTED AVERAGE COMMON AND COMMON
EQUIVALENT SHARES OUTSTANDING 3,247,848 3,242,500 3,256,005 3,242,500
========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
2
<PAGE>
QC OPTICS, INC.
STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
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JUNE 30,
1998 1997
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<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) $ 277,296 ($475,691)
Adjustments to reconcile net income (loss) to net
cash provided (used) by operating activities -
Depreciation and amortization 46,740 33,000
Changes in operating assets and liabilities -
Accounts receivable 475,770 306,349
Inventory (536,548) 34,157
Prepaid expenses and other assets 77,846 (5,614)
Accounts payable 62,747 (372,606)
Accrued expenses and refundable income taxes (278,417) (859,686)
Customer deposits 25,049 (105,209)
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Total adjustments (126,813) (969,609)
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Net cash provided (used) by operating activities 150,483 (1,445,300)
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CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment (31,393) (66,407)
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Net cash used in investing activities (31,393) (66,407)
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CASH FLOWS FROM FINANCING ACTIVITIES:
Net cash used in financing activities -- --
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NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 119,090 (1,511,707)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 3,766,534 5,022,772
---------- ----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $3,885,624 $3,511,065
========== ==========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid for -
Interest $ 5,197 $ 5,056
========== ==========
Income taxes $ 258,663 $ 520,648
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE>
QC OPTICS, INC.
NOTES TO FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The financial statements of QC Optics, Inc. (the "Company") included herein
have been prepared pursuant to the rules of the Securities and Exchange
Commission for quarterly reports on Form 10-Q and do not include all of the
information and footnote disclosures required by generally accepted accounting
principles. These statements should be read in conjunction with the financial
statements and notes thereto for the year ended December 31, 1997 included in
the Company's Form 10-KSB filed with the Securities and Exchange Commission.
The financial statements and notes herein are unaudited, except for the
balance sheet as of December 31, 1997, but in the opinion of management, include
all the adjustments (consisting only of normal, recurring adjustments) necessary
to present fairly the financial position, results of operations and cash flows
of the Company.
The results of operations for the reported 1998 period are not necessarily
indicative of the results to be achieved for any future period or for the entire
year ended December 31, 1998.
2. EARNINGS PER SHARE CALCULATION
In 1997, the Company adopted SFAS No. 128, Earnings per Share ("EPS").
Basic EPS is calculated by dividing net income (loss) by the weighted-average
number of common shares outstanding for the period. Diluted EPS is calculated
the same as basic except, if not antidultive, stock options are included using
the treasury stock method to the extent that the average share trading price
exceeds the exercise price. As of June 30, 1998 and 1997, there were 284,720 and
251,576 options outstanding, respectively. Of these potentially dilutive
securities, 65,488 qualified for inclusion in the diluted EPS calculation for
the three months ended June 30, 1998. These options yielded 5,348 incremental
shares for the period and as a result, the period-end weighted average shares
outstanding were 3,247,848 and 3,242,500 for the three months ended June 30,
1998 and 1997, respectively. The implementation of this standard did not have an
effect on EPS in the period ended June 30, 1997 and, therefore, did not require
restatement. Basic and diluted EPS were equal for the three months and six
months ended June 30, 1998 and 1997; therefore, no reconciliation between basic
and diluted EPS is required.
3. INVENTORY
Inventory is stated at the lower of cost (first-in, first-out) or market
and consists of the following:
<TABLE>
<CAPTION>
June 30, December 31,
1998 1997
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<S> <C> <C>
Raw materials and finished parts $1,935,554 $1,931,130
Work-in-process 2,626,422 2,094,298
---------- ----------
$4,561,976 $4,025,428
========== ==========
</TABLE>
4. COMPREHENSIVE INCOME
On January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income", which
4
<PAGE>
requires companies to report all changes in equity during a period, except those
resulting from investment by owners and distribution to owners, in a financial
statement for the period in which they are recognized (" Comprehensive Income").
The Company has no items of Comprehensive Income requiring disclosure in the
accompanying financial statements for all periods presented.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
QC Optics, Inc. (the "Company" or "QCO") designs, manufactures and markets
laser-based defect detection systems for the computer hard disk, semiconductor
and flat panel display markets. QCO uses its patented and other proprietary
technology in lasers and optical systems that scan a computer hard disk,
photomask or flat panel display for defects or contamination. The Company's
systems combine automatic handling, clean room capability and computer control
with reliable laser-based technology.
RESULTS OF OPERATIONS
COMPARISON OF THREE MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
Net sales for the three months ended June 30, 1998 ("Interim 1998") were
$3,038,366 compared to $1,732,827 for the three months ended June 30, 1997
("Interim 1997"). This increase of 75.3% resulted from increased sales of the
Company's computer hard disk inspection equipment. Historically the Company has
experienced significant quarterly fluctuations in operating results due to the
relatively small number of high priced sales in any quarter. Management expects
these fluctuations to continue.
Cost of sales for Interim 1998 was $1,545,710 compared to $855,417 for
Interim 1997. Primarily as a result of the decrease in margins on certain newly
introduced products during the period, gross profit as a percent of net sales
for Interim 1998 decreased to 49.1% ($1,492,656) from 50.6% ($877,410) for
Interim 1997.
Selling, general and administrative expenses decreased to $847,838 for
Interim 1998 from $887,695 for Interim 1997. The decrease of $39,857 (4.5%) was
due primarily to decreases in professional fees and relocation costs which were
offset somewhat by an increase in field service expenses.
Engineering expenses for Interim 1998 of $361,998 increased from $318,689
for Interim 1997. The increase of $43,309 (13.6%) was due primarily to an
increase in staffing costs.
Interest income (net) was $53,034 for Interim 1998 compared to $40,483 for
Interim 1997. This was due to an increase in average invested funds during
Interim 1998 as compared to Interim 1997.
Primarily as a result of increased net sales, income before provision for
income taxes was $335,854 (11.1% of net sales) for Interim 1998, as compared to
the loss before benefit for income taxes of $288,491 (16.6% of net sales) for
Interim 1997.
5
<PAGE>
In Interim 1998, the provision for income taxes amounted to $121,800, an
effective tax rate of approximately 36%. Due to the ability of the Company to
carryback losses incurred in Interim 1997, the Company has benefited the losses
for Interim 1997 by $114,700 using an effective tax rate of approximately 40%.
With the 75.3% increase in net sales, the Company had net income of
$214,054 (7% of net sales) for Interim 1998 compared to a net loss of $173,791
(10% of net sales) during Interim 1997.
COMPARISON OF THE SIX MONTH PERIODS ENDED JUNE 30, 1998 AND 1997
Net sales for the six months ended June 30, 1998 were $6,176,790, as
compared to $3,523,519 for the same period in 1997, an increase of 75.3%. The
increase resulted from increased sales of the Company's computer hard disk
inspection products.
Cost of sales for the first six months of 1998 was $3,337,865 (54% of net
sales) compared to $1,721,060 (48.8% of net sales) for the same period in 1997.
The gross profit as a percentage of sales decreased to 46% in the first six
months of 1998 from 51.2% for the six months ended June 30, 1997. This was due
primarily to the decreased margins on certain newly introduced products during
the period offset partially by the higher sales covering certain fixed
manufacturing costs.
Selling, general and administrative expenses decreased by $159,658 to
$1,846,882 for the six months ended June 30, 1998 from $2,006,540 for the first
six months of 1997. This decrease of 8% was due primarily to decreased
commissions, offset primarily by increases in staffing costs and certain field
service expenses.
Engineering expenses for the first six months of 1998 of $672,944 remained
relatively constant compared with the $673,713 for the same period in 1997.
Interest income (net) was $115,697 for the first six months of 1998, up
from $94,003 for the first six months of 1997 due to the increase in average
investable funds during Interim 1998 as compared to Interim 1997.
Primarily as a result of increased net sales, the income before provision
for income taxes was $434,796 (7% of net sales) for the six months ended June
30, 1998, as compared to the loss before benefit for income taxes of $783,791
(22.2% of net sales) for the same period in 1997.
In the first six months of 1998, the provision for income taxes amounted
to $157,500, an effective tax rate of approximately 36%. Due to the ability of
the Company to carryback losses incurred in the first six months of 1997, the
Company benefited the losses for the period by $308,100 using an effective tax
rate of approximately 39%.
With the 75.3% increase in net sales, the Company had net income of
$277,296 (4.5% of net sales) for the first six months of 1998 compared to a net
loss of $475,691 (13.5% of net sales) during the six months ended June 30, 1997.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1998, the Company had cash and cash equivalents of $3,885,624,
an increase of $119,090 from $3,766,534 at December 31, 1997. Working capital
was $7,947,010 at June 30, 1998 as compared to $7,607,447 at December 31, 1997,
an increase of $339,563. Cash provided by operating activities was
6
<PAGE>
$150,483 during the six months ended June 30, 1998 compared to $1,445,300 of
cash used by operating activities for the same period in 1997 due to the
improvement in operating results and the timing of accounts receivable
collections, payments of accounts payable and accrued expenses and receipt of
customer advances.
The Company has a revolving line of credit with State Street Bank and Trust
Company. The revolving line of credit agreement was amended on June 29, 1998 and
allows for maximum borrowings of $2,000,000 and requires monthly payment of
interest on the outstanding balance to maturity on June 30, 2000. Borrowings
under the revolving line of credit agreement are limited to 80% of qualifying
accounts receivable. Borrowings under the agreement bear interest at the bank's
prime rate (8.5% at June 30, 1998). The terms of the loan agreement provide for
the maintenance of certain specified financial ratios including the quick ratio
and debt to equity, minimum earnings tests and other negative and affirmative
covenants and restricts certain transactions without the bank's prior written
consent. As of June 30, 1998 the Company was not in default of any covenants or
provisions of the credit agreement. At June 30, 1998, the Company had no
borrowings outstanding under the revolving credit agreement and availability of
approximately $1,625,000.
Based on its current cash balances, current bank credit facilities and
anticipated results of operations, management believes that the Company has
sufficient funds to meet its working capital requirements for the next twelve
months. Thereafter, the Company anticipates that it could need additional
financing to meet its current plans for expansion. No assurance can be given
that additional financing will be successfully completed or that such financing
will be available or, if available, be on terms favorable to the Company.
YEAR 2000 DISCLOSURE
The Company has considered the potential problems that may arise
because of the year 2000 as it relates to the Company's internal information
systems. It is the Company's opinion that, having considered the systems that
the Company presently utilizes, the year 2000 should not present material
problems with respect to its own internal information systems. To date, the
Company is unaware of any situations of noncompliance that would materially
adversely affect its operations or financial condition. There can be no
assurance, however, that instances of noncompliance which could have a material
adverse effect on the Company's operations or financial condition will not be
identified; that the systems of other companies with which the Company transacts
business will be corrected on a timely basis; or that a failure by such entities
to correct a Year 2000 problem or a correction which is incompatible with the
Company's information systems would not have a material adverse effect on the
Company's operations or financial condition.
FORWARD LOOKING STATEMENTS
This report contains certain forward-looking statements regarding
anticipated results of operations, liquidity and other matters. These
statements, in addition to statements made in conjunction with the words
"anticipate", "expect", "believe", "intend", "seek," "estimate" and similar
expressions, are forward-looking statements that involve a number of risks and
uncertainties. Such statements are based on management's current expectations
and are subject to a number of factors and uncertainties that could cause actual
results to differ materially from those described in the forward-looking
statements. Such factors and uncertainties include, but are not limited to the
following: business conditions and growth in certain market segments and general
economy; an increase in competition; increased or continued market acceptance of
the Company's products and proposed products; the loss of the services of one or
more of the Company's key employees, which could have a material adverse effect
on the Company; dependence on few customers; the availability of additional
capital to fund expansion on acceptable terms, if at all; and other risks and
uncertainties indicated from time to time in the Company's filings with the
Securities and Exchange Commission.
7
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS. NONE
ITEM 2. CHANGES IN SECURITIES.
USE OF PROCEEDS
Pursuant to Rule 463 of the Securities Act, the Company filed its initial
Form SR with the Securities and Exchange Commission on January 31, 1997
reporting for the period from October 24, 1996 (the effective date of the
Company's registration statement for its initial public offering) through
January 24, 1997. On August 12, 1997 the Company filed its first amendment to
its Form SR covering the period from January 24, 1997 through July 24, 1997. The
following reflects as of June 30, 1998 an estimate of the amount of net offering
proceeds received by the Company from its initial public offering used for each
of the purposes set forth below (and reflects only the changes to the
information provided by the Company in the Form 10-QSB filed on May 8, 1998):
Direct or indirect payments to directors, officers, persons owning ten
percent or more of any class of equity securities of the Company, and
affiliates of the Company:
Repayment of debt $ 750,000
Direct or indirect payments to others:
Research and development $ 820,491
Sales and marketing $ 441,646
Working capital $ 562,174
Temporary investments in money market fund $2,500,000
ITEM 3. DEFAULT UPON SENIOR SECURITIES. None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. None
ITEM 5. OTHER MATTERS.
In accordance with the provisions of Rule 14a-4(c), stockholders of the
Corporation are hereby notified that to be considered for inclusion in the proxy
statement relating to any annual meeting of stockholders, stockholder proposals
must be received (i) no less than 60 nor more than 90 days prior to the
anniversary date of the preceding annual meeting of the Corporation provided
that such annual meeting is called within 30 days before or after the
anniversary date of the immediately preceding annual meeting, and (ii) in the
case of an annual meeting that is called for a date that is not within 30 days
before or after the anniversary date of of the immediately preceding annual
meeting, no later than the close of business on the tenth day following the day
on which notice of the date of the meeting was mailed or public disclosure of
the date of the meeting was made, whichever comes first. In 1998, the
Corporation's Annual Meeting of Stockholders was held on June 10. All
Stockholder proposals should be marked for the attention of Eric T. Chase,
President, QC Optics, Inc. 46 Jonspin Road, Wilmington, Massachusetts 01887.
8
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibit is filed herewith:
---------
<TABLE>
<CAPTION>
EXHIBIT
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NO. TITLE
---- -----
<S> <C>
10h Allonge to Promissory Note of QC Optics, Inc. to State Street Bank
and Trust Company, dated June 29, 1998.
10j Amended and Restated Credit Agreement by and between the
Company and State Street Bank and Trust Company, dated
June 29, 1998.
27 Financial Data Schedule
(b) Reports on Form 8-K. No reports on Form 8-K were filed during the
quarter for which this report is filed.
</TABLE>
9
<PAGE>
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
QC OPTICS, INC.
Date: August 11, 1998 By: /s/ Eric T. Chase
--------------------------------------
Eric T. Chase
Chief Executive Officer and President
Date: August 11, 1998 By: /s/ Richard C. Allard
--------------------------------------
Richard C. Allard
Vice President of Finance
10
EXHIBIT 10h
FIRST ALLONGE TO $4,000,000.00 PROMISSORY NOTE
----------------------------------------------
This Allonge to $4,000,000.00 Demand Promissory Note (this "Allonge")
is made and entered into as of June 29, 1998, by and between STATE STREET BANK
AND TRUST COMPANY (the "BANK") and QC OPTICS, INC. (the "Borrower") and is
firmly affixed to and made a part of that certain Promissory Note of the
Borrower payable to the order of the Bank, dated December March 29, 1996 and
issued in the original principal amount of $4,000,000.00 (the "Note").
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of
which are hereby acknowledged, the Borrower and the Bank hereby agree that the
Note is hereby amended as set forth below. Capitalized terms used but not
defined herein shall have the meaning set forth in the Note.
1. The text of the Note is hereby deleted in its entirety and replaced
with the following in its place:
"$2,000,000.00 June 29, 1998
Principal Sum Boston, Massachusetts
FOR VALUE RECEIVED, the undersigned QC OPTICS, INC., a Delaware
corporation (hereinafter called the "Borrower") hereby promises to pay to the
order of STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company
(hereinafter called the "Bank") at the office of the Bank located at 225
Franklin Street, Boston, Massachusetts 02110, or such other places as the holder
hereof shall designate, TWO MILLION AND 00/100 ($2,000,000.00) DOLLARS, or, if
less, the aggregate unpaid principal amount of all loans made by the Bank to the
Borrower, together with interest commencing on July 1, 1998 on unpaid balances
as follows on all Loans pursuant to and as defined in that certain Amended and
Restated Credit Agreement, dated as of June 29, 1998, between the Borrower and
the Bank (the "Agreement"), at the Prime Rate (as defined below) payable monthly
in arrears on the first day of each calendar month until Maturity (as defined in
the Agreement). Notwithstanding the foregoing, all loans made by Bank for the
Borrower hereunder shall be due and payable with all interest hereon at the
sooner of Maturity or acceleration pursuant to the terms hereof. Interest based
upon the Prime Rate shall fluctuate based upon the Bank's Prime Rate in effect
from time to time. Each change in the Prime Rate of interest shall take effect
simultaneously with the corresponding change in such Prime Rate. "Prime Rate"
shall mean the rate of interest announced by the Bank in Boston from time to
time as its "Prime Rate". After acceleration, or
<PAGE>
maturity, interest shall accrue and be payable at the Prime Rate plus Four (4%)
Percent per annum. Any rate of interest set forth herein shall be calculated on
the basis of actual days elapsed and a 360-day year.
All loans hereunder and all payments on account of principal and
interest hereof shall be recorded by the Bank and, prior to any transfer hereof,
endorsed on a grid on the last page of this Note. The entries on the records of
the Bank (including any appearing on this Note) shall be prima facie evidence of
amounts outstanding hereunder.
Loans, as defined in the Agreement, may be prepaid without premium or
penalty. In the event that less than the total outstanding balance is prepaid,
payments shall first be applied to outstanding charges, if any, then to
interest, with the balance to principal to be applied to the next principal
installments(s) due or in the inverse order of maturity, at the option of the
Borrower to be exercised in writing. If no written direction is given, then said
payment shall be applied to principal in the inverse order of maturity.
If any one or more of the Events of Default, as defined in the
Agreement, shall occur, the entire unpaid principal amount of this Note and all
of the unpaid interest accrued thereon may become or be declared due and payable
by the holder in the manner and with the effect provided in the Agreement.
Any deposits or other sums at any time credited by or due from the
holder to any maker, endorser or guarantor hereof in the possession of the
holder may at all times be held and treated as collateral security for the
payment of this Note. The holder may apply or set off such deposits or other
sums against said liabilities at any time in the case of the maker, but only
with respect to matured liabilities in the case of any endorser or guarantor.
No delay or omission on the part of the holder in exercising any right
hereunder shall operate as a waiver of such right or of any other right under
this Note. A waiver on any one occasion shall not be construed as a bar to or
waiver of any such right and/or remedy on any future occasions.
Every maker, endorser and guarantor of this Note, or of the obligation
represented hereby, waives presentment, demand, notice, protest, and all other
demands and notices in connection with the delivery, acceptance, performance,
default or enforcement of this Note, assents to any substitution, exchange or
release of collateral, and/or to the addition or release of any other party or
person primarily or secondarily liable.
The undersigned will pay all reasonable expenses of every kind of the
enforcement of this Note, or of any of the rights hereunder, and hereby agrees
to pay to the holder on demand the amount of any and all such expenses incurred
by it. After deducting all reasonable legal or other expenses and costs of
collection of this Note and all costs of storage, custody, sale and delivery of
collateral held hereunder, the residue of any proceeds of collection or sale
shall be applied to the payment of principal or interest on this Note or on any
or all the other liabilities aforesaid, due or
2
<PAGE>
to become due, in such order of preference as the holder shall determine, proper
allowance for interest on liabilities not then being made, and any over surplus
shall be returned to undersigned.
As herein used, the word "holder" shall mean the payee, or other
endorsee of this Note, or bearer if it is at the time payable.
This Note shall take effect as a sealed instrument and shall be
governed by the laws of The Commonwealth of Massachusetts.
THE BORROWER WAIVES ANY RIGHT TO TRIAL BY JURY THE BORROWER MAY HAVE IN
ANY ACTION OR PROCEEDING, IN LAW OR EQUITY, IN CONNECTION WITH THIS NOTE. THE
BORROWER AND THE BANK HEREBY KNOWINGLY AND VOLUNTARILY AND INTENTIONALLY WAIVE
ANY RIGHT TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER,
OR IN CONNECTION WITH THIS NOTE. THE BORROWER HEREBY CERTIFIES THAT NO
REPRESENTATIVE OR AGENT OF THE BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT THE BANK WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THIS WAIVER
OF RIGHT TO JURY TRIAL PROVISION. THE BORROWER ACKNOWLEDGES THAT THE BANK HAS
BEEN INDUCED TO ENTER INTO THE BANK'S LENDING RELATIONSHIP WITH THE BORROWER BY,
AMONG OTHER THINGS, THE PROVISIONS OF THIS PARAGRAPH."
2. All references to the Note and any other instrument or document
delivered in connection therewith to the "Note" or "Promissory Note" shall be
deemed to mean the Note as amended by this Allonge.
3. As hereby amended, the Note is hereby ratified and confirmed in all
respects.
[THIS SPACE INTENTIONALLY LEFT BLANK]
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<PAGE>
IN WITNESS WHEROF, THE EXECUTION hereof as an instrument under seal as of the
date first set forth above and shall be governed by the laws of the Commonwealth
of Massachusetts.
QC OPTICS, INC.
Attest:
By:
- --------------------------------- ----------------------------------
Its: President
EXHIBIT 10j
AMENDED AND RESTATED CREDIT AGREEMENT
-------------------------------------
This Amended and Restated Credit Agreement (this "Agreement") is
entered into as of this 29th day of June, 1998, by and between STATE STREET BANK
AND TRUST COMPANY (the "BANK") and QC OPTICS, INC. (the "Borrower") and amends
and restates that certain Credit Agreement between the Bank and Borrower dated
March 29, 1996, as amended as of July 1, 1997.
BACKGROUND
WHEREAS, the Borrower has requested that the Bank modify that certain
Revolving Line of Credit in favor of the Borrower to provide for borrowings in
the principal amount of $2,000,000.00; and
WHEREAS, the Bank has agreed to continue to provide such a Line of
Credit as amended herein and subject to the terms and conditions hereof;
IN CONSIDERATION THEREOF, the parties hereto agree as follows:
ARTICLE I
DEFINITIONS AND ACCOUNTING TERMS
--------------------------------
SECTION 1.01. DEFINED TERMS. As used in this Agreement, the following
terms have the following meanings (terms defined in the singular to have the
same meaning when used in the plural and vice versa):
"AFFILIATE" means a person or entity which is a parent, subsidiary or
brother/sister corporation of or a person or entity who or which owns or holds a
significant ownership interest in or in which a significant ownership interest
is owned or held by, the Borrower.
"AGREEMENT" means this Credit Agreement, as amended, supplemented, or
modified from time to time.
"BANK'S PRIME RATE" shall mean the rate of interest announced by the
Bank in Boston from time to time as its "PRIME RATE".
"BANKING DAY" shall mean a day on which commercial banks are open for
business in Boston, Massachusetts.
"BORROWING BASE" shall mean as of any time, a sum equal to 80% of all
Eligible Receivables.
In no event shall the Borrowing Base exceed the sum of Two Million
($2,000,000.00) Dollars.
<PAGE>
"COMMITMENT" means the Bank's agreement as set forth in the Bank's
Commitment Letter dated June 5, 1998, to make Loans to the Borrower.
"DEBT" means (1) indebtedness or liability for borrowed money or for
the deferred purchase price of property or services (including trade
obligations); (2) obligations as lessee under capital leases; (3) current
liabilities in respect to unfunded vested benefits under any plan; (4)
obligations under letters of credit issued for the account of any Person; (5)
all guaranties, endorsements (other than for collection or deposit in the
ordinary course of business), and other contingent obligations to purchase, to
provide funds for payment, to supply funds to invest in any Person, or otherwise
to assure a creditor against loss; and (6) obligations secured by any Lien on
property owned by the Borrower, whether or not the obligations have been
assumed.
"ELIGIBLE RECEIVABLES" shall have the meaning set forth in Paragraph
2.07 herein.
"EVENT OF DEFAULT" means any of the events specified in Section 7.01.
"HEAD OFFICE" means the principal office of the Bank at 225 Franklin
Street, Boston, Massachusetts 02110.
"LIEN" means any mortgage, deed of trust, pledge, security interest,
hypothecation, deposit arrangement, encumbrance, lien (statutory or other), pre
or post-judgment attachment or preference, or other security agreement or
encumbrance of any kind or nature whatsoever (including, without limitation, any
conditional sale or other title retention agreement, any financing lease having
substantially the same economic effect as any of the foregoing, and the filing
of any financing statement under the Uniform Commercial Code or comparable law
of any jurisdiction to evidence any of the foregoing).
"LOANS" shall have the meaning assigned to such term in Section 2.01.
"LOAN DOCUMENTS" means this Agreement and the Note from the Borrower
and all other related documents and instruments executed and delivered by
Borrower to the Bank, all of even date herewith, and all extensions,
ratifications and modifications thereof, and supplements thereto.
"MAXIMUM ADVANCE LEVEL" shall have the meaning set forth in Paragraph
2.07 herein.
"NOTE" shall have the meaning assigned to such term in Section 2.04
herein.
"OBLIGATIONS" means of all the Borrower's Debt to Bank and all of
Borrower's other liabilities to Bank of every kind, nature and description,
direct or indirect, secured or unsecured, joint, several, joint and several,
absolute or contingent, due or to become due, now existing or hereafter arising
regardless of how such Debt liability arises or by what agreement or instrument
it may be evidenced, or whether evidenced by any agreement or instrument,
including, but not limited, to the Loan, any other Debt or liability of Borrower
under this Agreement or any other
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Loan Document or under any other financing agreement between Bank and Borrower
and all obligations of Borrower to Bank to perform acts or refrain from taking
any action.
"OPERATING ACCOUNTS" means all of the Borrower's operating accounts,
including, without limitation, all of the Borrower's deposit and disbursement
accounts.
"PERMITTED ENCUMBRANCES" means Prior Liens and other Liens, which the
Borrower is permitted to grant, either by the provisions of this Agreement or
any other Loan Document, or as described on Schedule 3.01(2) hereto.
"PERSON" means an individual, partnership, corporation, business trust,
joint stock company, trust, unincorporated association, joint venture,
governmental authority, or other entity of whatever nature.
"QUALIFIED CERTIFIED ACCOUNT" means a Certified Account not considered
a Disqualified Account (as defined herein) and not excluded pursuant to Section
2.08 below.
"SUBSIDIARY OR "SUBSIDIARIES" means, as to any Person, a corporation of
which shares of stock having ordinary voting power (other than stock having such
power only by reason of the happening of a contingency) to elect a majority of
the board of directors or other managers of such corporation are at the time
owned, or the management of which is otherwise controlled, directly, or
indirectly through one or more intermediaries, or both, by such Person.
SECTION 1.02. ACCOUNTING TERMS. All accounting terms not specifically
defined herein shall be construed in accordance with Generally Accepted
Accounting Principles (GAAP) consistent with that applied in the preparation of
the financial statements referred to in Section 4.01, and all financial data
submitted pursuant to this Agreement shall be prepared in accordance with such
principles, except interim financial data may be subject to year-end
adjustments.
SECTION 1.03. CAPITAL ADEQUACY. If after the date of this Agreement,
the Bank shall have determined that the adoption or implementation of any
applicable law, rule or regulation regarding capital requirements for banks or
bank holding companies, or any change therein (including, without limitation,
any change according to a prescribed schedule of increasing requirements,
whether or not known on the date of this Agreement), or any change in the
interpretation or administration thereof by any governmental authority central
bank or comparable agency charged with the interpretation or administration
thereof, or compliance by the Bank with any request or directive of such entity
regarding capital adequacy (whether or not having the force of law) has the
effect of reducing the return on the Bank's capital to a level below that which
the Bank could have achieved (taking into consideration the Bank's policies with
respect to capital adequacy immediately before such adoption, implementation,
change or compliance and assuming that the Bank's capital was fully utilized
prior to such adoption, implementation, change or compliance) but for such
adoption, implementation, change or compliance as a consequence of its
commitment to make Loans hereunder by any amount deemed by the Bank to be
material, the Borrowers shall pay to the Bank as an additional fee from time to
time on demand such amount as the Bank shall have determined to be necessary to
compensate it for such reduction. The
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<PAGE>
determination by the Bank of such amount, if done on the basis of any reasonable
averaging and attribution methods, shall in the absence of manifest error be
conclusive. The Bank agrees to promptly notify the Borrowers in writing of any
such determination and not to require payment of such amount unless and until
such reduction shall have been effected. At the Borrower's request, the Bank
shall demonstrate the basis of such determination.
ARTICLE II
AMOUNT AND TERMS OF THE LOAN
----------------------------
SECTION 2.01. LINE OF CREDIT. The Bank shall from time to time make
loans to the Borrower under and pursuant to the terms of this Agreement and the
obligations to repay as evidenced under the Note (the "NOTE") of even date, in
the form annexed hereto as Exhibit 2.04, in an aggregate amount not to exceed
Two Million ($2,000,000.00) Dollars and as further limited as provided in
Sections 2.07 and 2.08 below (the "LINE OF CREDIT"). This Agreement is, and is
intended to be a, continuing agreement and shall remain in full force and effect
for a term ending on June 30, 2000 (the "MATURITY DATE") whereupon all
Obligations shall be due and payable in full without presentation, demand, or
further notice of any kind, whether or not all or any part of the Obligations is
otherwise due and payable pursuant to the agreement or instrument evidencing
same. The Bank may terminate this Agreement immediately and without notice upon
the occurrence of an Event of Default. Notwithstanding the foregoing or anything
in this Agreement or elsewhere to the contrary, the Bank's rights and remedies
and the Borrower's Obligations and liabilities hereunder shall survive any
termination of this Agreement and shall remain in full force and effect until
all of the Obligations outstanding before the receipt of such notice by Bank,
and any extensions or renewals thereof (whether made before or after receipt of
such notice) together with interest accruing thereon after such notice, shall be
finally and irrevocably paid in full. No obligations or liabilities of the
Borrower to Bank shall be released until such final and irrevocable payment in
full of the Obligations, as described in the preceding sentence. The loans made
pursuant to this section, shall be known as the "LOAN" or "LOANS" as the context
requires or permits.
SECTION 2.02. NOTICE AND MANNER OF BORROWING. The Borrower shall give
the Bank a request for Borrowing (effective upon receipt) of any Loans under the
Line of Credit, specifying the date and amount thereof, which shall be in
increments of not less than $10,000.00. Not later than 2:00 P.M. on the date of
such request and upon fulfillment of the applicable conditions set forth in
Article III, the Bank will make such Loan available to Borrower in immediately
available funds by crediting the amount thereof to Borrower's primary Operating
Account with the Bank. In the alternative, the Borrower may utilize the Bank's
Liquidity Management Control System ("LMCS").
SECTION 2.03. INTEREST. The Borrower shall pay interest to the Bank on
the outstanding and unpaid principal amount of the Loans, at a fluctuating
interest rate per annum equal to the Bank's Prime Rate in effect from time to
time. Each change in such interest rate shall take effect simultaneously with
the corresponding change in such Prime Rate. Interest shall be calculated on the
basis of actual days elapsed and a 360-day year. Interest on the Line of Credit
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<PAGE>
shall be paid by debiting the Borrower's primary Operating Account on the first
business day of each month.
SECTION 2.04. NOTE. All Loans relative to the Line of Credit made by
the Bank under this Agreement shall be evidenced by, and repaid with interest in
accordance with a promissory note of the Borrower in the form of Exhibit 2.04
duly completed and fully executed in the principal amount of Two Million
($2,000,000.00) Dollars, dated the date of this Agreement, payable to the Bank,
(the "Note"). The Bank is hereby authorized by the Borrower to endorse on any
schedule attached to the Note the amount of each Loan and of each payment of
principal received by the Bank on account of the Line of Credit or on any other
schedule or record of the Bank, which endorsement shall, in the absence of
manifest error, be prima facie as to the outstanding balance of the Loans under
the Line of Credit made by the Bank; provided, however, that the failure to make
such notation with respect to any Loan or payment shall not limit or otherwise
affect the obligations of the Borrower under this Agreement or the Note.
SECTION 2.05. PREPAYMENTS. The Borrower may at any time prepay the Note
in whole or in part without penalty with accrued interest to the date of such
repayment on the amount prepaid. Notwithstanding that the Borrower has made any
prepayments under the Line of Credit, Borrower may reborrow any such funds at
any time subject to the Bank's discretion as set forth herein.
SECTION 2.06. UNUSED FEE. In addition to the principal and interest
payments required under the Loan the Borrower agrees to pay an ongoing
Commitment Fee on the daily unused portion of the facility at the rate of
three-eights of one (3/8%) percent per annum, payable monthly in arrears on the
first day of each month. The Unused Fee shall be calculated on the basis of a
year of 360 days and paid for the actual number of days elapsed.
SECTION 2.07. LIMITATIONS ON LINE OF CREDIT. The aggregate of the Loans
outstanding to the Borrower under the Note shall at no time exceed the Borrowing
Base, as defined herein (the "Maximum Advance Level"). If, at any time, the
aggregate Loans outstanding exceed the Maximum Advance Level, the Borrower shall
immediately pay to the Bank such sums as to bring the balance down to the
Maximum Advance Level.
For purposes of this Agreement, the term "Eligible Receivables" shall
mean accounts (as defined in the Massachusetts
UCC) owing to the Borrower which meet the following specifications:
(i) The Account is not more than ninety (90) days from the date of the
Invoice, except to the extent of any final acceptance payments on
equipment sales in accordance with the Borrower's standard sales
agreement (not to exceed twenty (20%) percent of the total Invoice
amount) which shall not be more than one hundred-fifty (150) days from
the Invoice date;
(ii) The Account arises from the performance of services or a bona fide
sale or lease of goods except that service contracts are specifically
excluded herefrom;
5
<PAGE>
(iii) The Account is not subject to a prior assignment, claim, lien or
security interest except to subordinated lenders who have entered into
a Subordination Agreement with the Bank;
(iv) The Account is not subject to set-off, credit, allowances or
adjustments, except discounts for prompt payment and allowances or
adjustments set forth on the original invoice;
(v) The Account is owned by an account debtor whose place of business
is not outside of the United States, unless said account debtor with a
foreign place of business has been approved prior thereto by the Bank.
The initial list of acceptable account debtors with foreign places of
business is attached hereto as Schedule 2.07(v).
(vi) The Account is not owed by an Affiliate of the Borrower.
(vii) The Account is not owed from an entity which is owed monies (or
other indebtedness) from the Borrower (the "Contra Amount") except that
only the Contra Amount portion shall be eliminated from the Qualified
Account.
SECTION 2.08. EXCLUSION OF CERTAIN ELIGIBLE RECEIVABLES FROM THE
BORROWING BASE. The Bank shall have the right in its sole discretion at any time
and for any reason to exclude any Eligible Receivable from the Borrowing Base
except that the Bank shall be obligated to act in a reasonable manner in making
any such exclusion.
SECTION 2.09. CERTIFICATION OF ACCOUNTS. Prior to the making of the
first loan relative to the Line of Credit hereunder the Borrower will deliver to
the Bank a Certificate, in a form approved by the Bank: (a) listing the
Borrower's then existing Accounts Receivable having been earned by performance;
(b) containing such information in respect to such Accounts Receivable as the
Bank may request; and (c) containing a calculation of the Borrowing Base as of
the date of the Certificate. Thereafter, at predetermined times agreed to by the
Bank and the Borrower and prior to the Bank making any Loan, the Borrower will
deliver to the Bank similar Certificates in respect to all Accounts Receivable
of the Borrower as to which rights have been earned by performance not
previously certified to the Bank in such Borrower's possession, and other
information requested by the Bank. With each such Certificate, the Borrower will
upon request by the Bank, furnish to the Bank such information as to each
Account Receivable identified on the Certificate as the Bank may request,
together with a duplicate of the invoice, copies of the shipping documents or
other evidence of delivery, if any, and all contracts, guaranties, orders and
other documents requested by the Bank, or, if the Bank at any time shall relieve
the Borrower of the obligation to furnish such documents with such Certificates,
the Borrower will keep all such documents segregated and available for
inspection by the Bank and will furnish same to the Bank upon request.
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<PAGE>
ARTICLE III
CONDITIONS PRECEDENT
--------------------
SECTION 3.01. CONDITIONS PRECEDENT TO INITIAL LOAN AND SUBSEQUENT
LOANS. The agreement of the Bank to make any Loan to the Borrower is subject to
the condition precedent that the Bank shall have received on or before the day
of such Loan each of the following in form and substance satisfactory to the
Bank and its counsel:
(1) NOTE. The Note executed by the Borrower;
(2) EVIDENCE OF ALL CORPORATE ACTION BY THE BORROWER. Certified (as of
the date of this Agreement) copies of all corporate action taken by the
Borrower, including resolutions of its Board of Directors, authorizing the
execution, delivery, and performance of the Loan Documents to which such
Borrower is a party and each other document to be delivered pursuant to this
Agreement;
(3) INCUMBENCY AND SIGNATURE CERTIFICATE OF THE BORROWER. Certificates
(dated as of the date of this Agreement) of the Secretary of the Borrower
certifying the names and true signatures of the officers of such Borrower
authorized to sign the Loan Documents to which it is a party and the other
documents to be delivered by the Borrower under this Agreement;
(4) OPINION(S) OF COUNSEL FOR THE BORROWER. An opinion of Borrower's
counsel, dated as of the date hereof in a form and of such substance as the Bank
may reasonably request.
(5) BORROWING BASE AND ACCOUNTS RECIEVABLE AGING. (i) A Certificate, in
a form approved by the Bank: (a) listing the Borrower's then existing Accounts
Receivable having been earned by performance; (b) containing such information in
respect to such Accounts Receivable as the Bank may request; and (c) containing
a calculation of the Borrowing Base as of the date of the Certificate; and (ii)
a Certificate, in a form approved by the Bank: (a) listing the Borrower's then
existing Accounts Receivable having been earned by performance; and (b) a
monthly aging of Borrower's then existing Accounts Receivable.
(6) OTHER DOCUMENTS. Such other documents or certificate as may be
reasonably requested by the Bank, or its counsel and/or as are required under
the terms of this Agreement or any Loan Document.
ARTICLE IV
REPRESENTATION AND WARRANTIES
-----------------------------
The Borrower represents and warrants to the Bank that:
SECTION 4.01. FINANCIAL STATEMENTS. The balance sheet of the Borrower
as of December 31, 1997 and the related statements of income, cash flows and
stockholders' equity for the fiscal year then ended, reported on by Arthur
Andersen and set forth in the Borrower's 1997 Form 10-KSB, a copy of which has
been delivered to the Bank, fairly present, in conformity with
7
<PAGE>
generally accepted accounting principles, the consolidated financial position of
the Borrower as of such date and the results of operations and cash flows for
such fiscal year, and since the date through which the financial statements
cover, there has been (a) no material adverse change in the condition (financial
or otherwise), business, or operations of Borrower; (b) no damage, destruction
or loss materially adversely affecting Borrower's business; (c) no declaration
of making of any dividend or other distribution to stockholders of the Borrower
with respect to Borrower's capital stock or any direct or indirect redemption,
purchase or other acquisition of any such stock; (d) no increase in compensation
payable or to become payable by Borrower to any of its executive officers or any
general wage increase except in the ordinary course of the Borrower's business;
or (e) no materially adverse controversy with employees, labor unions or
governmental agencies. There are no liabilities of Borrower, fixed or
contingent, which are material but are not reflected in the financial statements
or in the notes thereto, other than liabilities arising in the ordinary course
of business.
SECTION 4.02. LITIGATION. Except as set forth on both Borrower's 1997
Form 10-KSB and on Schedule 4.02, there is no pending or, to the Borrower's
knowledge, threatened action or proceeding against or affecting the Borrower
before any court, governmental agency, or arbitrator which may, in any one case
or in the aggregate, materially adversely affect the financial condition,
operations, properties, or business of the Borrower or the ability of the
Borrower to perform its Obligations under the Loan Documents to which it is a
party.
SECTION 4.03. TAXES. The Borrower has filed all income tax returns,
excise tax returns and other tax returns (federal, state, and local) required to
be filed and has paid all taxes, assessments, and governmental charges and
levies thereon to be due, including interest and penalties. To the Borrower's
knowledge, no audit or investigation is presently being conducted with regard to
any tax return or tax obligation of Borrower.
SECTION 4.04. PATENTS/LICENSES/TRADEMARKS. Schedule 4.04 annexed hereto
is a listing of all patents and/or patents pending, trademarks, copyrights,
licenses and similar agreements in which the Borrower has an interest.
SECTION 4.05. INCORPORATION, GOOD STANDING, AND DUE QUALIFICATION. The
Borrower is a corporation duly incorporated, validly existing, and in corporate
good standing under the laws of the state of its incorporation; has the
corporate power and authority to own its assets and to transact the business in
which it is now engaged or proposed to be engaged in; and is duly qualified as a
foreign corporation and in good standing under the laws of each other
jurisdiction in which such qualification is required and in which the failure to
be so qualified would have a material adverse effect on the Borrower's business,
operations or financial statements.
SECTION 4.06. CORPORATE POWER AND AUTHORITY. The execution, delivery,
and performance by the Borrower of the Loan Documents to which each is a party
have been duly authorized by all necessary corporate action and do not and will
not (1) require any consent or approval of the stockholders of such corporation;
(2) contravene such corporation's charter or bylaws; (3) violate any provision
of any law, rule, regulation (including, without limitation,
8
<PAGE>
Regulation U of the Board of Governors of the Federal Reserve System), the
violation of which would have a material adverse effect on the business or
operations of the Borrower or any order, writ, judgment, injunction, decree,
determination, or award presently in effect having applicability to such
corporation; (4) result in a breach of or constitute a default under any
indenture or loan or credit agreement or any other agreement, lease, or
instrument to which such corporation is a party or by which it or its properties
may be bound or affected; (5) result in, or require, the creation or imposition
of any Lien upon or with respect to any of the properties now owned or hereafter
acquired by such corporation; and (6) cause such corporation to be in violation
of or default under any such law, rule, regulation, or any such indenture,
agreement, lease, or instrument which default would have a material and adverse
effect on the business or operation of such corporation or under any order,
writ, judgment, injunction, decree, determination or award.
SECTION 4.07. LEGALLY ENFORCEABLE AGREEMENT. This Agreement is, and
each of the other Loan Documents when delivered under this Agreement will be,
legal, valid, and binding obligations of the Borrower, enforceable against the
Borrower, , as the case may be, in accordance with their respective terms,
except to the extent that such enforcement may be limited by applicable
bankruptcy, insolvency, and other similar laws affecting creditors' rights
generally subject in all instances to general equitable principles.
SECTION 4.08. LABOR DISPUTES AND ACTS OF GOD. Neither the business nor
the properties of the Borrower are affected by any fire, explosion, accident,
strike, lockout or other labor dispute, drought, storm, hail, earthquake,
embargo, act of God or of the public enemy, or other casualty (whether or not
covered by insurance) materially and adversely affecting such business or
properties or the operation of the Borrower.
SECTION 4.09. COMPLIANCE. The Borrower has not materially violated, nor
is the Borrower in material violation of, any applicable law or regulation,
which violation would have a material and adverse effect on the business or
operations of the Borrower, or any order, judgment, or decree. The Borrower is
not a party to any contract or other agreement, or subject to any restrictions
under its charter documents, bylaws or other corporate instrument, or subject to
any order, judgment, rule, regulation, or decree of any court or governmental
authority, which materially and adversely affects its business, properties,
assets or financial condition or which restricts or otherwise limits its
incurring of the Loan or its performance and observance of its Obligations.
Neither the execution and delivery by Borrower, nor the compliance by Borrower
with the terms and conditions, of this Agreement, or any Loan Document to which
Borrower is a party, conflicts or will conflict with, constitutes or will
constitute a default under, or results or will result in any violation of, the
charter documents or By-laws of Borrower, any award of any arbitrator, to the
Borrower's knowledge, any law, any order, judgment, rule, regulation or decree
of any court or governmental authority, or any agreement or instrument to which
Borrower are a party or any of its property is subject; nor does the same result
nor will it result in the creation or imposition of any Lien upon any of its
property except the Liens created by this Agreement or any other Loan Document.
SECTION 4.10. NO DEFAULTS ON OUTSTANDING JUDGMENTS OR ORDERS. The
Borrower has satisfied all judgments and the Borrower is not in default with
respect to any judgment, writ,
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injunction, or decree of any court, arbitrator, or federal, state, municipal, or
other governmental authority, commission, board, bureau, agency, or
instrumentality, domestic or foreign, except as set forth in Schedule 4.10.
SECTION 4.11. OWNERSHIP AND LIENS. The Borrower has good and clear
record and marketable title to all properties and assets which it purports to
own, free and clear of all mortgages, liens, pledges, charges, security
interests and encumbrances, other than those reflected on Schedule 3.01(2).
SECTION 4.12. SUBSIDIARIES AND OWNERSHIP OF STOCK. Except as set forth
in Schedule 4.12, there are currently no subsidiaries of Borrower and except as
set forth on Schedule 4.12, Borrower has no investments in the stock or
securities of any other corporation, firm, trust or other entity.
SECTION 4.13. OPERATION OF BUSINESS. The Borrower possesses, to the
knowledge of the Borrower, all licenses, permits, franchises, patents,
copyrights, trademarks, and trade names, or rights thereto, to conduct its
business substantially now as conducted and as presently proposed to be
conducted, and the Borrower is not in any material violation of any rights of
others with respect to any of the foregoing.
SECTION 4.14. NO CHANGE OF NAME. The Borrower has not in the past five
(5) years changed its name.
SECTION 4.15. HAZARDOUS MATERIAL. The Borrower, nor to its knowledge,
any individual for whose conduct the Borrower is responsible, has ever:
(a) owned, occupied, or operated a site or vessel on which any
hazardous material or oil was or is stored, transported, or
disposed of (the terms site, vessel, and hazardous material
respectively being used in this Agreement with the meaning given
those terms in M.G.L. C. 21E); or
(b) directly or indirectly transported, or arranged for the
transport of any hazardous material or oil; or
(c) caused or been legally responsible for any release or threat of
release of any hazardous material or oil; or
(d) received notification from any federal, state, or other
governmental authority of any potential or known release or
threat of release of any hazardous material or oil from any site
or vessel owned, occupied, or operated by the Borrower or any
person for whose conduct the Borrower is responsible, and/or of
the incurrence of any expense or loss by such governmental
entity.
SECTION 4.16. INTENTIONALLY OMITTED
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SECTION 4.17. DEBT. Schedule 4.17 is a complete and correct list of all
credit agreements, indentures, purchase agreements (other than for materials,
supplies and services entered into in the ordinary course of business),
guaranties, leases (requiring lease payments in the aggregate of $50,000.00
annually), and other investments, agreements, and arrangements presently in
effect providing for or relating to extensions of credit (including agreements
and arrangements for the issuance of letters of credit or for acceptance
financing) in respect of which the Borrower or any subsidiary is in any manner
directly or contingently obligated; and the maximum principal or face amounts of
credit in question, which are outstanding and which can be outstanding, are
correctly stated, and all Liens of any nature given or agreed to be given as
security therefor are correctly described or indicated in such Schedule.
SECTION 4.18. OFFICERS AND DIRECTORS. The officers and directors of the
Borrower are as set forth on Schedule 4.18 annexed hereto and upon any changes
or additions, the Borrower will promptly notify the Bank in writing.
SECTION 4.19. ERISA COMPLIANCE. No employee pension benefit plan or
other plan (within the meaning of Section 3(2) of the Employees Retirement
Income Security Act of 1974, as amended ("ERISA")) which is or was sponsored at
any time, by Borrower or any member of a controlled group of corporations within
the meaning of Section 414(b) of the Internal Revenue Code of 1954, as amended
(the "Code"), or any member of a group of commonly controlled trades or
businesses (whether or not incorporated) within the meaning of Section 414(c) of
the Code of which Borrower is a member ("Plan"): (i) has incurred an
"accumulated funding deficiency" (within the meaning of Section 302(a)(2) of
ERISA), or which could result in a liability of Borrower (which liability could
materially adversely affect the financial conditions of Borrower) under Section
409 of ERISA or Section 4975 of the Code or pursuant to any agreement or statute
with respect to liabilities incurred by an person under such sections. No
material liability to the Pension Benefit Guaranty Corporation ("PBGC"), to a
Plan, or to any participant in or beneficiary of a Plan has been or, to the
present knowledge of Borrower, is expected to be incurred with respect to any
Plan by Borrower, and there has been no event or condition which presents a risk
of termination of any Plan by PBGC. None of the following events has occurred
or, to the knowledge of Borrower, is expected to occur, with respect to any
multi-employer plan (as that term is defined in Section 3(37) of ERISA) to which
any Borrower or any member of a controlled group of corporations or any member
of a group of commonly controlled trades or businesses of which Borrower is a
member, contributes on behalf of its employees (the "Contributing Employers")
which has resulted or could result in any material liability of the Borrower to
PBGC, to such multi-employer plan, or to any participant in or beneficiary of
such multi-employer plan: (i) a withdrawal, either complete or partial, from any
such plan (within the meaning of Section 4203 or Section 4205, respectively, of
ERISA) by a Contributing Employer; (ii) the termination of any such plan; or
(iii) the recording of a reorganization index (as defined by Section 4241 of
ERISA) in excess of zero by any such plan.
SECTION 4.20. FULL DISCLOSURE. No representation, warranty, or
statement by Borrower contained herein or in any certificate or other document
furnished or to be furnished by Borrower pursuant hereto contains or at the time
of delivery shall contain any untrue statement of
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material fact, or omits, or shall omit at the time of delivery, to state a
material fact necessary to make it not misleading.
SECTION 4.21. INVESTMENT COMPANY. The Borrower is not an "investment
company" within the meaning of the Investment Company Act of 1940, as amended.
ARTICLE V
AFFIRMATIVE COVENANTS
---------------------
So long as the Note shall remain unpaid or the Bank shall have any
Commitment under this Agreement, the Borrower will:
SECTION 5.01. MAINTENANCE OF RECORDS. Keep adequate records and books
of account, in which complete entries will be made in accordance with GAAP
consistently applied, subject to year end adjustments, reflecting all financial
transactions of the Borrower, including complete records of all accounts of
Borrower, as defined in the Massachusetts Uniform Commercial Code.
SECTION 5.02. MAINTENANCE OF PROPERTIES. Maintain, keep, and preserve
all of its properties (tangible and intangible) necessary or useful in the
proper conduct of its business in good working order and condition, ordinary
wear and tear excepted. Borrower shall maintain in full force and effect all
rights, patents, licenses, permits and privileges necessary for the proper
conduct of its business.
SECTION 5.03. CONDUCT OF BUSINESS. Continue to engage in the same
general type of business as conducted by it on the date of this Agreement.
SECTION 5.04. MAINTENANCE OF INSURANCE. Maintain insurance with
financially sound and reputable insurance companies or associations in such
amounts and covering such risks as the Bank shall reasonably require and as are
usually carried by companies engaged in the same or a similar business and
similarly situated, which insurance may provide for reasonable deductibility
from coverage thereof.
SECTION 5.05. COMPLIANCE WITH LAWS. Comply in all material respects
with applicable laws, rules, regulations, and orders, such compliance to
include, without limitation, paying before the same become delinquent all taxes,
assessments, and governmental charges imposed upon it or upon its property,
noncompliance with which would have a material and adverse effect on the
business and operations of the Borrower.
SECTION 5.06. RIGHT OF INSPECTION. At any reasonable time and from time
to time, permit the Bank or any agent or representative thereof to examine and
make copies of and abstracts from the records and books of account of, and visit
the properties of the Borrower and to discuss the affairs, finances, and
accounts of the Borrower with any of their respective officers and directors and
the Borrower's independent accountants so long as said activities do not
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unreasonably disrupt the business of the Borrower. In addition to the foregoing,
audits by the Bank's auditors shall be conducted on an ongoing basis.
SECTION 5.07. REPORTING REQUIREMENTS. Furnish to the Bank:
(1) SHAREHOLDER NOTICES. Promptly upon the mailing thereof to the
shareholders of the Borrower generally, copies of all financial statements,
reports and proxy statements so mailed.
(2) SECURITIES AND EXCHANGE COMMISSION FILINGS. Within five business
days of the filing thereof, copies of all registration statements (other than
the exhibits thereto and any registration statements on Form S-8 or its
equivalent) and reports on Forms 10-KSB, 10-QSB and 8-K (or their equivalents)
which the Borrower shall have filed with the Securities and Exchange Commission.
(3) NOTICE OF LITIGATION. Promptly after the commencement thereof,
notice of all actions, suits, and proceedings before any court or governmental
department, commission, board, bureau, agency, or instrumentality, domestic or
foreign, affecting the Borrower, which, if determined adversely to the Borrower,
could have a material adverse effect on the financial condition, properties, or
operations of the Borrower;
(4) NOTICE OF EVENTS OF DEFAULT. As soon as possible and in any event
within ten (10) days after the occurrence of each Event of Default, a written
notice setting forth the details of such Event of Default and the action which
is proposed to be taken by the Borrower with respect thereto;
(5) GENERAL INFORMATION. Such other information respecting the
condition or operations, financial or otherwise, receivables of the Borrower as
the Bank may from time to time reasonably request.
(6) MONTHLY AGING OF RECEIVABLES. Prior to making any Loan hereunder,
the Borrower shall furnish the Bank a monthly aging of the Borrower's then
existing Receivables as required pursuant to Article III.
(7) BORROWING BASE CERTIFICATE. Prior to making any Loan hereunder, the
Borrower shall furnish the Bank with a Borrower Base Certificate executed by one
of the President or Treasurer of the Borrower, certifying to the Bank as to
Eligible Receivables and setting forth information with respect to any Eligible
Receivable such information as the Bank may reasonably request.
(8) OFFICER CERTIFICATION. The Borrower will, at the time of delivery
to the Bank of the reports referred to in Sections 5.07(6) and (7), deliver to
the Bank certificates signed by any individual duly authorized by the Borrower
certifying that such individual has reviewed the provisions of this Agreement
and stating in his opinion, if such be the fact, that the Borrower has not been
and is not in default as to any of the covenants and agreements of the Borrower
contained in this Agreement.
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SECTION 5.08. ADDITIONAL DOCUMENTS. From time to time, execute and
deliver to the Bank all such other and further instruments or documents and take
or cause to be taken all such other and further action as the Bank may
reasonably request in order to effect and confirm or vest more securely in the
Bank all rights contemplated in this Agreement.
SECTION 5.09. PAYMENT OF TAXES AND CLAIMS. Pay when due all taxes,
assessments, governmental charges or levies imposed upon it or its income for
services, labor, materials and supplies, in each of such cases which, if unpaid,
might become a Lien or charge upon any of its properties or assets; but Borrower
shall not be required to pay any such tax, assessment, charge, levy or claim so
long as (1) the validity thereof shall be contested in good faith by appropriate
proceedings, (2) no proceedings in foreclosure or for the sale of any property
of Borrower on account of any such tax, assessment, charge, levy of claim shall
have been commenced (or such proceedings shall have been stayed pending the
disposition of such contest of validity) (3) Borrower shall have set aside on
its books adequate reserves with respect thereto and (4) such tax, assessment,
charge, levy or claim shall not have caused a material, adverse effect on the
Borrower's financial condition.
SECTION 5.10. ERISA NOTICES. Promptly notify Bank if any time (i) a
Plan incurs an "accumulated funding deficiency" (as defined in Sections 412(a)
of the Code), whether or not waived; (ii) a "reportable event" (within the
meaning of Section 4043(b) of ERISA) occurs with respect to a Plan; (iii)
Borrower engages in any transaction which violates Section 406 or Section 407 of
ERISA or which could result in a liability under Section 409, 501 or 502 of
ERISA or Section 4975 of the Code or pursuant to any agreement or statute with
respect to liabilities incurred by any person under such sections, which
liability could materially affect the financial condition of such Borrower; (iv)
Borrower incurs a material liability to the PBGC or to any participant in or
beneficiary of a Plan with respect to any Plan; (v) an event occurs or a
condition arises which presents a risk of termination of any Plan by the PBGC;
(vi) Borrower is notified by the Internal Revenue Service or the Department of
Labor that the Plan is not or may not be qualified under Section 401(a) of the
Code or that the trust established thereunder is not or may not be exempt from
tax under Section 501(a) of the Code; (vii) any of the following events occurs
with respect to any multi-employer plan (as defined in Section 3(37) of ERISA)
to which the borrower or any member of a group of commonly controlled trades or
businesses within the meaning of Section 414(c) of the Code of which any
Borrower is a member or contributes on behalf of its employees: (A) a
withdrawal, either complete or partial, from any such plan (within the meaning
of Section 4202 or Section 205, respectively, or ERISA) by a Contributing
Employer or a decision by the Contributing Employer to withdraw completely or
partially from such plan; (B) the termination of any such plan; or (C) the
recording of a reorganization index (as defined by Section 4241 of ERISA) in
excess of zero by any such plan.
SECTION 5.11. BANK ACCOUNTS. Maintain all of its Operating and Deposit
Accounts with the Bank.
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SECTION 5.12. COMPLY WITH OTHER COVENANTS AND WARRANTIES. Conform,
adhere to, and observe all covenants and warranties contained in any other
agreement between the Bank and the Borrower, or instrument furnished by the
Borrower to the Bank.
SECTION 5.13. MAINTENANCE OF EXISTENCE. Preserve and maintain their
corporate existence and good corporate standing in the jurisdiction of their
incorporation, and qualify and remain qualified as a foreign corporation in each
jurisdiction in which such qualification is required and in which the failure to
be so qualified would have a material adverse effect on the Borrower's business,
operations or financial statements.
SECTION 5.14. USE OF PROCEEDS. Use the proceeds of the Line of Credit
only for the working capital
needs of the Borrower.
SECTION 5.15. PAYMENT OF OTHER OBLIGATIONS. The Borrower will
punctually and promptly make all payments and perform all other obligations
which may be required of it with respect to any indebtedness (whether for money
borrowed, goods purchased, services rendered or however such indebtedness may
otherwise arise) owing to persons, firms or corporations other than the Bank,
including, without limitation, indebtedness which may be secured by a security
interest in assets of the Borrower or property of the Borrower, and all
obligations under the terms of any lease in which the Borrower is the lessee.
The provisions of this section shall not preclude the Borrower from contesting
in good faith and diligently defending against any such indebtedness or
obligation.
ARTICLE VI
NEGATIVE COVENANTS
------------------
So long as the Note shall remain unpaid or the Bank shall have any
Commitment under this Agreement, the Borrower will not:
SECTION 6.01. LIENS. Create, incur, assume, or suffer to exist, or
permit any Subsidiary (if any exist) to create, incur, assume, or suffer to
exist, any Lien upon or with respect to any of its properties, now owned or
hereafter acquired, except:
(1) Liens in favor of the Bank;
(2) Liens for taxes or assessments or other government charges or
levies if not yet due and payable or, if due and payable, if they are being
contested in good faith by appropriate proceedings and for which appropriate
reserves are maintained;
(3) Judgment and other similar Liens arising in connection with court
proceedings, provided the execution or other enforcement of such Liens is
effectively stayed and the claims secured thereby are being actively contested
in good faith and by appropriate proceedings, provided they do not adversely
affect the final outcome of the Borrower in a material way;
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(4) Purchase-money Liens on any property hereafter acquired or the
assumption of any Lien on property existing at the time of such acquisition, or
a Lien incurred in connection with any conditional sale or other title retention
agreement of a capital lease in an amount not to exceed $100,000.00 per year in
the aggregate;
(5) Permitted Encumbrances, as identified on Schedule 3.01(2).
SECTION 6.02. MERGERS OR DISPOSITION OF ASSETS. Without the prior
written consent of the Bank which shall not be unreasonably withheld or delayed,
alter the Borrower's capital structure, including, without limitation, sell,
transfer or redeem any shares of the Borrower, merge or consolidate with (unless
it is the survivor corporation) or sell, assign, lease, or otherwise dispose of
(whether in one transaction or in a series of transactions) all or substantially
all of its assets (whether now owned or hereafter acquired) to any Person, or
acquire all or substantially all of the assets or the business of any Person, or
permit any Subsidiary (if at any time existing) to do so.
SECTION 6.03. LEASES. Without the prior written consent of the Bank
which shall not be unreasonably withheld or delayed, create, incur, assume, or
suffer to exist, or permit any Subsidiary (if at any time existing) to create,
incur, assume or suffer to exist, any obligation as lessee for the rental or
hire of any real or personal property, except: (1) leases existing on the date
of this Agreement and any extensions or renewals thereof; (2) leases, of which
the total annual obligation under any such lease is not more than $25,000.00,
with the aggregate of all such new leases (i.e., leases not in effect at the
time of this Agreement) not to exceed $100,000.00.
SECTION 6.04. SALE OF ASSETS. Sell, lease, assign, transfer, or
otherwise dispose of, any of its now owned or hereafter acquired assets
(including, without limitation, shares of stock and indebtedness of
Subsidiaries, receivables, and leasehold interests), except: (1) for inventory
disposed of in the ordinary course of business; (2) the sale or other
disposition of assets no longer used or useful in the conduct of its business;
or (3) any sale of other assets, provided any such single sale does not exceed
$50,000 and the aggregate proceeds of all such sales in any one fiscal year do
not exceed $150,000.00.
SECTION 6.05. GUARANTIES, ETC. Assume, guarantee, endorse, or otherwise
be or become directly or contingently responsible or liable, or permit any
Subsidiary (if at any time existing) to assume, guarantee, endorse, or otherwise
be or become directly or contingently responsible or liable (including, but not
limited to, an agreement to purchase any obligation, stock, assets, goods, or
services, or to supply or advance any funds, assets, goods, or services, or to
maintain or cause such Person to maintain a minimum working capital or net
worth, or otherwise to assure the creditors of any Person against loss) for
obligations of any Person, except guaranties by endorsement of negotiable
instruments for deposit or collection or similar transactions in the ordinary
course of business.
SECTION 6.06. ADDITIONAL DEBT. Except as otherwise provided above,
issue evidence of indebtedness or create, assume, become contingently liable
for, or suffer to exist bank debt in addition to Debt to the Bank; provided,
however, that the Borrower may incur liabilities which
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are incurred or arise in the ordinary course of Borrower's business other than
Debt arising with respect to money borrowed or the issuance of letters of credit
for the account of the Borrower both of which shall be prohibited.
SECTION 6.07. NAME. Change its name without prior written notification
to the Bank.
SECTION 6.08. PLACES OF BUSINESS. Without prior written notice to the
Bank, open or operate any place of business other than those places listed on
Schedule 6.08, attached hereto and made a part hereof.
SECTION 6.09. TRANSACTIONS WITH AFFILIATES. Enter into any transaction,
including, without limitation, the purchase, sale, or exchange of property or
the rendering of any service, with any affiliate, or permit any subsidiary to
enter into any transaction, including, without limitation, the purchase, sale,
or exchange of property or the rendering of any service, with any affiliate, or
the making of advances to any affiliates except in the ordinary course of
business and pursuant to the reasonable requirements of the Borrower's or such
subsidiary's business and upon fair and reasonable terms no less favorable to
the Borrower or such subsidiary than would obtain in a comparable arm's-length
transaction with a Person not an affiliate.
SECTION 6.10. FINANCIAL COVENANTS. So long as the Note shall remain
unpaid or the Bank shall have any commitment under this Agreement:
(1) QUICK RATIO. The Borrower will maintain a ratio of Quick Assets to
current liabilities (excluding Bank Debt and all Subordinated Debt) of not less
than 1.75 to 1 and this ratio shall be tested at the end of each calendar
quarter. "QUICK ASSETS" shall mean the sum of (a) cash on hand or on deposit in
banks, (b) readily marketable securities issued by the United States, (c)
readily marketable commercial paper rated "A-1" by Standard & Poor's Corporation
or "P-1" by Moody's Inventor's Service (or a similar organization which rates
commercial paper), (d) certificates of deposit or banker's acceptances issued by
commercial banks of recognized surplus in excess of one hundred million
($100,000,000.00) Dollars and (e) net receivables as reported in accordance with
GAAP on monthly balance sheets.
(2) The Borrower will maintain a MINIMUM CAPITAL FUNDS level of
$7,500,000.00 which will be tested at the end of each quarter.
"MINIMUM CAPITAL FUNDS" shall mean Stockholders Equity plus
Subordinated Debt less Intangible Assets, all in accordance with GAAP.
(3) MAXIMUM DEBT/CAPITAL FUNDS RATIO. The Borrower will maintain a
ratio of Maximum Debt (which shall be defined as Total Liabilities exclusive of
any subordinated Debt) to Capital Funds which will be tested at the end of each
quarter, of not less than 1.0 to 1 from the execution hereof to the Maturity
Date.
(4) MINIMUM EARNINGS TEST. The Borrower will earn (after taxes) a
minimum level of Net Income of $500,000.00, which will be tested at each fiscal
year end until Maturity.
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(5) DIVIDENDS, ETC. Declare or pay any dividends; or purchase, redeem,
retire or otherwise acquire for value any of its capital stock now or hereafter
outstanding; or make any distribution of assets to its stockholders as such
whether in cash, assets, or obligations of the Borrower; or allocate or
otherwise set apart any sum for the payment of any dividend or distribution on
or for the purchase, redemption, or retirement of, any shares of its capital
stock; or make any other distribution by reduction of capital or otherwise in
respect of any shares of its capital stock; or permit any of its Subsidiaries to
purchase or otherwise acquire for value any stock of the Borrower or another
Subsidiary.
ARTICLE VII
EVENTS OF DEFAULT
-----------------
SECTION 7.01. EVENTS OF DEFAULT. If any of the following events
("EVENTS OF DEFAULT") shall occur:
(1) The Borrower should fail to pay the principal of, or interest on,
the Note as and when due and payable; or
(2) Any material representation or warranty made or deemed made by the
Borrower in this Agreement, or the Borrower in any of the Loan Documents, or
which is contained in any certificate, document, opinion, or financial or other
statement furnished at any time under or in connection with any Loan Document
shall prove to have been incorrect in any material respect on or as of the date
made or deemed made which cannot be cured within thirty (30) days or as
reasonably practicable thereafter after receipt of notice from the Bank; or
(3) The Borrower shall fail to perform or observe any material term,
covenant, or agreement contained in any Loan Document (other than the Note) on
its part to be performed or observed; or
(4) The Borrower shall (a) fail to pay any indebtedness for borrowed
money (other than the Note) of the Borrower which is evidenced by a Note or
other debt instrument as the case may be, or any interest or premium thereon,
when due (whether by scheduled maturity, required prepayment, acceleration,
demand, or otherwise), (whether or not related to this transaction or owed to
the Bank or another Person to the Bank) or (b) fail to perform or observe any
material term, covenant, or condition (subject to any applicable grace period
contained therein) on their part to be performed or observed under any agreement
or instrument relating to any such indebtedness, when required to be performed
or observed, if the effect of such failure to perform or observe is to
accelerate, or to permit the acceleration after the giving of notice or passage
of time, or both, of the maturity of such indebtedness, unless such failure to
perform or observe shall be waived by the holder of such indebtedness; or any
such indebtedness shall be declared to be due and payable, or required to be
prepaid (other than by a regularly scheduled required prepayment), prior to the
stated maturity thereof; or
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(5) The Borrower (a) shall generally not, or shall be unable to, or
shall admit in writing its inability to pay its debts as such debts become due;
or (b) shall make an assignment for the benefits of creditors, petition or apply
to any tribunal for the appointment of a custodian, receiver, or trustee for it
or a substantial part of its assets; or (c) shall commence any proceeding under
any bankruptcy, reorganization, arrangements, readjustment of debt, dissolution,
or liquidation law or statute of any jurisdiction, whether now or hereafter in
effect; or (d) shall have any such petition or application filed or any such
proceeding commenced against it in which an order for relief is entered or
adjudication or appointment is made; or (e) by any act or omission shall
indicate its consent to, approval of, or acquiescence in any such petition,
application, or proceeding, or order for relief, or the appointment of a
custodian, receiver, or trustee for all or any substantial part of its
properties; or (f) shall suffer any custodianship, receivership, or trusteeship.
Notwithstanding the foregoing if any of the above actions or proceedings
whatsoever, are commenced by or against Borrower any such proceeding not
instituted by Borrower shall be dismissed or stayed within forty-five (45) days
of same, there shall be no Event of Default hereunder; or
(6) One or more judgments, decrees, or orders for the payment of money
in excess of an aggregate of Twenty-Five Thousand ($25,000.00) Dollars in the
aggregate shall be rendered against the Borrower or any of their Subsidiaries
and such judgments, decrees, or orders shall continue unsatisfied and in effect
for a period of thirty (30) consecutive days without being vacated, discharged,
satisfied, or stayed or bonded pending appeal; or
(7) Intentionally Omitted.
(8) The service of any process on the Bank attaching by trustee process
any assets of the Borrower held by the Bank; or
(9) Intentionally Omitted.
(10)Intentionally Omitted.
(11)Intentionally Omitted
(12) The occurrence of any change in ownership or management of the
Borrower whereby Eric T. Chase ceases to serve as President, or Jay L. Ormsby
ceases to serve as Vice-President of Technology; then, in any such event, the
Obligations of the Borrower to the Bank under this Agreement and the other Loan
Documents and the Commitment of the Bank hereunder shall, at the Bank's option,
and subject to any grace periods provided herein, become immediately due and
payable without notice or demand at any time except that upon the occurrence of
an event described in 7.01 Subsections (5)(b), (5)(c) or 8 in which event the
Obligation shall automatically become due and payable.
SECTION 7.02. SUSPENSION EVENTS. (a) Upon the occurrence, from time to
time, of any Suspension Event (as defined herein) the Bank may suspend the Line
of Credit immediately and shall not be obligated, during such suspension, to
make any Loans or advances hereunder until the matter giving rise to such
Suspension Event has been cured.
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(b) As used herein, the term "SUSPENSION EVENT" means and refers to any
occurrence (i) which is an Event of Default or (ii) which would become an Event
of Default if the notice and/or the running of the period of time specified for
that occurrence were to be given and/or were to run and such occurrence were not
cured within any applicable grace period.
ARTICLE VIII
MISCELLANEOUS
-------------
SECTION 8.01. AMENDMENTS, ETC. No amendment, modification, termination,
or waiver of any provision of any Loan Document to which the Borrower is a
party, nor consent to any departure by the Borrower from any Loan Document to
which it is a party, shall in any event be effective unless the same shall be in
writing and signed by the party to be charged, and then such waiver or consent
shall be effective only in the specific instance and for the specific purpose
given.
SECTION 8.02. NOTICES, ETC. All notices and other communications
provided for under this Agreement and under the other Loan Documents to which
the Borrower is a party shall be in writing and mailed or hand delivered:
If to the Borrower: QC OPTICS, INC.
46 Jonspin Road
Wilmington, MA 01887
ATTN: Eric T. Chase, President
With a copy to: Mintz Levin Cohn Ferris
Glovsky & Popeo, P.C.
One Financial Center
Boston, MA 02111
ATTN: Neil H. Aronson, Esq.
If to the Bank: State Street Bank and Trust
225 Franklin Street
Boston, Massachusetts 02110
Attention: Mr. Bruce Daniels
Vice-President;
With a copy to: Ron M. Hadar, Esquire
Looney & Grossman
101 Arch Street
Boston, MA 02110;
or such other address as shall be designated by such party in a written notice
to the other party complying as to delivery with the terms of this Section 8.02.
All such notices and communication
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shall be effective when deposited in the mail, addressed as aforesaid, overnight
mail, registered or certified mail, return receipt requested, or on the day of
actual receipt, whichever is the first to occur.
SECTION 8.03. NO WAIVER; REMEDIES. No failure on the part of the Bank
to exercise, and no delay in exercising, any right, power, or remedy under any
Loan Document shall operate as a waiver thereof; nor shall any single or partial
exercise of any right under any Loan Document preclude any other or further
exercise thereof or the exercise of any other right. The remedies provided in
the Loan Documents are cumulative and not exclusive of any remedies provided by
law. The Bank shall not be required to have recourse to any collateral before
enforcing its rights or remedies against the Borrower. The Borrower hereby
waives presentment and protest of any instrument and any notice thereof.
SECTION 8.04. SUCCESSORS AND ASSIGNS. This Agreement shall be binding
upon and inure to the benefit of the Borrower and the Bank and their respective
successors and assigns,except that the Borrower may not assign or transfer any
of their rights under any Loan Document to which the Borrower is a party without
the prior written consent of the Bank.
SECTION 8.05. COSTS, EXPENSES, AND TAXES. The Borrower will pay or
reimburse the Bank, on demand, for all reasonable expenses (including, without
limitation, reasonable counsel fees and expenses) incurred or paid by the Bank
in connection with: the enforcement by the Bank of its rights as against the
Borrower or any other person primarily or secondarily liable to the Bank
hereunder or thereunder; and after an Event of Default or demand, for the
administration, supervision, protection or realization on any collateral held by
the Bank as security for any obligation of the Borrower or any other person
primarily or secondarily liable with respect thereto; and in the defense of any
action against the Bank with respect to its rights or liabilities hereunder or
thereunder. In addition, the Borrower shall pay any and all stamp and other
taxes and fees payable or determined to be payable in connection with the
execution, delivery, filing and recording of any of the Loan Documents and the
other documents to be delivered under any such Loan Documents.
SECTION 8.06. THIS SECTION INTENTIONALLY DELETED.
SECTION 8.07. GOVERNING LAW. This Agreement the Note and all other
documents hereunder have been made and delivered in the Commonwealth of
Massachusetts and shall be governed by, and construed in accordance with, the
laws of the Commonwealth of Massachusetts and the Borrower submits to the
jurisdiction of Massachusetts for all purposes with respect to this Agreement
and all other documents hereunder and its relationship with the Bank.
THE BORROWER WAIVES ANY RIGHT TO TRIAL BY JURY IT MAY HAVE IN ANY
ACTION OR PROCEEDING, IN LAW OR EQUITY, IN CONNECTION WITH THIS AGREEMENT. THE
PARTIES HERETO KNOWINGLY AND VOLUNTARILY AND INTENTIONALLY WAIVE ANY RIGHT TO A
TRIAL BY JURY IN RESPECT OF ANY LITIGATION ARISING OUT OF, UNDER, OR IN
CONNECTION WITH THIS AGREEMENT. THE BORROWER HEREBY CERTIFIES THAT NO
21
<PAGE>
REPRESENTATIVE OR AGENT OF THE BANK HAS REPRESENTED, EXPRESSLY OR OTHERWISE,
THAT BANK WOULD NOT, IN THE EVENT OF LITIGATION, SEEK TO ENFORCE THIS WAIVER OF
RIGHT TO A JURY TRIAL PROVISION. THE BORROWER ACKNOWLEDGES THAT BANK HAS BEEN
INDUCED TO ENTER INTO BANK'S LENDING RELATIONSHIP WITH THE BORROWER BY, AMONG
OTHER THINGS, THE PROVISIONS OF THIS PARAGRAPH.
SECTION 8.08. SEVERABILITY OF PROVISIONS. Any provision of any Loan
Document which is prohibited or unenforceable in any jurisdiction shall, as to
such jurisdiction, be ineffective to the extent of such prohibition or
unenforceability without invalidating the remaining provisions of such Loan
Documents or affecting the validity or enforceability of such provision in any
other jurisdiction.
SECTION 8.09. HEADINGS. Article and Section headings in the Loan
Documents are included in such Loan Documents for the convenience of reference
only and shall not constitute a part of the applicable Loan Documents for any
other purpose.
SECTION 8.10. TERMINATION. This Agreement shall continue to be fully
operative until all transactions entered into, rights or interest created or
Obligations incurred have been fully disposed of, concluded or liquidated. The
security interest, Lien and rights granted to Bank hereunder shall continue in
full force and effect until all Obligations have been satisfied.
SECTION 8.11 SURVIVAL. Further, the terms of the Commitment Letter dated
June 5, 1998, as modified by the Loan Documents, shall survive the Closing.
SECTION 8.12 Any matter disclosed by Borrower in this Agreement or any
Schedule hereto, or excepted from any representation, warranty or covenant of
Borrower herein, shall be deemed disclosed for all purposes of this Agreement
and to be an exception from all such representations, warranties and covenants.
[THIS SPACE INTENTIONALLY LEFT BLANK]
22
<PAGE>
IN WITNESS WHEREOF, the parties have caused this Agreement to be
executed by their respective officers thereunto duly authorized, as of the date
first above written and shall take effect as a sealed instrument.
QC OPTICS, INC.
By:
---------------------------------
Eric T. Chase, President
and Treasurer
STATE STREET BANK AND TRUST COMPANY
By:
----------------------------------
Bruce S. Daniels, Vice President
23
<PAGE>
EXHIBITS AND SCHEDULES
----------------------
<TABLE>
<CAPTION>
<S> <C>
2.04 Form of Promissory Note
2.07(v) Acceptable Account Debtors with foreign place of business
3.01(2) Permitted Encumbrances
4.02 Litigation
4.04 Patents/Licenses/Trademarks
4.10 Defaults
4.12 Subsidiaries
4.17 Debt
4.18 Officers and Directors
6.08 Places of Business
</TABLE>
EXHIBIT 2.04
FORM OF PROMISSORY NOTE
SCHEDULE 2.07(v)
LIST OF ACCEPTABLE ACCOUNT DEBTORS WITH
FOREIGN PLACES OF BUSINESS
(As of the Closing Date and subject to change)
SCHEDULE 3.01(2)
PERMITTED ENCUMBRANCES
SCHEDULE 4.02
LITIGATION
None.
SCHEDULE 4.04
PATENTS/LICENSES/TRADEMARKS
SCHEDULE 4.10
DEFAULTS
24
<PAGE>
SCHEDULE 4.12
SUBSIDIARIES AND AFFILIATES OF BORROWER
None.
SCHEDULE 4.17
DEBT
SCHEDULE 4.19
OFFICERS AND DIRECTORS
SCHEDULE 6.08
PLACES OF BUSINESS
25
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
FINANCIAL STATEMENTS OF THE ISSUER AS OF AND FOR THE SIX MONTH PERIOD ENDED JUNE
30, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 3,885,624
<SECURITIES> 0
<RECEIVABLES> 2,083,232
<ALLOWANCES> 50,000
<INVENTORY> 4,561,976
<CURRENT-ASSETS> 10,526,880
<PP&E> 661,640
<DEPRECIATION> 449,268
<TOTAL-ASSETS> 11,124,756
<CURRENT-LIABILITIES> 2,579,870
<BONDS> 0
0
0
<COMMON> 32,425
<OTHER-SE> 8,298,407
<TOTAL-LIABILITY-AND-EQUITY> 11,124,756
<SALES> 6,176,790
<TOTAL-REVENUES> 6,176,790
<CGS> 3,337,865
<TOTAL-COSTS> 3,337,865
<OTHER-EXPENSES> 2,519,826
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (115,697)
<INCOME-PRETAX> 434,796
<INCOME-TAX> 157,500
<INCOME-CONTINUING> 277,296
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 277,296
<EPS-PRIMARY> .07
<EPS-DILUTED> .07
</TABLE>
